Bond and money markets

Question 1

What are cash on deposit products

Answer 1

Call deposit
Notice deposit
Term deposit

Question 2

Money market deposit products

Answer 2

Treasury bills
Certificates of deposit
Commercial paper
Bills of exchange

Question 3

Characteristics of money markets

Answer 3

Security: Security usually depends on the issuer. In most cases, it is good because it is short-term and default is rare.
Yield: Expected returns are lower than most investments as it is considered risk free
Spread: There is little volatility in the market
Term: Short-term, less than a year. Usually overnight.
Expenses: Minimal
Marketability: Most are highly marketable except call and term deposits. Traded through banks
Tax: Treated as income tax

Question 4

Reasons for holding cash and money market instruments

Answer 4

Liquidity reasons:
Known short term commitments
Uncertain outgo
Opportunities
Recent cashflow
Preservation of nominal value
Risk aversion
Economic reasons:
Rising interest rates
Start of economic recession