MONEY MARKET t=time, the period where the money is borrowed or

● It is a place where short term debt lent

securities are issued. It has a maturity of
1yr or less. To compute for the maturity value (F), we have,
● They are issued by an economic agent E = P + I or F = P(1 + rt)
that needs short term funds to support
their operations or short term needs. Discounts
2 Basic Parties in Money Market: D = Fdt
1. Borrower or Issuer Where
2. Investor or Saver D = discount
BASIC CHARACTERISTICS OF MONEY
F = future value or maturity value
MARKET AND MONEY SECURITIES:
d = discount rate
1. Money market are sold in large denominations.
t = time
2. Money market securities have low default risk.
To compute the proceeds, we have:
3. Money market securities have a maturity period
P=F-D
of less than a year.
P = Proceeds

BOND EQUIVALENT YIELDS

It is denoted by Bond Equivalent Yields Quoted
nominal yield on a given security. Useful tool by
investors to determine the annual yield on the
IMPORTANT DATES IN MONEY MARKET security offered at a discount.
INSTRUMENTS:
● Transaction Date - This is the date EFFECTIVE ANNUAL RETURN
where the terms and conditions of the ● If the investor would like to make a
financial Instrument are stated such as comparison of financial instruments with
the term to maturity, the amount to be different compounding periods, the
invested, and the price agreed upon by effective annual rate (EAR) should be
the two parties. used.
● Value Date - It is the date when the ● It also known as the annual percentage
invested amount will start accruing return (APR)
interest.
● Maturity Date - This is the date where the DISCOUNT YIELD
contract is terminated or will end. ● It uses a 360 day in a year rather than
Yields on Money Market Instruments 365 days.
Simple Interest ● the dividend yield is denoted by Discount
Yield

Where:
I = interest, the cost of borrowing or return for
lending To make securities that use the discount yield
P = principal, the amount borrowed or invested comparable to securities that use the bond
r = the interest rate or the percent of the principal equivalent yield, the following formula is used:
to be paid for a period of time
SINGLE PAYMENT YIELDS
● It assume a 360-day year in computing
the interest due
For Example:
Negotiable Certificates of Deposit Overnight
Borrowings
Money Market Funds TREASURY BILL RATES TABLE
It is a table showing the quoted bid and asked for
the trading of T-bills for different maturity periods.
It is normally issued in newspapers for public
awareness. Below is a sample of a T-bill rates
table for different maturities.

MONEY MARKET SECURITIES

Money market securities give elbow room for the
borrowers and lenders on how to manage their
excess money or the need for the money.
The money market securities that can be
offered are the following:
1. Treasury bills
2. Negotiable certificate of deposit 3. Money
market funds
4. Commercial paper
5. Repurchase agreement
6. Interbank money market
7. Eurocurrency market To get the price using the asked yield (bond
8. Banker's acceptance equivalent yield) we have:

TREASURY BILL (T-BILLS)

● These are short-term obligations issued
by the government.
● Treasury bills are offered with a maturity
of 91 days, 182 days, and 364 days.
● T-bills are bought and sold by the CERTIFICATE OF TIME DEPOSIT (CTD)
government as a tool to implement ● It is issued by the banks to their
monetary policy. It is used by the depositors who would like to invest their
government when they need money in the excess money for less than a year. These
short term to finance government are bank placements withholding 30, 60,
expenses. 90, 120 up to 360 days. It earns interest
higher than the savings account.
To compute the discount yield, we have: ● The face of a CTD specifies the date of
maturity, the name of the holder, and the
amount of placement.
 Commercial Papers
● These are unsecured promissory notes
issued by firms with high credit standing.
● It has a maturity period of less than a year
because the need for money serves only
Negotiable certificate of deposit (NCD) for the meantime.
● It is already fixed by nature. ● The proceeds from the issuance of the
● NCD has a secondary market where the security are used for the current
investor can sell it at realizable value operations of the company
before its maturity ● Commercial papers are sold at a discount
● NCD is issued and guaranteed by the from their face value.
bank ● Issuance of commercial papers needs the
● NCD is a bearer instrument approval of the Securities and Exchange
● The Interest rate on an NCD Is slightly Commission (SEC) before it is issued or
lower compared to the regular certificate sold.
of deposit with the same term because of
its negotiability

