Unit 3 Money Market

Unit 3: Money Markets C O M P I L E B Y: AC H Y U T R A J P YA K U R E L ,
MBA
Money Market and Its Key Institutions and Traders, Common Money Market
Instruments, New Issue Market, Call Money Market, Bills Money Market, Money
Market Risk Management, Central Banking and the Rules that Surround the
Money Market, Money Market and Economy
What is the Money Market?
The money market is an organized exchange market where

participants can lend and borrow short-term, high-quality debt
securities with average maturities of one year or less. It enables
governments, banks, and other large institutions to sell short-term
securities to fund their short-term cash flow needs. Money markets also
allow individual investors to invest small amounts of money in a low-
risk setting.
Repurchase Agreement
A repurchase agreement, also known as a repo loan, is an instrument for raising short-term funds.
With a repurchase agreement, financial institutions essentially sell securities from someone else,
usually a government, in an overnight transaction and agree to buy them back at a higher price at
later date. The security acts as collateral for the buyer until the seller can pay the buyer back, and
the buyer earns interest in return.
Repurchase agreements allow the sale of a security to another party with the promise that it’ll be
purchased again later at a higher price. The buyer also earns interest.
With a repurchase agreement being a sell/buy-back type of loan, the seller acts as the borrower
and the buyer as the lender. The collateral refers to the securities sold, which usually originate with
the government. Repo loans provide quick liquidity.
The assets are meant to be sold right away, unlike a secured deposit. Although repo loans are safe
because they’re backed by government securities, there is a risk that the securities will drop in value,
hurting the buyer’s investment.
With an overnight repo loan, the agreed duration of the loan is one day. However, either party can
extend the maturity period, and occasionally the agreement has no maturity date at all.
Other collateralized loans include mortgages. Get a great rate on one today.
Treasury Bills or T-Bills are short-term
government bonds that are issued by the Central Bank on
behalf of the government. They are risk- free because of
the backing of the government. Their main purpose is to
meet the temporary liquidity shortfalls of the
Treasury Bill government. They have a maximum maturity period of
364 days from the issue date. Therefore they are money
market instruments and offer liquidity to the investors.
There are majorly five types of Treasury Bills,
categorized on the basis of their maturity periods.
Corporate Bond
When any private or public company issues bonds in this
market, such bonds are usually referred to as corporate
bonds. And such a market where the regular trade takes
place is referred to as Corporate Bonds Market. Public
companies can also issue convertible bonds, which can be
later converted into equity shares as well. These Bonds
are a long-term source of finance for the companies and
will have a minimum maturity of 1 year
Call money market
Call money is a short-term, interest-paying loan from one to 14 days made by a financial
institution to another financial institution. Due to the short term nature of the loan, it does not
feature regular principal and interest payments, which longer-term loans might. The interest
charged on a call loan between financial institutions is referred to as the call loan rate.
Call money, also known as "money at call," is a short-term financial loan that is payable
immediately, and in full, when the lender demands it. Unlike a term loan, which has a set maturity
and payment schedule, call money does not have to follow a fixed schedule, nor does the lender
have to provide any advanced notice of repayment.
◦ Call money – money lend for 1 day
◦ Notice Money- money lend for more than 1 day and less than 15 days
◦ Term Money – money lend for more than 15 days
Why do bank borrow?
To address temporary mismatches fund

To meet CRR and SLR
To meet unexpected demand of fund dur to large outflow
Bills Money Market
Treasury Bills or T-Bills are short-term government bonds that are issued by the Central
Bank on behalf of the government. They are risk- free because of the backing of the
government. Public Debt Management Department of NRB issues such Bills on behalf
of the Government.
Their main purpose is to meet the temporary liquidity shortfalls of the government.
They have a maximum maturity period of 364 days from the issue date.
Therefore they are money market instruments and offer liquidity to the investors. There
are majorly four types of Treasury Bills, categorized on the basis of their maturity
periods.
Bills Money
Market
Bills
Money Market
Money Market Risk Management
1. Credit risk
Money market securities are susceptible to volatility and are not insured, hence the potential
to not lose money, however low, is not guaranteed. There exists a probability of loss, although
it is generally quite small. There is no guarantee that investors will receive face value per
share on the redemption of their shares.
2. Low returns
The low returns of money market funds are usually lower than other funds comprising of assets
such as stocks and properties. There is a chance that money market returns may also fall
below the inflation rate, providing negative real returns to investors (inflation risk). Interest
rates can also go down further, reducing returns on money market investments.
Money Market Risk Management
3. Money Market Fund Rates Are Variable
You cannot know how much you’ll earn on your investment as the future unfolds. The rate could go up
or down. If it goes up, that may be a good thing. However, if it goes down—and you earn less than you
expected—you may end up needing more cash to meet your goals. This risk exists with other securities
investments, but it is still worth noting if you're looking for predictable returns on your funds.
4.Potential Opportunity Costs and Inflation Risk
Because money market funds are considered to be safer than other investments such as equities, long-
term average returns on money market funds may be lower than long-term average returns on riskier
investments. Over long periods, inflation can eat away at your returns, and you might be better served
with higher-yielding investments if you have the capacity and desire to take the risk.
5. Locked-Up Funds
In some cases, money market funds can become illiquid, which helps to reduce problems during market
turmoil. Funds can impose liquidity fees that require you to pay for cashing out. They may also use
redemption gates, or temporary suspensions, which require you to wait before receiving proceeds from a
money market fund.
Central Banking and the Rules that Surround the Money Market
1. Open Market Operations

2. Change in reserve requirements.
3. Margin lending
4. Interbank Market
5. Central Bank Interaction with Market and Interest Rate Volatility
◦ The ability to manage the quantity of reserve money accurately will give the central bank
freedom to provide incentives to market liquidity and to restrain volatility of interest rates.
Unfortunately, the single greatest problem most central banks face is poor ability to manage
the quantity of excess reserves. They are not able to forecast well the autonomous transactions
that affect the level of excess reserves, often because of poor government cash management
1. PRODUCING INFORMATION AND ALLOCATING
CAPITAL
2. SHARING RISK
Money
Market and 3. LIQUIDITY
Economy 4. DIVERCIFICATION
5. ENCOURAGE TO SAVING +INVESTMENT

6. CONTROLS PRICE LINE
7. CORRECTING IMBALLANCES IN THE

ECONOMY
Money Market 8. REGULATES FLOW OF CREDIT
and Economy
9. TRANSMISSION OF MONETARY POLICY
10. GROWTH OF MONEY MARKET

11. INTERBANK MARKETS
Money Market 12. LINK WITH FOREIGN

and Economy EXCHANGE MARKET
13. DETERMINATION OF
APPROPRIATE INTEREST RATES
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Unit 3: Money Markets C O M P I L E B Y: AC H Y U T R A J P YA K U R E L ,

The money market is an organized exchange market where

To address temporary mismatches fund

1. Open Market Operations

5. ENCOURAGE TO SAVING +INVESTMENT

7. CORRECTING IMBALLANCES IN THE

10. GROWTH OF MONEY MARKET

Money Market 12. LINK WITH FOREIGN

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