Transcript Document

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Course
WF5023
Conventional
Money Market
Conventional & Islamic
Financial Markets, Instruments, & Institutions
Topic 6
Conventional Money Market
Prepared by:
Abmalek F. Abubakar
[email protected]
WF5023
School of Finance & Banking
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Semester June
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2003
Conventional Money Market
Introduction to Money Market
Just what & where
is the
Money Market ?
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Conventional Money Market
Money Markets
● characterized by borrowing and lending large amount of money
● for short periods – typically one day up to, and including 12 months.
Bond Markets
● debt market that generally pay interest on instruments for a fixed
period of time for loan periods over 12 months up to 30 years.
● also known as the Fixed Income Markets
● involve medium to long term borrowing.
(1 to 10 year instruments are called notes and
instruments exceeding 10 years in maturity are called bonds)
Equity Markets
● involve medium to long term borrowing
but in this case interest is not paid to the lender.
● borrowing institutions issue stocks or shares to investors who
become part owners of the organization
● investors may or may not be paid dividend on their shares
depending on how well the organization performs.
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Conventional Money Market
Relationship between Money Market & Other Financial Markets
Money Markets
Bond Markets
● Short –term debt
● Medium to longterm
● Long-term
● Non-permanent
funding
● Non-permanent
funding
● Permanent
funding
● 1 day to 1 year
● 1 year to 30 yrs
● Perpetual
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Equity Markets
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Conventional Money Market
Recalling the role of a bank …
… acts as an intermediary between depositors and borrowers
places
money
depositors
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lend
money
bank
borrowers
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Conventional Money Market
Recalling the role of a bank …
In fulfilling its role as an intermediary between units that
seek funds and units with surplus funds, the bank always
finds itself in the following undesirable positions …
Long
$
Position
Bank
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Short
$
Position
Bank
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Conventional Money Market
Retail
Market
Interbank
Market
Retail
Market
Mixed of
Interbank
Lenders /
Borrowers
Non-bank
Lenders
Non-bank
Borrowers
● Repo
placement
● Direct lending
& borrowing
of Ringgit
● Sale of
Financial
Instruments
● Purchase of
Financial
Instruments
● Trading of
Financial
Instruments
● (Loans /
Advances)
● (Savings /
Fixed
Depots
● Repo /
Reverse Repo
● No direct
access to
borrowing
● Swaps
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● Foreign
currency
lending /
borrowing
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Conventional Money Market
So, what is money market?
In general terms, the money market is the market
where liquid and short-term borrowing and lending take
place. The lending of funds in this market constitutes
short-term investments.
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Conventional Money Market
Activities of the Money Market
Through the money market, participants are able to:
1.
borrow and lend funds; and
2.
buy and sell money market instruments
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Conventional Money Market
Structure of the Money Market in Malaysia
can be broadly divided into
● Wholesale (Inter-bank Market), and
● Retail (Commercial Market)
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Conventional Money Market
Players of the Interbank Money Market are
1.
Commercial Banks
2.
Merchant Banks
3.
Finance Companies (some only)
4.
Discount Houses
5.
Money Brokers
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Conventional Money Market
In the Interbank Money Market…
● direct lending and borrowing among participants
take place. Funds lent or borrowed are of short term
tenors, usually between overnight to twelve months;
● financial instruments are traded;
● money brokers act as middlemen between
lenders and borrowers. They play an important role
especially in a fast moving and active market;
● the central bank acts as market regulator. It
engages in open market operations to influence the
supply of money in the banking system, stabilize
interest rates, etc. in order to bring about a more
desirable and systematic market environment.
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Conventional Money Market
At the Commercial Money Market…
● there are other players like non-bank financial
institutions, corporate bodies, government agencies,
statutory bodies, trust and pension funds, insurance
companies, cash-rich individuals, etc;
● they utilize their temporary surplus funds;
● either for direct placements in fixed deposits or term
deposits or call money; or
● for purchasing of money market instruments.
