Money market basically refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded. Money market has become a component of the financial market for buying and selling of securities of 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 it is a wholesale process. It is used by the participants as a way of borrowing and lending for the short term.
Description: Money market consists of negotiable instruments such as treasury bills, commercial papers. and certificates of deposit. It is used by many participants, including companies, to raise funds by selling commercial papers in the market. Money market is considered a safe place to invest due to the high liquidity of securities.
It has certain risks which investors should be aware of, one of them being default on securities such as commercial papers. Money market consists of various financial institutions and dealers, who seek to borrow or loan securities. It is the best source to invest in liquid assets.
The money market is an unregulated and informal market and not structured like the capital markets, where things are organised in a formal way. Money market gives lesser return to investors who invest in it but provides a variety of products.
Withdrawing money from the money market is easier. Money markets are different from capital markets as they are for a shorter period of time while capital markets are used for longer time periods.
Meanwhile, a mortgage lender can create protection against a fallout risk by entering an agreement with an agency or private conduit for operational, rather than mandatory, delivery of the mortgage. In such an agreement, the mortgage originator effectively buys an option, which gives the lender the right, but not the obligation, to deliver the mortgage. Against that, the private conduit charges a fee for allowing optional delivery.
As the name suggests, money market instrument is an investment mechanism that allows banks, businesses, and the government to meet large, but short-term capital needs at a low cost. They serve the dual purpose of allowing borrowers meet their short-term requirements and providing easy liquidity to lenders.
Examples of Money Market Instrument
- Banker’s Acceptance
- Treasury Bills
- Repurchase Agreements
- Certificate of Deposits
- Commercial Papers
Features of Money Market Instruments
- Liquidity: They are considered highly liquid as they are fixed-income securities which carry short maturity periods of a year or less.
- Safety: Since the issuers of money market instruments have strong credit ratings, it automatically means that the money instruments issued by them will also be safe.
- Discounted price: One of the main features of money market instruments is that they are issued at a discount on their face value.
Functions of Money Market Instruments
Provides Funds
The Money Market Instruments help to provide short-term funds to the private and public institutions who need finance for their working capital requirements. These funds are provided by discounting the trade bills through commercial banks, brokers, discount houses, and acceptance houses. Therefore, the money market instruments, in turn, can help the development of trade, industry and commerce within and outside the country.
Use of Surplus Funds
Money market instruments provide opportunity to the banks and financial institutions to use their surplus funds profitably for a small period of time. They include commercial banks as well as large non-financial corporations, states and other local governments.
No need to borrow from banks
In case of a developed money market, there is no need to borrow money from commercial and central bank. However, if there is a short of cash requirement, they can call in some of their loans from the money market. Also, the most of the commercial banks would rather prefer to recall their loans than recalling it from the central banks at a higher rate of interest.
Helps Government
The money market instruments prove helpful to the government in borrowing short-term funds on the basis of treasury bills at low interest rates. Besides, it would lead to inflationary pressures in the economy if the Government had to issue paper money or borrow from the central bank.
Helps in Monetary Policy
The existence of a well-developed money market will help in successfully implementing the monetary policies of central bank. Is only through money market the central banks can control the banking system and therefore Influence commerce and the industry.
Helps in Financial Mobility
The Monet market helps in financial stability by smoothening the transfer for funds from one sector to another. And, financial mobility is important for the development of commerce and industry.
Promotes Liquidity and Safety
Apart from encouraging savings and investments, the money market instruments promote liquidity and safety of financial assets.
Equilibrium between Demand and Supply of Funds
The money market brings a balance between the demand and supply of loanable funds by allocating saving into investment channels.
Economy in Use of Cash
The money market instruments deal with assets which are not cash but equivalent to cash and thus help in economizing the use of cash. And hence it can be considered as a convenient way to transfer funds from one place to another.
Important Objectives of Money Market Instruments
Following are the objectives of served by a money market:
- The money markets not only help in the storage of short-term surplus funds but also help in lowering short term deficits.
- Money markets helps the central bank in regulating liquidity in the economy.
- Money market assists the short-term fund users to fulfill their needs at a very reasonable rate.
- It helps in the development of capital market and trade and industry.
- Money markets help in designing effective monetary policies.
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It also facilitates in streamlined functioning of commercial banks.