Repurchase Agreement
● A repurchase agreement is a loan
collateralized by money market securities.
● Repurchase agreements are overnight
transactions.
● The collateral pledged in a repurchase
Money Market Funds
agreement has a haircut applied.
● Money market funds are mutual funds
● Reverse purchase agreement is the
● One advantage of a money market fund is
lender's position in the repurchase
that it allows small investors access to
agreement.
professionally managed and diversified
portfolios
● Investment is composed of the pool of
funds coming from investors
● Money market fund is regarded as less
risky
● There are two fundamental types of
investment companies: open-end
investment companies and closed-end
investment companies.
Interbank Money Market ● It is the international equivalent of the
● it is a loan granted by one bank to another domestic money market.
bank ● The term Eurocurrency originated in the
● this happens when one of the banks has early 1960s in eastern European
surplus funds obtained from customers' countries.
deposits exceeded the demand for a loan ● This Euro currency is maintaining a US
and the other bank whose demand for dollar account In a bank whose currency
funds on account of a loan request from is different from the US currency.
their clients exceeded the availability of Banker's acceptances
funds utilizing deposits will face a ● Banker's acceptances are mainly used for
depletion of reserves. transactions to finance the shipment and
● The graph below shows the reserve handling of merchandise between the
requirements of the Philippines from April exporter and importer (Melicher, et.al.,
2019 to March 2020. The reserve 2003).
requirements decreased from 18% in April ● Banker's Acceptances are short-term
2019 to 12% in March 2020. The cut in financing in the sense that it matures in
reserve requirements is in line with the less than a year, normally ranging from 30
BSP's broad financial sector reform to 270 days.
agenda to promote a more efficient ● Banker's acceptances are payable to the
financial system by lowering financial bearer at the maturity and they can be
intermediation costs, the BSP said in a traded in the secondary market
press release.

LONDON INTERBANK OFFER RATE (LIBOR)

RATE OFFERED FOR EURODOLLAR FUNDS
IN THE INTERNATIONAL MONEY MARKET
Loan offered in the Interbank Money Market Usage:
1. Overnight Money: ● Substitute for overnight borrowings by
refers to loans that are borrowed and banks.
repaid the next day. ● Standard measure of interest rates for
2. Call Money: loans.
borrowed and lent for a very short period, Historical Context:
usually up to 14 days. ● Created in the 1980s by the British
3. Notice Money: Bankers' Association.
loans that are taken for a period between ● Managed by NYSE Euronext and
2 to 14 days. Borrowers must provide Intercontinental Exchange.
notice before repayment, which is ● Regulatory oversight by the UK.
typically 1 day. Scandal:
4. Term Money: ● Manipulation discovered in 2012 involving
These loans are extended for a period of Barclays and other banks.
more than 14 days but less than one year. Risk Comparison:
5. Intraday Money: ● Overnight borrowing generally cheaper
loans that are borrowed and repaid within due to lower risk.
the same banking day.
Eurocurrency Market LIBOR
● It is a market for short-term deposits Calculation
denominated in currencies and other ● Determined by averaging interest rates
easily convertible currencies other than from major banks in USD, EUR, and JPY.
the one in which the bank operates.
Impact on Loans Usage: Effective overnight reference rate for the
● Example: 2% + LIBOR indicates euro.
additional interest over LIBOR rate. Calculation: Weighted average of interbank
Market Dynamics lending within the euro area.
● LIBOR vs. Overnight Borrowing Rates.
● Supply and demand effects on interest Bond Market
rates. INTRODUCTION
When firms plan to expand, payoff their
LONDON INTERBANK BID RATE (LIBID) long-term obligations, increase capital
AVERAGE INTEREST RATE FOR MAJOR expenditures, or do other things in the long-term,
LONDON BANKS BIDDING FOR the firm would need funds to execute them. The
EUROCURRENCY DEPOSITS. board of directors will decide how the money
USAGE should be raised. Should the funds will come from
● Banks lend excess deposits to earn its retained earnings, issue additional shares,
additional income. borrow from the banks, or issue corporate bonds
● Counterpart to LIBOR, used within the to the public? Should the management decides to
interbank market. use their accumulated net income, it may take
COMPARISON TO LIBOR time to raise the needed funds to finance the
● LIBOR is the asking rate; LIBID is the project. Another option is to issue equity, either
bidding rate. common or preferred stock. However, the problem
LIBID not standardized or publicly with this is it will incur a high cost of financing.
available. And in addition, there is the possibility that the
MARKET TRANSACTIONS ownership of the stockholders will be diluted due
● LIMEAN: Average of LIBOR and LIBID. to an increase in outstanding. Borrowing, on the
● Used as a mid-market reference rate. other hand, will incur additional costs to the
APPLICATIONS company in the form of interest expenses.
● Reliable reference for borrowing and Although there are different ways to raise
lending rates in the interbank market. money, companies normally prefer to borrow
because of its benefits, Aside from not using their
SONIA AND EURONIA own money, the ownership of the existing
stockholders will not be diluted and it has a lower
SONIA: STERLING OVERNIGHT INDEX cost of capital compared to the issuance of
AVERAGE RATE stocks. With these, they normally come up with
Usage: Benchmark for British Sterling Market. the issuance of bonds in the market.
Establishment: 1997 by the Wholesale Markets
Brokers' Association. BONDS
Benefits: Stabilizes overnight rates, promotes Bonds are long-term debts issued by corporations
OIS market. to bondholders, requiring repayment of the
principal and periodic interest payments until
EURONIA: EURO OVERNIGHT INDEX maturity. They have lower capital costs compared
AVERAGE to stocks and are tax-deductible. Market
Usage: Benchmark for euro transactions between participants use bonds for large issues and notes
midnight and 4:00pm. for smaller issues sold to a limited number of
Calculation: Weighted average overnight deposit investors. Bonds have the highest risk, notes
rates for euro cash transactions. have the second-highest risk, and bills have the
least risk. Bonds are used by corporations and
EURIBOR and EONIA government units to finance large amounts of
activities, and require approval from the Securities
EURIBOR: EURO INTERBANK OFFERED RATE and Exchange Commission (SEC). Bondholders
Usage: Benchmark for euro interest rates. have priority in case of insolvency, and they
Calculation: Average interest rates from receive principal and interest payments before
eurozone banks. dividends are distributed.
Maturities: Ranges from one week to one year.

EONIA: EURO OVERNIGHT INDEX AVERAGE

THE BOND MARKET issue. It also includes the rights and duties of the
The bond market is a platform where borrower and other parties to the contract.
bonds are issued and traded, facilitating the B. Bond certificates are used. Each bond
transfer of funds from providers to issuers for certificate represents a portion of the total loan.
project financing. Providers include individuals, The usual minimum denomination in business
governments, and private corporations, while practice is P1,000 although smaller
issuers are government and private corporations denominations are issued occasionally.
seeking funding. The bond market comprises C. lf the property is pledged as security for the
primary and secondary markets. Corporations bond Issue, a trustee is named to hold title to the
wishing to issue bonds must approach investment property serving as security. The trustee acts as
banks, who are responsible for issuance and the representative of the bondholders and is
marketing upon SEC approval. The registration usually a bank or a trusted company.
form must include the business nature, bond D. A bank or trust company is usualy appointed
features, yield, maturity, issue amount, purpose, as a registrar or as a disbursing agent. The
collateral, potential investment risks, management issuing firm deposits the interest and principal
profile, major investors, and audited financial payments to the disbursing agents, who then
statements. Investment banks are paid based on distribute the funds to the bondholders. In other
the agreement with corporations and may act as words, the trust company is the one that ensures
the sole underwriter of bonds. If the issue is too that all the terms and covenants indicated in the
large, they may seek assistance from other indentures are executed by the issuing firm.
banks, forming a syndicate with the original
investment bank as the lead underwriter. Bond Indentures
● a legal document that contains the rights of
Corporations approached the investment bank the bondholders and a company
for several reasons. Some of them are as ● this is where the terms and conditions of
follows: bond issuance are determined
1. Firms want to be assisted based on the ● “ deed of trust of trust”
expertise and advice of the investment bank
regarding the issue, Bond Indentures Provisions:
2. It helps the issuing corporation to determine the 1.Details of the terms of the bonds issued
yield and maturity of the issue, and 2.Covenants
3. The. investment bank may enter into. a contract 3.Call provision
under the firm commitment underwriting where all 4.Conversion provisIon
the issues shall be sold to the general investing 5. Retirement provision
public or bought, the entire issue with the option 6.Sinking fund provision
to sell at a higher price or may enter into a best
effort agreement to sell the entire issues. 1. Details of the terms of the bonds ssued -it
includesthe ff:
Bonds in the Philippines ● nominal rate, principal or face amount
In the Philippines, there are two main types of ● Issue price
bonds: government bonds and corporate bonds. ● Maturity date
Government bonds, also known as retail
treasury bonds (RTB), are issued by the 2. Covenants -restricts in a certain actions of the
government, while corporate bonds are issued issuer to undertake further borrowings
by private or public corporations. Both types offer a. Protective covenants -actions or conditions
interest to bondholders, with government bonds that the company should follow.
offering lower interest rates. Bonds can be direct b. Negative covenants -actions or conditions that
or indirect, with direct bonds purchased from the company should not do.
corporations and indirect bonds bought by fund
managers. Government-issued bonds are 3. Call provision
accredited by financial institutions. a. callable bonds -gives right to the issue of the
bonds to call the bonds previously issued before
Features of Bond Issue the maturity date.
A. A bond indentureor deed of trust is the - generally, call price is more than par value of the
document that shows the full detail of the bond bond.
- difference between call price and the par value is Bond Rating
called call premium. When a company decided to go public for the
Putable Bonds -bondholders have the right to issuance of bonds, a rating agency such as
sell the bonds back to the issuer before it matures PhilRatings, will rate the bond qualitatively and
generally, issued at lowest yield or discount quantitatively.

