Money Market Instruments

Bank Deposits

Term or fixed deposits, demand deposit

Term or fixed deposits usually carry higher rates of return than demand deposit as a tradeoff for lower liquidity.
Early withdrawal of fixed or term deposit is subject to heavy penalty.

Only financial institutions authorized by The Hong Kong Monetary Authority such as licensed banks, restricted licensed banks, and deposit taking companies are allowed to accept deposits from the public and make loans.

Negotiable Short-term Debt Instruments (commonly known as Money Market Instruments)

Government Bills, Short term Certificate of Deposit, & Commercial Papers. Issued by governments, banks and large non-financial corporations.

Short-term (typically less than 1 year)
Higher Liquid
Low risk
Negotiable – may buy and sell in the secondary market.
Most money market instruments, except bank deposits, are sold on a discount basis.

Ex. A 182 days (26 weeks) Hong Kong Exchange Fund Bill(EFB) with a face value of HKD500,000 selling at a yield of 3.75% p.a. will cost HKD490,822.30. (500,000/(1+3.75%X182/365)).

Investor receives back HKD500,000 after 182 days.

Advantages and Disadvantages of Money Market Instruments

Suitable for short term safe haven purpose

Advantages

Disdvantages

Low risk

Provide reserve for emergencies

Accumulate funds for future purpose

Principal will not change

High liquidity

Low return(inflation risk)

Fluctuating yield (reinvestment-rate risk)

Default risk (for non government issues)

Large denomination