● they have no access to direct borrowing from the
money market
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Conventional Money Market
Major Players in Malaysian Money Market
●
●
●
●
●
●
●
●
●
●
●
●
●
Bank Negara Malaysia
Commercial Banks
Merchant Banks
Finance Companies
Discount Houses
Khazanah Berhad
Cagamas Berhad
EPF
Fund Managers
Insurance Companies
Major Corporations
Cash-rich Individuals
Money Brokers
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Conventional Money Market
Money Market Products
can be categorized as
● Short term Inter-bank Funds
● Instruments under Scriptless Securities Trading
System (SSTS)
● Instruments which are not under SSTS
● Other financial products
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Conventional Money Market
Short-term Interbank Funds
● borrowing and lending of Ringgit among financial
institutions that participate in the interbank money market
● availability of funds is subject to size of inflows and
outflows in the banking system which include
♦ government disbursements
♦ maturities & issuance of govt debts
such as MGS, MTB
♦ interest payments on govt debts
♦ tax, royalty and customs payments to govt
♦ central bank intervention
● cost of funds is determined by market forces of supply
and demand
● maturities range from overnight to 1 year or more
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Conventional Money Market
Money Market Instruments under SSTS
●
●
●
●
●
●
●
Malaysian Government Securities (MGS)
Malaysian Government Treasury Bills (MTB)
Bank Negara Bills (BNB)
Government Investment Issuance (GII)
Cagamas Bonds & Notes
Khazanah Bonds
Some Commercial Papers (CP), Medium Term Notes
(MTN), and Corporate Bonds
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Conventional Money Market
Money Market Instruments Not Under SSTS
● Bankers Acceptance (BA)
● Negotiable Instrument of Deposits (NID)
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Conventional Money Market
Other Money Market Products
●
●
●
●
●
●
●
●
●
●
●
●
Fixed Deposits (FD)
Repo/Reverse Repo
Short Term Revolving Credits (STRC)
Securities Borrowing and Lending (SBL)
Onshore Foreign Currency Loans (OFCL)
Foreign Currency Accounts (FCA)
KLIBOR Futures, Bond Futures
Interest Rate Swaps (IRS)
Forward Rate Agreements (FRA)
Currency Swaps
Currency Options
Structured Products
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Conventional Money Market
Interest-bearing Instruments & Discount Instruments
There are basically two types of instruments issued and traded in
the money market, namely:
1. Interest-bearing instruments
These are instruments which pay interest on the amount
invested, where the interest is normally paid to the holder of the
instrument (the lender), together with the redemption amount at
redemption date. Interim interest payments may be made in
certain cases.
2. Discount instruments
These are instruments that do not pay interest on the amount
invested but are issued at a discount of the nominal value (the
redemption amount). The full nominal amount is paid only on
maturity date. These instruments are called discount instruments.
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Conventional Money Market
Interest Rates Vs. Discount Rates
The discount rate on an instrument and the interest rate paid on an
instrument are not the same, and cannot be compared to when
deciding on an investment.
E.g. Lets compare a one-year NCD with a nominal amount of RM1
million and an interest rate of 11% with a one-year BA of RM1 million
and a discount rate of 11%
Product
NCD
BA
Amt Invested
RM1,000,000
11.0% RM 890,000
Interest/Discount amt
RM 110,000
RM 110,000
Redemption amt
RM1,110,000
RM1,000,000
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11.0%
12.3%
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Conventional Money Market
Interest Rates Vs. Discount Rates
From the above illustration, the yield on the NCD is:
Interest Received
Amount Invested
=
=
RM 110,000
RM1,000,000
11.0%
The yield on an investment on the BA is, however:
Discount Amount
Amount Invested
=
=
RM 110,000
RM 890,000
12.3%
The BA would thus give a higher yield and is the better investment, if
the difference in risk on these instruments is ignored.
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Conventional Money Market
Interest Rates Vs. Discount Rates
The discount rate on discount instruments must thus be converted to
yield before it can be compared to interest rates offered on interest
rate instruments.
The compounding period of rates must also be equal before they can
be compared.
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Conventional Money Market
Functions of a Money Market Department
Basically a Money Market Department performs the
following functions:
♦
To manage the bank’s statutory reserve
account at the central bank
♦
To manage the bank’s liquid assets by
complying to the BNM’s New Liquidity
Framework
♦
To manage the bank’s excess funds
♦
To take proprietary money market position
through trading in approved money market
products and instruments
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Conventional Money Market
Functions of the Money Market
- Meeting Statutory Reserve Requirements
The present Statutory Requirements imposed by BNM
include,
♦ the keeping of some portion of liabilities in the form
of reserves kept with the central bank
(Statutory Reserve Requirement ), and
♦ prudent management of assets, liabilities, and offbalance sheet commitments through maintenance of
sufficient liquefiable assets and available credit lines
(New Liquidity Framework).
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Conventional Money Market
Functions of the Money Market
- Meeting Statutory Reserve Requirements
Maintenance of Reserve Account with BNM
♦
♦
♦
♦
Under the existing guidelines, banking institutions must
set aside a certain portion of all deposits collected to be
placed with the central bank under a special reserve
account.
This placement earns no returns to the banking
institution.
The minimum amount of reserve required depends on
the net eligible liabilities of the banking institution and
differs between commercial banks, merchant banks and
finance companies.
Amount of Reserve = Eligible Liabilities x SRR%
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Conventional Money Market
Functions of the Money Market
- Meeting Statutory Reserve Requirements
Maintenance of Minimum Liquidity Ratio
♦
Banks are required to maintain certain ratios of liquid
assets to deposits at all times
♦
The ratios are determined by BNM from time to time
(what is the current ratio?)
♦
The types of liquid assets are also determined by BNM
(what are the items under this category?)
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Conventional Money Market
Functions of the Money Market
- Meeting Statutory Reserve Requirements
New Liquidity Framework (NLF)
Under the NLF, liquidity requirement of a banking institution is
assessed from 3 levels :
1st – sufficiency of bank liquidity in the normal course
of business over the next few months,
2nd – the capability of bank to withstand liquidity
withdrawal shocks, and
3rd – the degree of dependency by bank on a certain
funding source
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Conventional Money Market
New Liquidity Framework (NLF) (contd)
1st Level Assessment
To determine sufficiency of bank liquidity in the normal course
of business over the next few months.
