Money Market and Types of Money market Instruments

The money market and the component of the economy that provides short-term funds. The money market deals on short-term loans generally for a period of a year or less, as short-term securities became a component of the Financial market for assets involved in short-term borrowing, lending, buying, and selling with original maturities of one year or less.

People are also asking “What is an example of a money market? What are the types of money markets? What are the three types of money markets? Is the money market a good investment right now?”

Trading in the money market is done over the counter and is wholesale. A market can be described as a money market if it is composed of highly liquid and short-term assets.

What is money market?

The money market refers to a section of the financial market where Financial instruments with high liquidity and short-term maturities are traded. It is trading in very short-term debt investment at the wholesale level, it involves large-volume sales between institutions and traders at the retail level. It includes money market mutual funds bought by individuals investors and money market accounts opened by bank customers.

The money market is characterized by a high degree of safety and low rate of returns, money market provides a means for money lenders and borrowers to satisfy their short-term financial needs.

The money market has become a component of the financial market for buying and selling of securities if short-term maturities of one year or less such as treasury bills and commercial papers. Over-the-counter trading is done in the money market and its a wholesale process,it is used by participants as a way of borrowing for the short term.

The money market is one of the pillars of the global financial system. its involves overnight swaps of a vast amount of money between banks and the US government.

The majority of money market transaction are wholesale transaction that takes place between financial institution and companies.

Institutions that participate in the money market include banks that lend to one another and to large companies in the Euro-currency and time deposit markets, companies that raised money by selling commercial papers into the market.

What is money:

Money is a commodity accepted by general consent as a medium of economic exchange.it is a medium where prices and value are expressed, its circulated From person to person and from country to country facilitating trade and it is the principal measure of wealth. money can also be defined as what one can earn by working, selling things, and buying goods.

Money can be borrowed, lend, save, spend and earn.it is a current medium of exchange in form of coins and banknotes.

What are the money market instrument:

The instrument (types of money markets instruments) bears differing maturities, currency, credit risk, and structures. Below is the money market instrument and we will be explaining them one after the other:

  • Treasury bills (T-bills)
  • Certificate of deposit (CDs)
  • commercial papers (Cps)
  • Repurchase Agreement
  • Bankers Acceptance (BA)

The Instruments are also known as types of money markets instruments.

Treasury Bills:

This is short-term investment security issued by the government to finance national borrowing requirements.it is a negotiable bill of exchange, it is quoted for purchase/sales in the secondary market on an annual percentage yield to maturity, issued at discount.

The Treasury Bill is a tenured investment account with specific amount invested at an agreed interest rate and tenure.

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Certificate Deposit:

These are time deposits, commonly offered to consumers by banks thrift institutions, and credit unions.

Repurchase Agreement:

These are short-term loans normally for less than one week and frequently for one day,it is arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Money market mutual funds short-term investment debt is operated by professional institutions.

commercial paper:

Commercial papers are short-term instrument promissory notes issued by companies at discount to face value and redeem at face value.

what are the functions of money market:

The money market functions to finance trade, finance industry, invest profitably, enhance commercial banks self-sufficiency and lubricate central banks’ policies.

financing trade:

The money market plays a crucial role in financing domestic and international trade.commercial  finance is made available to the traders through bills exchange which are discounted by bill market. The acceptance houses and discount markets helps in financing foreign trade.

Financing industry:

The money market contributes to the growth of industries in two ways:

  • they help industries secure short-term loans to meet the working capital requirement through the system of finance, bills, commercial papers etc.
  • industries need long-term loans, which are provided in the capital market. However, the capital markets depends upon the nature of and conditions in the market. The short-term interest rate of the money market influence the long-term interest rate of the capital market.

Thus, the money market indirectly helps the industries through its link with and influence on the long-term capital market.

Self-sufficiency of commercial Banks:

Money market which are well developed helps commercial banks to become self-sufficient. In an emergency, when commercial banks have a scarcity of funds, they need not approach the central bank to borrow at the higher interest rate, rather they meet their requirements by recalling their old short-run loans from the money market.

They help central banks:

Though the central bank can function in the absence of a money market,the existence of a developed money market smoothens the functioning and increases the efficiency of the central bank. They help the central bank in the following ways:

  •  short run interest rate serves as an indicator of the monetary and banking conditions in the country and in this way guides the central bank to adopt an appropriate banking policy.
  • they help the central bank secure quick and widespread influence on the sub-market,thus, facilitating effective policy implementation.

Profitable investment:

The money market enables commercial banks to use their excess reserved in profitable investments. They help the commercial banks to earn profits without sacrificing liquidity.

Is the money market a good investment right now?

Banks use money from MMAs to invest in stable, short-term, low-risk securities that are very liquid. Money market funds invest in relatively safe vehicles that mature in a short period of time, usually within 13 months

money market  in developing countries:

Well-developed money markets exists only in a few highly-income countries. In other countries, money markets are narrow and poorly integrated and in many cases virtually non-existent despite the many difference among countries one can say in general that the degree of development of a country’s financial system, including the money market is directly related to the level of its economy.

Most low-income countries have limited financial systems in which the money market plays no role. In some colonies particularly in Africa, expatriate commercial banks had substituted for a local money market, the banks met fluctuations in loan demand by changing their balances at head office.

Recently government policies have encouraged banks to develop domestic channels for temporary surpluses and deficits. Persistent inflation has been another factor inhibiting the growth of the money market in developing countries.

Most developing countries except those having socialist systems have encouraged of money market as a policy objective if only to provide an outlet for short-term government securities.

At the same time, many of these governments pursue low-interest-rate policies in order to reduce the cost of government debt and to encourage investment, such policies discourage saving and money market instruments are unattractive.

In developing countries these pressure have led to”unorganized money markets” which are highly developed in urban areas, such markets are unorganized because they are outside normal financial institutions, they manage to escape government controls over interest rates but at the same time, they do not function very effectively because of high-interest rate and contracts between localities and among borrowers and lenders are limited.

Money markets are trusted institutions that lend, borrow, buy and sell foreign money.

 

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