5.2 Money Market

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1. Definition of Money Markets 货币市场的定义

Money markets exist to transfer funds from individuals, corporations, and government units with short-term excess funds(supplies of funds) to economic agents who have short-term needs for funds( users of funds).

2. Characteristics of Money Markets 货币市场的特点

①They are usually sold in large denominations.

②They have low default risk.

③They mature in one year or less from their original issue date. Most money market instruments mature in less than 120 days.

3. Institution Use of Money Markets 货币市场机构使用

Commercial banks and savings institutions

Finance companies

Money market mutual funds

Insurance companies

Pension funds

4. The Instruments of Money Markets 货币市场工具

1)Treasury bills 短期国库券

To finance the national debt, the treasury department issues a variety of debt securities. Treasury bills are the most liquid of all the money market instruments because they have an active secondary market and relatively short term to maturity.

They also are the safest of all money market instruments because there is no possibility that the government will fail to pay back the amount owed when the security matures.

The government is always able to meet its financial commitments because of its ability to increase taxes or to issue currency in fulfillment of its scheduled payments.

2)Negotiable certificate of deposit 可转让的存单

NCD is a debt instrument sold by a depository institution that pays annual interest payment equal to a fixed percentage of the original purchase price.

In addition, at maturity the original purchase price is also paid back. Most NCD have a maturity of 1-12 months. Because maturity date is specified, a NCD is a term security as opposed to a demand deposit .

3) Commercial paper 商业票据

Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days.

Because these securities are unsecured, only the largest and most creditworthy corporation issue commercial papers.

The interest rate that the corporation is charged reflects the firm’s level of risk. Most commercial paper actually matures in 20 to 45 days.

Like T-bills, Most commercial paper is issued on a discounted basis. Because the term of commercial paper is very short; so a stronger secondary market for commercial does not exit.

4) Banker's acceptance 银行承兑汇票

A Banker’s acceptances is a time draft drawn on and accepted by a bank. Before acceptance, the draft is not an obligation of the bank; it is merely an order to pay a specified amount of money to a named person or to the bearer of the draft on a given date.

Upon acceptance, which occurs when an authorized bank accepts and signs it, the draft becomes a primary and unconditional liability of the bank.

5) Repurchase agreements 回购协议

Repurchase agreements (repos) are short-term agreements in which the seller sells a government security and buys back on a later date at a higher price.

In effect, the seller has borrowed funds for a short term, and the buyer ostensibly has made a secured loan for which the government security serves as collateral. If the seller (borrower) fails to pay back the loan, the buyer (lender) keeps the government security.

6) Federal fund 联邦基金

In the United States, federal funds are overnight borrowings by banks to maintain their bank reserves at the Federal Reserve.

Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the federal funds market enable depository institutions with reserve balances in excess of reserve requirements to lend reserves to institutions with reserve deficiencies.

These loans are usually made for one day only, that is, “overnight”. The interest rate at which these deals are done is called the federal funds rate.

7) Eurodollars 欧洲美元

Eurodollars are time deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve.

Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins.

8) Money market mutual fund 货币市场共同基金

A money market fund (also known as money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as treasury bills and commercial paper.

Money market funds are widely (though not necessarily accurately) regarded as being as safe as bank deposits yet providing a higher yield.

Checkpoint:

What are the principle financial instruments traded in the money market? What common characteristics do these instruments possess?