Basic Understanding Of Money Market

Basic Understanding Of Money Market

The money market is the place wherein the high-quality debt securities which are short-term in nature are issued by the corporate borrowers and the government. The maturity of these securities will range from one day to one year. This market helps in creating liquidity for the borrowers to fund their cash flow needs which are of short-term.

The money market instruments that are commonly traded include a certificate of deposits, treasury bills, bankers’ acceptances, commercial paper, etc.  These instruments offer liquidity and are considered quite safe. People defaulting on the money market instrument are very much rare. However, since its quite safe to invest, it only gives the investor a low rate of return when compared to other securities.  It is quite different from the cryptocurrency market wherein the digital currencies are traded.  The cryptocurrencies do not come under the money market.  In the cryptocurrency market, the digital currencies are bought and sold with the help of automated trading robots like bitcoin trader. You can continue reading here to gain more insight into it.

There is no physical, formal money market. It is only an informal chain of brokers, dealers, financial institutions, and bankers that are electronically linked to each other. The corporations that have short-term money requirements can sell these money market instruments to raise money for a short-term period.

Instruments used in the money market

Treasury bills- This debt instrument is issued for a term less than one year.  It is the safest debt as it is fully backed by the credit and faith of the government.   The rate of treasury bills also acts as a barometer of the short-term rate of interest.  However, these instruments do not offer any interest but are sold at discounted values less than its original value.  Full value will be paid at the maturity time.

Certificate of deposits- This instrument is considered as a time deposit.  It is usually issued by the commercial banks directly but can also be purchased through brokerage firms.  It comes with a specific maturity date ranging from 3 months to 5 years.

Bankers acceptance- These are credit-investment that are short-term in nature and they are issued by the non-financial companies but are guaranteed by the bank to do the payment. In the secondary market, these acceptances get traded at a discounted value.  They are considered totally safe instrument and are mostly used in foreign trade.