Financial Market PDF

ROMBANO, RONELA SARTO, KHATE PAJO, ROVIC TEVES, JAYVEE Money Markets 1. Purpose and Structure    - The Role of Money Markets The money market provides short-term liquidity for governments, banks, and large corporations. It allows these entities to borrow and lend funds for a short duratio...

ROMBANO, RONELA SARTO, KHATE PAJO, ROVIC TEVES, JAYVEE Money Markets 1. Purpose and Structure    - The Role of Money Markets The money market provides short-term liquidity for governments, banks, and large corporations. It allows these entities to borrow and lend funds for a short duration, usually up to a year, to manage liquidity and fund immediate needs.    - Money Market Segments Key segments include the government securities market, interbank lending market, commercial paper market, and the repurchase agreement (repo) market.    - Money Market Participants Common participants include central banks, commercial banks, corporations, mutual funds, and governments. 2\. Money Market Instruments    - Treasury Bills and Other Government Securities Short-term debt instruments issued by the government, typically with maturities of one year or less. These are used by governments to manage short-term funding needs.    - The Interbank Market (Loans) A market where banks lend to one another to manage liquidity and reserve requirements, typically for very short durations like overnight or a few days.    - Commercial Papers Unsecured, short-term debt instruments issued by corporations to meet working capital needs, usually for maturities of 1 to 270 days.    - Certificates of Deposit (CDs) Time deposits issued by banks with a fixed maturity date and interest rate, used as an investment tool by businesses and individuals.    - Repurchase Agreement A short-term loan where one party sells securities to another with an agreement to repurchase them at a higher price at a future date. It\'s often used for short-term borrowing.    - International Money Market Securities Money market instruments that are traded internationally, such as Eurodollars, which are US dollar-denominated deposits held in foreign banks. 3\. Money Market Interest Rates and Yields    - Interest Rates and Yields Money market interest rates are typically lower compared to long-term debt markets, due to the short-term, low-risk nature of the instruments. These rates can be influenced by central bank policies and general economic conditions. Debt Markets 1\. Debt Market Instrument Characteristics    - Debt markets involve trading debt securities like bonds, loans, and other fixed-income assets. These instruments typically have fixed or floating interest rates and are issued for long-term capital needs. 2\. Bond Market    - Bond Market Characteristics The bond market involves the issuance and trading of bonds, which are long-term debt securities. Investors lend money to issuers (corporations, municipalities, or governments) in exchange for periodic interest payments and the repayment of principal at maturity.    - Bond Market Yields Bond yields refer to the returns an investor earns on a bond, primarily determined by the bond's coupon rate, price, and maturity. Yields fluctuate with changes in interest rates and credit risk. 3\. Bond Valuation    - Discounted Models This approach involves calculating the present value of future cash flows (interest payments and principal repayment) to determine the current value of the bond.    - Bond Duration and Risk Duration measures a bond's sensitivity to interest rate changes. The longer the duration, the more sensitive the bond is to interest rate fluctuations, which increases risk.    - Bond Price Volatility Bond prices are inversely related to interest rates; as interest rates rise, bond prices fall and vice versa. Long-term bonds tend to have more price volatility than short-term bonds due to their greater exposure to interest rate risk.