Money as an investment Flashcards
How does the government and deposit takers use the money markets to raise cash from each other?
The money market allows deposit takers and the government to raise cash from each other in the short term. If you consider the operation of a bank, they need to have a significant amount of money available at any time to meet the needs of running the business – people coming in to make withdrawals etc. However, they will not need all of this all the time. The money market allows them to lend it to other institutions for periods as short as a few hours and make a return. It also allows them to borrow from others where they have needs for extra liquidity in the short term
What are treasury bills?
Are short term money market
instruments (terms from 1-12 months), Managed by the Debt Management Office and used by the government to
raise cash for its own purposes. Bills are issued at below their face value and then redeemed at face value to give the return (They don’t pay interest) .The face value is
known as the par. Often referred to as “risk free cash instruments”, because of this, the “risk free” return is often used when measuring risk/return on other investments, in particular the risk premium (the return required from an investment for taking risk above the risk free rate).
What are certificate of deposits?
banks/building societies raising money against the deposits they hold – fixed rate of interest, paid on maturity and a fixed term (typically 1-3 months). No withdrawals allowed before end of the term).
The interest rate is usually related to the Sterling Overnight Index Average (SONIA). They can be traded which adds a level of liquidity. Yields depend on the credit rating of the issuer and market interest rates.
What are commercial bills?
companies raising money to fund
day to day operations. Work similarly to treasury bills but as they are not government backed, are not as liquid or as safe. This means that yields are typically higher than an equivalent treasury bill.
What are the maturity and life of the underlying assets within a short term money market fund?
a. Weighted Average Maturity of no more than 60 days
and
b. Weighted Average Life of no more than 120 days
What are the maturity and life of the underlying assets within a standard money market fund?
a. Weighted Average Maturity of no more than 6 months and
b. Weighted Average Life of no more than 12 months
What are the risks associated with money market funds
The risks involved with money market funds are the same as investments in cash, they may also contain currency risk. Charges need to be factored into suitability assessment vs a pure cash investment, as there will likely be a small annual charge of around 0.15%pa.
