MONEY MARKET

Money market basically refers to a section of the financial market where financial instruments with high liquidity
and short-term maturities are traded. Money market has become a component of the financial market for
buying and selling of securities of short-term maturities, of one year or less, such as treasury bills and
commercial papers.
It is used by many participants, including companies, to raise funds by selling commercial papers in the
market. Money market is considered a safe place to invest due to the high liquidity of securities.

It has certain risks which investors should be aware of, one of them being default on securities such as
commercial papers. Money market consists of various financial institutions and dealers, who seek to borrow or
loan securities. It is the best source to invest in liquid assets.

The money market is an unregulated and informal market and not structured like the capital markets, where
things are organised in a formal way. Money market gives lesser return to investors who invest in it but
provides a variety of products.

Withdrawing money from the money market is easier. Money markets are different from capital markets as
they are for a shorter period of time while capital markets are used for longer time periods.

FUNCTIONS

MONEY MARKET INSTRUMENTS

Money market securities are often considered a good place to invest funds that are needed in a shorter time
period—usually one year or less. Money market instruments include bankers' acceptances, certificates of
deposit and commercial paper. Bankers' acceptances are typically used to finance international transactions in
goods and services, while certificates of deposit (CDs) are large-denomination, negotiable time deposits issued
by commercial banks and thrift institutions. Commercial paper takes the form of short-term, unsecured
promissory notes issued by both financial and non-financial corporations.
WHY IS MONEY MARKET IMPORTANT FOR BUSINESS?
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. In essence the market acts as a repository for short-term funds. Large
corporations generally handle their own short-term financial transactions; they participate in the market through
dealers. Small businesses, on the other hand, often choose to invest in money-market funds, which are
professionally managed mutual funds consisting only of short-term securities.
Although securities purchased on the money market carry less risk than long-term debt, they are still not
entirely risk free. After all, banks do sometimes fail, and the fortunes of companies can change rather rapidly.
The low risk is associated with lender selectivity. The lender who offers funds with almost instant maturities
("tomorrow") cannot spend too much time qualifying borrowers and thus selects only blue-chip borrowers.
Repayment therefore is assured (unless you caught Enron just before it suddenly nose-dived). Borrowers with
fewer credentials, of course, have difficult getting money from this market unless it is through well-established
funds.
Without money market instruments, companies would have to wait until payments were received for goods
already sold. That would delay the purchases of the raw goods and slow down the manufacturing of the
finished product. Businesses need short-term cash, because payments for goods and services sold might take
months to receive.

Large corporations with short-term cash flow needs can borrow from the market directly through their dealer,
while small companies with excess cash can borrow through money market mutual funds.

Individual investors who want to profit from the money market can invest through their money market bank
account or a money market mutual fund. A money market mutual fund is a professionally managed fund that
buys money market securities on behalf of individual investors.

TREASURY BILLS

Treasury bills, which are issued by the government, are securities with maturities of less than a year. US
Treasury bills, sold at a discount from face value and actively bought and sold after they are issued, are the
safest instrument in which to place short-term savings. The markets are deep and liquid, and trading is covered
by securities laws. US Treasury bills are not only savings instruments; they can be used to settle transactions.
Treasury bills, which are issued electronically, can be sent through the payments system as readily as money.

MONEY MARKET YIELD

Money market investors receive compensation for lending funds to entities that need to fulfill their short-term
debt obligations. This compensation is typically in the form of variable interest rates determined by the current
interest rate in the economy. Since money market securities are considered to have low default risk, the
money market yield will be lower than the yield on stocks and bonds but higher than the interest rates on
standard savings accounts.

QUIZ ON FRIDAY: OVERVIEW TO MONEY MARKETS (True or false, identification, essay, definition)