Money Market Instruments

Definition:

The financial tools with a short-term period of up to 1 year which are used by issuers to raise funds are known money market instruments.

Money markets are instruments that offer huge sums of small cost to companies, bankers, and the governments for a limited time. The period can be nightly, several days, weekends, or even a year, but it is never more than a year. 

Financial model requirements are met by the money system. Businesses would have had to wait till repayments for things previously sold were collected if money markets were not available. 

It would cause the purchasing of raw materials to be delayed, and the production of the final piece to be slowed.

Types Of Money Market Instruments

There are many types of money market instruments. Some of them are discussed below:

1) Certificates Of Deposit

To generate short-term money, banks offer certificates of deposit. They can last anywhere from 1 to 6 months or more. 

The more the money is retained in a CD, the greater the interest amount. 

2) Swaps

The swaps are an agreement involving 2 entities in which all upcoming interests cost installments from a borrower are switched. Swaps enable financial institutions to operate as facilitators for businesses looking to hedge against interest price fluctuations. 

3) Treasury Bills

Treasury bills are used by the central government to generate funds. They’re just there for a year or less. 

T-Bills have a lower market value than regular bills At completion, the client receives the market price of the investment. The consumer’s profit is calculated as the difference between the original and market cost. 

They are the most secure unchangeable money investments for the short term.

4) Shares In Money Market Instruments

Money market funds are a type of mutual fund that invests in a variety of financial securities. Shareholders buy stocks in the funds from the financial providers.

5) Credit Enhancement

If the provider does not fulfill the financial market mechanism, the bank releases a promissory note stating that it would do so.

6) Eurodollars

Certificates of deposit are also issued by banks in other countries. In place of US currency, these are deposited in Euro currency.

7) Federal Funds

State funds are solely used by banks. They are used by banks to fulfill the Federal Treasury’s mandate nightly. It accounts for about 10percent of all bank loans above $58.8 million. 

Functions Of The Money Market

Assists The Banks

Instead of lending from the RBI, a commercial bank could lend from the current financial markets, as the money market’s return ratio is less than the RBI’s, saving the funds to the bank

Optimal Financial Management

Money Markets contribute to the growth of the trade and business sector by managing money resources and allowing funds to be conveniently moved from one location to the next.

Aids the Federal Government

Instead of borrowing from the RBI, the government may receive short-term funding from the financial markets at a low cost of interest by releasing Treasury notes.

Assists Economic Development

A financial system offers short-term funding to meet the operating expenses needs of numerous financial organizations. It promotes the development of the economy, trade, and industry by lowering commercial bills through financial institutions, reception offices, dealers, and other financial institutions.

Meaningful Usage Of Equity

It makes it easier for financial and non-financial institutions, as well as the state, to employ balanced equity investments effectively for a brief period.

Quizlet

Which of the following is not a money market instrument?

1. Commercial for Deposits
2. Treasury Bills
3. Bonds
4. Commercial paper

Correct Answer. C

Reason:

Money market instruments are employed for short-term investments. Whereas bonds are long-term investments and have a long period of one year or more. Hence they are not money market instruments.

Which one of the following is not a money market instrument? 

1. Equity
2. Promissory notes
3. Treasury Bills
4. Commercial paper

Correct Answer. A

Reason:

Equity shares are also a long-term investment that cannot be a part of the money market instrument because the money market is a short-term investment. 

Which one of the following is not a money market instrument?

1. Certificates of deposit
2. Inter-bank participation
3. Promissory notes
4. Debentures

Correct Answers. D

Reason:

The period for debentures sometimes exceeded 10 years which means that it is a long-term security having an exact level of interest. And money market is a short-term investment hence it’s not a money market instrument.