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Topic 2 - Money Market
Topic 2 - Money Market
(CHAPTER 2)
MONEY MARKET
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Updated: Sept23
LEARNING OUTCOME:
At the end of this lecture, students should be able to:
Explain the:
1. Nature and role of money market
2. Participants in the money market
3. Instruments traded in money market
4. Money market risk
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CONTENTS:
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1- NATURE AND ROLE OF MONEY
MARKET
• The money market is a segment of the financial markets where short-term
maturity securities are issued and traded.
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1- NATURE AND ROLE OF MONEY
MARKET (Cont’d)
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2- PARTICIPANTS IN THE MONEY MARKET
Central
01 State Government 02
Government
Insurance
06 Commercial Banks 03
companies
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3- INSTRUMENTS TRADED IN MONEY
MARKET
3.1- 3.3-
Bankers’ Certificates 3.5-
Acceptances of Deposit Eurodollars
(BA) (CD)
3.6-
3.2- 3.4-
Repurchase
Treasury Commercial
Agreements
Bills (TB) Paper
(Repo)
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3.1- Bankers’ Acceptances (BA)
• Banker’s acceptance is a time draft payable to the seller that a business can
order from the bank if it wants additional security against the risk of default by
the counter party.
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3.1- Bankers’ Acceptances (BA)
• Bankers’ acceptance needs to be held until maturity.
• Upon maturity of the BA, the holder of the bearer presents the BA through the
holder’s banker to the paying bank for full payment stated on the BA.
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3.1- Bankers’ Acceptances (BA) (Cont’d)
• In Malaysia, BA is subject to the prevailing Guidelines on Bankers Acceptances
(2004) issued by Bank Negara Malaysia (BNM BA Guidelines).
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3.1- Bankers’ Acceptances (BA) (Cont’d)
• If a RM1,000,000 face value BA wit 60 days to maturity is purchased at 5% per
annum, the discounted proceed will be as follows:
• Purchaser:
• pays only RM991,780.80
• at maturity: receive face value RM1,000,000
• Investment earning = RM8,219.20
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Updated: Sept23
3.2- Treasury Bills (TB)
• Malaysian Treasury Bills (MTBs) are issued with original maturities of 3-month,
6-month, and 1-year.
• The bills are discounted securities that are issued at a discount from the face
value.
• When the bills mature, the government pays the holder the full par value. Each
certificate of MTB carries a face value in multiples of RM10,000.
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3.2- Treasury Bills (TB) (Cont’d)
• The successful bidders are determined according to the most competitive yield
offered.
• The standard trading amount is RM5 million and are actively traded in the
secondary market.
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3.3- Certificates of Deposit (CD)/
Negotiable Certificates of Deposit (NCD)
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3.3- Certificates of Deposit (CD)/ Negotiable
Certificates of Deposit (NCD) (Cont’d)
• An NCD can be negotiated with the issuer (banks and financial institutions).
The more money that the investor is willing to deposit, the more favourable
terms can be agreed with the issuer.
• Tradable instrument can be bought or sold before the date of maturity. If a
depositor/investor wishes to have cash before the maturity of the NCD, the
investing party can sell the NCD to another investor in a readily active
secondary market. The bank guarantees that the investors holding the
certificate are paid their deposits and the interest earned.
• Issued in multiples of RM50,000, subject to a minimum deposit of RM100,000.
• The tenure: one month and up to ten years.
• There are also the Shariah compliant form of NID which are categorised as
Islamic Negotiable Instruments (INI).
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3.4- Commercial Paper
• Unsecured, short-term promissory note issued by a highly credit rated
corporation for:
• the financing of accounts payable and inventories (working capital)
• meeting short-term liabilities usually on a roll-over basis.
• Is usually sold at a discount, with the interest immediately deducted from the
face value of the note by the creditor that reflects prevailing market interest
rates.
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3.4- Commercial Paper (Cont’d)
• In practice, the denomination of commercial paper is large as the issuers are
mostly big institutions and corporations
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3.5- Eurodollars
• “Eurocurrency” is the general term for any currency deposited in banks and
financial institutions by governments or corporations operating outside of their
home market.
• These dollars denominated deposits in a bank outside the US are called the
Eurodollar market.
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Updated: Sept23
3.5- Eurodollars (Cont’d)
• Eurodollars may be held by governments, corporations and individuals from
anywhere in the world and are not subject to US bank regulations.
• The rate offered for sale on Eurodollar and other Eurocurrencies deposits is
known as the London Interbank Offered Rate (LIBOR). Other benchmark rate
includes the Euro LIBOR.
• The average Eurodollar deposit is very large (in the millions) and the terms
range from overnight to one year.
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3.6- Repurchase Agreements (Repo)
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3.6- Repurchase Agreements (Repo)
(Cont’d)
• Two major reasons why a company with surplus cash prefer repo to marketable
securities;
1. The adjustable maturity provision embedded in the repos The original repo’s
maturity period can be adjusted to suit the needs of investing companies.
2. Repos are protected against market price fluctuations throughout the contract
period, and therefore, any risk involved in the liquidation is removed. Thus,
companies can invest any surplus cash for a few days.
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3.6- Repurchase Agreements (Repo)
(Cont’d) -Mechanics of a Repurchase Agreement
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4- MONEY MARKET RISK
• Relatively low..Why?
• Short term instruments
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Updated: Sept23
REFERENCE:
Mohd Nizal Haniff, Norli Ali, Norashikin Ismail, Noreena Md Yusoff. Introduction to
Malaysian Financial Markets (2024). Mc Graw Hill. Revised First Edition.
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Updated: Sept23