Money Market Securities

MONEY MARKET SECURITIES
Money Market Securities
 Money Market Exists for the purpose of
“ Issuing and trading of short term instruments,

that is, instruments where the term remaining
from the date when trading takes place to the
date of maturity, is of short term nature”
Characteristics of Money Market Securities
 The developed money market has the following

characteristics
 Existence of Central Bank,
 Highly organized commercial Banking System
 Existence of sub-markets
 Healthy competition in sub-markets
 Integrated structure of money market

Cont….
 Availability of proper credit instruments.

 Adequacy and Elasticity of funds
 International attraction
 Uniformity of interest rates
 Stability of prices and
 Highly developed Industrial system
 Short term borrowing and lending
 Low credit risk
 High liquidity
 High volume of lending and borrowing
Economic Role of Money Market (MM)
 Economic Role of Money Market (MM)

 The money market is a market for liquidity
 Liquidity is stored in MM by investing in MM
securities.
 Liquidity is bought in MM by issuing securities
(borrowing).
 Liquidity status of commercial banks is reflected
 Provides market Fed’s reserve transactions(open
market operations)
 Indicator of economic conditions
Money Market Instruments
 Treasury Bills
 Commercial Papers
 Repurchase Agreements
 Bankers Acceptance
 Eurodollars Deposits
 Federal Funds
Treasury Bills
 T bills are the government debt securities

that mature in one year or less from their
date of issue.
 The T bills are different than other securities
because they do not offer interest like
others. The T bills are issued on discount
and when they mature the face value of the
T-bill is given to the holder.
Features of T Bills
 Issued through the bidding process

 Like Zero coupon bond issued at discount and
redeemed at par value.
 Purchased by institutions and corporate bodies
(Banks).
 May be traded in the countries secondary
markets
 T Bills issued for 03, 06, 12 months. The rate of
return vary over time.
Investment Characteristics of T Bills
 Default Risk
T bills are on the guarantee of the government therefore
minimum default risk is associated with them.
 Liquidity
Highly Liquid instruments in financial markets. Can be
liquidated when ever the holder wants
 Denomination
The denomination of the T bills is in Multiplier of
100
How to calculate return on T-Bills?
 Yield is based on their appreciation in price b/w time

of issue time they mature or are sold by the investor.
 Bill yield are determined by the discount method;
treats the par value as the investment base uses a
360-day year for simplicity
Discount Rate (DR)
par value – purchase price x ______360______
par value No of days to maturity
Cont….
 Suppose you buy a 12 Weeks T-bill at Rs.98 and keep

it until maturity having face value of rs.100. Then the
discount rate on this bill can be calculated = 0.06
 The T bills rate is figured out in a different way than

other securities. Therefore, the investor also
calculates the and compares the bill yield into
investment yield. How?
Cont…..
Investment yield or rate (IR)

IR = 365 x DR__________
360 – (DR x Days to Maturity)
OR
IR = par value – purchase price x ______365______
purchase price No of days to maturity
How T bills are Traded
 At start Treasury bills were issued on fixed rate.eg;

six months at 6 percent per year
 In April 1991
 Introduce the American-style auction-based system.
 The role of primary market restrict to fortnightly
auctions.
 Primary dealers were appointed.
Cont….
 SBP use two methods
Auction
System
Open Market Operations
Auction System
 SBP announces the T-Bill auction

 Primary dealers submit the bids
 After the submission dead line, bids will open
 MOF decides the cut off price
 After one or two days of finalizing price, securities
are issued.
Open Market Operation (OMO)
 In OMO Government fix the discount rate before the

announcing the new securities and can be issued
when they need funds.
 Through OMO Government can sell as well as buy
back securities.
 Trading T-Bills in OMO is mainly to control the
circulation of money in the market
Commercial Papers
 Short-term, unsecured promissory notes issued by

well-known companies carrying high credit rating
 Used to meet immediate cash needs
 Funds raised from commercial paper are commonly
used for current transactions
 SBP and SECP started process of creating
commercial paper market in Pakistan in2003
 Maturity Period Between 30 days and one year
from the date of subscription
Issuers of Commercial Papers
 Highly rated companies and financial

institutions with minimum equity of Rs.100
million
 Minimum current ratio of 1: 1 and
debt/equity ratio of 60: 40.
 Minimum credit rating of the issuer shall be
A-
 No overdue loan or defaults
Size And Denomination
 Minimum size of the issue of commercial

paper shall not be less than Rs.10 million
 In case of private placement, CP would be
denominated in Rs. 100,000 or in multiple
thereof
 In case of offer to general public, CP maybe
denominated in Rs. 5,000 or in multiples
thereof
Mode Of Issue And Discount Rate
 In the form of a promissory note

