CHAPTER 3: MONEY MARKET AND RELATED
FINANCIAL INSTRUMENTS.
•Money Market
- Deals with the exchange of financial
instrument that are practically short term or
characterized as usually sold in large
denominations, low default risk; and mature in
one year or less from original issue date.
- Offer a least expensive alternative for fund
demanders such as the government and
financial intermediaries when they have short-
term fund requirements.
>Three fundamental characteristics.
1) Usually sold in large denominations;
2) Low default risk; and
3) Mature in one year or less from original
issue date
>Participants in the money market include the
following
 Bureau of Treasury - The bureau sells
government securities to raise funds.
Short-term issuances of government
securities allow the government to
obtain cash until tax revenues are
collected.
 Commercial banks - Issues treasury
securities; sells certificates of deposits
and extends loans; offers individual
investor accounts that can be used to
invest in money markets. Banks are the
primary issuer negotiable certificates of
deposits, banker's acceptances and
repurchase agreements.
 Private Individual - These private
individuals made their investment
through money market mutual funds
 Commercial Non-Financial Institutions -
These entities buy and sells money
market securities to manage their cash
i.e. to temporarily store excess funds in
exchange of somewhat higher return
and obtain short-term funds
 Investment companies - Trade
securities on behalf of their clients.
Makes a market for money market
securities through maintaining an
inventory of financial instruments that
can be bought or sold. Investment
companies help maintain liquidity of
the money market since they make sure
that sellers can easily sell their
securities when the need arises.
 Finance / commercial leasing
companies - These companies raise
money market instruments i.e.
commercial paper to lend funds to
individual borrowers
 Insurance companies - These are
companies that invest in the money
market to maintain liquidity level in
case of unexpected demands most
especially for property and casualty
insurance companies.
 Pension funds - Maintain funds in the
money market as preparation for long-
term investing in stocks and bonds.
 Money market mutual funds - These
funds permit small investors (e.g.
individuals) to invest in the money
market by accumulating funds from
numerous small investors to buy large-
denominatior money market securities.
•Financial instruments - Are the main vehicle
used for transactions in the financial market.
Securities that are maturing within 90 days or
less are classified under cash equivalents.
>There is a minimum of two parties involved in
a financial instrument:
 The issuer - The issuer is the party that
issues the financial instrument and
agrees to make future cash payments to
the investor.
 The investor - Is the party that receives
and owns the financial instrument and
bears the right to receive payments to
be made by the issuer. Usually have
surplus funds.
>Financial instruments have two main economic
purposes:
 Allows transfer of fund from entities
with excess funds (investors) to entities
who needs funds (issuer) for business
purposes (e.g. to pay for tangible
assets).
 Permit transfer of fund that allows
sharing of inherent risk associated with
the cash flows coming from tangible
asset investment between the issuer
and investor.
•Money market Instruments
- Take the form of short-term deposits,
government securities, commercial papers and
certificates of deposit which form part of the
Philippine interest rate market. Governed by
Philippine regulations and are influenced by
market movements.
>Types of Money Market Financial Instruments:
✓Treasury Bills
 Government securities issued by the
Bureau of Treasury which mature in less
than a year.
 There are three tenors of Treasury Bills:
(1) 91 day (2) 182-day (3) 364-day Bills.
 Have virtually zero default risk since the
government can always print more
money that they can use to redeem
these securities at maturity.
>Treasury bills can be sold via two methods:
 Competitive Bidding/Auctions - the
Bureau of Treasury announces the
quantity and type of securities that they
will sell.
 Noncompetitive bidding - Bidders only
give the amount of securities that they
want to buy.
 The main difference between the two
methods is that competitive bidders
may or may not receive allocation from
the securities being sold while
noncompetitive bidders are guaranteed
to receive the securities.
✓Repurchase Agreement (repo)
 Is a contract where a party which is a
seller/borrower of an instrument will
agree to the buyer/lender that the
instrument will be repurchased or
bought back on a later date at a higher
price. Enable short-term funds to be
transferred
 There are repos which are called open
repos which do not have an indicative
date of repurchase.
 Repos are a key component of the debt
securities market that produces short-
term cash or securities liquidity critical
to price-making.
 Since repos are collateralized by the
accompanying securities, these usually
are treated as low-risk investments with
low interest rates.
✓Negotiable Certificates of Deposit
 Are securities issued by banks which
record a deposit made.
 The certificate indicates the interest
rate and the maturity date of the
deposit.
 Are treated as a term security with a
specific maturity date.A certificate of
deposit essentially restricts holders
from withdrawing funds on demand.
 Classified as Bearer Instrument.
 Have a maturity period between one to
four months up to six months.
✓Commercial Paper
 Are unsecured promisson notes. May
be short-term or long-term.
 Short term commercial paper means an
evidence of indebtedness of any person
with a maturity of three hundred and
sixty-five (365) days or less.
 Long term commercial paper is an
evidence of indebtedness of any person
with a maturity of more than three
hundred sixty-five (365) days.
✓Banker's Acceptances
 Refer to an order to pay a specified
amount of money to the bearer on a
specified date.
 Often used to finance purchase of
goods that have not yet been
transferred from the seller to the buyer.
 An acceptance is formed when a draft
or a promise to pay is made by the
bank's client and the bank then
ultimately accepts, promising to pay on
behalf of the client.
•Evaluating Money Market Securities -Money
market securities may be evaluated based on
the interest rates and liquidity.
