Knowledge

Terminology
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Interest And Discount

In this section we will look at the return an investor (lender) receives from a money market instrument. However, before doing so we need to establish some basic terminology.

As we have seen, money market instruments are contracts between a borrower and lender.

The lender (investor) pays a sum of money - the proceeds - to the borrower (issuer) for a fixed period of time - the term to maturity.

At the end of this period - at maturity - the money - the principal - is repaid to the lender.

If the instrument is negotiable the lender can sell it on in the secondary market. Principal will be paid to whoever holds the instrument at maturity.

Having lent money, the lender will require a return to compensate for the following:

  • the loss of cash (and so of alternative forms of return or consumption) during the period of the loan;        
  • the expected erosion of the real value of the money due to inflation;        
  • and the risk that the borrower could default on his obligation to repay the lender at maturity.

The date on which the instrument starts to accrue a return is called the value date (the beginning of the term to maturity) and can be contrasted with the date on which the terms of the purchase are agreed - the transaction date.

The value date may or may not be the same as the transaction date:

  • If it is, the transaction is said to be for same-day value or value today.  
  • If the value date is the business day after the transaction date the transaction is said to be for next-day value or value tomorrow.  
  • Where the value date is two business days after the transaction date the transaction is said to be for spot value.
This material has been prepared by FT Knowledge and is for information purposes only. It has not been independently verified by Standard Chartered Bank and makes no recommendation and accepts no responsibility or liability with respect to the accuracy or correctness of information contained in the material. It has not been prepared to be suitable for any particular person or class of persons and should not be relied on as a basis for investment decisions. The material in this document is not intended as an offer or solicitation of an offer to buy or sell any financial products. It does not constitute a prediction of likely future movements in rates or prices or any representation that such future movements will not exceed those shown in this document. Past performance is not necessarily indicative of future performance; the value, price or income from investments that may fall as well as rise. Before making any investment, you should seek your own professional advice.