Money market

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For other uses, see Money market (disambiguation).
Finance
Philippine-stock-market-board.jpg
Markets[show]
Instruments[show]
Corporate[show]
Personal[show]
Public[show]
Banks and banking[show]
Regulation Standards[show]
Economic history[show]
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As money became a commodity, the money market became a component of the
financial markets 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, including treasury bills,

commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of
exchange, repurchase agreements, federal funds, and short-lived mortgage- and
asset-backed securities.[1] The instruments bear differing maturities, currencies,
credit risks, and structure and thus may be used to distribute exposure.[2]

Money markets, which provide liquidity for the global financial system, and
capital markets make up the financial market.

Contents [hide]
1 Participants
2 Functions of the money market
2.1 Financing trade
2.2 Financing industry
2.3 Profitable investment
2.4 Self-sufficiency of commercial bank
2.5 Help to central bank
3 Money market instruments
3.1 Discount and accrual instruments
4 See also
5 References
6 External links
Participants[edit]
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 thirteen 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 lendingbanks borrowing

and lending to each other using commercial paper, repurchase agreements and
similar instruments. These instruments are often benchmarked to (i.e., priced by
reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term
and currency.

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. Examples of eligible assets include auto loans,
credit card receivables, residential/commercial mortgage loans, mortgage-
backed securities and similar financial assets. Some large corporations with
strong credit ratings, such as General Electric, 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.S. Treasury issues Treasury bills to fund the U.S. public debt:

Trading companies often purchase bankers' acceptances to tender for payment

to overseas suppliers.
Retail and institutional money market funds
Banks
Central banks
Cash management programs
Merchant banks
Functions of the money market[edit]
Financial markets
Looking up at a computerized stocks-value board at the Philippine Stock
Exchange
Public market
Exchange Securities
Bond market
Bond valuation Corporate bond Fixed income Government bond High-yield debt
Municipal bond
Securitization
Stock market
Common stock Preferred stock Registered share Stock
Stock certificate Stock exchange
Other markets
Derivatives
(Credit derivative Futures exchange Hybrid security)
Foreign exchange
(Currency Exchange rate)
Commodity Money Real estate Reinsurance
Over-the-counter (off-exchange)
Forwards Options
Spot market Swaps
Trading
Participants Regulation Clearing house
Related areas
Banks and banking Finance corporate personal public
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Money markets serve five functionsto finance trade, finance industry, invest
profitably, enhance commercial banks' self-sufficiency, and lubricate central bank
policies.[3][4]
Financing trade[edit]
The money market plays 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.

Financing industry[edit]
The money market contributes to the growth of industries in two ways:

They help industries secure short-term loans to meet their working capital
requirements through the system of finance bills, commercial papers, etc.
Industries generally need long-term loans, which are provided in the capital
market. However, the capital market depends upon the nature of and the
conditions in the money market. The short-term interest rates of the money
market influence the long-term interest rates of the capital market. Thus, money
market indirectly helps the industries through its link with and influence on long-
term capital market.
Profitable investment[edit]
The Money Market enables the commercial banks to use their excess reserves in
profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain cash
demand of the depositors. In the money market, the excess reserves of the
commercial banks are invested in near-money assets (e.g., short-term bills of
exchange), which are easily converted into cash. Thus, commercial banks earn
profits without sacrificing liquidity.

Self-sufficiency of commercial bank[edit]

Developed money markets help the commercial banks to become self-sufficient.
In the situation of emergency, when the commercial banks have scarcity of
funds, they need not approach the central bank and borrow at a higher interest
rate. On the other hand, they can meet their requirements by recalling their old
short-run loans from the money market.

Help to central bank[edit]

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.

Money markets help central banks in two ways:

Short-run interest rates serve as an indicator of the monetary and banking
conditions in the country and, in this way, guide the central bank to adopt an
appropriate banking policy,
Sensitive and integrated money markets help the central bank secure quick and
widespread influence on the sub-markets, thus facilitating effective policy
implementation
Money market instruments[edit]
Certificate of deposit Time deposit, commonly offered to consumers by banks,
thrift institutions, and credit unions.
Repurchase agreements Short-term loansnormally for less than one week and
frequently for one dayarranged by selling securities to an investor with an
agreement to repurchase them at a fixed price on a fixed date.
Commercial paper Short term usanse promissory notes issued by company at
discount to face value and redeemed at face value
Eurodollar deposit Deposits made in U.S. dollars at a bank or bank branch
located outside the United States.
Federal agency short-term securities In the U.S., short-term securities issued by
government sponsored enterprises such as the Farm Credit System, the Federal
Home Loan Banks and the Federal National Mortgage Association. Money
markets is heavily used function.
Federal funds In the U.S., interest-bearing deposits held by banks and other
depository institutions at the Federal Reserve; these are immediately available
funds that institutions borrow or lend, usually on an overnight basis. They are
lent for the federal funds rate.
Municipal notes In the U.S., short-term notes issued by municipalities in
anticipation of tax receipts or other revenues
Treasury bills Short-term debt obligations of a national government that are
issued to mature in three to twelve months
Money funds Pooled short-maturity, high-quality investments that buy money
market securities on behalf of retail or institutional investors
Foreign exchange swaps Exchanging a set of currencies in spot date and the
reversal of the exchange of currencies at a predetermined time in the future
Short-lived mortgage- and asset-backed securities
Discount and accrual instruments[edit]
There are two types of instruments in the fixed income market that pay interest
at maturity, instead of as couponsdiscount 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