Money Market

[Pethmalu]

Is there anyone here who knows how MONEY MARKET works? or is there already a opened thread about this? :confused:

[KuyaDanny]

The term money market loosely applies to the market for short-term funding outside the bank deposit system. This means that the borrowers (companies usually) get money directly from the lenders (investors).

Debts are evidenced by such instruments as commercial paper, trade acceptances, and promissory notes. Government securities (T-Bills, CB Bills) are also considered money market instruments.

Are you looking for more specific information?

[Pethmalu]

Well... I think what I need is your advice since you seemed to know much about this business. Is it a good idea to invest my money on that? someone told me that you can earn about 40% of your invested money annually(or semi annually - i'm not sure) but still I'm a little bit skeptical about this... cause i don't know if it's a guaranteed earning or it depends on something ( like exchange rates ) to determine profit/loss... anyway, could you enlighten me on this? :rolleyes:

and thanks for your reply :)

[the_ace]

Is it like the Money Mkt Savings acct in banks ?:confused:

[KuyaDanny]

Pethmalu, I would be very skeptical of any money market instrument in this day and age which can pay 40% per annum, let alone one which "guarantees" your return.

In simple terms, that rate is HIGH, and when the returns are high, so are the risks. The only kind of money I would invest in such a channel is money I am prepared to totally lose.

[Pethmalu]

thanks KuyaDanny !

ano ba yan, wala na bang easy money dito sa pinas... mang hold-up na lang kaya ako :D

pero siguro i'm prepared to lose that money i'm going to invest... no guts no money :confused:

[KuyaDanny]

Pethmalu, there might be ways to make "easy money" legally, but I haven't found any yet. I'd just like to say that there's something to be said about working hard for your money. At the end of the day you will actually feel good doing it.

To put things in perspective, some businessmen can make 40% returns on their money, but it usually means they have to be involved in running the business.

[blue[]ce]

Does anybody know about the money market or commercial papers? My friend suggested that I invest my money here. Do you guys think it is a good idea? What is the interest rate? How do i know the credit ratings of the company. which companies handle things like these? Any help would be much appreciated

[Hulk]

Hi blue[]ce! :wave:

First of all you have to learn the definition of the money market. The money market is an exchange for short-term debt instruments. By short-term we mean instruments with maturities of one year or less. That is the strict definition but have some have liberally defined it to include other fixed-income instruments with longer maturities.

Next you have to distinguish the different types of money market instruments. They are:

1. Government securities - these are direct obligations of the national government issued by the Bureau of Treasury. They are issued to fund the expenditures of the government. The types of government securities are as follows:

a. Treasury bills (Tbills) - are short-term (364 days or shorter), zero coupon instruments wherein you collect your interest and principal on the maturity of the instrument. Usual tenors are 91 days, 182 days and 364 days.

b. Fixed-rate Treasury Notes (FXTNs) - are long-term (1 yr. or longer), coupon instruments, which means you can collect interest every six months equivalent to the coupon rate. Principal is collected at the maturity of the instrument. Usual tenors are 2yrs., 5 yrs., 7 yrs., 10 yrs. and 20 yrs.

Now when I talk about usual tenors, I mean those tenors that are readily available for sale. You could also buy FXTNs with 1 year to maturity or a Tbill with 7 days to maturity, depending on the supply of the financial institution you are buying it from.

Another important thing to stress about government securities is that your credit risk lies with the national government. So barring any radical changes in govt. (i.e Commies take over), your money is relatively safe since the government could always print money to cover its debts.

2. Commercial Papers (CPs) - are SEC registered securities that are direct obligations of corporations. They could either be Short-term commercial papers (STCPs), whose original life is 365 days or less; or Long-term Commercial Papers (LTCPs), whose original maturities are more than 365 days.

The credit risk of these instrument lies on the ability of the issuing corporation to pay its obligations. Although CPs are rated by, ... sorry name of the rating agency currently escapes my memory, the ratings are not regularly updated. This is due to the fact that the issuing corporation has to ask the rating agency for a new rating befor it can issue a rating.

LTCPs are secured by collateral.

3. Commercial Loans/Direct Lending - these are , unregistered, unrated, and usually unsecured loans by a corporation usually sold as participations without recourse by financial institutions. The credit risk again lies with the borrowing corporation. As mentioned these are unregistered with the SEC. The difference is that they don't have to comply with SEC standards like financial ratios etc.

