MONEY MARKET INSTRUMENTS

PRESENTED BY:-SONIKA(30-MBA-06)

MONEY MARKET

CHARACTERISTICS OF MONEY MARKET INSTRUMENTS

• Short-term borrowing and lending.

• Low credit risk.

• High liquidity.

• High volume of lending and borrowing.

Money market Instruments

• Eurodollars• Treasury Bills• Federal bonds• Municipal bonds

Eurodollars• Eurodollar: U.S. dollars held as deposits in foreign banks

• Corporations often find it more convenient to hold deposits at foreign banks to facilitate payments in their foreign operations

• Can be held in U.S. bank branches or foreign banks• Risk:

• They are not subject to reserve requirements • Nor are they eligible for FDIC depositor insurance (U.S. government is not

interested in protecting foreign depositors)• The resulting rates paid on Euro dollars are higher (higher risk)

• Trading:• Over night trading as in the Federal Funds market• Eurodollars are traded in London, and the rates offered are referred to as

LIBOR (London Interbank Offered Rate)

Treasury Bills

• T-bills are short-term securities issued by the US Treasury to raise money from public.

• They are issued with three-month, six-month and one-year maturities.

• T-bills are purchased for a price that is less than their par value;

• One of the few money market instruments that are affordable to the individual investors.

• T-bills are usually issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million.

• Treasury Bills are sold by single price auctions held weekly. • If you want to buy a T-bill, you submit a bid that is prepared

either non-competitively or competitively. • T-bills are considered to be the safest investments .• They are exempt from state and local taxes.• return are less because Treasuries are exceptionally safe.• Investment characteristics of treasury bills:-

– Default risk– Liquidity– Taxes – Minimum denomination

Federal Funds• Short-term funds transferred (loaned or borrowed) between

financial institutions, usually for a period of one day.• Used by banks to meet short-term needs to meet reserve

requirements (over night).• Banks loan because they would not make any interest at all

on excess reserves held with the Fed.• Banks may borrow the funds to meet the reserves required

to back their deposits.• Participants in federal funds market include commercial

banks , savings and loan associations , government sponsored enterprises , branches of foreign banks in the US , federal agencies and securities firms.

Fed funds rates and T-bill rates 1990 through 2004

Municipal Bonds• Bond issues by a state , city , or other local govt. or their

agencies.• The method and practices of issuing debt are governed by an

extensive system of laws and regulations , which vary by state.• The issuer of the municipal bond receive a cash payment at the

time of issuance in exchange for a promise to repay the investor over time.

• Repayment period can be as short as few months to few years.• Bond bear interest at either fixed or variable rate of interest.• Interest income received by bond holders is often exempt from

the federal income tax and income tax of state.

• Investors usually accept lower interest payments than other types of borrowing.

• Municipal bond holders may purchase bonds either directly from the issuer at the time of issuance or from other bond holders after issuance.

• Municipal bonds typically pay interest semi-annually.

• Interest earnings on bonds that fund projects that are constructed for the public good are generally exempt from federal income tax.

• But , not all municipal bonds are tax-exempt.

• Municipal bonds may be general obligations of issuer or secured by specified revenues.

Comparing Money Market Securities : A comparison of rates

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