By definition, the money market is a market for the exchange of money and
other financial assets as close substitutes with a maturity of less than one
year.
The money market can also be described as a market for short-term financial
instruments with low risk of default, liquidity and high face value.
The focus of this market is on the use of tools that allow individuals and
companies to rapidly raise liquidity to the required level.
The main reason for the need for money market economic units is the asynchrony
of receiving money and spending.
However, entities can retain cash resources to carry out their planned
expenditures independently of receiving cash.
But this does have a cost in the form of interest rates, and companies try to
keep these costs as low as possible to keep up with day trading.
For this purpose, they will use a combination of monetary resources and
financial instruments of money markets with characteristics of high liquidity
and relatively low cost and risk.
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| Learn about the money market |
The money market is not an organized market. In other words, there is no
specific geographic location of the money market and, in general, banks,
non-bank credit institutions and other places where financial instruments are
traded constitute the money market.
Participants in the money market are individuals or entities that have excess
liquidity, as savers, who provide their resources directly or indirectly to
units that need financial resources with short maturities.
In other words, the most important task of the money market is to create
facilities for economic units to provide liquidity - in the short run - in
addition to working capital.
money market tools
Treasury bills:
Treasury bills are short-term government-issued securities that usually have a
maturity of three months, six months and one year.
These documents are sold in reduced form (less than the face value) at the
time of sale, and on the due date, the owner receives the nominal amount of
the document.
So they are in the line of discounted money market tools.
These bonds are issued and repurchased by the central bank on behalf of the
government.
The most important advantage of treasury bills is their low risk.
An investor who invests his money in treasury bills is willing to take as
little risk as possible. For this reason, these documents have a relatively
low yield.
Treasury bills are mainly bought by investment companies who are looking for a
temporary investment in a safe place.
Bank Acceptance:
Bank acceptance, which is required to pay a certain amount to the bearer on a
certain date, is one of the oldest and smallest (in terms of size and amount)
money market instruments.
Although this financial instrument has been in use since the 12th century, it
was not an important instrument in the money market until the 1960s, when
international trade grew exponentially.
In any case, this instrument is used to finance goods that have not yet been
transferred from the seller to the buyer.
Thus, these debentures are issued by a commercial enterprise on behalf of a
private commercial bank, and when the bank stamps them (i.e. accepts them), it
is known as bank acceptance.
For example, suppose Company A in Russia wants to buy goods from Company B in
Japan.
The Japanese company, unaware of the (Russian) company being a party to its
contract, will not be willing to send the goods before the funds are received.
On the other hand, the Russian company is also reluctant to pay before
receiving the goods.
In such a case, this trading company can make the transaction possible by
issuing bank acceptance bonds.
Although bank acceptance was originally used to finance shipments of
internationally transported goods, today it is used to finance shipments of
domestic goods, store major items of domestic and foreign goods available in
the market, and provide credit for the purpose of exchanging dollars is also
used for banks in some countries.
Bank acceptance also brings direct benefits to the banks. In this way, the
bank will be able to support the credit needs of its customers without using
its credit creation capabilities.
Banks' acceptance has a very good secondary market, with intermediaries,
foreign central banks and local banks being the most important actors.
commercial bonds:
A type of short-term bond - with a maturity of 270 days or less - issued by
financial companies and non-financial institutions.
Bonds are an effective financial tool for companies that need cash in the
short term. These bonds can also be used as a medium-term and even long-term
financing solution.
In this case, the company issues new commercial securities to pay off its
overdue debt. Of course, in recent years, the stock market has been
increasingly used by commercial banks as a source of borrowed money.
Commercial securities are unbacked and usually unsecured by a specific
asset. However, companies selling these securities must have support lines
from commercial banks.
In most countries, access to this market is legal, and commercial securities
can only be issued to publicly listed companies that have a minimum fixed
capital. Commercial securities, such as treasury bills, are sold at a
discount, and their returns are calculated at the discount rate.
