UNIT-FOUR

MONEY MARKETS
Yagya Raj Bhandari
Money Markets

Concept
Money market is part of financial market. It is the market for short term
financial securities as well as short term loans. Thus money market is market
of securities having maturity period of one or less than one year like:
Treasury bills, Commercial paper, Certificate of deposit etc. The money
market plays significant role in flow of short term fund between lenders and
borrowers.
Contd..

Corporations issue money market securities to fulfill their working capital requirement.
Investors purchase money market securities to earn short term interest benefit with lower
degree of risk. Government, central bank, commercial parties, other financial

institutions, broker and dealers are major participant of the money market. The
Nepalese money market still in developing phase in terms of types of money market
securities issued and institutions involved in the money market. Treasury bills and
short term loans are main money market transaction carried out in Nepalese financial
market.
Features of Money Market

Flow of short term fund

Highly liquid able

Lower maturity

Less risky

Limited participants
Types of money market instruments

Money market instruments are also known as short term financial alternatives

or short term financial securities some money market securities are issued in

discount basis which means zero coupon payment basis where as some other

money market securities are issued in coupon interest payment basis. The

main money market securities are as follows:

Contd…..

1. Treasury bill:

The Treasury bill is issued by the central bank on behalf of the government to fulfill
short term budget deficit of the government. Treasury bill is also popular as risky free
investment because it’s backed by the government. The Treasury bill is issued in
discount basis which means we can purchase Treasury bill below the par value and we
received par value at the maturity period it means the discount amount is benefit to
use. It is sold to competitive & non competitive bidders. It is popular in Nepalese
financial market.
T-bill quotation

Maturity Days to Mat. Bid Asked Chg. Ask Yld.

Nov 25’ 94 116 4.54 4.52 -0.03 4.65

• Maturity: Time period at which T-bill reach at maturity

• Days to maturity: Total maturity days of T-bill
• Bid: Selling price for an investor which is expressed in discount yield basis (%)
• Asked: Purchase price for an investor which is expressed in discount yield basis (%)
• Chg = it shows change in previous day’s bid price (%)
• Ask yield: Annualized yield or yield to maturity based on ask price (%)
Contd…..

2. Commercial Paper:

The commercial paper is unsecured short term promissory note issued by the large
companies. It means it is issued by the large corporations to fulfill their short term
financial needs. Commercial paper is usually issued for 270 days in international
practices. It is also issued on discount basis. The commercial paper is not popular in
Nepalese financial market.
Contd…

3. Certificate of deposit:

It is issued by commercial banks or financial institutions to solve their

liquidity problem. Commonly it is issued in multiple of millions. It is issued
on fixed percentage coupon interest payment basis. The certificate of deposit
is also useful for investor to take short term loans from other financial
institutions in the case of liquidity problem. CD can be sellable in secondary
market which is called negotiable CD.
Contd……

4. Banker’s acceptance: Bankers acceptance is issued by different institutions to solve

their short term financial problems and guaranteed by the commercial banks to payoff
the interest and principal if issuer organization fails to make the payment. It is used in
international business for import and export business. Letter of credit can be taken an
example of banker’s acceptance. This type of transaction is popular in Nepalese
financial market as well.

The bankers acceptance is issued at a discount, and paid in full when it becomes due the
difference between the value at maturity and the value when issued is the interest. The letter
of credit is a document issued by a bank that guarantees the payment of the importer's draft
for a specified amount and time
Contd…

5. Repurchase agreement:

If one party sells shares to other party by reducing value and commits to purchase back at
a full price after certain time period its known as re-purchase agreement. These types of
transactions are carries out to solve short term financial problem. Re-purchase agreement
transactions are carried out in discount basis. Repo rate refers to the rate at which commercial
banks borrow money by selling their securities to the Central bank. In reverse repo rate is rate at
which central bank borrows money from commercial banks when there is excess liquidity in the
market
Contd…

6. Eurodollar CD:

Eurodollar CD is also kind of certificate of deposit but taken by making deposit of dollar currencies in bank
outside the united state. The interest rate on Eurodollar CD is generally higher than common type of
certificate of deposit because the exchange rate stability of currency is strong as well as demand for dollar
currency is higher in international trade.

7. Central bank fund:

Central bank fund is short term lending and borrowing between commercial banks from reserve maintain at
central bank.

8. Short Term Loans: Commercial banks provide short term loan to fulfill working capital need of the
different companies which is popular money market financial transaction in Nepalese financial market.
Role/Purpose of Money Market

Money market is significant part of financial market. It is the market for short term
financial transactions. Money market has great role for all its participants. Therefore
money market participants involved in money market to fulfill short term gap of cash
inflows and cash outflows. The major roles of money market are as follows:

1. Raising short term fund:

• Money market is the place where government agencies and business unit can raise
short term capital by issuing short term security or taking short term loan.
Contd……

2.Supplying fund

Money market is the place where investors can make investment of their
temporary access cash to earn short term interest benefit.

3.Meeting daily expenditure

Money market is the mechanism which provides financial resources to the

corporations to fulfill operating expenditures or administrative expenditure.
Participants of Money Market

• Central Bank
• Commercial banks
• Security dealers
• Corporations
• Mutual funds
• General insurance
• Finance companies
• Individual investors
Some Formula
•  
• Discount yield or Quoted yield =

• Equivalent yield or yield or investment return (EY) =

or Quoted yield× = %

• Holding period return = = %

Contd……
•  
•Effective annual yield = [1+HPR]M – 1
=- 1 = %
• Yield on repo or Repo rate = =%
• Current value of security = = Rs…….
• Yield to maturity = - 1 = %

Where;
t = Maturity period in days, weeks and months
n = Maturity period in yearly basis (t/365)
M= No. of compounding in a year. (365/t)
Discount = Face value – Selling price
Thank you!