Last updated on September 2nd, 2022 at 10:52 am
Learn More About The Regulation Of Money Market Funds In 2022
The money market is a systematized exchange market where contributors lend and borrow high-quality, short-term debt securities with annual or fewer period maturities. This enables banks, governments, and large financial institutions to sell short-term securities and fund their short-term cash flow demands. Money markets allow individual investors to invest small funds in a low-risk setting.
Standard instruments traded in the money market are certificates of deposit, treasury bills, commercial paper, accounts of exchange, federal funds, asset-backed securities & short-term mortgage-backed securities. More prominent corporations with short-term cash flow need to borrow from the market directly through agents, while small companies with cash reserves borrow through money market mutual funds.
Functions of the Money Market
Apart from contributing to the development of a country and economic stability, the money market course provides short-term liquidity to commercial banks, governments, and other institutions. Investors with excess money can invest in the money market and earn interest.
Let’s learn more about the main functions of the money market:
Financing Trade
The money market provides financing for international & local traders in urgent need of short-term funds. It facilitates discounted bills of exchange and offers immediate financing for goods and services and many more things.
Central Bank Policies
The central bank is responsible for guiding a country's monetary policy and building a healthy financial system. This can affect the money market through actions and guide interest rates and the banking industry. For instance, if the central bank changes interest rates, it can affect the banks' profits & their power to lend money.
Growth of Industries
The money market provides an easy avenue for businesses to obtain short-term loans for working capital needs. Through commercial paper and finance bills, they can easily borrow money on a short-term basis. Although money markets do not provide long-term loans, this market can influence the capital market & help businesses obtain long-term financing by setting interest rate benchmarks.
Commercial Banks Self-Sufficiency
Commercial banks can invest in the money market and earn interest on any excess reserves. They can easily convert short-term investments, such as bills of exchange, into cash to support customer withdrawals or withdraw themselves when faced with liquidity problems. The advantage of this is that the money market may charge lower interest rates on short-term loans than the central bank.
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