This is done by putting the assets, liabilities and off-balance
sheet commitments of a bank into maturity ladder profile of 5
bands – “up to 1 week”,” >1 week – 1 mth”, “1 mth – 3 mth”, “
>3 mth – 6 mth”, “ >6 mth – 1 yr”, and “ > 1 year”.
Based on the net maturity mismatch profile for each band,
banks should be able to make necessary arrangement to meet
any liquidity shortfalls.
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Conventional Money Market
New Liquidity Framework (NLF) (contd)
2nd Level Assessment
To determine the capability of bank to withstand liquidity
withdrawal shocks.
Liquidity measurement at this level takes into account the
additional emergency funds that can be quickly realised
from the sale of liquefiable assets or drawn upon from
available credit lines.
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Conventional Money Market
New Liquidity Framework (NLF) (contd)
3rd Level Assessment
To determine the degree of dependency by bank on a certain
funding source.
Measurement for this assessment consists of a series of broad
ratios and supplementary information designed to indicate the
extent of dependency a banking institution on a particular
market for its funding sources.
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Conventional Money Market
Components of Liquefiable Assets include,
♦ RM marketable securities/papers issued by Fed
Govt or BNM
♦ RM marketable securities/papers guaranteed by
Fed Govt or BNM
♦ Danaharta bonds
♦ Cagamas bonds and notes
♦ Danamodal bonds
Class-1
Liquefiable
Assets
♦ NIDs (excluding own-issued NIDs) issued by Tier-1
or AAA rated institutions
♦ BAs (excluding own BAs)
♦ RM corporate bonds and papers with at least an
AAA/P1/MARC 1 rating or its equivalent
Class-2
Liquefiable
Assets
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Conventional Money Market
– Cost of Statutory Requirements
Example :
Banks are required to hold 8% of their total deposits in reserve
accounts with the central bank which gives a yield of 1% p.a.
In addition, an amount equal to 18% of deposits is required to
be held in liquefiable assets which yield 8% p.a. If the bank
pays its depositors an average of 12% p.a., what would be the
break-even rate before it can quote a lending rate for a new
loan ?
If the bank collects deposit totaling RM100, it is required to
lodge RM8 with the central bank, thereby have available only
RM92 for lending or investment activities.
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Conventional Money Market
Example : (contd.)
The break-even cost of funds, b, is computed as
follows:
Interest received from central bank and borrowers = Interest paid to depositors
(8 x 0.01) + (18 x 0.08) + (100 – (8 + 18) b = 0.12 x 100
0.08 + 1.44 + 74 b = 12
74 b = 12 – 0.08 – 1.44
74 b = 10.48
b = 10.48 / 74
= 0.1416
= 14.16% p.a.
Effective cost of funds
= 14.16% p.a.
Nominal deposit rates
= 12.00% p.a
Effective cost of reserve requirements = 2.16% p.a.
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Conventional Money Market
Money Market & BNM
SRR is one of the monetary tools used by BNM in
managing the country’s monetary policy
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Conventional Money Market
Money Market
Instruments
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Conventional Money Market
Money Market Instruments
● They are negotiable instruments, i.e., they can be
traded as there are bids and offers made by buyers
and sellers who are mainly inter-bank participants
● It can be held until maturity for long-term investment
purposes; or
● For short-term investment (of which the paper is
acquired to utilize short-term surplus cash position);
● It is also held to fulfil statutory reserve requirements;
● The instrument can also be acquired for trading
purposes where the paper is disposed when price is
right.
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Conventional Money Market
Money Market Instruments
Instruments can either be
● interest-bearing papers; or
● discounted papers
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Conventional Money Market
Money Market Instruments
- Interest-bearing Securities
● normally issued at par and redeemed on maturity with
principal plus any due interest
● some have a short original maturity and interest is paid
only at maturity
● some have a longer original maturity where interest is
normally paid periodically
● the rate of interest paid on these securities is referred
to as “coupon rates”
● these papers are traded either on
♦ yield % p.a. basis (e.g. 5.0%-6.0%), or
♦ price per 100 basis (e.g. 99.20-99.70 or 101.20-101.70)
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Conventional Money Market
Money Market Instruments
- Discounted Securities
● normally issued at a discount from face value and
redeemed for full face value at maturity
● they do not pay interest
● return to investor is the full amount receives on maturity
compared to what he receives at issue or purchase
● these papers are traded on rates of discount that
normally reflects prevailing market rates
● as the sale and purchase of these papers represents
the borrowing and lending of funds, price is quoted
such that the bid is higher than the offer
(e.g.
