All About Money Market and Its Instruments

Money Market refers to a financial market characterized by short-term financial assets. These assets are characterized by the liquidity of 1 year or less. In the money market, the trading of financial assets takes place on stock exchanges. The securities in the concept of the money market are very liquid. The short-term borrowing needs of participants are facilitated in the money market. The participants here are individual investors, large institutional investors, and banks. Keep on reading to know all about the concept of the money market. Here, we will also look at the various money market instruments.

Objectives of Money Market

In the concept of the money market, the main objectives are as follows:

• To provide borrowers with short-term funds at a price that is considered reasonable.
• To provide lenders with sufficient liquidity due to short-term securities.
• To enable lenders to convert idle funds into profitable investments.
• To follow the rules and regulations of Government and authoritative bodies.
• To control and regulate the level of liquidity in the economic system.
• To assist organisations by providing them with required funds for meeting their working capital requirements.
• To provide a good opportunity for the banks to invest their surplus funds.

Functions of the Money Market

The various functions of the money market are as follows:

• The money market ensures a balance between the demand of short-term funds and their supply.
• The money market facilitates economic growth by making funds available to various parties.
• Money markets allow governments to check and monitor the nation’s liquidity by impacting the money supply. Thereby, deflation or inflation can be kept in check.
• A suitable platform is provided to parties for wholesaling, borrowing, or investing funds in the money market.

Various Money Market Instruments

The various money market instruments are as follows:

1. Treasury Bills

They are the most used instruments in the concept of the money market. Treasury bills have different instruments for short-term maturities. These bills can differ from one nation to another. The Indian government issues them at a discount for 2 weeks to 364 days.

The issuing of treasury bills takes place at a discount. Moreover, their repayment takes place at par when maturity comes.

2. Commercial Bills

In the concept of the money market, commercial bills are similar to a bill of exchange. Organisations issue them to needy parties for meeting short-term money requirements.

You will get much more efficient liquidity with commercial bills. This is because their transfer can occur quickly from one party to another whenever there is a sudden cash need.

3. Certificate of Deposit

This is a negotiable term deposit acceptable by financial institutions like commercial banks. Their issue generally takes place via a promissory note.

Certificate of Deposit can be issued to various parties like:

• Individuals
• Corporations
• Trusts
• Others

Commercial banks can issue them at a discount. Usually, the duration of the certificate of deposit is somewhere in the range of 3 months to 1 year.

4. Commercial Paper

Commercial papers are issued by organisations for meeting their short-term working capital needs. They are a suitable alternative to borrowing from the bank. The time period of commercial paper is, on average, from 15 days to 365 days.

The government or the central bank makes rules regarding the issue of commercial papers. Moreover, this issue must take place at a discount to face value. Also, their discount rate is determined by the market.

5. Call Money

It is a segment where lending or borrowing takes place by scheduled commercial banks. This lending or borrowing takes place on short notice, usually around 1-2 weeks. Call money helps in the day-to-day management of organisational cash flows.

The interest rates in call money are market-driven. Therefore, they can be significantly impacted by economic demand and supply changes.

Conclusion

Money Market is a financial market that is characterized by short-term financial assets. These assets have liquidity of 1 year or less than it. Here, the securities are extremely liquid. In the concept of the money market, the participants are individual investors, large institutional investors, and banks. Understanding the objectives and functions of the money market are essential. The various money market instruments are treasury bills, commercial bills, certificates of deposit, commercial paper, and call money.