The Money Markets
Chapter 11
• Sold in Large denominations
• Low Default Risk
• Mature in one year or less
Why do we need the Money markets?
• Provide short term loans
• Accept short term deposits
Purpose of Money Markets
1. “Warehouse” Surplus Funds
2. Provide a low-cost source of funds that need a short-term infusion of funds.
3. An interim investment that provides a higher return than holding cash or money in banks.
4. Investment advisers often hold some funds in money market, so they will be able to act quickly to take advantage of investment
opportunities they might identify.
https://www.infovesta.com/index2/rdpu
Who Participates
in the Money Markets?
Money Market Instruments
1. Treasury Bills 2. Federal Funds
3. Repurchase Agreements
4. Negotiable Certificates of Deposit 5. Commercial Paper
6. Banker’s Acceptance 7. Eurodollars
1. Treasury Bills
I. Issued by Government & traded by central bank
• 28, 91, 182 day maturities
• Discounting
• Zero Risk
II. Risk
• Zero risk
• Deep (many different buyers & sellers) & Liquid (can be bought
& sold quickly with low transaction cost) III. Treasury Bill Auctions
• Competitive Bidding
• Non Competitive Bidding IV. Interest Rate Low
2. Fed Funds / Pasar Uang Antar Bank (in Indonesia)
1. Maturity : one night / overnight 2. Purpose : Provide banks with an immediate infusion of reserves
3. Interest rate : Forces of supply and
demand set the Fed funds interest rate
(Close to Discount Loans rate)
3. Repurchase Agreements
1. These work similar to the market for fed funds, but nonbanks can
participate.
2. A firm sells Treasury securities, but agrees to buy them back at a certain date (usually 3–14 days later) for a certain price.
3. purchases/sells Treasury securities in the repo market.
4. Low risk & low return
4. Negotiable Certificates of Deposit
1. History of CD: to counter the long term trend of declining demand deposits at large banks, 2. Bearer Instrument
3. Maturity : 1- 4 Months 4. Interest rate :
– Similar with other rate on money market (relatively low)
– Negotiated between bank & customer
5.Commercial Paper
• Unsecured promissory notes, issued by corporations, that mature in no more than
270 days.
• Free from SEC Regulations becauce
sold directly by the issuer to the buyer (Direct Placement)
• Discounting
• Most of CP back up their paper with a
line of credit at bank.
6. Banker’s Acceptances
• An order to pay a specified amount to the
bearer on a given date if specified conditions have been met, usually delivery of promised goods.
• These are often used when buyers / sellers of expensive goods live in different countries.
• As seen, banker’s acceptances avoid the need to establish the credit-worthiness of a
customer living abroad.
• There is also an active secondary market for banker’s acceptances until they mature. The terms of note indicate that the bearer,
whoever that is, will be paid upon maturity.
7. Eurodollars / Pasar Valuta Asing (In Indonesia)
• Eurodollars represent Dollar
denominated deposits held in
foreign banks.
Money Market Transaction In Indonesia
Source : bi.go.id
