Market Money

Money Market
Agenda
Topics covered:
Introduction to Money Market
Instruments traded in Money Market
Difference between
Repo and Reverse Repo
Caps Floors and Collars
Advantages of investing in Money Market
Disadvantages of investing in Money Market
Difference between
Capital Market and Money Market
Introduction of Money Market
Money market is a part of the global financial market that deals with shortterm lending and borrowing.
They are often used as a solution to short-term cash needs by

governments, large institutions, and, sometimes, individuals.
Unlike a stock exchange, the money market is not a particular place but is
a system.
The transactions take place between different investors by telephone, fax

without personal meeting.
Funds are available in this market for periods ranging from a single day up
to a year. This market is dominated mostly by government, banks and
financial institutions.
Introduction of Money Market(cont)
The main instruments of money market are -treasury bills, commercial

papers, Call/Notice, repurchase agreement and certificate of deposit
which are of short-term nature.
A money market account, or money market deposit account, is a

government-insured bank account that pays relatively high interest rates
and provides cash withdrawal privileges.
This type of account offers both savings and checking tools at higher
yields than regular savings and checking accounts.
Money market accounts are offered by banks and credit unions and have
several significant advantages and disadvantages.
Instruments of Money Market
Instruments of Money market(cont)
Instruments of Money market(cont)
Issuance of Treasury
Bill in the market
Treasury Bill - T-Bill
A short-term debt obligation backed by the government with a maturity of

less than one year.
T-bills are sold in denominations of $1,000 and commonly have maturities

ofonemonth (four weeks),three months (13 weeks) orsix months (26
weeks).
Treasury Bill - T-Bill
T-bills are issued through a competitive bidding process at a discount from

par, whichmeans thatrather than paying fixed interest payments
likeconventionalbonds, the appreciation of the bond provides the return
to the holder.
For example, let's say you buy a13-week T-bill priced at $9,800.
Essentially, the U.S. government agrees to pay $10000 back in three
months.
T-Bill Primary Market
The securities are issued via a regularly scheduled auction

process. Upon the Treasurys announcement of the size of
upcoming auction, tenders or sealed bids are being solicited
Bidders are submitting two types of bids:
competitive and
non-competitive.
T-Bill Primary Market competitive bids
A competitive bidder specifies both the amount of the security that the
bidder wants to buy, as well as the price that the bidder wants to pay. The
price is set in terms of yield.
The price of the securities in the auction is set based on the prices offered
in competitive bids, taking the average of all accepted competitive prices.
T-Bill Primary Market competitive bids
Competitive bidders are the largest financial institutions . In general 8090% Treasury securities are sold to them.
The Treasury will accept the competitive bids with the highest price and
lowest interest rates, and will reject other bids.
T-Bill Primary Market non-competitive

bids
A non- competitive bidder specifies only the amount of the security that
the bidder wants to buy, without providing the price, and automatically
pay the defined price.
Noncompetitive bidders are retail customers, who purchase low volumes

of the issues, and are not enough sophisticated to submit a bid price.
Limits on each non-competitive bid can be set. Direct purchases of

Treasury securities by individuals are limited in many countries. In such
cases they use the services of dealers.
T-Bills Auction Forms
Uniform price auction is an auction, when all bidders pay the same
price.
Discriminatory price auction is an auction, in which each bidder pays

the bid price.
Caps and Floor are used in a

decided for the security.
market wherein a price band is to be
The band has two limits :
Caps : Is the maximum price in the price band that the security can be
issued for.
Floor : Is the minimum price in the price band that the security can be
issued for.
A collar is a long position in a cap and a short position in a floor
Auction Process
All competitive tenders are ranked in order of the bid yield.
The lowest competitive bid is accepted first. As a result, the highest bid
prices are accepted until the issue is sold out fully.
The lowest rejected bid yield (or the highest accepted bid yield) is called
stop yield. The corresponding price is called the stop-out price.
Auction Process
Each competitive bidder pays the price for the securities, which
is determined by the yield that was bid. The average yield is
the average of all accepted competitive bids, weighted by the
amounts allocated at each yield.
All noncompetitive bidders pay the average yield.
Repurchase Agreement
(REPO)
Repurchase Agreement (REPO)
A repurchase agreement (REPO) is an agreement to buy any securities

from a seller with the agreement that they will be repurchased at some
specified date and price in the future.
Repurchase agreement (REPO) is a fully collateralize loan in which the

collateral consists of marketable securities
Repurchase Agreement (REPO)
The REPO transaction represents a loan backed by securities. On default

