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CHAPTER 4
Money market
In finance, the money market is the global financial market for short-term borrowing
and lending. It provides short-term liquid funding for the global financial system. The
money market is where short-term obligations such as Treasury bills, commercial paper
and bankers' acceptances are bought and sold.
The money market consists of financial institutions and dealers in money or credit who
wish to either borrow or lend. Participants borrow and lend for short periods of time,
typically up to thirteen months. Money market trades in short term financial instruments
commonly called "paper". This contrasts with the capital market for longer-term funding,
which is supplied by bonds and equity.
Whenever a bear market comes along, investors realize (yet again!) that the stock market
is a risky place for their savings. It's a fact we tend to forget while enjoying the returns of
a bull market! Unfortunately, this is part of the risk-return tradeoff. To get higher returns,
you have to take on a higher level of risk. For many investors, a volatile market is too
much to stomach - the money market offers an alternative to these higher-risk
investments.
The money market is better known as a place for large institutions and government to
manage their short-term cash needs. However, individual investors have access to the
market through a variety of different securities. In this tutorial, we'll cover various types
of money market securities and how they can work in your portfolio.
The money market is a subsection of the fixed income market. We generally think of the
term fixed income as being synonymous to bonds. In reality, a bond is just one type of
fixed income security. The difference between the money market and the bond market is
that the money market specializes in very short-term debt securities (debt that matures in
less than one year). Money market investments are also called cash investments because
of their short maturities.
One of the main differences between the money market and the stock market is that most
money market securities trade in very high denominations. This limits access for the
individual investor. Furthermore, the money market is a dealer market, which means that
firms buy and sell securities in their own accounts, at their own risk. Compare this to the
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stock market where a broker receives commission to acts as an agent, while the investor
takes the risk of holding the stock. Another characteristic of a dealer market is the lack of
a central trading floor or exchange. Deals are transacted over the phone or through
electronic systems.
The easiest way for us to gain access to the money market is with a money market mutual
funds, or sometimes through a money market bank account. These accounts and funds
pool together the assets of thousands of investors in order to buy the money market
securities on their behalf. However, some money market instruments, like Treasury bills,
may be purchased directly. Failing that, they can be acquired through other large
financial institutions with direct access to these markets.
There are several different instruments in the money market, offering different returns
and different risks. In the following sections, we'll take a look at the major money market
instruments.
Participants
The core of the money market consists of banks borrowing and lending to each other,
using commercial paper, repurchase agreements and similar instruments. These
instruments are often benchmarked to the London Interbank Offered Rate (LIBOR).
Certain large corporations with strong credit ratings, issue commercial paper on their
own credit. Other large corporations arrange for banks to issue commercial paper on their
behalf via commercial paper lines.
In the Malaysia, federal, state and local governments all issue paper to meet funding
needs. States and local governments issue municipal paper, while the Malaysian Treasury
issues Treasury bills to fund the public debt.
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• Federal Agency Short-Term Securities - (in the US). Short-term securities issued
by government sponsored enterprises such as the Farm Credit System, the Federal
Home Loan Banks and the Federal National Mortgage Association.
• Federal funds - (in the US). Interest-bearing deposits held by banks and other
depository institutions at the Federal Reserve; these are immediately available
funds that institutions borrow or lend, usually on an overnight basis. They are lent
for the federal funds rate.
• Money market mutual funds - Pooled short maturity, high quality investments
which buy money market securities on behalf of retail or institutional investors.
• Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the
reversal of the exchange of currencies at a predetermined time in the future.
Maybank's wide network and balance sheet strength offers you the advantage of a variety
of Money Market products at competitive prices. You will benefit from the wide
experience of our team and commitment to deliver the best value on your investments.
Banker's Acceptance
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Short Term Revolving Credit (STRC) is a financial tool for short-term non trade-related
activities. The tenor ranges from 1 to 12 months.
Repurchase Agreement
In a Repo or Repurchase Agreement, the bank sells its money market instruments
approved by Bank Negara Malaysia to an investor, with an understanding to buy back the
said instruments at an agreed price (interest rate) on a specific future date.
A Repo offers flexibility because the tenor ranges from 1 day to 1 year and investors can
retire the transaction earlier (Reverse Repo), subject to rate adjustment, should they need
the funds prior to maturity. Maybank offers both conventional and Islamic Repo.
Fixed Deposit
A fixed deposit bears interest at an agreed rate based on a specific maturity date. The
tenor may vary from 1 to 60 months. The minimum placement is RM5,000 for 1 to 2
months and RM1,000 for 3 months or longer. A fixed deposit earns higher interest than a
savings account and offers protection from interest rate fluctuations.
Maybank accepts currency deposits for major foreign currencies like USD, EURO and
AUD, besides MYR deposits. Our worldwide branch networking and extensive
correspondent banking relationships enable us to quote competitive pricing for tenors
ranging from 1 day to 1 year.
Investment Products
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