Money Market Instruments Explained

The amount of securities awarded to a bidder or subscriber.

Example: Demand exceeds supply, so the investorA person or organisation that commits capital with the expectation of a financial return. receives only half the requested allotment.

Allotment is the amount of securities awarded to a bidder or subscriber; the economics of the instrument depend on when cash is paid, how the instrument ranks against other claims and the yield demanded by current buyers.

For example, demand exceeds supply, so the investor receives only half the requested allotment. Credit events, reinvestmentUsing distributions or proceeds to buy additional units instead of receiving cash. rates, accrued interestInterest earned since the last coupon date but not yet paid. and transaction price can alter the amount ultimately earned.

For Allotment, inspect the issuer, currency, principalThe original amount of money invested or lent, excluding later returns., coupon or discount, payment dates, maturityThe date when a debt investment's principal is scheduled to be repaid., seniorityThe order in which claims are paid relative to other claims., securityA tradable financial claim or ownership interest, such as a share, bond, or fund unit., yield basis, durationA measure of a fixed-income portfolio's sensitivity to changes in interest rates., liquidityThe ease and speed with which an investment can be converted into cash without a major price concession. and default provisions; a high yield normally signals a lower price, greater risk or both.

The yield or price determined through a competitive securities auction.

Example: Successful Treasury-bill bids establish the auction rate.

Auction Rate is the yield or price determined through a competitive securities auction; the instrument sits within the exchange of money today for contractual cash flows later. Coupon, maturity, principal, seniority, credit quality and market yield determine the value.

For example, successful Treasury-bill bids establish the auction rate.

Compare Auction Rate using yield to maturityThe annualised return implied by a bond's price if held to maturity and all promised payments occur and are reinvested as assumed. or another consistent yield measure, then test the effect of rate changes, default and reinvestment at lower rates; a high yield normally signals a lower price, greater risk or both.

A time draft guaranteed by a bank, commonly used to finance trade.

Example: An exporter discounts a banker's acceptance before its maturity dateThe date on which a debt instrument's remaining principal becomes due..

Bankers' Acceptance is a time draft guaranteed by a bank, commonly used to finance trade; the instrument sits within the exchange of money today for contractual cash flows later. Coupon, maturity, principal, seniority, credit quality and market yield determine the value.

An exporter discounts a banker's acceptance before its maturity date. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

For Bankers' Acceptance, inspect the issuer, currency, principal, coupon or discount, payment dates, maturity, seniority, security, yield basis, duration, liquidity and default provisions.

Very short-term funds lent between financial institutions, often repayable on demand or overnight.

Example: A bank borrows overnight call money to meet settlement needs.

Call Money describes very short-term funds lent between financial institutions, often repayable on demand or overnight; separate promised cash flows from market price. Interest-rate changes can move the price even when the issuer remains able to pay.

A bank borrows overnight call money to meet settlement needs. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

Read the term sheetA preliminary document outlining the main commercial terms of a proposed investment. or prospectusThe formal document explaining a fund's objective, strategy, risks, fees, governance, and dealing rules. for Call Money and map every cash flow; do not rely on the coupon alone, because purchase price and maturity determine the actual yield. A high yield normally signals a lower price, greater risk or both.

A time deposit or tradable bank instrument that pays interest over a stated term.

Example: An investor places money in a six-month certificate of deposit.

Certificate of Deposit is a time deposit or tradable bank instrument that pays interest over a stated term; separate promised cash flows from market price. Interest-rate changes can move the price even when the issuer remains able to pay.

An investor places money in a six-month certificate of deposit. The market valueThe price at which an asset could trade in the market at a given time. remains sensitive to rates, liquidity and the issuer's perceived ability to pay.

Compare Certificate of Deposit using yield to maturity or another consistent yield measure, then test the effect of rate changes, default and reinvestment at lower rates; fixed cash flows do not imply a fixed market value.

Short-term unsecured debt issued by a company.

Example: A highly rated manufacturer issues 180-day commercial paper to fund working capitalCurrent operating assets minus current operating liabilities, with exact components depending on the analysis..

Commercial Paper describes short-term unsecured debt issued by a company; the economics of the instrument depend on when cash is paid, how the instrument ranks against other claims and the yield demanded by current buyers.

A highly rated manufacturer issues 180-day commercial paper to fund working capital. An investor selling before maturity may realise a different return because the market price has changed.

A fixed-income review of Commercial Paper should distinguish government from corporate credit, nominal from inflation-adjusted return and hold-to-maturity income from mark-to-market volatilityThe degree and frequency of price or return fluctuations.; fixed cash flows do not imply a fixed market value.

An auction bid specifying the quantity and yield or price requested.

Example: A bank bids for ₦500 million of bills at a stated yield.

