Bond and money markets are vital parts of the global financial infrastructure.

They provide financing requirements for, and are essential to, the daily finan­cial management of governments as well as thousands of corporations and financial institutions. They also provide alternative sources of investment returns for savers.

The difference between bond markets and money markets is a time or maturity issue. The term to maturity (or simply term or maturity or tenor) is the length of time remaining until the borrower pays the stated amount to the lender who owns the bond or money market instrument. Generally, money market instruments have maturity dates of one year or less, and bond markets deal in instruments with maturities in excess of one year.

As you can see from the extract from the annual accounts of the giant drinks company Diageo (Table 1.1), a firm requires good understanding of a great many different debt instruments to carry out the efficient management of its financing requirements, and it is crucial that this aspect of running a firm is expertly executed. The debt instruments employed by Diageo are typical of those used by large corporations, ranging from a simple bank overdraft to the more esoteric hedging instruments, and may be in different currencies and have different maturity dates. At this stage the titles of these instruments are going to seem confusing jargon, but by the end of the book you will have a sound understanding of terms such as commercial paper, medium-term notes and interest rate hedging.

To keep track of all its financial instrument obligations and to ensure that a company has sufficient finance for its needs throughout a year at the lowest cost is a skilful undertaking and requires a complete understanding of the

Table 1.1

Source : Diageo plc, Annual Report 2013, Note 17

complexities of the bond and money markets. If a firm can achieve efficient management of its financing requirements, its customers may also benefit through lower prices.