Role Of Money Market And Its Instruments Pdf


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role of money market and its instruments pdf

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The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities. There is no physical "money market. Money markets exist both in the United States and abroad.

Money Market Instruments

The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As money became a commodity , the money market 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. Trading in money markets is done over the counter and is wholesale.

There are several money market instruments in most Western countries, including treasury bills , commercial paper , banker's acceptances , deposits , certificates of deposit , bills of exchange , repurchase agreements , federal funds, and short-lived mortgage- and asset-backed securities.

Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid, low-risk securities. The four most relevant types of money are commodity money, fiat money, fiduciary money, and commercial bank money.

Commodity money relies on intrinsically valuable commodities that act as a medium of exchange. Fiat money, on the other hand, gets its value from a government order. Money markets, which provide liquidity for the global financial system including for capital markets , are part of the broader system of financial markets.

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to twelve months. Money market trades in short-term financial instruments commonly called "paper".

This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. The core of the money market consists of interbank lending —banks borrowing and lending to each other using commercial paper , repurchase agreements and similar instruments.

These instruments are often benchmarked to i. Finance companies typically fund themselves by issuing large amounts of asset-backed commercial paper ABCP , which is secured by the pledge of eligible assets into an ABCP conduit. Some large corporations with strong credit rating issue commercial paper on their own credit.

Other large corporations arrange for banks to issue commercial paper on their behalf. In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper , while the U. Treasury issues Treasury bills to fund the U. Money markets serve five functions—to finance trade, finance industry, invest profitably, enhance commercial banks' self-sufficiency, and lubricate central bank policies.

The money market plays a crucial role in financing domestic and international trade. Commercial finance is made available to the traders through bills of exchange , which are discounted by the bill market. The acceptance houses and discount markets help in financing foreign trade. The money market enables commercial banks to use their excess reserves in profitable investments.

The main objective of commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of its depositors. In the money market, the excess reserves of commercial banks are invested in near money assets e. Thus, commercial banks earn profits without sacrificing liquidity. Developed money markets help commercial banks to become self-sufficient.

In an emergency, when commercial banks have scarcity of funds, they need not approach the central bank and borrow at a higher interest rate. They can instead meet their requirements by recalling their old short-run loans from the money market. Though the central bank can function and influence the banking system in the absence of a money market, the existence of a developed money market smooths the functioning and increases the efficiency of the central bank.

There are two types of instruments in the fixed income market that pay interest at maturity, instead of as coupons —discount instruments and accrual instruments. Discount instruments, like repurchase agreements , are issued at a discount of face value , and their maturity value is the face value. Accrual instruments are issued at face value and mature at face value plus interest.

From Wikipedia, the free encyclopedia. For other uses, see Money market disambiguation. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.

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Money Market

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The assets are a close substitute for money and support money exchange carried out in the primary and secondary market. In other words, the money market is a mechanism which facilitate the lending and borrowing of instruments which are generally for a duration of less than a year. High liquidity and short maturity are typical features which are traded in the money market. The non-banking finance corporations NBFCs , commercial banks, and acceptance houses are the components which make up the money market. Money market is a part of a larger financial market which consists of numerous smaller sub-markets like bill market, acceptance market, call money market, etc.

The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As money became a commodity , the money market 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. Trading in money markets is done over the counter and is wholesale. There are several money market instruments in most Western countries, including treasury bills , commercial paper , banker's acceptances , deposits , certificates of deposit , bills of exchange , repurchase agreements , federal funds, and short-lived mortgage- and asset-backed securities. Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid, low-risk securities.


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Money Market Instruments – Meaning, Objectives, Types, and features

The money market is referred to as dealing in debt instruments with less than a year to maturity bearing fixed income. In this article, we will cover the meaning of money market instruments along with its types and objectives. It is a financial market where short-term financial assets having liquidity of one year or less are traded on stock exchanges. The participants in this financial market are usually banks, large institutional investors, and individual investors. These include treasury bills, certificates of deposit, commercial paper, repurchase agreements, etc.

Money market is basically that particular section of the finance market wherein finance related instruments, with very brief maturities and high amount of liquidity are adequately traded. The money market is utilized by the participants for the purpose of lending and borrowing for a brief period, for a number of days to a little less than a year. The securities of money market incorporates certificates of deposit that are negotiable, U.

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Money market

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Money Market: Objectives, Functions and Limitations

Money Market Instruments

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Role of money market in the financial system

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3 Comments

Samuel C.
07.05.2021 at 12:56 - Reply

Read this article to learn about Money Market.

Huon V.
08.05.2021 at 11:53 - Reply

We keep hearing how money markets show the first sign of change when a currency gains or loses value.

Didier G.
11.05.2021 at 01:10 - Reply

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