 Discount to face value is determined by the issuer
keeping in view the prevailing T-bill rates, KIBOR
and issuer’s credit rating
 Calculation
Discount Rate (DRcp)
par value – purchase price x ______360______
par value No of days to maturity
Investors and Advantages of CP
 Can be issued by way of Public offer and/or

to Scheduled Banks
 Large Institutions as the issue size is often
too high for individual investors
 Higher yields than time deposits
 Safe investment
Repurchase Agreement
 Repurchase agreements are agreements

between a borrower and a lender
 Borrower sells securities to the lender with
the stipulation that the securities will be
repurchased on a specified date and at a
fixed price and interest
 Securities serve as collateral for loan
Types Of Repo
(In Term of Maturity)
1. Overnight repos
2. Term repos
3. Open repo
Major Borrowers And Lenders
 Major borrowers include government bond dealers

of Treasuries and federal agency securities, and large
banks
 Active lenders include state and local governments,
insurance companies,
 Large banks, non-financial corporations, and foreign
financial institutions
 Government securities are the main collateral for
most repos
Repo Interest Income
 The difference between the underlying securities

current price and repurchase price is the amount of
interest paid by the borrower to the lender
RP Interest income=
Amount of loan x Current Repo Rate x (Repo
Term in days/360 days)
Purpose of Repo
 To meet deposit reserve requirements

 In order to purchase interest bearing
securities
 Companies lend to avoid losing even a
single day’s interest.
Advantages Of Repo
 Repo rate is less than borrowing from a

bank
 Benefit to lenders is that the maturity of
the Repo can be precisely tailored to the
lender's needs
Banker’s Acceptance
 Acceptance means a vow to pay a definite

amount of money
 The person who will pay is called as the
promissory while the one who will receive
is the beneficiary
Requirements of the Time Draft
 Promissory Signature
 The word accepted on top of his signatures and
 The date on which the amount will be paid
 If the time draft is formally accepted by a bank
then it becomes a banker’s acceptance
 The maturities of banker’s acceptance mostly
range from 30 to 180 days
 The promissory uses the bank’s
creditworthiness instead of his own
What influences the Money Market?
 Monetary policy is the process by which the government,

central bank, or monetary authority manages the money
supply to achieve specific goals—such as
 constraining inflation or deflation
 maintaining an exchange rate
 achieving full employment or economic growth.
 Usually the goal of monetary policy is to accommodate
economic growth in an environment of stable prices.
 Monetary policy can involve changing certain interest rates,
either directly or indirectly through open market
operations, setting reserve requirements, acting as a last-
resort lender (i.e. discount window lending)
 trading in foreign exchange markets.
Fiscal Policy
 Fiscal policy is the economic term that defines the set

of principles and decisions of a government in setting the
level of public expenditure and how that expenditure is
funded.
 Fiscal policy and monetary policy are the macroeconomic
tools that governments have at their disposal to manage
the economy.
 Fiscal policy is the deliberate and thought out change in
government spending, government borrowing or taxes to
stimulate or slow down the economy.
 It contrasts with monetary policy, which describes
policies concerning the supply of money to the economy.
Weekly Assignment
 What are the Money market instruments

in Pakistan?
 What are various International Money Market
Instruments?
 Discuss what International Money Market
Instruments exist in Pakistan.

Money Market Securities

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MONEY MARKET SECURITIES

Money Market Securities

 Money Market Exists for the purpose of

“ Issuing and trading of short term instruments,

 The developed money market has the following

 Highly organized commercial Banking System

 Healthy competition in sub-markets

 Integrated structure of money market

 Availability of proper credit instruments.

 Economic Role of Money Market (MM)

 T bills are the government debt securities

 Issued through the bidding process

 Yield is based on their appreciation in price b/w time

 Suppose you buy a 12 Weeks T-bill at Rs.98 and keep

 The T bills rate is figured out in a different way than

Investment yield or rate (IR)

 At start Treasury bills were issued on fixed rate.eg;

 SBP use two methods

 SBP announces the T-Bill auction

 In OMO Government fix the discount rate before the

 Short-term, unsecured promissory notes issued by

 Highly rated companies and financial

 Minimum size of the issue of commercial

 In the form of a promissory note

 Can be issued by way of Public offer and/or

 Repurchase agreements are agreements

 Major borrowers include government bond dealers

 The difference between the underlying securities

 To meet deposit reserve requirements

 Repo rate is less than borrowing from a

 Acceptance means a vow to pay a definite

 Monetary policy is the process by which the government,

 Fiscal policy is the economic term that defines the set

 What are the Money market instruments

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