The money markets Flashcards
What are the money markets?
The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term. Often referred to as the wholesale market to distinguish from the retail markets. A typical deal may involve a loan of tens of millions of pounds.
Who invests in the money market?
Anyone with short term funds - banks companies and fund management companies. Retail investors can get involved via money market funds - unit trusts that offer returns that are competitive with bank and building society accounts.
What is LIBOR?
The London Interbank Offered Rate - a benchmark rate set by some of the world’s largest banks for short-term loans. It is the first step on calculating interest rates on various loans throughout the world. Based on 10 currencies and 15 maturities. Hence there are 150 different LIBOR rates each day. Most commonly quoted is the three month USD rate.
How is LIBOR calculated?
Each morning, just before 11 a.m. Greenwich Mean Time, a group of major banks are asked the rate at which they could borrow funds from other banks. The banks confidentially send their results for each of the 15 loan maturities - ranging from overnight to one year - to the market intelligence firm Thomson Reuters. The organization throws out figures in the highest and lowest quartile and averages the remaining half.
Thomson Reuters publishes the resulting Libor rates, as well as all the contributing rates that the banks provide, by noon each day. According to the British Bankers Association, these numbers appear on over 1 million trading screens around the world and in a wide variety of news sources. Any loans that are tied to one of the Libor indices - for example, a three-month U.S. dollar rate - will change in lockstep with the new figures.
What instruments are traded in the money markets?
- Short-term bank deposits
- Treasury bills
- Commercial bills
- Commercial paper
- Certificate of Deposit
- Gilt-edged securities near the end of life
- Gilt repos
What are treasury bills?
The Treasury bills are short-term money market instrument that mature in a year or less than that. The purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value.
What are commercial bills?
Can be bills in the real sense referring to a specific commercial transaction. Customer gives the supplier an IOU which can then be sold to a financial institution for less than face value in order to get money in advance. Often not related to any spcific deal, just another means of borrowing money.
What is a certificate of deposit?
A tradeable document attesting that the holder has lent money to a bank or building society. Offers more liquidity than a loan as it can be bought and sold if the funds are needed suddenly. Dealt with on an interest-accrued basis (ie the money that the CD would have earned is added to its face value), but this will depend on the way that interest rates have moved since the CD was purchased.
