What Are Money Market Instruments?

Money market instruments refer to financial instruments available for trading on the borrowing market for short-term funds. Mainly include: short-term treasury bills and other short-term bonds issued by the central government; short-term bonds issued by local governments; bank acceptance bills, including two types of acceptance bills converted from commercial acceptance bills and generated based on letters of credit; Transfer of time deposit certificates; commercial cashier's orders, including transactional cashier's orders based on legal transactions and financing cashier's guarantees guaranteed by financial institutions; commercial acceptance bills, etc.

Money market instruments

Money market instruments are cash; banks within one year (including one year)

First, they are all debt contracts.

Second, the deadline is within one year.

Third, generally show

The main money market instruments consist of short-term government bonds, large negotiable certificates of deposit, commercial paper, bank acceptance bills, repurchase agreements, and other money market instruments.

(1) Short-term national debt

Short-term government bonds are short-term bonds issued by the government in order to meet the temporary funding needs generated by the advance payment and then collection. Short-term government bonds are called Treasury bills in the United Kingdom and the United Kingdom, and the UK was the first country to issue short-term government bonds.

Characteristics of short-term government bonds

Short-term Treasury bonds with the lowest risk are the direct liabilities of the government. The government has the highest credit status in a country. Generally, there is no risk of repayment due to maturity. Therefore, investors generally believe that there is basically no risk in investing in short-term government bonds.

High mobility. Due to the low risk and high reputation of short-term government bonds, industrial and commercial enterprises, financial institutions, and individuals are willing to invest short-term funds in short-term government bonds and use this to adjust their current asset structure, creating a very convenient and developed Level market.

The period is short, basically within one year, and most of them are within six months.

Types of short-term government bonds

Divided by time limit, there are 3 months, 6 months, 9 months, and 12 months;

According to the method of interest payment, it can be divided into discounted government bonds and interest-bearing government bonds. Most of short-term government bonds are discounted government bonds.

(2) Large transferable certificates of deposit

A large transferable time deposit certificate is also called a large amount transferable certificate of deposit. It is a type of time deposit certificate issued by a bank. The certificate is printed with a certain face value, deposit and maturity date, and interest rate. After maturity, it can be based on the face value All the principal and interest are withdrawn at the prescribed interest rate. Overdue deposits are non-interest-bearing, and large-amount negotiable certificates of deposit are negotiable and freely traded.

Features of large transferable time deposit certificates

A large transferable time deposit certificate is a transferable time deposit certificate issued by a bank before maturity.

It is usually anonymous, cannot be withdrawn in advance, and can be transferred on the secondary market;

Large deposit certificates are issued in standard units with large denominations;

The issuers are mostly big banks;

The deadline is mostly within one year.

Large certificates of deposit are securitizations of bank deposits.

(3) Commercial paper

Commercial paper refers to a negotiable debt instrument that is issued by an issuer to meet liquidity needs and has a term of 2 to 270 days. Generally refers to a certificate issued commercially by a drawer that unconditionally agrees with itself or requires others to pay a certain amount of negotiable securities that can be circulated and transferred, and the holder has certain rights. The commercial paper market has experienced remarkable growth: from 1980 to 2008, the non-repayment balance of commercial paper increased by more than 1400%, rising from USD 122 billion to USD 173.2 billion. ^[2]

Types of commercial paper

(1) Short-term notes are short-term credit instruments in the money market. The shortest term is 30 days and the longest is 270 days.

(2) For a single-name note, only one person's signature is required when issuing it.

(3) Financing notes are issued for short-term working capital.

(4) Large-value notes, the denomination of which is an integer, most of which are calculated in multiples of $ 100,000.

(5) Unsecured notes do not require collateral and guarantors, but rely on company credit guarantees.

(6) Market bills are sold to non-specified public.

(7) For large company bills, only those large financially sound and creditworthy companies can issue commercial bills.

