Money and Banking – Grade 2 - ASU – 2nd Term
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Chapter 2 – Part 2
Money Market Instruments
Because of their short terms to maturity, the debt instruments traded in the money market
enjoy with least price fluctuations and so are the least risky investments. The money market growing
more rapid rate than others.
Money Market
Type Features and Characteristics
1) Treasury Bills: a) Short Term Debt Instrument (One, Three, or Six Months)
b) Issued by Government to finance government budget and expansion
c) Pay set amount of money at maturity (No Interest Payment) but it initially issued at
discount (T.B Issued with $9,000 and will be redeemed after 6 months $ 10,000)
d) T.B is most liquid instrument in Money Market and most actively traded.
e) Safest Money Instrument and enjoy low probability of default (The Government can
always meet its debt as it can raise taxes, borrow, or issue Money)
f) T.B are held mainly by banks, although small amounts are held by households,
corporations, and other financial intermediaries.
2) Negotiable a) Debt instrument sold by a bank to depositor
Bank b) It pays periodic interest and pay the CD amount at Maturity.
Certificates of c) Negotiable CDs means it can be sold in secondary market.
Deposit (CDs) d) CDs are an extremely important source of funds for commercial banks
3) Commercial a) Short Term Debt Instrument issued by large banks and well-know Corporation
Paper (Microsoft – General Motors) to finance short term liabilities, A/R or Inventories
b) There is no Interest Rate
c) Sells at Discount.
d) Dominations $ 100,000
e) Has no Collateral and depend on reputation of the entity.
(Collateral is an asset that guarantee the lending amount in case of non-repayment)
4) Repurchase a) Short-term loans (usually with a maturity term of less than two weeks)
Agreements b) It issued by large corporation which has an idle funds
(REPOS) c) Treasury bills serve as collateral.
اتفاقية إعادة Example: Microsoft, may have some idle funds in its bank account, say $1 million,
ر
الشاء which it would like to lend for a week. Microsoft uses this excess $1 million to buy
Treasury bills from a bank, which agrees to repurchase them the next week at a price
slightly above Microsoft’s purchase price
5) Federal (Fed) a) Overnight loans between banks of their deposits at the Central Bank (Federal Reserve)
Funds b) Banks might borrow in the federal funds market (From Bank to Bank) if it does not have
enough funds in its deposit accounts at the Central Bank (Fed) to meet the amount
required by regulators.
c) The interest rate applied for the one night between banks is Federal Fund Rate
d) The Federal Fund Rate is considered very important barometer of credit market condition
− When the Federal Fund Rate is High it reflects the banks are strapped for funds
− When Rate is Low it indicates the banks credit needs are low.
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Money and Banking – Grade 2 - ASU – 2nd Term
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Capital Market Instruments
Capital market instruments are debt and equity instruments with maturities of greater
than one year, and it have fluctuations in prices other than money market instruments and are
considered more risky investments.
Capital Market
Type Features and Characteristics
1) Stocks: a) Stocks are equity claims on the net income and assets of a corporation.
b) It considers the highest value of Capital Market Instruments.
c) Individuals hold around half of the value of stocks; the rest is held by pension
funds, mutual funds, and insurance companies.
2) Mortgages Loans a) Loans to households or firms to purchase land, housing, or other real structures
b) The collateral for the loans is the real structures itself.
3) Corporate Bonds a) long-term bonds are issued by corporations with very strong credit ratings.
b) The bondholder receive Fixed Interest Rate and receive Face Value of bond at
Maturity
c) There is some bonds called Convertible Bonds that have additional features of
allowing holder to convert bond into a number of shares of stock at any time up
to the maturity date.
d) The convertible bonds more desirable than bonds without it, and it allows the
corporation to reduce its interest payments because the bonds can increase in
value if the price of the stock appreciates sufficiently.
4) U.S. Government a) It Long Term Debt instruments are issued by Government to finance the deficits
Securities of the government.
b) It considers the most widely traded bonds and more liquid security traded in
Capital Market.
5) U.S Government a) It Long Term Bonds issued by Government Agencies (Suiz Canal, Electricity,…..) to
Agencies finance projects for these agencies.
b) These securities are guaranteed by the Government.
c) It functions same as Governmental Bonds but issued from Agencies.
6) State and Local a) State and local bonds, also called municipal bonds, are long-term debt
Government Bonds instruments issued by state and local governments
b) It issued by Local/State Government to finance expenditures on schools, roads,
and other large programs.
7) Consumer Bank a) These Loans are made to consumer and business firm.
Loans and b) Banks are main source of financing these loans and also can be issued from
Commercial Loans Finance Companies (Ex. Valu, Mashrai3y).
