Money And Financial Institutions

NATIONAL UNIVERSITY OF MODERN LANGUAGES DEPARTMENT OF MANAGEMENT SCIENCES LAHORE CAMPUS

SUBMITTED TO:

Mam Hina

SUBMITTES BY:

Abdul Mannan 0332-4019001 BBA (Hons) 6th SEM

Money and Financial Institutions Money and Capital Market

Dated: August 28, 2009

Types of Money Market Instruments Treasury Bills The Treasury bills are short-term money market instrument that mature in a year or less than that. The purchase price is less than the face value. At maturity the government pays the Treasury bill holder the full face value. The Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very low returns.

Certificate of Deposit The certificates of deposit are basically time deposits that are issued by the commercial banks with maturity periods of 14 days. The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk. CDs typically require a minimum deposit, and may offer higher rates for larger deposits. The consumer who opens a CD may receive a passbook or paper certificate, but it now is common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such.

Advantages of Certificate of Deposit as a money market instrument

 Since one can know the returns from before, the certificates of deposits are considered

much safe.  One can earn more as compared to depositing money in savings account.  The Federal Insurance Corporation guarantees the investments in the certificate of

deposit.

Commercial Paper Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers is a maximum of (270 days) 9 months. They are very safe since the financial situation of the corporation can be anticipated over a few months. Note: Secondary market is usually not found to be suitable for commercial paper.

Bankers Acceptance It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable. Before acceptance, the draft is not an obligation of the bank; it is merely an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft. Upon acceptance, which occurs when an authorized bank accepts and signs it, the draft becomes a primary and unconditional liability of the bank. Euro Dollars The Euro dollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Euro dollar market is free from any strict regulations, the banks can operate at narrower margins as compared to the banks in U.S. The Euro dollars are traded at very high denominations and mature before six months. The Eurodollar market is within the reach of large institutions only and individual investors can access it only through money market funds. Repurchase agreement A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as guarantee for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a cash transaction combined with a forward contract. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is the interest on the loan while the settlement date of the forward contract is the maturity date of the loan.

Types of Capital Market Instruments Federal Government Securities All federal government securities are considered to be quite safe, and therefore, usually have no credit rating. Almost all federal securities, including savings bonds, can be bought. U.S. Treasury Bonds pay semi-annual interest, and mature in 10 to 30 years. These securities are issued by government to raise the funds necessary to pay for its expenses. Having a maturity period of 10 to 30 years it is used for control and development purposes. Government Agency Securities A security, usually a bond, issued by a U.S. government-sponsored agency. The offerings of these agencies are backed by the government, but not guaranteed by the government since the agencies are private entities. Such agencies have been set up in order to allow certain groups of people to access low cost financing e.g. students and home buyers. Another type is present that is known as the federal credit agency and this is fully guaranteed by the government.

Municipal Bonds These are issued by local governments and may take the form of general obligation bonds (GOs) or revenue bonds. General obligation bonds are funded by the municipality’s total taxing capabilities. A revenue bond is tied to the taxes generated from a specific project---whether a stadium, a sewage treatment plant, or a power plant. The interest earned from a municipal bond is exempt from state and federal taxes. (Exemption from state taxes requires that the investor be a resident of the state where the bond was issued.) Corporate Bonds Fixed income securities issued by private-sector corporations, railroads, or public utility corporations to raise money for ongoing operating expenses or special projects All corporate bonds must include an agreement (a contract that lists the payment schedule, details about the bond, and the responsibilities of the issuing institution).

Corporate bonds have call provisions. Call provisions allow the issuing institution to call its bonds before they mature. When this occurs, bondholders are obligated to submit their bonds. The issuing institution will then pay back the principal of the bond with an additional call provision premium.

Equity security An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. For example, if a firm has 1000 shares of stock outstanding and an individual owns 50 of them, then he/she owns 5% of the firm.