(8) Discounted bills are issued in a discounted manner, that is, interest is withheld at the time of issuance.

Characteristics of commercial paper

1. A bill is a voucher with certain powers: the right to request payment, the right to recourse

2. There is no reason for the rights and obligations of the bill. As long as the holder has obtained the bill, he has obtained all the powers conferred by the bill.

3. The bill laws of all countries require the form and content of bills to be standardized and standardized.

4. Notes are tradable securities. With the exception of the bill itself, bills can be transferred by endorsement and delivery.

(4) Bank acceptance bills

A banker's acceptance bill is a bill issued by a depositor who has opened a deposit account with an accepting bank, which is applied to the account-opening bank and approved by the bank's review, guaranteeing that the specified amount is paid unconditionally to the payee or bearer on a specified date. Acceptance of a commercial bill of exchange issued by the drawer is the credit support given by the bank based on the recognition of the credit of the drawer. The face value of bank acceptance bills in China is up to 10 million yuan (inclusive). Bank acceptance bills charge a five-ten-thousandths fee to the accepting applicant at the face value, and less than 10 yuan is counted as 10 yuan. The acceptance period shall not exceed 6 months. If the acceptance applicant fails to pay the due bill at the bank, the overdue penalty interest will be calculated in accordance with the regulations.

(5) Repurchase agreement (repos)

A repurchase agreement refers to an effective short-term financial financing that is collateralized by marketable securities, and is in the form of conditional securities trading.

Features of the repurchase agreement method

Integrating the return of funds and liquidity has increased investor interest. Investors can sign a repurchase agreement with the borrower on the next day or "continuous contract" according to their own funding arrangements, and increase the income of the fund on the premise that the funds can be recovered at any time for other purposes.

The liquidity of long-term bonds has been enhanced, and the losses that securities holders may have caused by the sale of long-term assets for realisation have been avoided.

has strong security. Repurchase agreements are generally short-term and have 100% bonds as collateral, so investors can withdraw funds in a timely manner based on changes in the capital market conditions to avoid the risk of long-term investment.

Longer repurchase agreements can be used to arbitrage. If a bank obtains funds at a lower interest rate in the form of a repurchase agreement and then lends out at a higher interest rate, the spread can be obtained.

The operation procedure of the repurchase agreement is: there is idle funds in the bank accounts of large companies such as Microsoft, such as $ 1 million, and the company is willing to lend the idle funds for a week. Microsoft Corps used the idle $ 1 million to buy Treasury bills from the bank, and the bank agreed to recover the Treasury bills it bought a week later at a specific price slightly higher than Microsoft's purchase price. The effect of this agreement is that Microsoft will lend $ 1 million to the bank and hold the bank's $ 1 million in treasury bills until the bank buys back the treasury bills and pays off the loan. ^[2]

Repurchase agreements have become an important source of bank funding, and large companies are the main lenders in this market.

(6) Other money market instruments

European dollars

Is the main European currency, referring to US dollar deposits deposited in foreign banks outside the United States or overseas branches of U.S. banks, such as pounds and euros, which are deposits at foreign banks or foreign branches of U.S. banks (often fixed deposits) .

Federal Fund

It is an overnight loan from a depository institution that deposits with the Federal Reserve Bank. Such loans are not issued by the Federal Reserve System, but are inter-banked between banks. One of the reasons why banks borrow from the federal funds market is that the bank's balance of deposits in the Federal Reserve System account cannot meet the requirements of the supervisor. The bank can borrow from other banks to supplement the insufficient deposit balance and transfer the borrowed money to the borrowing bank account through the Federal Reserve's electronic payment system. This market is very sensitive to bank borrowing needs. The interest rate on such loans is called the federal funds rate. It is a barometer of tight credit markets and monetary policy positions in the banking system. The higher the federal funds rate, the tighter the funds in the banking system; the lower the federal funds rate, the weaker the bank's borrowing demand. ^[2]