1/27/2024 0 Comments Money market graph![]() Self-sufficiency of commercial banks ĭeveloped money markets help commercial banks to become self-sufficient. Thus, commercial banks earn profits without sacrificing liquidity. In the money market, the excess reserves of commercial banks are invested in near money assets (e.g., short-term bills of exchange), which are easily converted into cash. The main objective of commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of its depositors. The money market enables commercial banks to use their excess reserves in profitable investments. Thus, money market indirectly helps the industries through its link with and influence on long-term capital market. The short-term interest rates of the money market influence the long-term interest rates of the capital market. However, the capital market depends upon the nature of and the conditions in the money market. Industries generally need long-term loans, which are provided in the capital market.They help industries secure short-term loans to meet their working capital requirements through the system of finance bills, commercial papers, etc.The money market contributes to the growth of industries in two ways: The acceptance houses and discount markets help in financing foreign trade. Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market. The money market plays a crucial role in financing domestic and international trade. Money markets serve five functions-to finance trade, finance industry, invest profitably, enhance commercial banks' self-sufficiency, and lubricate central bank policies. Retail and institutional money market funds.Trading companies often purchase bankers' acceptances to tender for payment to overseas suppliers.Treasury issues Treasury bills to fund the U.S. ![]() States and local governments issue municipal paper, while the U.S. In the United States, federal, state and local governments all issue paper to meet funding needs. Other large corporations arrange for banks to issue commercial paper on their behalf. Some large corporations with strong credit rating issue commercial paper on their own credit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. These instruments are often benchmarked to (i.e., priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.įinance 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. The core of the money market consists of interbank lending-banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. Money market trades in short-term financial instruments commonly called "paper". Participants borrow and lend for short periods, typically up to twelve months. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Money markets, which provide liquidity for the global financial system including for capital markets, are part of the broader system of financial markets. Fiat money, on the other hand, gets its value from a government order. Commodity money relies on intrinsically valuable commodities that act as a medium of exchange. The four most relevant types of money are commodity money, fiat money, fiduciary money ( cheques, banknotes), and commercial bank money. Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid, low-risk securities. Ī market can be described as a money market if it is composed of highly liquid, short-term assets. The instruments bear differing maturities, currencies, credit risks, and structures. There are several money market instruments in most Western countries, including treasury bills, commercial paper, banker's acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage- and asset-backed securities. Trading in money markets is done over the counter and is wholesale. ![]() The money market deals in short-term loans, generally for a period of a year or less.Īs short-term securities 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. The money market is a component of the economy that provides short-term funds.
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