✓Interest rates - Very relevant in deciding
which money market securities to invest since
this dictates the potential return that can be
received from the investment.
✓Liquidity - refers to how quick, efficient and
cheap it is to convert a security into cash.
•Valuation of Money Market Securities -
important to determine at what amount an
investor is willing to pay in exchange for a
security.
CHAPTER 4: DEBT MARKET
•Debt Securities Market - Is a type of financial
market where the debt instruments or
securities are transacted by suppliers and
demanders of funds.
•Debt Instrument - Is a paper or electronic
obligation that enables the issuing party to raise
funds with a promise to return it to the lender
in accordance with terms of a contract.
>Importance of a debt instrument
 It makes the repayment of debt legally
enforceable.
 It increases the transferability of the
obligation, giving it increased liquidity
and giving creditors a means of trading
these obligations on the market.
>Types of Debt Instruments
  Short-term debt instruments - both
personal and corporate, come in the
form of obligations expected to be
repaid within one calendar year.
 Long-term debt instruments - are
obligations due in one year or more,
normally repaid through periodic
installment payments.
•Debt Security - Refers to a debt instrument,
such as a government bond, corporate bond,
certificate of deposit (CD) or municipal bond
that can be bought or sold between two parties
and has basic terms defined.
•Difference between debt securities and debt
instruments - Debt securities are negotiable
and tradable debt instruments which carry
value on them.
>Types of Debt Securities
 Money market debt securities -Are debt
securities with maturity of less than one
year. Money market securities of most
interest toindividual investors are
treasury billsand certificates of deposit
(CDs).
 Capital market debt securities - Are
debt securities with maturities of longer
than one year.
•Safety of Debt Securities - Debt securities have
an implicit level of safety simply because they
ensure that the principal amount is returned to
the lender at the maturity date or upon the sale
of the security.
•The Bond Market
 Debt market, also known as bond
market, is a financial market in which
the participants are provided with the
issuance and trading of debt securities.
 Primarily includes government-issued
securities and corporate debt securities,
facilitating the transfer of capital from
savers to the issuers or organizations
requiring capital.
>Types of Bond Markets
Corporate Bond - Corporations provide
corporate bonds to raise money for different
reasons, such as financing ongoing operations
or expanding businesses. The term "corporate
bond" is usually used for longer-term debt
instruments that provide a maturity of at least
one year.
Government Bonds - National governments
issue government bonds and entice buyers by
providing the face value on the agreed maturity
date with periodic interest payments. This
characteristic makes government bonds
attractive for conservative investors.
Municipal Bonds - Local governments and their
agencies, states, cities, special-purpose districts,
public utility districts, school districts, publicly
owned airports and seaports, and other
government-owned entities issue municipal
bonds to fund their projects.
Mortgage Bonds - Pooled mortgages on real
estate properties provide mortgage bonds.
Mortgage bonds are locked in by the pledge of
particular assets. They pay monthly, quarterly
or semi-annual interest.
Asset-backed bonds (or asset-backed security) -
Is a financial security collateralized by a pool of
assets such as loans, leases, credit card debt,
royalties or receivables.
•Sustainability Bonds or Green Bonds - Are used
to finance or fund environmental or social
initiatives and programs, or projects or both.
> Characteristics of Bonds
 Coupon rate - Paid to bondholders
based on the agreement (usually semi-
annually). The fixed return that an
investor earns periodically until it
matures. The coupon rate is multiplied
to the principal to arrive at the interest
to be paid.
 Maturity date - All bonds have maturity
dates. When the bond matures, the
bond issuer repays the investor the full
face value of the bond.
 Current or Market Price - Depending on
the level of interest rate in the
environment, the investor may
purchase a bond at par, below par, or
above par.
•Determination of Interest Rate:
- Interest rates in the industry
- Risk exposure
- Compensation on the market expectation.
•Risk-free rate - is the rate that assumes zero
default in the market which is more or less
equivalent to the rates offered by the
sovereign.
>Mitigating the Interest Rate Risks
 Spot Rates - Spot rates are already
actual rates and are not hedge. The
applicable interest rate is based on the
prevailing market rate at the particular
time.
 Forward Rates - Forward rates are
normally contracted rates that fix the
rates and allow another party to
assume such risk on the difference
between the contracted rate and the
spot rate.
 Swap Rate - Swap rate is a contract rate
where a fixed rate exchange for a
certain market rate at a certain
maturity.
•Bond Valuation - Is a technique for
determining the theoretical fair value of a
particular bond.
•Credit Ratings - Credit rating affects the
confidence level of the investors to countries or
companies.
Three major ratings companies
1. Standard and Poor's Corporation - Is an
American financial services corporation was
founded in 1941 by Henry Varnum Poor in New
York, USA.
2. Moody's Investors Service - Is credit rating
company particularly on debt securities
established in 1909 in New York, USA.
3. Fitch Ratings - The third credit rating agency
is Fitch Ratings. It was founded in 1914 in New
York, USA.
 Other rating agencies - There are other
credit rating agencies other than the
three major like DBRS and CARE
Ratings. These credit rating agencies
were not located in the United States.
✓DBRS was established in 1976 in Toronto,
Canada. The company was considered as the
fourth largest ratings agency.
✓CARE Ratings started its operation in 1993
based in India. The company is based in
Mumbai with partners in Brazil, Portugal,
Malaysia and South Africa. .