Money Market

Market for short-term debt securities, such as banker's acceptances, commercial paper,
repos, negotiable certificates of deposit, and Treasury Bills with a maturity of one year
or less and often 30 days or less. Money market securities are generally very safe
investments which return a relatively low interest rate that is most appropriate for
temporary cash storage or short-term time horizons. Bid and ask spreads are relatively
small due to the large size and high liquidity of the market.

What Does Money Market Mean?

A segment of the financial market in which financial instruments with high liquidity and
very short maturities are traded. The money market is used by participants 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).

Types of Money Market Instruments

TREASURY BILLS. Treasury bills (T-bills) are short-term notes issued by the U.S.
government. They come in three different lengths to maturity:90, 180, and 360 days.
The two shorter types are auctioned on a weekly basis, while the annual types are
auctioned monthly. T-bills can be purchased directly through the auctions or indirectly
through the secondary market. Purchasers of T-bills at auction can enter a competitive
bid (although this method entails a risk that the bills may not be made available at the
bid price) or a noncompetitive bid. T-bills for noncompetitive bids are supplied at the
average price of all successful competitive bids.

FEDERAL AGENCY NOTES. Some agencies of the federal government issue both
short-term and long-term obligations, including the loan agencies Fannie Mae and Sallie
Mae. These obligations are not generally backed by the government, so they offer a
slightly higher yield than T-bills, but the risk of default is still very small. Agency
securities are actively traded, but are not quite as marketable as T-bills. Corporations
are major purchasers of this type of money market instrument.
SHORT-TERM TAX EXEMPTS. These instruments are short-term notes issued by
state and municipal governments. Although they carry somewhat more risk than T-bills
and tend to be less negotiable, they feature the added benefit that the interest is not
subject to federal income tax. For this reason, corporations find that the lower yield is
worthwhile on this type of short-term investment.

CERTIFICATES OF DEPOSIT. Certificates of deposit (CDs) are certificates issued by a

federally chartered bank against deposited funds that earn a specified return for a
definite period of time. They are one of several types of interest-bearing "time deposits"
offered by banks. An individual or company lends the bank a certain amount of money
for a fixed period of time, and in exchange the bank agrees to repay the money with
specified interest at the end of the time period. The certificate constitutes the bank's
agreement to repay the loan. The maturity rates on CDs range from 30 days to six
months or longer, and the amount of the face value can vary greatly as well. There is
usually a penalty for early withdrawal of funds, but some types of CDs can be sold to
another investor if the original purchaser needs access to the money before the maturity
date.

Large denomination (jumbo) CDs of $100,000 or more are generally negotiable and pay
higher interest than smaller denominations. However, such certificates are insured by
the FDIC only up to $100,000. There are also eurodollar CDs, which are negotiable
certificates issued against U.S. dollar obligations in a foreign branch of a domestic bank.
Brokerage firms have a nationwide pool of bank CDs and receive a fee for selling them.
Since brokers deal in large sums, brokered CDs generally pay higher interest rates and
offer greater liquidity than CDs purchased directly from a bank.

COMMERCIAL PAPER. Commercial paper refers to unsecured short-term promissory

notes issued by financial and nonfinancial corporations. Commercial paper has
maturities of up to 270 days (the maximum allowed without SEC registration
requirement). Dollar volume for commercial paper exceeds the amount of any money
market instrument other than T-bills. It is typically issued by large, credit-worthy
corporations with unused lines of bank credit and therefore carries low default risk.

Standard and Poor's and Moody's provide ratings regarding the quality of commercial
paper. The highest ratings are A1 and P1, respectively. A2 and P2 paper is considered
high quality, but usually indicates that the issuing corporation is smaller or more debt
burdened than A1 and P1 companies. Issuers earning the lowest ratings find few willing
investors.

Unlike some other types of money-market instruments, in which banks act as

intermediaries between buyers and sellers, commercial paper is issued directly by well-
established companies, as well as by financial institutions. "By cutting out the
intermediary, major companies are able to borrow at rates that may be 1 to 1 ½ percent
below the prime rate charged by banks," according to Brealey and Myers. Banks may
act as agents in the transaction, but they assume no principal position and are in no
way obligated with respect to repayment of the commercial paper. Companies may also
sell commercial paper through dealers who charge a fee and arrange for the transfer of
the funds from the lender to the borrower.

BANKERS' ACCEPTANCES. "A banker's acceptance begins life as a written demand

for the bank to pay a given sum at a future date," Brealey and Myers noted. "The bank
then agrees to this demand by writing 'accepted' on it. Once accepted, the draft
becomes the bank's IOU and is a negotiable security. This security can then be bought
or sold at a discount slightly greater than the discount on Treasury bills of the same
maturity." Bankers' acceptances are generally used to finance foreign trade, although
they also arise when companies purchase goods on credit or need to finance inventory.
The maturity of acceptances ranges from one to six months.

