Financial Instruments – an asset is a Money Market – FI traded here are short

resource controlled by the entity as a result of term and highly liquid that it can be
past events and from which future economic considered close to being money.
benefits are expected to flow to the entity.
Three characteristics of MM securities
Tangible assets – has physical properties and
1. sold in large denominations
can be easily seen, touch, or perceived by the
2. low default risk
five senses.
3. mature in one year or less from issue
Intangible assets – do not have physical date; it mostly mature in less than 4
substance and usually represents a legal claim months.
to some future economic benefit.
Transactions in MM are not confined in one
Financial Instruments – basically intangible single location, it happens electronically.
as future economic benefit takes form of a
Active secondary market enables
claim to cash that will be received in the
individuals/organizations to trade MM
future;
instruments to cater to short term financial
- main vehicle used in financial needs.
market;
MM = wholesale market
- may be presented in cash
equivalents or investments; Mature secondary market allows the MM
- securities maturing within 90 to be the preferred place for firms to
days or less are under CE temporarily store excess funds.
Two parties involved in Financial Instrument Participants in the MM
Issuer - party that issues the FI and agrees to Bureau of Treasury – sells government
make future cash payments to the investor. securities to raise funds. Short-term issuances
of government securities allow the
Investor – party that receives and owns the
government to obtain cash until tax revenues
FI and bears the right to receive payments to
are collected.
be made by the issuer.
Commercial Banks – issues treasury
Financial Instruments = Assets
securities; sells certificate of deposits and
Two main economic purposes extend loans; they are the primary issuer
negotiable certificates of deposits, banker’s
1. Allows transfer of fund from entities
acceptances and repurchase agreement.
with excess funds (investors) to
entities who needs funds (issuer). Private individual – made their investment
2. Permit transfer of fund that allows through money market mutual funds.
sharing of inherent risk associated
Commercial non-financial institution –
with the cash flows coming from
buy and sells MM securities to manage their
tangible asset investment between the
cash to temporarily store excess funds in
issuer and investor.
exchange of somewhat higher return and
obtain short-term funds.
Investment companies – trade securities in - Deep market means that the
behalf of their clients; help maintain liquidity market has numerous diff. buyers
of MM since they make sure that sellers can and sellers.
easily sell their securities when the need - Liquid market means that
arises. securities can be quickly traded at
low transactions cost.
Finance/Commercial leasing companies –
- Govt. securities particularly, TB,
these companies raise MMI i.e. commercial
are the safest investment
paper to lend funds to individual borrowers.
instrument in the market.
Insurance Companies – companies that - TB are issued at a discount (lower
invest on MM to maintain liquidity level in price than the par value at
case of unexpected demands (property and maturity).
casualty). - Risk-free asset; meant as an
investment vehicle to temporarily
Pension funds – maintain funds in MM in store excess cash.
preparation for long-term investing in stocks - TB can be sold via two methods
and bonds market. - Auctions/Competitive bidding.
MM mutual funds – permit small investors The Bureau of Treasury
to invest in the MM by accumulating funds announces quantity and type of
from numerous small investors to buy large securities that they will sell.
denomination MMS. - Noncompetitive bidding. Bidders
only give the amount of securities
Types of MM Financial Instruments that they want to buy.
MMI took the form of short-term deposits, 𝐵𝑣−𝐵𝑝 360
Annualized Discount Rate = ( )
govt. securities, commercial papers and 𝐵𝑣 𝐷
certificate of deposits which form part of the Bv = face value/market value
Philippine interest rate market. MMI are
governed by Philippine regulations and are Bp = purchase price
influenced by market movements. D = tenor or period in days
Treasury bills A 1,000 TB with a 91-day tenor can be
- govt. securities issued by Bureau purchased at 995.
of Treasury which mature in less 1000 − 995 360
Annualized Discount Rate = ( 91 )
than a year. 1000
- Cash Management Bills – mature 5 360
Annualized Discount Rate = 1000 ( 91 )
in less than 91 days.
- Virtually zero default risk Annualized Discount Rate = 1.98%
- Risk of inflationary changes is
𝐵𝑣−𝐵𝑝 365
lower since maturity term is Annualized Investment Rate = ( )
𝐵𝑝 𝐷
shorter.
- Market for TB both deep and - Face amount as a denominator
liquid. - Use of 360 days
Repurchase Agreement (repo) Not required to register with SEC if:
- Financial contract involving two - Issued to not more than 19 non-
securities transactions, a institutional lenders
sale/purchase of a debt security on - Payable to specific person
a near date and reversing - Neither negotiable nor assignable
purchase/sale of the same or and held on to maturity
equivalent debt security on a - Amount not exceeding 50 million
future date.
Banker’s Acceptance
- Key component of the debt
securities market that produces - Refer to an order to pay a
short-term cash or securities specified amount of money to the
liquidity critical to price-making bearer on a specified date.
activity of fixed income dealers. - Usually offered to importers and
- Collateralized loans exporters.
- Govt., through BSP, uses repo to - Usually payable to the bearer
enforce monetary policy.
- Low risk investments with low Evaluating MMS
interest rate MMS may be evaluated based on interest
rates and liquidity.
Negotiable Certificates of Deposits
- Securities issued by banks which Interest rate in MM tend to be relatively low
records a deposit made. as a result of the low risks associated with
- Restricts holders from them and the short maturity period.
withdrawing funds on demand. MMS have a very deep market.
- The concept of CD is that
investors are willing to accept a Liquidity refers to how quick, efficient and
higher return in exchange of cheap to convert a security into cash.
having no access to liquidity. Valuation of MMS
- As a bearer instrument, whoever
person or entity which possesses It is important to determine at what amount
the instrument upon maturity will an investor is willing to pay in exchange of a
receive the principal and the security.
interest. MMS can be valued using the present value
Commercial paper approach.
𝑆𝑏
- Unsecured promissory notes. Market Security Value = (1+𝑖)1
- May be short or long-term
- Only large and creditworthy As the interest rate rises, the value of the
corporations can issue this security becomes lower which also means
security. that the market risk increases and so the
impact on the value of the securities
decreases.