Financial

Management
in the Arts
GKP 3273

1
 Money Market

 As money became a commodity,

the money market became a
component of the financial markets
for assets involved in short-term
borrowing, lending, buying and
selling with original maturities of
one year or less.
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 Money Market

 Trading in the money markets is done

over the counter and is wholesale.
Various instruments exist, such as
Treasury bills, commercial paper,
bankers' acceptances, deposits,
certificates of deposit,
bills of exchange,
repurchase agreements, federal funds,
and short-lived mortgage-, and
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 Money Market

 It provides liquidity funding for

the global financial system.
Money markets and
capital markets are parts of
financial markets. The
instruments bear differing
maturities, currencies, credit
risks, and structure. Therefore
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 Money Market

 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.
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 Money Market

 The core of the money market consists

of interbank lending--banks borrowing
and lending to each other using
commercial paper,
repurchase agreements and similar
instruments. These instruments are
often benchmarked to (i.e. priced by
reference to) the
London Interbank Offered Rate (LIBOR)
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 Money Market

 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.
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 Money Market

Money Market what is it all about

 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.
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 Money Market

 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 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.

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 Money Market

 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.

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 Money Market

 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.

Money Market: Treasury-Bills

 Treasury Bills (T-bills) are the most marketable money
market security. Their popularity is mainly due to their
simplicity. Essentially, T-bills are a way for the U.S.
government to raise money from the public. In this tutorial,
we are referring to T-bills issued by the U.S. government, but
many other governments issue T-bills in a similar fashion.
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 Money Market

 T-bills are short-term securities that mature in one year or

less from their issue date. They are issued with three-
month, six-month and one-year maturities. T-bills are
purchased for a price that is less than their par (face)
value; when they mature, the government pays the
holder the full par value. Effectively, your interest is the
difference between the purchase price of the security and
what you get at maturity.
 For example, if you bought a 90-day T-bill at $9,800 and
held it until maturity, you would earn $200 on your
investment. This differs from coupon bonds, which pay
interest semi-annually.
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 Money Market

 The biggest reasons that T-Bills are so popular is that

they are one of the few money market instruments
that are affordable to the individual investors. T-bills
are usually issued in denominations of $1,000,
$5,000, $10,000, $25,000, $50,000, $100,000 and
$1 million.
 Other positives are that T-bills (and all Treasuries) are
considered to be the safest investments in the world
because the U.S. government backs them. In fact,
they are considered risk-free. Furthermore, they are
exempt from state and local taxes.
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 Money Market

 The only downside to T-bills is that you

won't get a great return because
Treasuries are exceptionally safe.
Corporate bonds,
certificates of deposit and money
market funds will often give higher
rates of interest. What's more, you
might not get back all of your
investment if you cash out before the
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 Money Market

Example:
Malaysian Treasury Bills-i
 MTB-i is an Islamic short-term instrument issued
by the Malaysian Government with maturities not
exceeding one year. The issuance of MTB-i is
based on the principle of bai’ inah. In the primary
issue, submission of tenders for MTB-i is
conducted through the Islamic banks and Principal
Dealers. The tender is based on the exact
purchase price (proceeds) basis.
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 Money Market

Certificate of Deposit
 A certificate of deposit (CD) is a time deposit with
a bank. CDs are generally issued by commercial
banks but they can be bought through
brokerages. They bear a specific maturity date
(from three months to five years), a specified
interest rate, and can be issued in any
denomination, much like bonds. Like all time
deposits, the funds may not be withdrawn on
demand like those in a checking account.
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 Money Market

 CDs offer a slightly higher yield than T-Bills because

of the slightly higher default risk for a bank but,
overall, the likelihood that a large bank will go
broke is pretty slim. Of course, the amount of
interest you earn depends on a number of other
factors such as the current interest rate
environment, how much money you invest, the
length of time and the particular bank you choose.
While nearly every bank offers CDs, the rates are
rarely competitive, so it's important to shop around.

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 Money Market

 A fundamental concept to understand when

buying a CD is the difference between
annual percentage yield (APY) and
annual percentage rate (APR).
 APY is the total amount of interest you earn
in one year, taking compound interest into
account. APR is simply the stated interest
you earn in one year, without taking
compounding into account
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 Money Market
 The difference results from when interest is paid. The
more frequently interest is calculated, the greater the
yield will be. When an investment pays interest annually,
its rate and yield are the same. But when interest is paid
more frequently, the yield gets higher.
 For example, say you purchase a one-year, $1,000 CD that
pays 5% semi-annually. After six months, you'll receive an
interest payment of $25 ($1,000 x 5 % x .5 years). Here's
where the magic of compounding starts. The $25 payment
starts earning interest of its own, which over the next six
months amounts to $ 0.625 ($25 x 5% x .5 years). As a
result, the rate on the CD is 5%, but its yield is 5.06. It
may not sound like a lot, but compounding adds up over
time.
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 Money Market
Example:
Compare Bank Account Rates in Malaysia
 The Malaysia economy with a population of
28.25 million (Est 2010) ranks 30th in the
world with a GDP PPP of 384 billion and GDP
PPP per capita of 13,800 vs 45,934 (United
States) according to the IMF in 2009. Its
currency is the Malaysian ringgit (MYR) / RM.
Bank deposits held for a fixed term in Malaysia
are called fixed deposits. Inflation was 5.4% in
2008 and .6% in 2009. (price controls in place)
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