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CONTENTS

Introduction Page 03

a) Treasury Bills (T-bills) Page 04

b) Commercial Paper Page 06

c) Certificate of deposit Page 08

d) Bankers’ Acceptances Page 10

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Introduction

Money market instruments are very liquid and considered extraordinarily safe. Because they are

extremely conservative, money market securities offer significantly lower return than most

other securities. One of the main differences between the money market and the stock market

is that most money market securities trade in awfully high denominations. This limits the access

of the individual investor. Furthermore, the money market is a dealer market, which means that

firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock

market where a broker receives commission to acts as an agent, while the investor takes the risk

of holding the stock. Another characteristic of a dealer market is the lack of a central trading

floor or exchange. The easiest way for us to gain access to the money market is with money

market mutual funds, or through money market bank account, which are offered. These

accounts and funds pool together the assets of thousands of investors in order to buy the

money market securities on their behalf. However, some money market instruments, like

treasury bills, may be purchased directly. Failing that, they can be acquired through other large

financial institutions with direct access to these markets. Call money rate -the rate at which

short term funds are lent and borrowed among banks- is the core of an overnight money market

for credit. Volatility of the overnight money market rate (call money rate) is a very usual

phenomenon for a well functioning market. Market participants determine the rate according to

their perceptions of the current and future liquidity condition in the market. Thus this rate

reflects the supply and demand behavior of bank reserves, and hence, gives important signals to

the central bank to understand the market pressure. Call money rate in Bangladesh can be

viewed as a market-clearing rate. Fluctuations in the overnight rates come mainly from supply

and demand for liquidity in the money market. Periodic change in reserve requirements as well

as economic and seasonal factors may cause the demand to rise. The overnight money market

rate can also be impacted on the days when Bangladesh Bank (BB) conducts open market

operations.

Commonly used money market instruments in Bangladesh

a) Treasury Bills (T-bills)

b) Commercial Paper

c) Certificate of deposit

d) Bankers’ Acceptances

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a) Treasury Bills (T-bills)

Dept obligations of the Government used to finance fiscal deficits. Bangladesh Bank treasure

bills are issued in one three, six, twelve month and two year maturity. They pay a set

amount at maturity. Tax revenues or any other source of government funds may be used to

repay the holders of these financial instruments. They carry great weight in the financial

system due to their zero (or nearly zero) default risk, ready marketability, and high liquidity.

Types of Treasury Bills:

Regular-series bills are issued routinely every week or month in competitive auctions with

original maturities of three months (13 weeks), six months (26 weeks), and one year (52 weeks).

Irregular-series bills are issued only when the Treasury has a special cash need. These

instruments include strip bills and cash management bills.

Primary Issue/Auction of 30-day BB Bill, 91-day, 182-day & 364-day T-Bills scenario in

Bangladesh.

Issue date *

ISIN Number

Tenor and nam

e

Bids received Bids accepted

No of

bids

Face value

(Cr.Tk.)

Range of

yields (%)

No of

bids

Face value

(Cr.Tk.)

Sale value

(Cr.Tk.)

Range of

yields (%)

Weighted

average Price (taka)

Cut off

yield (%)

09/02/2014

BD0103026144

30-day BB Bill

1 200.0000 6.9500

1 200.0000

198.864 6.9500

99.432 6.9500

10/02/2014

BD0909132146

91 days T.Bill

39 2326.5800

7.25-7.70

11 900.0000

883.8147

7.25-7.40

98.2016 7.4000

Devolvement on PDs

Mandatory Allocation to Non-PDs

Devolvement on Bangladesh Bank

03/02/2014

BD0918231145

182 days

51 1963.2400

8.18-9.25

8 600.0000

576.3234

8.18-8.27

96.0539 8.2700

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T.Bill

Devolvement on PDs

Mandatory Allocation to Non-PDs

Devolvement on Bangladesh Bank

10/02/2014

BD0936432154

364 days T-bill

63 2315.4600

8.77-9.50

14 850.0000

781.3247

8.77-8.85

91.9206 8.8500

Devolvement on PDs

Mandatory Allocation to Non-PDs

Devolvement on Bangladesh Bank

N.B. As per last auction held.*

T-bills do not carry a promised interest rate. Instead, they are sold at a discount from their par

or face value.

Bill yields are determined by the bank discount method, which does not compound interest

rates and uses a 360-day year for simplicity. The bank discount rate (DR) on T-bills:

=Par Value− Purchase Price

Par Value×

360

Days to Maturity

Because the rates of return on most other debt instruments are not figured in the same way,

comparisons with other securities cannot be made directly. The investment yield or rate (IR) on

T-bills:

=Par Value− Purchase Price

Purchase Price×

365

Days to Maturity

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Dealer or

industrial

paper

b) Commercial Paper

Commercial paper consists of short term, unsecured promissory notes issued by a corporation

to raise short term cash, often to finance working capital requirements. Unsecured promissory

notes with a fixed maturity of one to 270 days; usually sold at a discount from face value.

Commercial paper is traded mainly in the primary market. Opportunities for resale in the

secondary market are more limited.

Commercial paper is rated prime, desirable, or satisfactory, depending on the credit standing of

the issuing company.

Types of Commercial Paper:

There are two major types of commercial paper.

Direct paper is issued mainly by large finance companies and bank holding companies directly to

the investor.

Dealer paper, or industrial paper, is issued by security dealers on behalf of their corporate

customers (mainly nonfinancial companies and smaller financial companies).

Issuers of Commercial Paper

Finance Companies Bank Holding Companies Nonfinancial Firm

Investors in Commercial Papers

Money market fund

Bank

Insurance Companies

Pension fund

Industrial Companies

Other Fund

Paper

Dealer

Houses

Direct or Finance Paper

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Maturities & Rate of Return

Maturities of commercial paper range from three days (“weekend paper”) to nine months. Most

commercial paper is issued at a discount from par, and yields to the investor are calculated by

the bank discount method, just like Treasury bills.

DR =Par Value− Purchase Price

Par Value×

360

Days to Maturity

Advantages

Relatively low interest rates

Flexible interest rates - choice of dealer or direct paper

Large amounts may be borrowed conveniently

The ability to issue paper gives considerable leverage when negotiating with banks

Disadvantages

Risk of alienating banks whose loans may be needed when an emergency develops

May be difficult to raise funds in the paper market at times

Commercial paper must generally remain outstanding until maturity - does not permit

early retirement without penalty

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c) Certificate of deposit

Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. It

is a short term borrowing more like a bank term deposit account to raise the fund. It is a

promissory note issued by a bank in form of a certificate entitling the bearer to receive interest.

The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued

in any denomination. They are stamped and transferred by endorsement. Its term generally

ranges from three months to five years and restricts the holders to withdraw funds on demand.

However, on payment of certain penalty the money can be withdrawn on demand also. The

returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk.

While buying Certificate of Deposit, return method should be seen. Returns can be based on

Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is based

on compounded interest calculation. However, in APR method, simple interest calculation is

done to generate the return. Accordingly, if the interest is paid annually, equal return is

generated by both APY and APR methods. However, if interest is paid more than once in a year,

it is beneficial to opt APY over APR.

A certificate of deposit (CD) is an interest-bearing receipt for funds left with a depository

institution for a set period of time.

CD interest rates are computed as a yield to maturity (YTM) on a 360-day basis.

Interest Income =Term in days

360× Deposit Principle × Promised YTM

In secondary market trading, the bank discount rate (DR) is used as a measure of CD yields.

DR =Par Value− Purchase Price

Par Value×

360

Days to Maturity

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Funds raised to meet legal reserve

requirements and other bank cash

needs

Sale of

negotiable

CDs Redemption

of CDs at

maturity

The principal buyers of negotiable CDs include corporations, state and local governments,

foreign central banks and governments, wealthy individuals, and a variety of financial

institutions. Most buyers hold CDs until they mature. However, prime-rate CDs are actively

traded in the secondary market.

Market structure for Negotiable CDs

Bankers are becoming increasingly innovative in packaging CDs to meet the needs of customers.

Money

Center

Banks

Large depositors

(Corporations & other

customers)

Buyers in the

secondary CD

market

Immediately

available funds

Issue primary Market CDs

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d) Bankers’ Acceptances

It is a short term credit investment created by a non financial firm and guaranteed by a bank to

make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a

buyer’s promise to pay to the seller a certain specified amount at certain date. The same is

guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The

person drawing the bill must have a good credit rating otherwise the Banker’s Acceptance will

not be tradable. The most common term for these instruments is 90 days. However, they can

vary from 30 days to180 days. For corporations, it acts as a negotiable time draft for financing

imports, exports and other transactions in goods and is highly useful when the credit worthiness

of the foreign trade party is unknown. The seller need not hold it until maturity and can sell off

the same in secondary market at discount from the face value to liquidate its receivables.

A bankers’ acceptance is a time draft drawn on and endorsed by an importer’s bank.

Acceptances are used in international trade because most exporters are uncertain of the credit

standing of their importers. The issuing bank unconditionally guarantees to pay the face value of

the acceptance when it matures, thus shielding exporters and investors in international markets

from default risk. Acceptances carry maturities ranging from 30 to 270 days, with 90 days being

the most common. They are traded among financial institutions, industrial corporations, and

securities dealers as a high-quality investment and source of ready cash.