THE MONEY MARKET

The money market

The money market trades short-term funds, usually with a maturity of up to one year.
Money market securities have three basic characteristics in common:
1. They are usually sold in large denominations.
2. They have low default risk.
3. They mature in one year or less from their original issue date. Most money market instruments
mature in less than 120 days.

It involves the transferring of monetary resources to fill short-term financial needs.

 Who Participates in the Money
Markets?

Governments
Centrals banks
Commercial banks
Large non-financial companies
Other financial institutions
 Money Market Financial Instruments
Governments bonds: is a short-term government debt obligation with a maturity of one year or less.

There are some key elements of bonds:

The par, face, or maturity value of the bond is the amount that the issuer must pay at maturity.
The coupon rate is the rate of interest that the issuer must pay, and this periodic interest payment is
often called the coupon payment.
Maturity date (e.g., 3, 6 and 12 months)
 Money Market Financial Instruments
Italian Government bonds: BOT
 Money Market Financial Instruments
Repurchase Agreements: they are arrangements whereby an asset is sold while the seller simultaneously
obtains the right and the obligation to repurchase it at a specific price on future date or on demand.
Negotiable Certificates of Deposit: A negotiable certificate of deposit is a bank-issued security that
documents a deposit and specifies the interest rate and the maturity date.
Commercial paper: they are unsecured promissory notes, issued by corporations, that mature in no more
than 270 days.
 An example of commercial paper is when a retail firm is looking for short-term funding to finance some new
inventory for an upcoming holiday season. The firm needs $10 million and it offers investors $10.1 million in face
value of commercial paper in exchange for $10 million in cash, according to prevailing interest rates. In effect, there
would be a $0.1 million interest payment upon maturity of the commercial paper in exchange for the $10 million in
cash.
 Money Market Financial Instruments
Banker’s Acceptances: A banker’s acceptance is an order to pay a specified amount of money to the
bearer on a given date.
 For example, suppose that Company “A” wants to buy an equipment from another company “B” in Japan. “B” does
not want to ship the equipment without being paid because it has never heard of company “A” and realizes that it
would be difficult to collect if payment were not forthcoming.
Similarly, company “A” is reluctant to send money to Japan before receiving the equipment.

Overnight deposits: A bank deposit is overnight if it is to be paid off the first business day following the
one in which it was made
CAPITAL MARKETS
 Capital Markets
It involves transactions of financial instruments to fill long-term financial needs:
Suppose that a company, after a careful financial analysis, determines that it needs a new plant to meet
the increased demand for its products.
Therefore, financial instruments have a muturity date over 1 years, or they have not a maturity date.

Bond markets
Equity markets
Mortgage markets
CAPITAL MARKETS:
the Bond market
 Bond market
A bond is a debt security that promises that payments will be made periodically for a
specified time.

Bonds obligate the issuer to pay a specified amount at a given date, generally with
periodic interest payments

Long-term bonds traded in the capital market include long-term government bonds,
and corporate bonds.
 Bond market
Governmet bonds.
Bonds are the main instruments that euro-area governments use to finance their budget
deficits.
Generally, the government issues bonds with 2-,3-, 5-, 7-, and 10-20 year maturities.

E.g., Several actions have been implemented to finance the measures taken by the Government
to face with the health and economic emergency caused by the ongoing epidemic COVID 19. The
new BTP Italia issue is wholly earmarked to finance Covid-19 emergency expenses, the measures
for Italy’s economic recovery and support for families and businesses.
 Bond market
Corporate Bonds: When large corporations need to borrow funds for long periods of time, they may
issue bonds.
E.g., Volvo Cars is to issue the first green bond from a European car manufacturer, with the proceeds
being used to finance cars that can be powered without fossil fuels.

Key characteristics and elements:

The bond indenture: a contract that states the lender’s rights and privileges and the borrower’s
obligations. Any collateral offered as security to the bondholders will also be described in the
indenture.
Restrictive covenants. They usually limit the amount of dividends the firm can pay (so to conserve
cash for interest payments to bondholders) and the ability of the firm to issue additional debt.
Call provision, which states that the issuer has the right to force the holder to sell the bond back