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Money and Banking – Grade 2 - ASU – 2nd Term
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مهمه جدا Internationalization of Financial Markets:
It means the globalization of financial markets, (Investment made by agents in one
)country in another country’s financial markets
The traditional instruments in the international bond market are known as foreign bonds.
االسواق المالية العالمية )(Internationalization of Financial Markets
عل ى ى ى
المقصود به هو عولمة األسواق المالية ،بمعن أن المستثمرين يف دولة معينة بيعملوا استثمارات يف أسواق مالية يف دول تانيه ،ي
سبيل المثال رشاء األسهم أو السندات األجنبية.
الدول للسندات والعمالت The International Bond Market can be issued in form: ي السوق
الجزء ده مهم جدا جدا جدا وبيجيلك يف صوره حاالت ويسالك الحاله دي بأي نوع ...او يسالك يف التعريفات مع امثله
1) Foreign bonds are sold in a foreign country and are denominated in that country’s
currency.
For example, if P&G International Company it’s head office located in USA and sells
bonds in United Kingdom denominated in Pound Sterling.
-1السندات األجنبية(Foreign Bonds):
ر ّ ى
الل
اخ الدول يالل هبيعها فيها( .احتم يا يالن بيتم بيعها يف دولة أجنبية ولكن تكون مقومة بعملة الدولة ي
ه السندات ي ي
انت رايح تبيع فيها السند وبيع بعملتها).
مثال:
لين. ر ّ ر
لو شكة P&Gاألمريكية قررت تبيع سندات داخل المملكة المتحدة وتكون مقومة بالجنيه اإلست ي
2) Eurobond, a bond denominated in a currency other than that of the country in which it is sold
Example, if P&G International Company it’s head office located in USA and sells bonds in
United Kingdom denominated in US dollar
الل بيتم فيها البيع. ى
الل بيتم إصداره يف دولة أجنبية ولكن بعملة مختلفة عن عملة الدولة ي
هو السند ي
مثال:
مقومة بالدوالر األمريك (يبق انت بتبيع الحاجه فى
لو رشكة P&Gاألمريكية قررت تبيع سندات داخل المملكة المتحدة بس تكون ّ
ي ي ي
الل انت بتبيعه فيها)
غي عمله البلد ي
بلد تانيه بعمله ر
3) Eurocurrencies: are foreign currencies deposited in banks outside the home country.
هو أي عملة أجنبية يتم إيداعها في بنك خارج بلدها األصلي .بمعنى ،لو معاك فلوس بعملة بلد معين ،بس حاططها في بنك
خارج الدولة دي ،يبقى الفلوس دي تعتبر. Eurocurrencies
مثال لو معاك جنيه مصري وودعته في بنك موجود في اإلمارات ،يبقى الجنيه المصري ده يعتبر ، Eurocurrenciesألنه
موجود في بنك خارج مصر.
4) Eurodollar: which are U.S. dollars deposited in foreign banks outside the United States
or in foreign branches of U.S. banks
هو الدوالر األمريكي اللي بيتم إيداعه في بنوك خارج الواليات المتحدة ،أو حتى في فروع أجنبية للبنوك األمريكية نفسها.
مثال :لو شركة أو مستثمر معاه دوالرات أمريكية وحطها في بنك في بريطانيا أو فرنسا أو أي دولة غير أمريكا ،يبقى الفلوس
دي تعتبر يورودوالر.
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Money and Banking – Grade 2 - ASU – 2nd Term
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FUNCTION OF FINANCIAL INTERMEDIARIES (INDIRECT FINANCE)
Financial Intermediation: is the process of indirect financing using financial intermediaries
and it is the primary route of moving funds from lenders to borrowers.
What is the importance of financial institutions?
1. Financial institutions are the primary route for moving funds from lenders to borrowers.
2. Reducing Transaction Cost (Time, effort and Money Spent on carrying out financial
transactions).
3. It provides its customer with liquidity service as it makes the service easier and quicker
to conduct transactions.
4. Reduce the exposure of investor risk:
a. Risk Sharing (Uncertainty about returns on assets) which it sells assets to people
with acceptable risk and use funds to purchase other assets that may have far
more risk enabling them to earn a profit on the spread. This process also called
as (Asset Transformation) because risky assets are turned into safer assets for
investors.
b. Diversification: Financial intermediaries also help individuals to diversify risk they
are exposed through investing their fund in a collection of assets (portfolio)
whose returns do not always move together (Treasury Bills – Repos – LT Bonds –
Gov. Securities)
5. Financial Intermediaries reduce Asymmetric Information problem
Asymmetric Information or inequality is (Low quality of Information or Lack of
information)
- Lack of information creates problems in the financial system on two fronts: before the
transaction is entered into, and After Transaction
a) Before Transactions: is an (Adverse Selections Problem) which is a asymmetric
information problem before the transactions occurs
- Adverse Selection Problem will be exist before transaction due to absence of
inadequate information about other party to make accurate decision.