4. Time deposits (TDs) - are direct obligations of the bank where you are depositing your bank. The credit risk therefore lies with your bank. The tenors for these type of investments are anywhere from 30 to 90 days.

5. Buy-back agreements - although legal, the method by which local financial institutions do it, is highly unacceptable to the Bangko Sentral. These are agreements to sell long-dated securities to the investor with the promise to buy the same after the lapse of a certain period of time (i.e. 90 days). The risk here is whether the financial institution (FI) would honor its commitment to buy the securities from you on the given date. If they don't, then you would be stuck with a long-dated security (i.e. 10 years). An important thing to note is that FIs don't document the buy-back agreement.

6. Common Trust Funds (CTFs) - these are funds where trust departments pool your money so you could enjoy the benefits of investments with a more diverse portfolio.

Financial Instituions (FIs)
1. Universal/Commercial Banks - you could purchase govt. securities, make time deposits and arrange buy-back agreements.

2. Investment houses - you could purchase government securities and commercial papers, participate in loans and arrange buy-back agreements.

3. Trust companies/departments - most banks and investment houses have trust companies which could offer CTFs.

Interest Rates
Interest rates are low right now. You could probaly get 2% from time deposits. For direct loans you could probably get 4%. For GS and CPs it really depends on the length of time until maturity. The higher the tenor, the higher the rate.

Good Idea or Not
Well it really depends on your profile whether it's appropriate for you or not. Well like I said, interest rates are low, so it's really not that attractive to invest in these right now. However if you are risk-averse, govt. securities could be good for you.

Lastly, there are minimum trading lots to some instruments that could be prohibitive to you personally. I am not belittling your means but some banks have P 10 MM lots for government securities.



Well hope that helps. If you have anymore questions like the specific risks, or settlements of each security, or you wish to clarify some of the points in my (sort of long and technical) exposition, then don't hesitate to ask. *okay*


:frank:

[blue[]ce]

Thanks Hulk,

I really appreciate the response. It definitely cleared up most things.

Some more details which could be helpful,

-my friend works in an investment house
-he tells me that investing in the money market can yield as much as 3.6% net per month.
-i have a small amount of money currently invested in a CTF by metrobank at an interest of 6.2% per annum

Would you consider investing in CP to be high risk or medium risk? Is the interest rate for it better than TD or Tbills?

Has there been lots of instances wherein companies forfeit their CP and fail to pay? If so, how is the consumer supposed to go about it?


Thanks a lot. I really appreciate the reply. Thanks Hulk

[Hulk]

In the Philippines I would consider it highly risky for the following reasons:
1. No reliable credit rating agency - as I said in my previous post, ratings are not updated on a regular basis. A company like TIPCO had an "A" rating when it decided to restructure its borrowings.

2. No outright market - most CPs are sold on an buy-back basis (refer to previous post) since the long-term market has yet to be developed. This is one of the reasons why several investment houses closed shop since they were stuck with LTCPs while having to refinance them with short-term money.

3. No proper Marking-to-market - securities should be marked-to-market to reflect their real values. Unfortunately due to the lobbying of some IHs, there is no sufficient M-T-M standards for CPs. Since most of these CPs are issued in the mid-90's, their spread over GS are grossly understated, and since some IHs would sell their securities to you at par (so as not to book any losses), you would be practically be holding onto a highly overpriced security whose actual valuation is only about 60 to 70% of your original investment.

With these reasons, I would deem GS as vastly superior than CPs. Even though CPs have a higher yield, the underlying risks in the local market are too high.

Defaults:
1. Investment House closes
If the investment house that you bought your CP (buy-back agreement)from, closes, the best thing you could hope for is actually having a participation in the security. You see the problem is settlement. When you purchase a CP from an IH, it would be very unlikely that you will receive the actual CP certificate since these are denominated in large lots (i.e. 1MM). What you would get is merely a Confirmation of Sale. Getting your money back is a long and tedious process. You must remember that these are not covered by PDIC.

2. Issuing company defaults
The company would then go under a restructuring process. IH normally has no choice in the matter but to agree with the restructuring. So whatever the IH and the company agrees upon also applies to the CP holder (aka the investor).


:frank: