Interests in money markets consist of funds, money market accounts, and instruments. Such markets allow businesses, banks, and governments to manage their expectations on short-term needs and investments. Money markets are as critical as all the other markets because they strengthen the financial system and enable the smooth functioning of the economy. Different types of money market provides a haven for investments, having surplus cash that earns interest and, at the same time, helps some organizations meet their short-term financial obligations. Typically, the participants in the money markets comprise central banks, commercial banks, financial institutions, corporations, and individual investors.
What is Money Market?
A money market denotes a financial market where borrowing and lending are done for a short period. The money market deals in hyper-liquid instruments for a maturity of less than one year. To satisfy the objective of financing for the short term, the money market is necessary.
The money market is vital in stabilizing the economy helping firms, banks, and governments take care of their liquidity conditions. It acts as a mobilizer and efficient utilization of potential fund surpluses. It also helps stabilize prices for goods and the cost of borrowing by affecting the money supply in the economy.
What is Money Market Instruments?
Money market instruments are very short-term financial securities developed for raising funds and maintaining liquidity. These stimulate the financial institutions to pay on behalf of corporate and governmental clients and help these institutions pay their short-term obligations. They are highly liquid and secure, and their maturity lasts up to one year.
Types of Money Market Instruments
These instruments help regulate short-term interest rates and provide a fluid environment for financial practices. The various types of money market instruments available are:
- Treasury Bills
- Commercial Papers
- Certificates of Deposit
- Call Money
- Repurchase Agreements
- Banker’s Acceptances
- Promissory Notes
Treasury Bills
Treasury Bills (T-Bills) are short-term government securities issued by the Reserve Bank of India (RBI) or central banks of other countries. They help manage government money flow and control inflation.
Features of Treasury Bills
- The government issues these.
- Market zero-coupon securities (no interest, sold at discounted prices).
- Highly liquid and secure.
- Maturity occurs in 91 days, 182 days, and 364 days.
Benefits of Treasury Bills
- Investment with no risk.
- Provides temporary liquidity.
- Helps the government with fundraising.
Commercial Papers
The trade-off is that Commercial Papers (CPs) are unsecured short-term promissory notes from large corporations and financial institutions to raise funds.
Characteristics of Commercial Papers
- Issued by corporations with high credit ratings.
- Their nature is unsecured.
- Maturity can vary widely, ranging from 7 days to 1 year.
- More Return Than that on Bank Deposits.
Advantages of Commercial Papers
- It is Cost-effective for Business Enterprises.
- They are easily Traceable in the secondary market.
- They Provide Quick Access to Funds.
Certificates of Deposit
Certificates of Deposit(CDs) are time deposits issued by commercial banks. They pay fixed interest rates for a maturity term predetermined by agreement.
Characteristics of Certificates of Deposit
- Banks and financial institutions issued it.
- Maturities are fixed (7 days to 1 year for banks and up to 3 years for financial institutions).
- Higher interest rates than savings accounts.
Benefits of Certificates of Deposit
- It is a safe and secure investment.
- Greater returns than savings accounts.
- Flexible investment option.
Call Money
On the other hand, call money refers to short-term loans that banks grant each other for a day to a few weeks.
Features of Call Money
- It is used as an interbank lending.
- It is highly liquid.
- No collateral is needed.
Advantages of Call Money
- Short-term liquidity management is enabled.
- Smooth operation in banking is facilitated.
- No risk of default in short tenure.
Repurchase Agreements (Repo & Reverse Repo)
Repurchase Agreements (Repos) are agreements where financial institutions trade their securities with the promise to sell them back at a future date.
Features of Repurchase Agreements
- Used by banks and financial institutions.
- As such, it helps maintain the liquidity of the system.
- Short-term borrowing instrument.
Advantages of Repurchase Agreements
- Provides short-term funding.
- Helps with monetary policy implementation.
- Reduces market volatility.
Banker’s Acceptances
A banker’s acceptance is a short-term credit instrument because a bank guarantees it. A banker’s acceptance represents a promise by the bank to pay a specific amount at a certain date in the future, and it is mainly used for circumstances where international trade is conducted.
Features of Banker’s Acceptances
- Used in trade finance
- Another low-risk instrument
- Short-term maturity
Benefits of Banker’s Acceptances
- Reduction in payment risk for trade
- Liquidity to businesses
- Can be traded in the secondary market
Promissory Notes
Promissory Notes are writing instruments. Whereafter, the One Party binds itself to pay a fixed amount to another party at some future date.
Features of Promissory Notes
- Used for trade and personal finance
- Legally enforceable instruments
- Fixed interest rate
Advantages of Promissory Notes
- Simple and flexible financing
- Legally binding
- Used for both personal and business finance
Types of Money Market
Money market instruments are short-term financial tools that help quickly borrow and lend. They include treasury bills, commercial papers, certificates of deposit, call money, repurchase agreements, and banker’s acceptances. These instruments help keep liquidity in the economy and regulate interest rates.
Money Market Funds
These are mutual funds investing in very short-term debt instruments. They are risk-free investments for investors and assured returns.
Features of Money Market Funds
- Invest in short-term instruments.
- Low risk, high liquidity
- Managed by Asset Management companies.
Advantages of Money Market Funds
- It’s a very safe investment option.
- Provides much better returns than savings accounts.
- Best for risk-averse investors.
Money Market Accounts
A money market account is a type of savings account through which banks frequently offer higher interest rates than those in regular savings accounts.
Features of Money Market Accounts
- Higher interest rates than savings.
- Limited withdrawals.
- Require a higher minimum than savings.
Advantages of Money Market Accounts
- Gives better returns than savings accounts.
- Easy accessibility, such as the availability of funds.
- Insured by the government in some countries.
Money Market Instruments
The money market instruments are the financial securities used in the money market to lend and borrow in the short term.
Features of Money Market Instruments
- Nature of short-term.
- High liquidity and very secure.
- Issued by governments, banks, and corporations.
Advantages of Money Market Instruments
- Helps for short-term financing.
- Provides liquidity in the market.
- Compared to other investments, it carries a lower risk.
Types of MoneyMarket FAQs
1. What are the different types of money market instruments?
Money market instruments include treasury bills, commercial papers, certificates of deposit, call money, repos, banker’s acceptances, and promissory notes. These instruments help with short-term borrowing and lending.
2. What is the difference between Money Market and Capital Market?
The maturities of the money market and capital market differ; the money market deals with short-term securities (less than one year), while the capital market handles long-term securities, like stocks, bonds, etc.
3. What are examples of money market instruments?
Examples are treasury bills, commercial papers, certificates of deposit, and repurchase agreements. Through these, short-term financing is made possible.
4. How do money market funds work?
Money market funds place investment into treasury bills and commercial papers for the short term, enabling investment at low risk and hence assuring stable returns.
5. What is the role of money market in the economy?
The money market helps to maintain liquidity, permanence of control over inflation, and stability in interest rates. It also provides short-term finance to businesses, banks, and the government.