REPURCHASE AGREEMENTS. Repurchase agreements—also known as repos or

buybacks—are Treasury securities that are purchased from a dealer with the agreement
that they will be sold back at a future date for a higher price. These agreements are the
most liquid of all money market investments, ranging from 24 hours to several months.
In fact, they are very similar to bank deposit accounts, and many corporations arrange
for their banks to transfer excess cash to such funds automatically.

The following are the Money Market instruments in Pakistan:

1. Pakistan Investment Bonds (PIBs)
2. Federal Investment Bonds (FIBs)
3. Market Treasury Bills (MTBs)
4. Term Finance Certificates (TFCs)
 5. Certificate of Investments (COIs)
6. Certificate of Deposits (CODs)
7. Commercial Papers (CPs)
8. Foreign exchange platform (forex)

Common money market instruments

 Certificate of deposit - Time deposits, commonly offered to consumers by banks,

thrift institutions, and credit unions.
 Repurchase agreements - Short-term loans—normally for less than two weeks
and frequently for one day—arranged by selling securities to an investor with an
agreement to repurchase them at a fixed price on a fixed date.
 Commercial paper - Unsecured promissory notes with a fixed maturity of one to
270 days; usually sold at a discount from face value.
 Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch
located outside the United States.
 Federal agency short-term securities - (in the U.S.). Short-term securities issued
by government sponsored enterprises such as the Farm Credit System, the
Federal Home Loan Banks and the Federal National Mortgage Association.
 Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other
depository institutions at the Federal Reserve; these are immediately available
funds that institutions borrow or lend, usually on an overnight basis. They are lent
for the federal funds rate.
 Municipal notes - (in the U.S.). Short-term notes issued by municipalities in
anticipation of tax receipts or other revenues.
 Treasury bills - Short-term debt obligations of a national government that are
issued to mature in three to twelve months. For the U.S., see Treasury bills.
 Money funds - Pooled short maturity, high quality investments which buy money
market securities on behalf of retail or institutional investors.
 Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the
reversal of the exchange of currencies at a predetermined time in the future.
 Short-lived mortgage- and asset-backed securities
In the financial markets, there is a flow of funds from one group of parties (funds-surplus
units) known as investors to another group (funds-deficit units) which require funds.
However, often these groups do not have direct link. The link is provided by market
intermediaries such as brokers, mutual funds, leasing and finance companies, etc. In
all, there is a very large number of players and participants in the financial market.
These can be grouped as follows :

The individuals: These are net savers and purchase the securities issued by
corporate. Individuals provide funds by subscribing to these security or by making other
investments.

The Firms or corporate: The corporate are net borrowers. They require funds for
different projects from time to time. They offer different types of securities to suit the risk
preferences of investors’ Sometimes, the corporate invest excess funds, as individuals
do. The funds raised by issue of securities are invested in real assets like plant and
machinery. The income generated by these real assets is distributed as interest or
dividends to the investors who own the securities.

Government: Government may borrow funds to take care of the budget deficit or as a
measure of controlling the liquidity, etc. Government may require funds for long terms
(which are raised by issue of Government loans) or for short-terms (for maintaining
liquidity) in the money market. Government makes initial investments in public sector
enterprises by subscribing to the shares, however, these investments (shares) may be
sold to public through the process of disinvestments.

Regulators: Financial system is regulated by different government agencies. The

relationships among other participants, the trading mechanism and the overall flow of
funds are managed, supervised and controlled by these statutory agencies. In India, two
basic agencies regulating the financial market are the Reserve Bank of India  (RBI ) and
Securities and Exchange Board of India (SEBI). Reserve Bank of India, being the
Central Bank, has the primary responsibility of maintaining liquidity in the money market’
It undertakes the sale and purchase of T-Bills on behalf of the Government of India.
SEBI has a primary responsibility of regulating and supervising the capital market. It has
issued a number of Guidelines and Rules for the control and supervision of capital
market and investors’ protection. Besides, there is an array of legislations and
government departments also to regulate the operations in the financial system.