5.5%
4.5% )
bid
offer
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Conventional Money Market
Money Market Instruments
- Malaysian Government Treasury Bills (MTB)
Definition
MTB are short term government debts with original
maturities of less than one year, issued at a discount
and redeemable at full face value on maturity
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2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Treasury Bills (MTB)
Characteristics & Features
●
●
●
●
●
●
●
●
an SSTS instrument
issued weekly (normally on a Friday of the week)
original issuance are of 3 mths, 6 mths, or 1 year
distributed via competitive tender through Fully
Automated System of Tendering (FAST)
anybody can participate in the tender through
Principal Dealers
traded in secondary market in Bands
purchased at discount, redeemed on maturity at par
settlement using true discount formula
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Conventional Money Market
Money Market Instruments
- Malaysian Government Treasury Bills (MTB)
The Bands
Band
Band
Band
Band
Band
Band
Band
Band
Band
Band
1
2
3
4
5
6
7
8
9
10
-
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1
22
44
68
92
132
172
212
262
312
to
to
to
to
to
to
to
to
to
to
21
43
67
91
131
171
211
261
311
364
days
days
days
days
days
days
days
days
days
days
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Treasury Bills (MTB)
Discount Formula
Discounted
= FV
Proceeds
where,
1-
(rxt)
36500
FV is the Face Value,
r
is the discount rate of interest, and
t
is the tenor of the bill.
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Conventional Money Market
Money Market Instruments
- Malaysian Government Treasury Bills (MTB)
Example
An MTB of face value RM1.0 million with 157 days
remaining to maturity is sold at a rate of 5.2% p.a.
Sales Proceeds = RM1,000,000 { 1 – ( 5.2 x 157) }
36500
= RM977,600.00
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Conventional Money Market
Money Market Instruments
- Malaysian Government Treasury Bills (MTB)
Example
An MTB of face value RM1.0 million with 157 days
remaining to maturity is purchased at a rate of 6.0% p.a.
Purchase Proceeds = RM1,000,000 { 1 – ( 6.0 x 157) }
36500
= RM974,200.00
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Conventional Money Market
Money Market Instruments
- Malaysian Government Treasury Bills (MTB)
Trading Mechanics
● MTB is traded on yield per annum basis
● The sale and purchase of MTB represents the
borrowing and lending of funds
● As a discount paper, quotation for MTB is the reverse
of the short-term interbank funds
i.e. the bid is higher than the offer rate
E.g.
4.35
(buying)
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-
4.25
(selling)
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Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Definition
MGS are long term interest-bearing securities issued by
the Malaysian Government to finance development
projects and form part of the sources of funding in the
annual budget.
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Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Characteristics & Features
●
●
●
●
●
●
●
●
an SSTS instrument
no fixed schedule for its issuance
longest ever bond issued has original tenor 21 years
issued by auction to appointed Principal Dealers (PD)
anybody can participate in the auction through PDs
interest-bearing notes with coupon payments ½ yearly
traded in secondary market on a price per 100 units
not active secondary market
– unattractive rates & tenor too long
● mainly held by financial institutions to fulfil statutory
requirements
● acts as benchmark for all RM bond issues
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Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Why hold MGS ?
1. Investment Purposes
MGS is a source of fixed income in the form of
periodical coupon interest payments
2. Trading Purposes
Possible capital appreciation
3. Compliance Purposes
To fulfill minimum statutory requirements
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Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Example : MGS as an Investment Tool
● Government issued a 10-year MGS
● Stock Details
♦ Issue Amount
♦ Issue Date
♦ Stock Code
- RM5,000,000,000
- 28 September 2001
- MN01001V
● Summary Results
♦ Applied
♦ Accepted
♦ Rejected
- RM14,808,000,000
- RM 5,000,000,000
- RM 9,808,000,000
● Tender Results
♦ Highest
♦ Lowest
♦ Average
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- 3.847%
- 3.800%
- 3.833%
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Example : MGS as an Investment Tool
● Cash inflows for Stock MN01001V for every RM1 million
♦
♦
♦
♦
♦
♦
♦
♦
♦
♦
28 Mar 2002
28 Sep 2002
28 Mar 2003
28 Sep 2003
28 Mar 2004
28 Sep 2004
28 Mar 2005
28 Sep 2005
28 Mar 2006
28 Sep 2006
-
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
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♦
♦
♦
♦
♦
♦
♦
♦
♦
♦
28 Mar 2007
28 Sep 2007
28 Mar 2008
28 Sep 2008
28 Mar 2009
28 Sep 2009
28 Mar 2010
28 Sep 2010
28 Mar 2011
28 Sep 2011
-
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM19,165
RM1,019,165
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Example : MGS as an Investment Tool
● Selected price movement of Stock MN01001V
♦
♦
♦
♦
♦
♦
♦
♦
♦
♦
♦
♦
29 Sep 2001
02 Oct 2001
15 Oct 2001
06 Nov 2001
12 Nov 2001
30 Nov 2001
15 Jan 2002
22 Jan 2002
25 Jan 2002
06 Feb 2002
18 Feb 2002
07 Mar 2002
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Price
Price
Price
Price
Price
Price
Price
Price
Price
Price
Price
Price
100.90
102.95
103.77
103.52
104.11
102.65
97.00
95.95
92.00
95.65
95.25
95.30
YTM 3.724
YTM 3.481
YTM 3.383
YTM 3.410
YTM 3.340
YTM 3.511
YTM 4.215
YTM 4.350
YTM 4.881
YTM 4.391
YTM 4.446
YTM 4.442
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
General Bond Characteristics
The price or valuation of a bond is influenced by a number of
factors including:
♦
♦
♦
♦
♦
The value of a government bond of similar maturity
The coupon rate and frequency
The maturity – the longer the period the risky it is
The credit rating of the issuer
The type of bond – straight, callable, puttable,
sinking fund, index-linked, zero-coupon, etc
♦ Registered or in bearer form – bearer bonds often
have tax advantages
♦ Liquidity of bond – transaction costs, volatility, etc
♦ Taxation aspects – is the income taxed at source,
at what rate and when
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Bond Trading – Settlement Formula
Proceeds = Principal + Accrued Interest
Proceeds
where
=
( FV x P )
100
+ FV
(c*t)
( 200 * e )
FV = Face Value
P = Price of Stock per 100 units
t = No. of days between last interest payment
date and the value date
c = Coupon Rate
e = No. of days in the coupon period in which
settlement takes place
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Malaysian Government Securities (MGS)
Bond Trading – Calculation of Proceeds (Example)
Investor purchased RM1.0 million of Stock MN0100V on
28 Mar 2002 over spot at 93.50
Stock Details
c = 3.833
Coupon Dates =
every 28 Sep and 28 Mar
Transaction Details
Value Date = 01 Apr 2002
t = 4 days
e = 184 days
● Principal
= (93.50 / 100) x 1,000,000 = 935,000.00
● Accrued Interest = 1,000,000 x ((4 x 3.833) / (200 x 184))
= 416.63
● Buyer Pays
= 935,000.00 + 416.63 = RM935,416.63
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Definition
BA is a bill of exchange, issued at a discount, drawn on
and accepted by an authorized bank to finance
genuine trade transactions
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Characteristics & Features
● not an SSTS instrument
● drawn by a customer on his bank to finance either
export, import, domestic sales, or domestic purchases
● normally customer has prior facility arrangement with
his bank
● tenor at creation is normally 21 days to 200 days
● issued at a discount and redeemable at par on maturity
● minimum amount is RM30k and in multiple of RM1k
● active secondary market
● eligible as liquid assets held by banks
● settlement based on discounted formula
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Examining the Life Cycle of BAs
● customer makes sales or purchases
● bank extends financing and owns the BA certificate
● bank may sell the BA certificate to potential investor
(and thereby obtain funding for the BA),
● or bank may retain the BA till maturity (thereby collects
discounted income)
● on maturity, BA customer pays bank the full face value
and bank pays investor (if BA had been sold before
maturity)
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
BA as a Financing Instrument
advance money
BANK
(lender)
CUSTOMER
(borrower)
draws BA
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
BA as a Investment Instrument
lend / advance money
BANK
(seller)
INVESTOR
(buyer)
delivers BA
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Creation of BA
INVESTOR
School of Finance & Banking
WF5083 Financial Risk Management
BANK
CUSTOMER
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Redemption of BA
INVESTOR
School of Finance & Banking
WF5083 Financial Risk Management
BANK
CUSTOMER
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Example: An importer draws a BA with face value RM5.0
million for 90 days at a discount rate of 3.70
On Creation Day:
Proceeds to the importer is
= RM5,000,000 1 – (90 x 3.70)
36500
= RM4,954,384
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Example (contd)
Assuming on 3rd day, bank sells the BA to an investor at 3.65%
On Day 3 :
Bank receives
= RM5,000,000 1 – ( 87 x 3.65 )
36500
= RM4,956,500
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Example (contd)
Assume investor is able to sell the BA 30 days after purchase at
3.50%
On Day 57 :
Investor receives
= RM5,000,000 1 – ( 57 x 3.50 )
36500
= RM4,972,621.23
Trading income to investor is
RM4,972,621.23 – RM4,956,500.00 = RM16,121.23
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Example (contd)
Redemption of the BA on maturity date
On Day 90 :
Importer pays full Face Value RM5,000,000 to Bank,
and
Bank pays full Face Value to last holder of BA certificate
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bankers Acceptance (BA)
Advantages of Trading in BA
● Liquidity
BA can be easily liquidated for cash if the need arises,
or take profit if price is right
● Secondary market is active and discount rates reflect
market prevailing rates
Limitation of Trading in BA
Amount and tenor required depend very much on paper
availability
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
Definition
… debt instruments created by Cagamas Berhad, the
Malaysian National Mortgage Corporation, to purchase
primarily housing loans from primary lenders (financial
institutions)
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
Types of Bonds / Notes Issued by Cagamas
1.
2.
3.
4.
