An introduction 7 contents 6 derivative instruments 117 6. Functions of the money market the money market contributes to the economic stability and development of a country by providing shortterm liquidity to governments, commercial banks, and other large organizations. The money market operates through a number of instruments. The stock market, fixed income financial instruments market, precious metal market and fx market are all spot markets. Money market instruments are securities that provide businesses, banks, and the government with large amounts of lowcost capital for a short time. In other words, there is a necessity for clearing and settling the trade, tasks that are. Types of treasury bills treasury bills are basically instruments for short term. It consists of a sprawling complex of institutions and mechanisms whereby intermediateterm funds and longterm funds are pooled and made available to businesses, government, and individuals. The table summarizes the instruments of the money market and serves as a guide to the chapters in this book. Investors finance money market instruments at low interest because their salability on short notice confers an implicit monetary services yield.
The major participants in the money market are commercial banks, governments, corporations, governmentsponsored enterprises, money market. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Money market learn about money market instruments and. Lecture notes financial markets and instruments module 1, 2007 new economic school mif supported by morganstanley 7 theories of the term structure. Money market instruments treasury bills n tbills are the government debt securities that matures in one year or less from their issue date. This contrasts with the capital market for longerterm funding, which is supplied by bonds and equity. Because both parties in a term repo arrangement are exposed to interest rate risk, it is a fairly common practice to have the collateral value of the underlying securities adjusted daily marked to market to reflect. A money market fund is a mutual fund that invests solely in money market instruments. These instruments usually are traded, at a discount, in organized markets.
The table summarizes the instruments of the money market. Laroche, federal reserve bank of richmond, 1993, 15. Money market introduction money market means market where money or its equivalent can be traded. The money market is the organized exchange where participants lend and borrow large sums of money for one year or less.
Get the latest headlines on wall street and international economies, money news, personal finance, the stock market indexes including dow. The major participants in the money market are commercial banks, governments, corporations, government sponsored enterprises, money market mutual funds, futures market exchanges. Money market instruments pdf introduction financial markets in every economy have two separate segments, one catering to short term funds and other catering to long term funds. For the short term these markets are described as money markets because the assets that are bought and sold are short termwith maturities ranging from a. Money market instruments are debt securities that generally give the owner the unconditional right to receive a stated, fixed sum of money on a specified date. View essay money market instruments from science mgt at bahria university. For printing purposes a pdf file of the entire publication has been made available. It is a written promise on the part of a businessman today to another a certain sum of money at an agreed future data. Money market instruments constituents and importance. It provides for the quick and dependable transfer of short term debt instruments maturing in one year or less, which are used to finance the needs of consumers. The money market is a market for shortterm instruments that are close substitutes for money. Treasury bills, also known as zero coupon bonds are the instrument of short term borrowing with maturity period of less than one year. Capital market characteristics and instruments in the financial sense, it is the market for the instruments representing longterm funds requirements of the corporation.
Money market instruments can be negotiable or nonnegotiable. Money market instruments pdf introduction financial markets in every economy have two separate segments, one catering to short term funds. It supplies industry with fixed and working capital and finances mediumterm and longterm. In fixed income markets, there are a variety of instruments that, rather than paying coupons, accumulate value to maturity. The money market refer to borrowing and lending for periods of a year or less. Tbills are the most marketable money market security due to its simplicity. The major purpose of financial markets is to transfer funds from lenders to borrowers. A spot market is a market where the buyer pays the asset in full and the seller delivers the asset in full. An exclusive project report on the indian money market. These are cheques, bills, promissory notes, commercial paper, treasury bills and shortdated government bonds. Discount instruments are money market instruments that are issued at a value less than or discounted from their stated face value and mature for their face value. Commercial bills are issued by financial institutions.
The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of shortterm securities. Following are the types of money market instruments. Call money is a method of borrowing and lending for one day. Project report on the meaning and nature of indian money. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. It covers money and financial assets that are close substitutes for money. Financial instruments issued by financial institutions or governments, such as certificates of deposit cds and treasury bills, that are considered to be extremely lowrisk. Negotiable money market instruments, such as commercial paper or negotiable certificates of deposit, can be traded in secondary market places. When the maturity date is one year or less, the debt contracts are called as money market instruments and they trade on the money market. Participants borrow and lend for short periods, typically up to twelve months.
Instruments dealt in the money market the shortterm funds are borrowed by manufacturers, industrialists, traders, businessmen and even by government which issue credit instruments. They are issued at some price and later mature for a greater value. The bill market is a submarket of the money market in india. Money market instruments are used by corporations, governments, and individual investors seeking shortterm funding or shortterm places to invest money. Their standard maturity periods are 4, 26 or 52 weeks1, 3, 6, 12 months one of the money market instruments that are affordable to the individual investors. Overview of financial markets and instruments financial markets and primary securities financial markets securities can be traded on. For example when we buy stocks we pay their cost in full. What are the characteristics of money market instruments. Capital market is the market where investment instruments like bonds, equities and mortgages are traded.
It is a financial instrument with a written promise by one party, to pay to another party, a definite sum of money by demand or at a specified future date, although it falls in due for payment after 90 days within three days of grace. These instruments tend to have lower returns than higherrisk investments, but are much safer due to being backed by the resources and. The money market consists of individual investors and. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. A promissory note is one of the earliest type of bills. Get a running start in the highstakes world of financial investment. A money market mutual fund is a professionally managed fund that buys money market securities on behalf of individual investors. A money market fund is a type of mutual fund that invests in highquality, shortterm debt instruments and cash equivalents. Hence, the instruments traded and the players in the market require to beapproved by rbi. Mengle whenever a money market instrument is traded, some means must exist for transferring the instrument and for making payment. Businesses need shortterm cash because payments for goods.
Principal value may fluctuate if sold prior to stated maturity. Pdf money market instruments in conventional and islamic. Treasury bills make up the bulk of the money market instruments. Instruments of the money market federal reserve bank. Treasury bills these are issued by the reserve bank usually a period of 91 days. Learn global financial markets and instruments from rice university. Money market instruments are forms of debt that mature in less than one year and are very liquid. Financial market participants commonly distinguish between the capital market and the money market. The reserve bank uses these bills to take money out of the market. The period is overnight, a few days, weeks, or even months, but always less than a year. The money market and the bond market make up part of the debt. Money market trades in shortterm financial instruments commonly called paper.
While treasury bills or tbills are issued by the central government. This first course is designed to help you become an informed investor by providing you with the essential. Reprinted from instruments of the money market edited by timothy q. Clearing and settling money market instruments david l. The shortterm financial market is known as money market and the long term financial market is known as the capital market. Islamic banking, liquidity management, islamic money market instruments, and l iquidity risk. The money market encompasses a group of shortterm credit market instruments, futures market instruments, and the federal reserves discount window. It deals in funds and financial instruments having a maturity period of one day to one year. The short term instruments are highly liquid, easily marketable, with little change of loss. Doc project report on indian money market rahul yadav.
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