Market Intermediaries: There are a number of market intermediaries known as

financial intermediaries or merchant bankers, operating in financial system. These are
also known as investment managers or investment bankers. The objective of these
intermediaries is to smoothen the process of investment and to establish a link between
the investors and the users of funds. Corporations and Governments do not market their
securities directly to the investors. Instead, they hire the services of the market
intermediaries to represent them to the investors. Investors, particularly small investors,
find it difficult to make direct investment. A small investor desiring to invest may not find
a willing and desirable borrower. He may not be able to diversify across borrowers to
reduce risk. He may not be equipped to assess and monitor the credit risk of borrowers.
Market intermediaries help investors to select investments by providing investment
consultancy, market analysis and credit rating of investment instruments. In order to
operate in secondary market, the investors have to transact through share brokers.
Mutual funds and investment companies pool the funds (savings) of investors and
invest the corpus in different investment alternatives. Some of the market intermediaries
are:

 Lead Managers
 Bankers to the Issue
 Registrar and Share Transfer Agents
 Depositories
 Clearing Corporations
 Share brokers
 Credit Rating Agencies
 Underwriters
 Custodians
 Portfolio Managers
 Mutual Funds
 Investment Companies

These market intermediaries provide different types of financial services to the

investors. They provide expertise to the securities issuers. They are constantly
operating in the financial market. Small investors in particular and other investors too,
rely on them. It is in their (market intermediaries) own interest to behave rationally,
maintain integrity and to protect and maintain reputation, otherwise the investors would
not be trusting them next time. In principle, these intermediaries bring efficiency to
corporate fund raising by developing expertise in pricing new issues and marketing
them to the investors.

Capital Market

Sources from which long-term capital is raised for the setting up the sustained growth of
companies. The stock exchange is a part of the capital market, not only because it
readily provides money for new or existing ventures, but also because it helps investors
to trade in their shares and maintains the liquidity of investments. Investment in further
public and rights issues, convertible and non-convertible debentures, therefore, become
an attractive proposition and companies are able to raise the resource they need. The
capital market is distinct from money market – banks and lending institutions – which
provides short – term finance.

What Does Capital Markets Mean?

A market in which individuals and institutions trade financial securities.

Organizations/institutions in the public and private sectors also often sell securities on
the capital markets in order to raise funds. Thus, this type of market is composed of
both the primary and secondary markets.

Investopedia explains Capital Markets

Both the stock and bond markets are parts of the capital markets. For example, when a
company conducts an IPO, it is tapping the investing public for capital and is therefore
using the capital markets. This is also true when a country's government issues
Treasury bonds in the bond market to fund its spending initiatives.    

Capital market instruments

are responsible for generating funds for companies, corporations, and sometimes
national governments.

These are used by the investors to make a profit out of their respective markets. There
are a number of capital market instruments used for market trade, including

Stocks

Bonds

Debentures

Treasury-bills

Foreign Exchange

Fixed deposits, and others

Capital market is also known as securities market because long term funds are raised
through trade on debt and equity securities. These activities may be conducted by both
companies and governments. This market is divided into primary capital market.
and secondary capital market. The primary market is designed for the new issues and
the secondary market is meant for the trade of existing issues. Stocks and bonds are
the two basic capital market instruments used in both the primary and secondary
markets. There are three different markets in which stocks are used as the capital
market instrument: the physical, virtual, and auction markets.

Bonds, however, are traded in a separate bond market. This market is also known as a
debt, credit, or fixed income market.

Trade in debt securities are done in this market. There are also the T-bills and
Debentures which are used as capital market instruments by the investors.

These instruments are more secured than the others, but they also provide less return
than the other capital market instruments.

While all capital market instruments are designed to provide a return on investment, the
risk factors are different for each and the selection of the instrument depends on the
choice of the investor.

The risk tolerance factor and the expected returns from the investment play a decisive
role in the selection by an investor of a capital market instrument.

Capital market instruments should be selected only after doing proper research in order
to increase one.
Classification of players by supply and demand for capital
As the capital market is the place where the supply of capital, provided by investors,
meets demand, coming from issuers, as an initial approach capital market players can
be broken down into the following three main categories:

 Issuers
 Investors
 Intermediaries

With regard to the role played by intermediaries, that of facilitating contact between
investors and issuers, economic theory distinguishes between financing provided
through bank loans, so-called "intermediated" financing, to financing through the
issuance of securities, "disinter mediated" financing.

In the first case (intermediated financing), the resources of agents with a financing
capacity (deposits, in particular from households) are made available via banks to
agents with financing requirements (companies). The crucial role of banks in this regard
is to enable the short-term time horizon of the first group to be transformed into the
long-term time horizon (investment) of the latter.

In the second case, agents with financing requirements capture public savings directly
through the issuance of securities (stocks and bonds), which are acquired by agents
with financing capacity. The description "disinter mediated" used for this form of
financing is somewhat misleading as intermediaries operating in this second situation
are in fact more numerous and diverse than in the previous case, and once again the
banks play a central role!