Competitive Bid is an auction bid specifying the quantity and yield or price requested; separate promised cash flows from market price. Interest-rate changes can move the price even when the issuer remains able to pay.

A bank bids for ₦500 million of bills at a stated yield. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

A fixed-income review of Competitive Bid should distinguish government from corporate credit, nominal from inflation-adjusted return and hold-to-maturity income from mark-to-market volatility; fixed cash flows do not imply a fixed market value.

A bill's discount from face valueThe principal amount stated on a bond and usually repaid at maturity. expressed using the market's stated convention.

Example: A bill bought for ₦950 and repaid at ₦1,000 has a quoted discount based on ₦1,000 face value.

Discount RateThe rate used to convert future cash flows into present value. on a Bill is a bill's discount from face value expressed using the market's stated convention. The instrument is shaped by two distinct risks: the issuer may fail to pay, and market yields may change the present valueThe current worth of money expected in the future after applying a discount rate. of payments that remain fully contractual.

A bill bought for ₦950 and repaid at ₦1,000 has a quoted discount based on ₦1,000 face value. An investor selling before maturity may realise a different return because the market price has changed.

For Discount Rate on a Bill, inspect the issuer, currency, principal, coupon or discount, payment dates, maturity, seniority, security, yield basis, duration, liquidity and default provisions; a high yield normally signals a lower price, greater risk or both.

The actual annualised returnA return converted into an equivalent yearly rate to make periods easier to compare. relative to the amount invested, allowing for the stated compoundingThe process by which returns earn additional returns over time. convention.

Example: A bill's effective yield exceeds its discount rate because the return is measured against the lower purchase price.

Effective Yield is the actual annualised return relative to the amount invested, allowing for the stated compounding convention; separate promised cash flows from market price. Interest-rate changes can move the price even when the issuer remains able to pay.

For example, a bill's effective yield exceeds its discount rate because the return is measured against the lower purchase price.

A fixed-income review of Effective Yield should distinguish government from corporate credit, nominal from inflation-adjusted return and hold-to-maturity income from mark-to-market volatility.

A short-term deposit made by one financial institution with another.

Example: A fund places cash with a bank for 30 days.

Interbank Placement is a short-term deposit made by one financial institution with another; the economics of the instrument depend on when cash is paid, how the instrument ranks against other claims and the yield demanded by current buyers.

A fund places cash with a bank for 30 days. An investor selling before maturity may realise a different return because the market price has changed.

For Interbank Placement, inspect the issuer, currency, principal, coupon or discount, payment dates, maturity, seniority, security, yield basis, duration, liquidity and default provisions.

A standardised annualised yield used to compare short-term instruments.

Example: An investor converts a bill's return into money market yield before comparing deposits.

Money Market Yield is a standardised annualised yield used to compare short-term instruments; the instrument is shaped by two distinct risks: the issuer may fail to pay, and market yields may change the present value of payments that remain fully contractual.

An investor converts a bill's return into money market yield before comparing deposits. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

Compare Money Market Yield using yield to maturity or another consistent yield measure, then test the effect of rate changes, default and reinvestment at lower rates; inflationA sustained increase in the general price level, reducing the purchasing power of money. can erode purchasing powerThe quantity of goods and services that a sum of money can buy. even when every payment arrives.

A financial instrument whose ownership or payment rights can be transferred according to law.

Example: A negotiable certificate of deposit can be sold before maturity.

Negotiable Instrument is a financial instrument whose ownership or payment rights can be transferred according to law; the instrument is shaped by two distinct risks: the issuer may fail to pay, and market yields may change the present value of payments that remain fully contractual.

A negotiable certificate of deposit can be sold before maturity. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

Compare Negotiable Instrument using yield to maturity or another consistent yield measure, then test the effect of rate changes, default and reinvestment at lower rates.

An auction bid that accepts the yield or price determined by competitive bidding, subject to applicable rules.

Example: A small investor requests bills without specifying a yield.

Non-Competitive Bid is an auction bid that accepts the yield or price determined by competitive bidding, subject to applicable rules; separate promised cash flows from market price. Interest-rate changes can move the price even when the issuer remains able to pay.

A small investor requests bills without specifying a yield. An investor selling before maturity may realise a different return because the market price has changed.

For Non-Competitive Bid, inspect the issuer, currency, principal, coupon or discount, payment dates, maturity, seniority, security, yield basis, duration, liquidity and default provisions.

A situation in which investor demand exceeds the amount of securities offered.

Example: A ₦50 billion bond offer receives ₦120 billion of subscriptions.

Oversubscription is a situation in which investor demand exceeds the amount of securities offered; the instrument is shaped by two distinct risks: the issuer may fail to pay, and market yields may change the present value of payments that remain fully contractual.

A ₦50 billion bond offer receives ₦120 billion of subscriptions. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

Compare Oversubscription using yield to maturity or another consistent yield measure, then test the effect of rate changes, default and reinvestment at lower rates; inflation can erode purchasing power even when every payment arrives.

