MONEY

MARKET
FINANCIAL
INSTRUMENTS
Amerahannan M. Balang
Nasheba A. Batugan
Sittie Alaizah Noren L. Ansari
Moslima C. Amiroden
Chapter Outline
VALUATION AND RISK OF
01 MONEY MARKET
SECURITIES 03 MONEY MARKET
SECURITIES

MAJOR OVERVIEW OF

02 PARTICIPANTS OF
MONEY MARKET
04 MONEY MARKET
YIELDS

05 GLOBALIZATION OF
MONEY MARKETS
 01
MONEY MARKET
SECURITIES
MONEY MARKET
-a sector of the financial market where financial instruments that will
mature or be redeemed in one year or less from issuance date are
traded.

MONEY MARKET MONEY MARKET

SECURITIES SECURITIES
characteristics
❑ Short-term, with a maturity ➢ Treasury Bills
values one year or less ➢ Commercial Paper
❑ Low default risk ➢ Certificates of Deposits
❑ Highly liquid ➢ Repurchase Agreement
❑ Flexible, readily used for short-
term needs ➢ Banker’s Acceptance
❑ Often sold in large
denomination
TREASURY BILLS
❑ Securitieswith a maturity of
one year or less, issued by
national governments in its COMMERCIAL PAPER
own currency.
❑ Short-term debt obligation of
❑ Considered the safest of all a private-sector firm or a
possible investments in that government-sponsored
currency. corporations
❑ Can be traded in secondary ❑ In most cases, it has a
market maturity greater than 90
days but less than 9 months.
❑ Sold below par value
(discount to par) ❑ Usually unsecured and is
issued only by large and
credit worthy enterprises.
❑ Issued on a discount
CERTIFICATES OF DEPOSITS
❑ are interest bearing bank deposits that
cannot be withdrawn without penalty
before a specified date.
❑Bank-issued securities that document a
deposit and specify the interest rate and
the maturity date.
❑Typically have maturity of 1-4 months
❑The interest rate is negotiable between
the bank and the customer.
REPURCHASE AGREEMENT
❑ is a form of a short-term
borrowing for dealers in
government securities.
❑ A repo is a combination of two
transaction
- Securities leader sells
securities it owns to an investor,
agreeing to repurchase the securities
- after days or months later
the dealer buys back the securities
from the investor
❑ Low-risk investment
 BANKER’S ACCEPTANCE
❑ refers to an order to pay a
specified amount of money to the
bearer on a specified date.
❑Often used to finance the
purchase of goods that have yet to
FEDERAL FUNDS
be delivered to the buyer. ❑ are short-term funds transferred
❑Sold on a discount basis between financial institutions,
usually for a period of one day.
❑Usually have a maturity of less than
six months ❑Provide banks with immediate
infusion of reserves should they run
short of minimum reserve
requirements.
 02
MAJOR PARTICIPANTS
OF MONEY MARKET
MAJOR PARTICIPANTS

Treasury Federal Reserve Commercial Banks

Department System

Businesses Investments and Individuals

Securities Firms
 03
VALUATION AND
RISK OF MONEY
MARKET SECURITIES
 Valuation of money market securities
is important to determine at what amount
an investor is willing to pay in exchange of
a security. This can be valued using the
present value approach where the interest
rate used in the valuation shall reflect the
required return from the instrument based
on the investor’s perceived risk.
 The formula for present value is:
PV = CF/(1+r)n
Where:
CF = cashflow in future period
r = the periodic rate of return or interest (also called
the discount rate or the required rate of return)
n = number of periods
Sample Problem :

Assume that you would like to put money in an

account today so that you have enough money in 10
years. If you would like to invest P10,000 in 10 years,
and you know you can get 5% interest per year from a
savings account during that time, how much should
you put in the account now?
 To Compute:

PV = P10,000/ (1 + .05)10 = P6,139.13

Why Does Present Value (PV) Matter?

The concept of present value is one of the

most fundamental and prevalent in the world of
finance. It is the basis bond pricing, stock pricing
financial modeling, banking, insurance, and pension
fund valuation. It accounts that money we receive
today can be invested to earn a return. Present value
accounts for the time value of money.
Risk of Money Market Securities
❑ Because of the short maturity, money market securities are generally
not subject to interest rate risk, but they are subject to default risk.
o Investors commonly invest in securities that offer a slightly higher
yield than T-bills and are very unlikely to default.
o Although investors can assess economic and firm-specific
conditions to determine credit risk, information about the issuer’s
financial condition is limited.
❑ Measuring risk
- Money market participants can use sensitivity analysis to
determine how the value of money market securities may change in
response to a change in interest rates.
 04
OVERVIEW OF
MARKET YIELDS
WHAT IS MONEY MARKET YIELD?
The interest rate earned by investing in securities with high
liquidity and maturities of less than one year such as negotiable
certificates of deposit, U.S. Treasury bills, and municipal notes.

UNDERSTANDING MONEY MARKET YIELD

HOW TO CALCULATE MONEY MARKET YIELD
Money market yield = Holding period yield x (360/Time to maturity)

Money market yield = [(Face value – Purchase price)/Purchase price] x

(360/Time to maturity)
Example:
T-bill with $100,000 face value is issued for $98,000 and due to mature
in 180 days. The
money market yield is:

= ($100,000 - $98,000/$98,000) x 360/180

= 0.0204 x 2
= 0.0408, or 4.08%
 05
GLOBALIZATION OF
MONEY MARKETS
GLOBALIZATION OF MONEY MARKETS
❑ Interest rate differentials occur because geographic markets are
somewhat segmented
❑ Interest rates have become more highly correlated:
-Conversion to the euro
-The flow of funds between countries has increased because of:
Tax differences
Speculation on exchange rate movements
A reduction in government barriers
-Eurodollar deposits, Euro notes, and Euro-commercial paper are
widely traded in International money markets
Three widely traded in international money markets
Eurodollar deposits
o Euro deposits are funds deposited in a European account.
o These deposits allow foreign citizens to invest in euros, collecting on
the interest rate set by the European Central Bank (ECB).
o Typical transactions are $1 million or more

Euro notes
o It is a paper banknote that represent the euro currency, which is legal
tender throughout the eurozone.
o Ranging from €5 to €500, but in 2016 the ECB took steps to stop
producing new €500 notes to curb financial crime.
o The supply and control of the physical euro banknotes are controlled
by the ECB.
o Short-term Euro notes are issued in bearer form with maturities of
one, three, and six months.
Three widely traded in international money markets

Euro-Commercial Paper (Euro-CP)

o Euro commercial paper (ECP) refers to commercial paper issued by a
company denominated in a currency that differs from the domestic
currency of the market where the paper is issued.
o To raise short-term financing to fund day-to-day operations, with
notes maturing on the order of days or weeks.
o ECPs are an ideal source of capital for global institutional investors.
❑Performance of foreign money market securities
• Measured by the effective yield (adjusted for the
exchange rate Ye = (1 + Yf ) × (1 + %∆S ) − 1

• Depends on:
o The yield earned on the money market security in
the foreign currency
o The exchange rate effect
❑Computing the Effective Yield
A U.S. investor buys euros for $1.15 and invests in a one-year
European security with a yield of 8 percent. After one year, the investor
converts the proceeds from the investment back to dollars at the spot rate
of $1.16 per euro. What is the effective yield earned by the investor?

Ye = (1 + Yf ) × (1 + %∆S ) – 1
= [(1.08 × 1.0087) − 1] To compute %∆S:
= 8.94% $1.16-$1.15= 0.01
0.01/$1.15= 0.0087
THANK YOU
AND
WASSALAM!