Cagamas Fixed Rate Bonds
Cagamas Floating Rate Bonds
Cagamas Notes
Sanadat Mudharabah Cagamas
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
1. Cagamas Fixed Rate Bonds
● these bonds have tenures of 1 ½ to 12 years
● carry a fixed coupon rate which is determined at the
point of issuance, based on tenders submitted by
Principal Dealers
● interest on these bonds is paid half-yearly
● the redemption of the bonds is at nominal value
together with the last interest due on maturity date
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
2. Cagamas Floating Rate Bonds
● these instruments have a tenure of up to 7 years
and an adjustable interest rate pegged to the
3-months or 6-months KLIBOR
● the coupon is reset every 3 or 6 months while
interest is paid at 3 or 6 monthly intervals
● interest on these bonds is paid half-yearly
● they are redeemed at face value together with the
last interest due on maturity date
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
3. Cagamas Notes
● these are short-term instruments with maturities
between 1 to 12 months
● issued at a discount from the face value
● other features of these notes are similar to that of
the MTB
● the notes are redeemable at their nominal value
upon maturity
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
4. Sanadat Mudharabah Cagamas
● these are bonds issued under the Islamic principle
of Al-Mudharabah (profit-sharing) to finance the
purchase of house financing debts which were
granted under Al-Bai Bithaman Ajil
● medium tenor instruments with maturity up to 7 yrs
● issued at par with pre-determined profit sharing
ratio payable semi-annually
● the bonds are redeemed at face value, together with
final dividend payments (if any) on maturity date
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
Trading Formula for Cagamas Bonds
Proceed
where,
p
=
p
FV
c
t
100
x
FV +
(cxt)
36500
= Price
= Face Value of Bond
= Coupon Rate
= No. of days from last interest date
to settlement date
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
Example :
An investor buys RM1.0 million worth of Cagamas Bond
on 28 Mar 2002 for value date 01 Apr 2002 at 105.10
Details of the stock is as follows :
● c = 5.449
● t = 21 days
● Last coupon date = 11 Mar 2002
P
=
{
105.10
100
}*
1,000,000 +
{
(5.449 x 21)
36500
= RM1,054,035.04
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
}
Conventional Money Market
Money Market Instruments
- Khazanah Bonds
Definition
… debt securities issued by Khazanah Nasional Berhad, the
Malaysian Government corporate arm, to participate
in acquiring shares of corporatised government bodies and
in companies of strategic national interests.
Primary issue is on price per 100 units, based on tender
basis, normally underwritten by approved Principal Dealers.
It carries the implicit guarantee from the government and at
present all issues are zero coupon bonds.
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Khazanah Bonds
Example :
● Khazanah issue a 3-year zero coupon bond
● Stock Details
♦ Issue Amount
♦ Issue Date
♦ Stock Code
- RM1,000,000,000
- 18 September 2001
- QG00002V
● Summary Results
♦ Applied
♦ Accepted
♦ Rejected
- RM 3,708,000,000
- RM 1,000,000,000
- RM 2,708,000,000
● Tender Results
♦ Highest
♦ Lowest
♦ Average
School of Finance & Banking
WF5083 Financial Risk Management
- 87.118
- 87.016
- 87.040
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Khazanah Bonds
Example :
● Selected price movement of Stock QG00002V
♦
♦
♦
♦
♦
♦
♦
♦
14 Sep 2000 Price
16 Oct 2000 Price
11 Jan 2001 Price
22 Mar 2001 Price
30 May 2001 Price
16 Aug 2001 Price
02 Jan 2002 Price
07 Mar 2002 Price
School of Finance & Banking
WF5083 Financial Risk Management
86.93
87.40
90.20
92.00
92.60
93.77
95.05
95.54
YTM 4.72
YTM 4.67
YTM 3.90
YTM 3.40
YTM 3.38
YTM 3.12
YTM 3.00
YTM 3.03
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Cagamas Bonds & Notes
Trading Formula for Khazanah Bonds
Proceed of sale
or purchase
where,
p
FV
School of Finance & Banking
WF5083 Financial Risk Management
=
p
100
x
FV
= Price
= Face Value of Bond
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Khazanah Bonds
Example :
An investor buys RM1.0 million Khazanah Bond QG00002V
on 30 Mar 2001 at 92.10
Investor pays
=
{
92.10
100
}
x
1,000,000
= RM921,000.00
If investor hold the stock till maturity, he would receive
RM1,000,000.00 on 18 Sep 2003
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Definition
NID is a document issued by an authorised bank which
certifies that a certain sum in Ringgit has been
deposited with the bank for a stated rate of interest with
a specified maturity date.
