final money market

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Financial Marketing and InstitutionsFinancial Marketing and Institutions

TOPIC - MONEY MARKET

GROUP MEMBERS

KUNAL GHARAT

DEEPAK GOHIL

PRADEEP GORE MEENAKSHI JADHAV

SANDEEP JAIGUDE



Money marketMoney market



List Of TopicsWhat is money market?

Need of money market?

Advantages of money market

Various instruments of money market?

Bond equivalent yield

Discount yield

Monetary policy in term of central bank

Monetary policy in term of economy



DEFINATION OF MONEY MARKET

DEFINATION OF MONEY MARKET

A segment of the financial market in which

financial instruments with high liquidity and very short

maturities are traded. The money market is used byparticipants as a means for borrowing and lending in the

short term, from several days to just under a year. Money

market securities consist of negotiable certificates of

deposit (CDs), bankers acceptances, U.S. Treasury bills,commercial paper, municipal notes, federal funds and

repurchase agreements (repos).



Need for money market Receipts of economic units do not coincide with their

expenditures.

Money balances to insure that planned expenditures can bemaintained independently of cash receipts (i.e.,transactions balances in the form of currency, demanddeposits).

A cost in the form of foregone interest involved, by holdingthese balances.

To enable the economic units to minimize this cost, they

usually seek to hold the minimum money balancesrequired for day-to-day transactions.

Supplement these balances with holdings of money marketinstruments.



Structure of Indian Money Market

I :- ORGANISED STRUCTURE

1.Reserve Bank Of India.

2. DFHI (Discount And Finance House Of India).3. Commercial banks

i. Public Sector BanksSBI with 7 subsidiariesCooperative banks20 Nationalized Banks

ii. Private Banks

Indian BanksForeign banks

4. Development bank

IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.



Continued««

II. UNORGANISED SECTOR1. Indigenous banks2 Money lenders3. Chits

4. Nidhis

III. CO-OPERATIVE SECTOR1. State Cooperative

I. Central Cooperative Banks

Primary Agri credit societiesPrimary urban banks

2. State Land Development BanksCentral Land Development BanksPrimary Land Development Banks



ADVANTAGES OF MONEY MARKET

it can be converted to cash quicklyat a relatively low cost

it have low price risk due to their short maturities.

Highly organaised banking system

Presence of central bank

Availability of proper credit instrument

Existence of sub-market

Ample resourcesExistence of secondary market

Demand and supply of fund



VARIOUS INSTRUMENTSVARIOUS INSTRUMENTS

COMMERCIAL PAPERS

TREASURY BILLS (T-BILLS)

REPURCHASE AGREEMENTS

CERTIFICATE OF DEPOSIT BANKER·S ACCEPTANCE

PRIME SALES FINANCE PAPER

DEALER PAPER (FINANCE)

NEGOTIABLE TIME CERTIFICATES OF DEPOSIT

TAX AND BOND ANTICIPATION NOTES



COMMERCIAL PAPERS (CP·S)

CP is a short term unsecured loan issued by a corporationtypically financing day to day operation.

CP is very safe investment because the financial situation of acompany can easily be predicted over a few months.

Only company with high credit rating issues CP·s.



CERTIFICATE OF DEPOSIT (C D )

A CD is a time deposit with a bank.

Like most time deposit, funds can not withdrawn

before maturity without paying a penalty. CD·s have specific maturity date, interest rate and it

can be issued in any denomination.

The main advantage of CD is their safety.

Anyone can earn more than a saving account interest



Treasury Bills (T-Bills) T-bills are the most marketable money market

security.

They are issued with three-month, six-month &

one-year maturities.T-bills are purchased for a price that is less than

their par(face) value; when they mature, thegovernment pays the holder the full par value.

T-Bills are so popular among money marketinstruments because of affordability to the

individual investors.



Negotiable Certificates Of Deposit (NC DS)

NCDS is a certificate issued by a bank for a deposit made at the

bank. This deposit attracts a fixed rate of interest, which is normallypayable to the holder of the instrument together with the nominalamount invested, at redemption date. NCDs are normally issued inmultiples of R1 million. The NCD will contain the followinginformation:

name of the issuing bank date of issue

date of redemption (maturity date)

amount of the deposit

maturity valueannual interest rate paid on the deposit.

NCDs are bearer documents which means that the name of the owner(holder or depositor) does not appear on the document. The bearer orholder of the document will receive the maturity value (the amount

deposited plus interest) at maturity date.



BANKER·S ACCEPTANCE

A banker·s acceptance (BA) is a short-term creditinvestment created by a non-financial firm.

It is a guaranteed by a bank to make payment.

Acceptances are traded at discounts from face value inthe secondary market. It acts as a negotiable time draft for financing imports,

exports or other transactions in goods. This is especially useful when the credit worthiness of a

foreign trade partner is unknown.



Repurchase agreement (Repos) Repo is a form of overnight borrowing and is used by those

who deal in government securities.

They are usually very short term repurchases agreement,from overnight to 30 days of more.

The short term maturity and government backing usually

mean that Repos provide lenders with extremely low

risk.