Unlike treasury bills, commercial securities do not have a large second-hand
market, which has resulted in low liquidity.
These papers fall into two main categories:
The first category is the securities issued by large and reputable
companies. Which are sold directly to the buyers of financial instruments
without the need for brokers and dealers.
The second category, which is published by smaller but reputable companies
and sold to customers through dealers and intermediaries. The interest rates
on these securities are usually higher than those issued by large companies
due to the higher risks as well as transaction costs incurred by traders.
Commercial papers are usually issued by a particular seller, for example a
branch of commercial banks, and it is often the seller's responsibility to
retrieve them.
Commercial securities have great advantages for sellers and buyers, which is
why its market has grown rapidly in recent years.
An important advantage of these bonds for sellers is that they are less
expensive than borrowing from commercial banks. Also, commercial securities
are of special interest to clients because of their higher returns than
treasury bills, and their maturity dates in line with the needs of
investors.
The largest commercial market in the world is the United States.
Its trade volume constitutes nearly 80% of world trade. Then there are the
markets of European countries, which, although young, have grown
significantly in recent years.
Deposit Certificate:
Certificate of Deposit is the smallest and at the same time one of the most
important tools in the money market.
This certification dates back to the early 1960s and has expanded rapidly
due to its flexibility, versatility, and organized market for second-hand.
It is currently considered one of the most important sources of financing
for commercial banks in addition to being an important component of the
investors' portfolio.
A certificate of deposit is a document issued by a depository institution -
usually a bank - in exchange for a certain amount of money deposited with
it.
This certificate has a maturity date as well as a fixed interest rate.
This type of investment has two main advantages:
- First, the investor can accurately calculate the return on his money.
- Second, the due date of the asset and certificate interest is also determined.
In general classification, certificates of deposit are divided into
transferable and non-transferable parts.
The holder of a negotiable certificate of deposit can sell it on the
second-hand market before the maturity date. This is why these certificates
are highly liquid, as the holder can sell them in the flea market if they
need cash. However, non-fungible certificates cannot be resold and their
holders cannot go to a depository institution unless they need cash and
withdraw their deposit from the institution incurring a fine.
The minimum term for certificates of deposit is seven days and the maximum
is unlimited. However, in practice, most CDs are issued with a maturity of
less than one year, of which the quarterly and six-month certificates are
more common.
Negotiable certificates of deposit are divided into two categories based
on their face value:
- Large certificates and small certificates.
In the United States, for example, a large certificate of deposit has a face
value of more than $1 million and a small certificate of deposit has a face
value of less than $1 million.
Large CDs are most often purchased by banks, mutual funds, institutional
investors (investment institutions), and money market funds, while most
clients for small CDs are individuals.
Also, the interest rate on a small certificate of deposit is lower than the
interest rate on a large certificate of deposit.
Usually, the negotiable certificate of deposit is divided into two
categories, internal and external, based on the market prepared for sale.
The domestic type of these certificates is issued for sale within the
country and the foreign type for sale in other countries in foreign
currency.
Certificates of deposits in foreign currencies are divided into two
categories: the dollar and the euro, due to the importance and position of
the American and European markets in the global money market.
Foreign currency certificates of deposit issued for sale in the United
States are known as bank certificates of deposit, and certificates of
deposit issued for sale in Europe are known as euro certificates of deposit.
Obviously, these certificates are also posted for sale in other parts of the
world, but due to their lesser importance, there is no standardized name for
them.
There are also other types of certificates of deposit issued by non-bank
credit institutions and they are known as credit certificates of deposit.
money market institutions
Central bank and other banking financial intermediaries like commercial
banks and non-bank credit institutions are among the most important money
market institutions.
In addition to these financial intermediaries, commercial companies,
government and government institutions, investment funds, brokers,
traders, and ultimately investors also play an important role in this
market.
Watch also: What are the securities?