Money Market
Money market refers to a financial market where short-term borrowing and lending of funds takes place. The market deals in financial instruments that have a maturity period of one year or less. Money market instruments are considered low-risk investments and are popular among investors who seek to preserve capital and earn a moderate level of return.
Here are some of the key points about the money market:
- Definition of Money Market: The money market is a financial market that deals in short-term debt instruments such as treasury bills, commercial papers, certificates of deposit, and repurchase agreements. These financial instruments have a maturity period of less than one year.
- Features of Money Market: The money market is characterised by high liquidity, low risk, low returns, and short-term maturity. It provides an avenue for short-term borrowing and lending of funds.
- Participants in the Money Market: The participants in the money market include banks, corporations, governments, financial institutions, and individual investors.
- Instruments of Money Market: The major instruments of the money market include treasury bills, commercial papers, certificates of deposit, repurchase agreements, and banker’s acceptances.
- Functions of Money Market: The money market performs several functions such as providing liquidity to the financial system, facilitating short-term borrowing and lending, providing a benchmark for short-term interest rates, and acting as a source of financing for governments and corporations.
- Advantages of Money Market: The money market offers several advantages such as safety, liquidity, flexibility, low transaction costs, and ease of access.
- Risks of Money Market: Despite being considered low-risk investments, the money market is not entirely risk-free. The risks include credit risk, interest rate risk, and liquidity risk.
- Role of the Central Bank: The central bank plays a crucial role in the money market by regulating the money supply, setting short-term interest rates, and acting as a lender of last resort.
In conclusion, the money market plays a significant role in the financial system by providing short-term financing and liquidity to the economy. The market is highly regulated and offers a range of low-risk financial instruments for investors. However, investors must be aware of the potential risks and seek professional advice before investing in the money market.
