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Syllabus B. Financial Management Environment B3. The nature and role of money market

The characteristics and role of the principal money market instruments

The characteristics and role of the principal money market instruments

Money market instruments are short term and they can give interest, be discounted or be derivative based

Interest Bearing

Any financial instrument that earns interest

  • Certificates of deposit (CDs)

    A CD is a receipt for funds deposited in a bank for a specified term and for a set rate

    With a CD - if they’re negotiable - they can be sold before maturity. Non-negotiable ones just pay a set amount of interest (coupon) and is repaid as normal

  • Repurchase Agreement

    A repo is where 2 parties agree to buy/sell an instrument at an agreed price and then repurchase back at an agreed price a set time later

  • Bank Deposits

    Bank deposits are made to deposit accounts at a banking institution.
    The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the account. 

    The "deposit" itself is a liability owed by the bank to the depositor (the person or entity that made the deposit).

  • Government Security

    A bond (or debt obligation) issued by a government authority, with a promise of repayment upon maturity that is backed by said government. 

    These securities are considered low-risk, since they are backed by the government.

  • Local authority bond

    a fixed- interest bond, repayable on a specific date, used by a local authority in order to raise a loan and similar to a Treasury bond


  • Bill Of Exchange

    Is an unconditional order in writing to pay the addressee a specified sum of money either on demand or at a future date.

Discount Instruments

These don’t pay interest as such. They are issued at a discount, which effectively means the “interest” is all at the beginning

Think of it from the lenders viewpoint. They wish to lend $100, but actually only need to lend $80 (discounted at the start) but are paid back the full $100.

  • Treasury Bills

    These are issued by governments with maturities from 1m to 12m. They are issued at a discount to their face value

  • Commercial paper

    These are unsecured with a typical term of 30days.

    There are issued by large organisations with good credit ratings - funding their short term investment needs

  • Bankers Acceptance

    These again are issued by companies BUT are guaranteed by a bank

    The banks will get a fee for this guarantee - and because the risk is low (for the lender due to the bank guarantee) - the interest the companies offer on these will be low

    Again these are offered at a discount however they are negotiable, meaning they can be traded before maturity

    These are normally issued by firms who do not have a good enough credit rating to offer commercial paper