Money Market Instruments and Characteristics

Money Market Instruments and Characteristics

Money Market – Meaning

Money Market Instruments and Characteristics. It focuses on debt instruments only the maturities of which range from one day to one year. It also involves a complex of instruments dominated by the central bank as agent of the government and commercial banks. It purchases and sells new instruments rather than trading in outstanding claims.

Characteristics

Money market is not the unique place or mechanism where short term debt instruments are traded among the investors rather there are several locations where direct transactions take place between borrowers and lenders. Under an efficient system to handle any amount and volume of transactions at any time, regional sub-markets are also linked together with the centrally organized market.

However, the basic characteristics of money markets are given below:
◘ Short-term securities with maturity of less than one year are traded in the money market
◘ Central and regional short-term markets create a national short-tern interest rate structure.
◘ They also create a national short-term credit.
◘ Idle funds are transferred through the intermediaries from all over the country to the central open market.
◘ Funds are largely transferred on a wholesale basis, although the large institutions deal directly with each other.
◘ The whole role of the institutions involved in the money market is controlled by the monetary and credit system of the country.
◘ The major participants in the money markets are the central banks and commercial banks.

Instruments

Money market instruments are summarized below:
◘ Treasury bills
◘ Bankers’ acceptance
◘ Commercial paper
◘ Certificates of deposits-CDs
◘ Negotiable CDs

Any firm distinction between money and capital markets is some what arbitrary. Suppliers of funds may direct them to one or both the market and users of fund may draw funds from either market. Furthermore, funds flow back and forth between two. Any institution serves both the market. Rates of interest or fund acquisition costs are interrelated with changes in the general demand and supply of funds.