4. Conversion provision -issued at premium or Risk of Investing in Bond

discount as it amortized from the time it was ● Interest rate risk
issued until the time they will mature instead of ● Inflation risk
the conversion date. ● Market Risk
● Credit Risk
5. Retirement Provisions Philippine Dealing and Exchange (PDex)
Retirement of bonds may be done in several ways ● Is a dealing exchange for major banks here
by: in the Philippines.
1. Paying at the maturity date ● PDEx is also responsible for calculating the
2. Means of conversions, if the bond issued are Philippine Dealing System Treasury
convertible Reference Rate (PDST Rates).
3. Calling the bonds, if it has a call feature, and
4. Periodic Payment, if the bond issue is sinking HOW TO INVEST IN BONDS?
fund issue
A Minimum Qualification Should Be Met They Are
6. Sinking Fund Provisions As Follows :
It is a provision that requires the issuing 1. One Primary Identification Card And Secondary
corporation to set aside an amount to pay off their Identification Card
bond issuances. 2. The Investor Should At Least Be 18 Yrs Old
Sinking fund retirement of bonds may take two 3. Should Secure A Tax Identification Card
forms: Number (TIN)
1. The trustee receives a cash payment from the 4. The Required Minimum Amount Of The Bond
corporation that issued the bonds. Normally Ranges From 10,000 To 100,000
2. The bonds are purchased in the open market.
FORMS THAT NEED TO BE ACCOMPLISH (
Securities to Bond Issuance TRUST AND MANAGEMENT DEPARTMENT)
1. Unsecured Debentures
2. Secured Debentures 1. Account Opening Form
2. Client Sustainability Assessment Form
Types of Bonds 3. Invest Management Agreement
1. Term Bonds 4. Letter Of Instruction
2. Serial Bonds 5. Risk Disclosure Statement
3. Secured Bonds
4. Open-end mortgage bond SALE OF BONDS
5. Mortgage Bond ● Bonds May Either Be Interest Bearing Or
6. Collateral Bond Non - Interest - Bearing
7. Equipment obligation bonds ● Bond Issuance Is Not Free From Any Costs
8. Unsecured Bonds
9. Debentures Bonds VALUATION OF BONDS
10. Subordinate bond The Valuation Of Bonds Is Always Between The
11. Income Bond Two Parties, The Issuer And The Investor.
12. Registered Bond To Value The Bond, Individuals Must Know The
13 Bearer Bonds Following :
14. Convertible Bonds 1.PAR VALUE - Initial Value Of The Bond
15. Callable Bond Sometimes Referred As The Principal Or Face
16. Guaranteed Bond Value Of The Bond
17. Junk Bonds 2.COUPON RATE - It Is An Interest Rate stated In
18. Floating Rate Bond the Bond Certificate
 ⬆️= Value of the
⬇️
3. REQUIRED RATE OF RETURN - Actual Rate Required Rate of Return

⬇️= Value of the

Received by the Bondholder Bond

⬆️
4. MATURITY RATE - Final Date On Which Required Rate of Return
Repayment Of The Principal Bond Is Use Bond

FORMULA FOR COMPUTING THE VALUE OF IMPACT OF TIME ON THE BOND PRICES
A BOND

BOND AT A DISCOUNT
If The Selling Price Of The Bond Is Less Than
The Face Value Of The Bond, The Bond Is Said
To Be Issued At A Discount.
SEMI-ANNUAL PAYMENT OF INTEREST
BOND PREMIUM If the bond is selling with Interest payable every
If The Selling Price Of The Bond Is More Than six months, the same formula is used to compute
The Face Value Of The Bond, The Bond Is Said the value of the bond.
To Be Sold At A Premium. However, the following steps are involved when
interest is paid every six months:
BOND ISSUED WITH ACCRUED INTEREST 1. Compute the interest payment based on six
months
2. Get the n periods by multiplying the number of
years to maturity by 2, and
3. Divide the required rate of return by 2.
NON-INTEREST BEARING BOND
It is a bond that bears no interest but sold at a YIELD TO MATURITY
very deep discount. The investor's expected YTM is the expected rate of return if the bond was
return in this type of bond is on the difference held up from the time it was purchased until its
between the acquisition cost and the full FV of the maturity date. It assumes that the issuer of the
bond. bond pays all the interest and the principal as
To compute for the zero-coupon bond, we have: stated in the bond contract.

