This lesson examines the short-term funding options available to an organisation and the role of the money market in treasury operations. The ACT Certificate in Treasury mandates a working knowledge of the money markets and the different instruments available to treasurers .

1.1 The Short-Term Borrowing Spectrum

Organisations need short-term funding to bridge temporary liquidity gaps. The primary sources can be categorised as:

• Bank Overdrafts: A flexible but uncommitted facility allowing the company to draw beyond its account balance up to an agreed limit. It is usually repayable on demand and can be more expensive than other forms of borrowing .

• Committed Facilities (Lines of Credit): A formal agreement where the bank is legally obligated to provide funds up to a certain limit for a defined period. Unlike an overdraft, a facility fee is often charged on the undrawn portion .

• Commercial Paper (CP): An unsecured promissory note issued by a corporation to raise short-term funding directly from the market. It is typically a cheaper alternative to bank borrowing for large, creditworthy corporations .

1.2 Key Money Market Instruments

Money market instruments are short-term debt instruments with maturities typically under one year . Treasury must understand their features, pricing, and role in the market :

• Certificates of Deposit (CDs): Time deposits with a bank that offer a fixed interest rate.

• Treasury Bills (T-Bills): Short-term debt issued by governments, considered among the safest investments .

• Banker’s Acceptances: A time draft drawn on and accepted by a bank, often used in international trade.

1.3 Yield and Pricing Conventions

A core competency is calculating yields on short-term instruments. The pricing of money market instruments differs from bonds, often using simple interest on a discount or add-on basis. Understanding concepts such as the discount yield and bond equivalent yield is crucial for comparing different investment or borrowing opportunities .