To reduce the loss due to adverse selection problem, the Financial Intermediaries
develop expertise in screening out bad credit risk (Investigation Team)
b) After Transactions: is (Moral Hazard) which the problem created by asymmetric
information after the transaction occurs.
To reduce losses from Moral Hazard, the financial intermediaries closely
monitories parties after granting loans to be sure about repayment of loan
successfully.
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Money and Banking – Grade 2 - ASU – 2nd Term
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Types of Financial Intermediaries:
Types of Financial Intermediaries
Depository Instiution (Banks) Contractual Saving Institutions Investment Intermediaries
1- Commercial Bank 1- Life Insurance Companies 1- Finance Companies
2- S&L and Mutual Saving Banks. 2-Fire and Casualty Insurance Companies 2- Mututal Funds
3- Credit Union 3- Pension Funds And Gov. Retirement Funds 3- Money Market Mututal Funds
Types of Financial These Institution Includes Primary Liabilities Primary Assets (Uses of
Intermediaries (Source of Fund) Funds)
1- Depository a) Commercial Banks Deposits Business and Consumer
Institutions: Loans, Mortgages, U.S.
Depository Government Securities
institutions are banks b) Saving and Loan Deposits Mortgages
that accept deposits Associations جمعيات االدخار كانت متخصصة ى يف
بقت تقدم: حالياً القروض العقارية فقط
from individuals and جمعيات االدخار والقروض
.خدمات مالية متنوعة شبه البنوك
institutions and
c) Mutual Saving Banks Deposits Mortgages
make loans.
d) Credit Unions Deposits Consumer Loans
(are typically very small cooperative الل
جمع األموال عن طريق الودائع ي
lending institutions organized (Shares).بيتم تسميتها أسهم
around a particular group, union بتستخدم األموال دي فى،بعد كده
ي
members, and employees of a تقديم القروض لألعضاء بأسعار فائدة
particular firm) .منخفضة مقارنة بالبنوك التقليدية
غي
ه مؤسسات مالية تعاونية ر اتحادات االئتمان ي
ى
بمعن إنها مش مملوكة وال الفراد وال ،هادفة للرب ح
لمستثمرين ولكن مملوكه من مجموعة من االعضاء
الل
وهما يShare وبيكون كل عضو بيدخل ب
بيستفيدوا بخدماتها لنفسهم (اتحاد االطباء مثال او
رى
)التجاريي نقابة
2- Contractual Savings a) Life Insurance Companies Acquire funds from Use fund to buy corporate
Institutions (acquire (insure people against the premiums of bonds and mortgages
funds at periodic financial hazards) Policies
intervals on a b) Fire and Casualty Insurance Acquire funds from Use fund to buy corporate
contractual basis) Companies (insure against the premiums of bonds, stocks and U.S Gov.
loss from theft, fire, and Policies Securities.
accidents)
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Money and Banking – Grade 2 - ASU – 2nd Term
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المؤسسات االدخارية c) Pension Funds and from employers and corporate bonds and stocks
ه وسطاء ماليون التعاقدية ي Government Retirement from employees
(Financial Funds
بيجمعواIntermediaries) صناديق المعاشات ونهايه الخدمه
ً
األموال بشكل دوري وفقا )(الحكوميه
وبيشملوا،لعقود مسبقة
رى
التأمي وصناديق رشكات
.المعاشات
3- Investment a) Finance Companies رشكات raise funds by selling lend these funds to
Intermediaries توظيف اموال commercial paper consumers, and to small
هم مؤسسات مالية بتجمع and by issuing stocks businesses
األموال من المستثمرين and bonds.
وتوظفها يف استثمارات
مختلفة b) Mutual Funds صندوق استثمار Shares Stocks and Bonds
ه مؤسسات مالية صناديق االستثمار ي
كبت من المستثمرينبتجمع األموال من عدد ر
c) Money Market Mutual Shares Money Market Instruments
Funds (similar to mutual
funds but uses funds to buy
money market instruments
that are both safe and very
liquid)
،صناديق استثمار تشبه صناديق االستثمار العادية
قصية األجل ى
لكنها تستثمر فقط يف األدوات المالية ر
ً
الل بتكون آمنة جدا وسائلة (سهلة التحويلي
. )لنقد
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