However, through the use if interpolation, the

process can be shortened.

REQUIRED RATE OF RETURN AND THE BOND

PRICES
The value of the bond is changing over time. The
changes are attributable to two factors: the TIME YIELD TO CALL (УТС)
and the REQUIRED RATE OF RETURN. YTC is a provision that gives a right to the issuer
of the bonds to call the bonds previously issued
before the maturity date.
 TREASURY NOTES AND BONDS
● Issued by the Philippine government through
the Philippine Treasury to finance
government obligations and expenditures.
● Default-free investments, as payment is
CURRENT YIELD guaranteed by the government.
It is the current ratio of the interest received per ● Treasury notes have maturities of more than
year divided by the current market price of the one year up to ten years,while treasury
bond. bonds are issued with maturities beyond ten
years.
● Yields are lower than corporate bonds due to
their default-free nature, but they are still
subject to interest rate risk, particularly for
BOND REFUNDING longer-term bonds.
● Bond refunding, also known as bond ● Interest is typically paid every six months
refinancing, refers to the issuance of new until maturity.
bonds to pay off their outstanding bonds.
● Bond refunding requires an initial outlay of EUROBONDS
funds to call in the outstanding bonds and ● Eurobonds are bonds issued and sold
there are cash inflows expected in future outside the country using a currency different
periods because of interest savings. from the one in which the bond is
denominated (e.g., U.S. dollar-denominated
bonds issued in Europe).
● Eurobonds were first introduced in 1963 to
avoid taxes and domestic regulations,
allowing corporations to raise funds in foreign
BOND DURATION markets without domestic borrowing
Bond duration measures the sensitivity of the limitations.
price of the bond as brought by the change in the ● Typically, Eurobonds are issued in
interest rates. denominations of $5,000 to $10,000, and the
To compute the duration, the following information coupon payments are calculated on a
is needed: 360-day year basis.
1. The bond's yield to maturity or effective annual ● Floating-rate Eurobonds generally pay
yield. Sometimes it is also called the required rate interest semi-annually using the LIBOR rate.
of return. ● Eurobonds are also bearer bonds, traded in
2. The nominal interest rate. This is to compute over-the-counter markets.
the amount of interest to be received for each ● Investment banks place Eurobonds in the
payment period. primary market, often using syndicate led by
3. The number of interest payments received per a lead bank. A firm commitment offering is
year common,meaning the bank must sell the
4. The principal amount of the bond is to be entire issue.
received at maturity ● Due to associated risks, Eurobonds typically
have a higher spread compared to domestic
MODIFIED DURATION bonds, and the distribution is international.
To determine the bond's volatility, the duration of ● Banks in countries like the Philippines may
the bond can be adapted. prefer issuing bonds outside their country,
using Eurobonds instead of domestic bonds
for broader reach.

FOREIGN BONDS
● Foreign bonds are long-term bonds issued by
governments or corporations in a different
country.
● These bonds are denominated in the
currency of the country where they are
 issued (e.g., a Philippine corporation issuing
bonds in the U.S.would denominate them in
U.S. dollars).
● Foreign bonds have been in use longer than
Eurobonds, giving them a reputation as
traditional international bonds.

SEPARATE TRADING OF REGISTERED

INTEREST AND PRINCIPAL SECURITIES
(STRIPS)
● STRIPS are Treasury bonds with separated
coupon payments, creating individual
securities for each coupon payment and the
bond's maturity value.
● Each component, known as Treasury
zero-coupon bonds, provides a single
stripped payment, suiting investors with
different investment horizons. Long-term
investors may prefer the principal portion,
while short-term investors may favor the strip
portion.
● STRIPS are created and issued by financial
institutions, not directly by the government,
though they originate from Treasury
securities.
● STRIPS have a low default risk due to their
government-backed origin and can be traded
on the secondary market if investors do not
wish to hold them to maturity.