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
General Features & Characteristics
● NID is like a fixed deposit with a bank, however, it offers
the holder/purchaser an important additional advantage
in that it is negotiable
● Because it is a bearer document, the original certificate
is kept with an authorized depository (usually the issuing
banks) at all times
● Minimum nominal value RM100,000, issued in multiple of
RM50,000 up to RM1,000,000 per certificate
● An active secondary market enables an investor to make
a re-sale at any time before maturity
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Trading of NID
An NID may be traded in the secondary market based on
● outright sale and purchase, which results in a transfer
of ownership from seller to buyer, without recourse,
except to the Issuer
● Purchase and redemption prior to maturity date by Issuer
of its own NID, which results in premature liquidation
● Repo – first buyer and first seller respectively undertake
to repurchase and sell-back the NID at an agreed price &
on a specified future date
● transaction value “same day”, “spot”, or “forward”
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Another
Investor
pays principal plus last interest due
redeems the certificate on maturity
Issuer
(Bank)

issues

Depositor
pays full principal
another
resell

sells
Investor

Another
Bank
resell
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Presently NIDs are issued under 4 broad categories :
● Short-term Negotiable Instruments of Deposits (SNID)
● Long-term Negotiable Instruments of Deposits (LNID)
● Zero-coupon Negotiable Instruments of Deposits (ZNID)
● Floating-rate Negotiable Instruments of Deposits (FRNID)
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Short-term Negotiable Instruments of Deposits (SNID)
● Tenor ranges from 1 month to 12 months
● Minimum value RM100k, in multiples of RM50k,
Maximum value up to RM1.0 million
● Interest, based on fixedcoupon rate, will be paid on
maturity together with principal
● Redemption proceeds is based on following formula,
NV
1 +
(cxt)
36500
where, NV is nominal value,
c is coupon interest rate p.a.,
t is no. of days between issue date and maturity
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Example : SNID (primary issue)
A SNID was issued with the following features:
Issue Date 08 Feb 2002 (Fri),
Nominal Value is RM1.0 mil.,
Maturity Date 07 Feb 2003 (Fri)
Coupon Rate is 7.0 % p.a.
If depositor holds the instrument till maturity, his redemption
proceeds is
Redemption
= 1,000,000
Proceeds
1 +
(7.0 x 364)
36500
= RM1,069,808.22
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
SNID : Trading in Secondary Market
In the secondary market, SNID is traded on yield p.a. basis.
The proceeds to be paid by a buyer is computed as follows:
Proceeds
=
NV
36500 + (C x DIM)
36500 + (Y x DSM)
where, NV = Nominal Value,
C
= Coupon Rate,
y
= Yield in % p.a.
DIM = No. of days between issue date and maturity,
DSM = No. of days between settlement date and
maturity date
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Example : SNID (secondary market)
A SNID has the following features:
Issue Date 05 Feb 2002 (Tue), Maturity Date 05 Aug 2002 (Mon)
Nominal Value is RM1.0 mil., Coupon Rate is 7.45 % p.a.
The original bearer sold the SNID for value same day at a
yield of 7.50% p.a. to a buyer on 03 May 2002,
Proceeds
from buyer
= 1,000,000
36500 + (7.45 x 181)
36500 + (7.50 x 94)
= RM1,017,294.72
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Long-term Negotiable Instruments of Deposits (LNID)
● Tenor must be at least 12 months up to 120 months
● Minimum value RM100k, in multiples of RM50k,
Maximum value up to RM10 million
● Coupon payments made semi-annually or quarterly
except for the 1st interest payment which could be
earlier than 3 or 6 months
● Traded on price basis, i.e. quoted in terms of “price per
100 nominal value” (e.g. “99.90” or “100.15”)
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
LNID : Computation of 1st Interest Payment
Computation of the 1st Coupon Proceeds is based on
CP
=
NV x
( c/n )
100
x
DIC
DCC
where, CP
NV
c
n
DIC
= Coupon Proceeds,
= Nominal Value,
= Coupon Rate,
= Frequency of coupon payments p.a.
= Actual no. of days between issue date and
to the first interest date,
DCC = No. of days in the next interest period
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Example : Computation of 1st Interest Payments on LNID
An LNID was issued with the following features:
Issue Date 12/02/2002 (Tue) Maturity Date 12/05/2002 (Mon)
Nominal Value RM1.0 mil
Coupon Rate 7.8%p.a.
Interest Dates : every 12/05 and 12/11
The 1st interest date would be 12/05/2002, i.e. only 3 months
after issue date. Interest payment would be
CP
= RM1,000,000 x
7.8 / 2
100
x
89
181
= RM19,176.80
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
LNID : Computation of Remaining Interest Payments
Computation of Coupon Proceeds is based on
CP
=
where, CP
NV
c
n
NV
x
( c/n )
100
= Coupon Proceeds,
= Nominal Value,
= Coupon Rate,
= Frequency of coupon payments p.a.
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
LNID : Trading in Secondary Market
In the secondary market, LNID is traded on price basis.
Proceeds to be paid by a buyer is computed as follows:
Proceeds = NV x
p
100
+
c/n
100
x
DCS
DCC
where, NV = Nominal Value,
p = Price,
c = Coupon Rate,
n = Frequency of coupon payments p.a.
DCS = No. of days between last interest date and
settlement date,
DCC = No. of days in the current interest period
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Example : LNID (secondary market)
Issue Date 04/05/2002 (Fri) Maturity Date 04/05/2006 (Thu)
Nominal Value RM1.0 mil
Coupon Rate 8.0% p.a.
