Resources

Money Market Instruments

Introduction

Money-market instruments are high liquid, low risk investments that have maturities of one year or less.

There are two types of debt instruments issued in money markets. The first type is discount securities. These instruments bear no interest and are sold at a discount to the face value. On the maturity date, the holder receives the face amount. US T-Bills are examples of discount securities.

The second type is interest at maturity securities. These are interest-bearing securities which pay the face amount plus a coupon on the maturity date. The coupon is equal to the product of the coupon rate, the accrual time (from dated date to maturity date) and the face amount. LIBOR deposits are examples of interest at maturity securities.

Technical Details

Money market instruments are quoted by yield. When valuing from a yield, the fair value of the discount security is the present value of the principal received at maturity discounted at the given yield. Typically, discount securities are quoted on a discount rate basis. Let F be the face amount, the price P given the yield Y is given by P = 1 - YT, where T is the time in years from the value date to the maturity date. In the case of a US T-bill, T is calculated on an actual 360 basis and T = days to maturity / 360.

On the other hand, interest-at-maturity securities are typically quoted on a simple interest rate basis. The fair value of the interest bearing security is the present value of the principal and interest received at maturity discounted at the given yield. Let F be the face amount and let C be the coupon, the price dirty PD given the yield Y is given by PD = (F+C) / (1+YT), where T is the time in years from the value date to the maturity date. Letting A be the accrued interest and P the clean price, this means that P + A = (F+C) / (1+YT).

Analysis Supported

FINCAD money market functions can be used for the following:

  • Calculate the fair value, yield and risk stats for a discount security (TBills, BAs,…)
  • Calculate the fair value, yield and risk statistics for an interest at maturity security (e.g. Notes, commercial paper, CDs …)

To find more information about FINCAD products and services, contact a FINCAD Representative.