,the lender has a claim on the securities.
For the party selling the security (and agreeing to repurchase it in the
future) it is a repo; For the party on the other end of the transaction,
(buying the security and agreeing to sell in the future) it is a reverse
repurchase agreement.
Repo - Tenure
Open REPO is a REPO agreement with no set maturity date, but renewed
each day upon agreement of both counterparties.
Term REPO is a REPO with a maturity of more than one day.
The participants of REPO transactions are banks, money market funds,

non-financial institutions.
Difference between Repo and Reverse Repo
No
.
Repo
Reverse Repo
Seller of the security has

Buyer of the security has
the right to repurchase the the right to surrender the
security at a future date.
security at a future date.
Receiver of the funds is

the borrower
Receiver of the funds is the

lender.
Advantages of Money Market
Disadvantages of Money Market
Difference between Capital Markets and

Money Markets
N
o
Capital Markets
Trading of financial
instruments with maturity of
more than 1 year.
Money Markets
Trading of financial
instruments with maturity of
less than 1 year.
Risk is more and varied.
Less risky.
Deals in long term capital.
Deals in short term capital.
Instruments include shares,

bonds, etc.
Instruments include T Bills,

Certificate of deposit, etc.
Do you have any

questions?
Thank You

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Money Market

Introduction to Money Market

Instruments traded in Money Market

Repo and Reverse Repo

Caps Floors and Collars

Advantages of investing in Money Market

Disadvantages of investing in Money Market

Capital Market and Money Market

Introduction of Money Market

They are often used as a solution to short-term cash needs by

The transactions take place between different investors by telephone, fax

Introduction of Money Market(cont)

The main instruments of money market are -treasury bills, commercial

A money market account, or money market deposit account, is a

Instruments of Money Market

Instruments of Money market(cont)

Instruments of Money market(cont)

Treasury Bill - T-Bill

A short-term debt obligation backed by the government with a maturity of

T-bills are sold in denominations of $1,000 and commonly have maturities

Treasury Bill - T-Bill

T-bills are issued through a competitive bidding process at a discount from

T-Bill Primary Market

The securities are issued via a regularly scheduled auction

Bidders are submitting two types of bids:

T-Bill Primary Market competitive bids

T-Bill Primary Market competitive bids

T-Bill Primary Market non-competitive

Noncompetitive bidders are retail customers, who purchase low volumes

Limits on each non-competitive bid can be set. Direct purchases of

T-Bills Auction Forms

Discriminatory price auction is an auction, in which each bidder pays

Caps and Floor are used in a

market wherein a price band is to be

The band has two limits :

A collar is a long position in a cap and a short position in a floor

All competitive tenders are ranked in order of the bid yield.

All noncompetitive bidders pay the average yield.

Repurchase Agreement (REPO)

A repurchase agreement (REPO) is an agreement to buy any securities

Repurchase agreement (REPO) is a fully collateralize loan in which the

Repurchase Agreement (REPO)

The REPO transaction represents a loan backed by securities. On default

Term REPO is a REPO with a maturity of more than one day.

The participants of REPO transactions are banks, money market funds,

Difference between Repo and Reverse Repo

Seller of the security has

Receiver of the funds is

Receiver of the funds is the

Advantages of Money Market

Disadvantages of Money Market

Difference between Capital Markets and

Risk is more and varied.

Deals in long term capital.

Deals in short term capital.

Instruments include shares,

Instruments include T Bills,

Do you have any

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