Repos are safe collateral for loans



Prime Sales Finance Paper

y These are promissory notes from financecompanies placed directly with the investor. Thesecome in denominations of $1,000 to $5,000,000.

There is a minimum order of $25,000. These areissued to mature on any day ranging from 3 days to270 days. There is no secondary market for these.Under certain conditions, the company will buyback the securities prior to maturity. They willusually adjust the interest rate in this event. Thesecan be either discounted or interest bearing. Andthey are based on actual days based on a 360 dayyear.



Dealer Paper (Finance)

y These are promissory notes of financecompanies sold through commercial paperdealers. Their denominations range from

$100,000 to $5,000,000. They are issued tomature on any day from 15 days to 170 days.There is a limited secondary market. Earlybuyback can usually be negotiated with the

dealer. These can be either discounted orinterest bearing based on actual days and a 360day year.



Tax and Bond Anticipation Notes

y These are notes of states, municipalities, or

political subdivisions. They are issued in

denominations of $1,000 to $1,000,000. They

usually mature in periods of 3 months to 1 yearfrom the date of issue. There is a good secondary

market for these. The rate is determined on a

yield basis. Interest is paid at maturity based onusually 30 days and a 360 day year.



BOND

EQUIV

AL

ENT YIELD

The yields listed for short-term discount instruments

have simply been annualized without compounding the interest.

This simplifies the math and can be calculated using a calculatorthat doesn't have a root or exponential function. This

uncompounded annual interest rate is simply called the annual

interest rate to distinguish it from the effective annual yield,

but, most often, it is called the bond equivalent yield (BEY)

( investment rate yield, equivalent coupon yield).



The simplified formula for (BEY)The simplified formula for (BEY)

BEY = Interest Rate per Term x Number of Terms per Year



y Example ³ Calculating The Bond EquivalentYield Of A T-Bill

y If you buy a 4-week T-bill with a face value of

$1,000 for $996.50, what is the bond equivalent

yield, assuming it is not a leap year ?

y ($1,000-

$996.50)/$996.50 x 365/28 = 4.58% (rounded)



DISCOUNT YIELD ON MONEY MARKET

Fixed income markets have standard formulas for

quoting the yield on various instruments. Because

instruments are often quoted with yields instead of

prices, the formulas must be applied precisely to obtainthe price that corresponds with a quoted yield. Most of

the formulas evolved before the age of computers, so

they represent a trade off between

computational ease with pencil and paper, and

a reasonable representation of economic return.



DISCOUNT YIELD

Yields for discount instruments traded in the money market

are generally quoted on a bank discount basis, which amply

illustrates this trade o ff. The bank discount yield (or

simply discount yield) of a discount instrument having facevalue 100 is calculated as

Day counts are almost always on an actual/360 basis, but check

the convention for your particular market



Monetary Policy In Term Of Central Bank

Regulation of supply of Money and Cost and Availability of Credit in the

economy

Purpose of Monetary Policy

Maintain price stability, ensure adequate flow of credit to the

productive sectors of the economy and overall economic growth

Variables affected by Monetary Policy in the economy

Interest Rates

Liquidity

Credit Availability

Exchange Rates



There are two kinds of tools:

Quantitative tools ±control the volume of credit and inflation, indirectly.

Qualitative tools ±they control the supplyof money in selective sectors of the economy



y Bank Rate

Bank Rate is the rate at which RBI allows f inance to commercialbanks. Bank Rate is a tool, which RBI uses for short-termpurposes. Any revision in Bank Rate by RBI is a signal to banks torevise deposit rates as well as Prime Lending Rate.

Role of bank rate is limited in India because

The structure of interest rates is administered by RBI

Commercial banks enjoy specif ic ref inance facilities

CRR

All scheduled commercial banks are required to maintain a

fortnightly minimum average daily cash reserve equivalent withRBI .The apex bank is empowered to vary this ratio between 3 and15 per cent. RBI uses CRR either to impound the excess liquidity or to release funds needed for the economy from time to time.

Quantitative ToolsQuantitative Tools



y SLREvery bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and TimeLiabilities as liquid assets in the form of cash, gold etc, in addition

to cash reserve requirements. The ratio of liquid assets todemand and time liabilities is known as Statutory Liquidity Ratio(SLR). Present SLR is 24%.

Repos and Reverse Repo

RBI is empowered to enter a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specif ied securities with an agreementto repurchase the same at a mutually decided future date and aprice. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in

future at a predetermined price. Such a transaction is called aRepo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described fromthe point of view of the supplier of funds. Thus, whether a given agreement is termed as Repo or a Reverse Repo depends on whichparty initiated the transaction.



Effect Of Monetary Policy On Central Bank

y There was some optimism about the sustainability of the global recovery

y on the domestic front, the recovery has consolidated

and is becoming increasingly broad-based.

y The dominant concern that has shaped the monetary

policy stance in this review is high inflation.

y consumer price inflation have shown some moderation,

they are still in double digits.y With growth taking f irm hold, the balance of policy

stance has to shift decisively to containing inflation and

anchoring inflationary expectations.



Effect Of Monetary Policy On Economy

y Control Inflation

y Interest Rates

y Business Cycles

y Spending

y Employment

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