Interest rates and short-term debt are tradable on the money market. This article defines and describes what are objectives of money market instruments and different types of money market in dept for extensive knowledge on it.
The money market is part of the financial market. It comprises the bill market, acceptance market, call money market, and so forth. Money market transactions use trade bills, government papers, promissory notes, and other instruments instead of cash. Brokers are unable to handle money market transactions.
What is Money Market?
Short-term assets redeemable within a year are tradable on the Money Market. Bills and securities are readily available. Bill trading allows participants to meet their short-term financial needs.
Many money market instruments are tradable on the NASDAQ, NSE, and BSE. Treasury bills, CDs, commercial paper, buyback agreements, and other financial instruments Because traded securities are liquid, money market investments are safe.
The Federal Reserve establishes interest rates on some money market products. The risk in the money market is lower. The majority of instruments are due within a year. As a result, a default occurs more quickly. The money market is a place where you may purchase and sell cash-like assets.
What Are Money Market Instruments?
Money Market Instruments are, as the name implies, financial instruments. These products assist borrowers in meeting short-term demands while also assisting lenders in obtaining funds. Money market instruments include Banker’s Acceptance, Treasury Bills, Repurchase Agreements, CDs, and Commercial Papers.
Different Types Of Money Market
Borrowers (issuers) seeking quick cash and investors (lenders) seeking fixed returns prefer these securities. You can also refer different types of fixed deposits for your more research purpose. Among the different types of money market instruments are:
Certificate of Deposits (CDs)
CDs save money that has been deposit in a bank or other financial institution. A Fixed Deposit Receipt differs from a CD in two ways. For starters, CDs are more expensive. To begin, anyone can purchase a CD.
Certificate of Deposits are discount like Treasury bills and have terms ranging from seven days to a year. CDs have maturities of three, six, or twelve months. They can be received by trusts, firms, corporations, associations, funds, non-resident Indians, and others (excluding minors).
Treasury Bills (T-Bills)
Treasury Bills issued by the federal government are among the safest money market securities. Treasuries are risk-free investments. Instruments with no risk. These investments provide modest returns. Treasury bills can be purchased and sold on both the primary and secondary markets.
They have due dates of three, six, or twelve months. Treasury bills are discount by the government. The buyer receives interest equal to the difference between the maturity value of the bill and its auction price. India auctions treasury bills with maturities of 91 days, 182 days, and 364 days.
Commercial Papers (CPs)
Commercial Papers are promissory notes that are unsecured. They are issue by highly rated firms to meet market capital demands. Certificates of deposit normally have a term of 1 to 270 days.
Commercial papers are use in Japan, the United Kingdom, the United States, Australia, and other countries. Better than Treasury Bills, but less secure. Commercial paper is tradable on the secondary market.
Eurodollars are held by foreign banks. They are not subject to Federal Reserve regulations. Banks in Cayman and the Bahamas have large eurodollar deposits. They pay more interest than US government debt, therefore large corporations, money market funds, and international institutions purchase them.
Money Market Funds
The wholesale money market is only accessible to corporations and financial institutions. Individuals might purchase these via mutual funds. The NAV of these funds should remain at $1.
This happened to one fund in 2008. This caused the market to panic, and many consumers left the funds, making riskier investments more difficult.
Repurchase Agreements (Repo)
Repurchase Agreements, sometimes known as “Repos”. These are short-term loans in which buyers and sellers agree to sell and buy the same goods. Only Reserve Bank approve parties are permit to participate. Repo/Reverse Repo transactions can only be conduct by Reserve Bank approve parties.
Only trade in Reserve Bank approved securities. Treasury bills, central/state government securities, corporate bonds, and PSU bonds are all examples of government securities.
Banker’s Acceptance (BA)
Bills of exchange are also use in the world money market including US, India, UK, etc. Bills of exchange and commercial bills function in the same way. The vendor hands over a bill of exchange to the buyer. When a bank accepts a bill of exchange, it is refer to as a commercial bill. This bill can be paid as needed by the vendor.
Money Market Accounts
BA is a paperwork indicating that a commercial bank will pay later. Banker’s acceptance, like treasury bills, is use in money market funds. It specifies the amount, the due date, and the recipient. Banker’s Acceptance is available for 30-180 days.
Call and Notice Money
Banks and other financial institutions borrow short-term funds to manage cash flow. One-day borrowing or lending is refer to as call money. Money on notice is a 14-day loan or borrowing without security.
It’s a checking account. Some financial institutions make it difficult to withdraw funds or write cheques. When these limits are exceeded, the account is convertable to a checking account. Banks compute and add money market account interest daily.
Money market accounts provide more interest than savings accounts. The spread between savings and money market rates has narrowed since the 2008 financial crisis. The average money market interest rate varies according on deposit quantity. The best no-minimum money market account paid 0.56 percent per year in August 2021. Money market accounts at banks and credit unions are insure by the FDIC and NCUA.
Objectives of Money Market Instruments
These funds invest in short-term debt. They are liquid and give short-term income. What is the objectives of money market instruments?
Provide Short-term Liquidity
Short-term investments allow sellers and buyers to repay their money quickly. Because of Reserve Bank control, they keep the economy’s liquidity safe.
Use Extra Funds Wisely
Lenders may benefit from unused funds. Borrowers benefit from speedy cash. They’re adaptable. Take out small amounts as needed or invest any surplus funds.
Meet Working Capital Requirements
Money market instruments give working capital. The difference between a company’s accounts payable and receivable is its working capital. It is what a business requires to survive.
Decisions on Fiscal Policy
They govern the short-term market and the interest rates on short-term loans. By disclosing the country’s money and banking status, this assists the central bank in determining future interest rates and monetary policy.
Considerations for Money Market Funds
Money market funds move in the same way that other markets do. Many organisations can obtain short-term finance through the money market, while others can put excess funds somewhere safe. Consider these before making an investment.
Long-term money market funds are risky investments. Mutual fund NAV is influence by market direction (NAV). If interest rates rise, NAV may decline, lowering returns. The expenditure ratios differ depending on the Asset Management Company. The expense ratio and yield are inversely proportional. Short-term gains are tax at 15%.
Short-term investments allow sellers and buyers to repay their money quickly. Lenders might profit from under-utilize funds by investing them. Borrowers benefit from speedy cash. Different types of money market instrument and objectives of money market instruments assist businesses in meeting their cash requirements.