A financial institution authorised to participate directly in specified government securities operations.

Example: A primary dealer submits bids at a Treasury auction.

Primary Dealer is a financial institution authorised to participate directly in specified government securities operations; the economics of the instrument depend on when cash is paid, how the instrument ranks against other claims and the yield demanded by current buyers.

A primary dealer submits bids at a Treasury auction. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

For Primary Dealer, inspect the issuer, currency, principal, coupon or discount, payment dates, maturity, seniority, security, yield basis, duration, liquidity and default provisions.

A transaction in which one party sells securities and agrees to buy them back later at a higher price.

Example: A bank obtains overnight cash through a repo secured by government bonds.

Repurchase Agreement is a transaction in which one party sells securities and agrees to buy them back later at a higher price; the instrument sits within the exchange of money today for contractual cash flows later. Coupon, maturity, principal, seniority, credit quality and market yield determine the value.

A bank obtains overnight cash through a repo secured by government bonds.

Read the term sheet or prospectus for Repurchase Agreement and map every cash flow; do not rely on the coupon alone, because purchase price and maturity determine the actual yield.

The cash-lending side of a repurchase agreement, involving purchase and later resale of securities.

Example: A fund places surplus cash overnight through a reverse repo.

Reverse Repurchase Agreement is the cash-lending side of a repurchase agreement, involving purchase and later resale of securities. The instrument is shaped by two distinct risks: the issuer may fail to pay, and market yields may change the present value of payments that remain fully contractual.

A fund places surplus cash overnight through a reverse repo.

Read the term sheet or prospectus for Reverse Repurchase Agreement and map every cash flow; do not rely on the coupon alone, because purchase price and maturity determine the actual yield. Holding to maturity reduces price uncertainty only if the issuer pays as promised.

Reinvesting proceeds from a maturing instrument into a new instrument.

Example: The investor rolls a matured 91-day bill into another 91-day bill.

Rollover describes reinvesting proceeds from a maturing instrument into a new instrument; the instrument is shaped by two distinct risks: the issuer may fail to pay, and market yields may change the present value of payments that remain fully contractual.

For example, the investor rolls a matured 91-day bill into another 91-day bill. The market value remains sensitive to rates, liquidity and the issuer's perceived ability to pay.

For Rollover, inspect the issuer, currency, principal, coupon or discount, payment dates, maturity, seniority, security, yield basis, duration, liquidity and default provisions.

Money placed with a bank for a fixed period at an agreed interest rateThe price of borrowing money or the return paid for lending it..

Example: An investor locks ₦2 million in a 90-day time deposit.

Time Deposit means money placed with a bank for a fixed period at an agreed interest rate; the economics of the instrument depend on when cash is paid, how the instrument ranks against other claims and the yield demanded by current buyers.

For example, an investor locks ₦2 million in a 90-day time deposit. Credit events, reinvestment rates, accrued interest and transaction price can alter the amount ultimately earned.

Read the term sheet or prospectus for Time Deposit and map every cash flow; do not rely on the coupon alone, because purchase price and maturity determine the actual yield.

A short-term government debt instrument usually issued at a discount and repaid at face value.

Example: An investor buys a 364-day Treasury bill below par and receives face value at maturity.

A treasury bill is a government's short-term IOU, maturing in a year or less. It carries no coupon. You buy below face value and receive face value at maturity, and the discount is your entire return.

The arithmetic deserves one careful look. A bill quoted at a 20% discount rate does not pay you 20%. Buying ₦1,000,000 face value at that discount costs ₦800,000 for a one-year bill. Your gain is ₦200,000 on an outlay of ₦800,000, a true yield of 25%. Discount rates always understate yields, and the gap widens as rates rise.

Treasury bills anchor short-term interest rates in most economies because they carry the government's credit and mature quickly. Banks, funds, and corporations park cash in them, and money market funds are essentially professionally managed baskets of bills and similar paper.

For Nigerian specifics, tenors, auction mechanics, and how to buy, see the Nigerian treasury billA short-term naira-denominated debt instrument issued by the Federal Government of Nigeria through the relevant process. entry.

A situation in which investor demand is less than the amount offered.

Example: The issuer sells only ₦30 billion of a planned ₦50 billion issue.

Undersubscription is a situation in which investor demand is less than the amount offered; separate promised cash flows from market price. Interest-rate changes can move the price even when the issuer remains able to pay.

The issuer sells only ₦30 billion of a planned ₦50 billion issue. The market value remains sensitive to rates, liquidity and the issuer's perceived ability to pay.

Compare Undersubscription using yield to maturity or another consistent yield measure, then test the effect of rate changes, default and reinvestment at lower rates; holding to maturity reduces price uncertainty only if the issuer pays as promised.