CIMA F3 Syllabus B. Sources of long term funds - Money market instruments - Notes ^{2 / 15}

Money market instruments are short term and they can give interest, be discounted or be derivative based

Interest Bearing

Any financial instrument that earns interest

• Certificates of deposit (CDs)

  A CD is a receipt for funds deposited in a bank for a specified term and for a set rate

  With a CD - if they’re negotiable - they can be sold before maturity. Non-negotiable ones just pay a set amount of interest (coupon) and is repaid as normal

• Repurchase Agreement

  A repo is where 2 parties agree to buy/sell an instrument at an agreed price and then repurchase back at an agreed price a set time later

• Bank Deposits

  Bank deposits are made to deposit accounts at a banking institution.
   
  The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the account. 

  The "deposit" itself is a liability owed by the bank to the depositor (the person or entity that made the deposit).

• Government Security

  A bond (or debt obligation) issued by a government authority, with a promise of repayment upon maturity that is backed by said government. 

  These securities are considered low-risk, since they are backed by the government.

• Local authority bond

  a fixed- interest bond, repayable on a specific date, used by a local authority in order to raise a loan and similar to a Treasury bond

Non-interest-bearing

• Bill Of Exchange

  Is an unconditional order in writing to pay the addressee a specified sum of money either on demand or at a future date.

Discount Instruments

These don’t pay interest as such. They are issued at a discount, which effectively means the “interest” is all at the beginning

Think of it from the lenders viewpoint. They wish to lend $100, but actually only need to lend $80 (discounted at the start) but are paid back the full $100.

• Treasury Bills

  These are issued by governments with maturities from 1m to 12m. They are issued at a discount to their face value

• Commercial paper

  These are unsecured with a typical term of 30days.

  There are issued by large organisations with good credit ratings - funding their short term investment needs

• Bankers Acceptance

  These again are issued by companies BUT are guaranteed by a bank

  The banks will get a fee for this guarantee - and because the risk is low (for the lender due to the bank guarantee) - the interest the companies offer on these will be low

  Again these are offered at a discount however they are negotiable, meaning they can be traded before maturity

  These are normally issued by firms who do not have a good enough credit rating to offer commercial paper