Interest Dates : 04/11 and 04/05
The LNID was sold on 04/07/2001 at a price of RM99.95; and
the sale proceeds are calculated as follows:
Proceeds = RM1,000,000
99.95
100
+
8.0 /
2
x
100
61
184
= RM1,012,760.87
(of which accrued interest is RM13,260.87)
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Zero-coupon Negotiable Instruments of Deposits (ZNID)
● Tenor must be at least 1 month up to 120 months
● Minimum value RM100k, in multiples of RM50k,
Maximum value up to RM10 million
● Full nominal value to be paid by Issuer at maturity
● Traded on yield basis (e.g. 7.05%) for papers with remaining
maturity of less than 365 days, and on price (e.g. 98.90) for
papers exceeding 365 days to maturity
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
ZNID : Trading in Secondary Market
Proceeds to be paid by buyer for papers < 365 days to maturity
NV
Proceeds
=
1
+
Y x DSM
36500
where, NV = Nominal Value,
y
= yield
DSM = No. of days from previous settlement
date to current interest date
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Example : Trading ZNID in Secondary Market ( < 365 days)
Issue Date 07/02/2000 (Mon) Maturity Date 07/02/2002 (Thu)
Nominal Value RM1.0 mil.
The paper was sold on 04/09/2001 at a yield of 7.5% p.a. The
sales proceeds were
1,000,000
Proceeds
=
1
=
+
7.5 x 156
36500
RM968,940.80
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
ZNID : Trading in Secondary Market
Proceeds to be paid by buyer for papers > 365 days to maturity
p
Proceeds
=
NV
+
100
where, NV
p
School of Finance & Banking
WF5083 Financial Risk Management
= Nominal Value,
= price
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Example : Trading ZNID in Secondary Market ( > 365 days)
A ZNID with a nominal value of RM1.0 million is purchased at a
price of RM95.00
Proceeds to be paid by buyer,
Proceeds
= RM1,000,000
x
95
100
= RM950,000
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Floating-rate Negotiable Instruments of Deposits (FRNID)
● Tenor must be at least 12 month up to 120 months
● Minimum value RM100k, in multiples of RM50k,
Maximum value up to RM10 million
● Interest payment every 3 or 6 monthly intervals based on
KLIBOR ± margins fixed every interest payment date
● Traded on price basis (e.g. 98.90)
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Floating-rate Negotiable Instruments of Deposits (FRNID)
Computation of proceeds is based on formula,
Proceeds =
NV
p
100
+
c x DCS
36500
where, NV = nominal value,
p = price,
c = coupon
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Negotiable Instruments of Deposits (NID)
Example : Trading FRNID
Issue Date 01/03/2000 (Wed) Maturity Date 01/03/2005 (Tue)
Nominal Value RM1.0 mio
Coupon Rate KLIBOR + 0.25%
Interest Dates : every 01/09 and 01/03
On the 1st interest date of 01/09 2002, KLIBOR was 7.6% p.a.
The coupon rate was then fixed at 7.85% p.a.
The FRNID was sold for value 02/10/2002 at a price of 99.95.
Proceeds to be paid by buyer
Proceeds = RM1,000,000
99.95
100
+
7.85 x 31
36500
= RM1,006,167.12
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Bank Negara Bills (BNB)
BNB are short term securities issued by Bank Negara
Malaysia and are bidded on yield basis. The yield is
specified as a rate of discount and the tenor of BNB is
expressed as a number of days.
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Repurchase Agreements (Repo / Reverses)
What is a Repo ?
■ By definition, a repo is an agreement whereby a bank
sells its valued money market papers to an investor
with an understanding to repurchase them at an
agreed price on a specified future date.
■
The type of money market papers normally used for
repo include
(i) Bankers Acceptances (BAs)
(ii) Negotiable Certificate of Deposits (NIDs)
(iii) Malaysian Government Stocks (MGSs, MTBs)
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Repurchase Agreements (Repo / Reverses)
How does a Repo work ?
1. On Day 1
places surplus funds
with bank on short term
INVESTOR
BANK
pledges money market papers
for the tenor of placement
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Repurchase Agreements (Repo / Reverses)
How does a Repo work ?
2. On Maturity Date
returns principal
plus interest
INVESTOR
BANK
returns the right of
claim to the money
market papers
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Repurchase Agreements (Repo / Reverses)
Who can do repo ?
■ Private and public companies with surplus funds
■ Government agencies with surplus funds
■ Cash-rich individuals
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Repurchase Agreements (Repo / Reverses)
Advantages of repo to investors
■ able to maximise returns on short term surplus
funds rather than leaving the funds idle in current
account which yield no return
■ can manage and plan cash flow more efficiently as
the tenor for repo is very flexible
■ in emergency cases, funds can be withdrawn
before maturity date of repo, with interest paid for
the number of days the funds were held by bank
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Repurchase Agreements (Repo / Reverses)
Formula for Computation of Interest Payable on Repo
The calculation of interest payable on repo transactions is based
on the simple interest formula
I =
where,
I
=
P =
R =
T =
PxRxT
100
Interest payable
Principal sum placed under repo
Rate of interest for the placement
Tenor of the repo
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003
Conventional Money Market
Money Market Instruments
- Repurchase Agreements (Repo / Reverses)
Example :
A repo placement by an investor of RM1,000,000 for 7 days
at 6.50 percent
I = 1,000,000 x 0.065 x 7
365
= RM 1,246.58
School of Finance & Banking
WF5083 Financial Risk Management
WF5023
Semester June
2003