Role Of Money Market And Its Instruments Pdf

role of money market and its instruments pdf

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Money Market

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. The short-term debts and securities sold on the money markets—which are known as money market instruments—have maturities ranging from one day to one year and are extremely liquid. Treasury bills, federal agency notes, certificates of deposit CDs , eurodollar deposits, commercial paper, bankers' acceptances, and repurchase agreements are examples of instruments. The suppliers of funds for money market instruments are institutions and individuals with a preference for the highest liquidity and the lowest risk. The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell securities or borrow funds on a short-term basis.

We keep hearing how money markets show the first sign of change when a currency gains or loses value. This is because it deals in short-term instruments that are close substitutes for money. These short term instruments are easily marketable, highly liquid and can be bought and sold easily. Since the holding time is less than a year, the returns you receive are quick, unlike traditional instruments that have long maturity time. It is important to keep the money flowing in a financial system. Especially now, when the whole world can be treated as one large market, money market is an integral part of the financial system in any economy.

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. Treasury related bills, bankers acceptance, commercial paper, federal funds, repurchase agreements and municipal notes. The money market is utilized by a variety of participants, including an entity that raises money by selling off commercial paper in the market as well as an investor buying certificates of deposits as a safe option for keeping money for a brief period. However, there are certain risks involved in the market, which an investor must be careful about and this includes the risk of securities default.

Money Market Instruments

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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. 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.

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.


The major purpose of financial markets is to transfer funds from lenders to borrowers. Financial market participants commonly distinguish between the "​capital.


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.

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Role of money market in the financial system

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Read this article to learn about Money Market.

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