When we say “the money market,” we mean the place where debt investments with terms of three months or less are bought and sold. At the wholesale level, there are a lot of deals between institutions and dealers. Anyone who wants to invest can buy shares of money market mutual funds. Continue reading to become an expert in types of money market and learn everything you can about it.
When we say “the money market,” we mean the buying and selling of short-term debt instruments with a fixed interest rate. This article will explain what money market instruments are and go over the different types of them.
Types of Money Market
The foreign exchange market allows trading of a specific set of financial instruments on each of the NSE and BSE stock markets. There are many different types of financial products in this class, such as treasury bills, certificates of deposit, commercial paper, and repurchase agreements. We’ll look at the types of money market and talk about the related topics in this area.
Money Market Accounts
A type of savings account is a money market account. Not only do they earn interest, but some issuers also let you make partial withdrawals or use the account to write checks. The options that come with a checking account are more flexible than these limited privileges. (Because the federal government has passed laws, there are limits on how much you can take out. After a certain amount is in the account, the bank will automatically turn it into a checking account.
Certificates of Deposit (CDs)
One cannot consider most certificates of deposit (CDs) as money market funds since they offer terms that can extend up to ten years. CDs, on the other hand, have terms that range from three to six months.
Like money market accounts, savings accounts with bigger deposits and longer terms earn more money. In August 2021, certificates of deposit with a 12-month term were available. Depending on the size of the initial deposit, the interest rates ranged from about 0.50% to 0.70%.
Commercial Bills
One can relate bills of exchange to another type of money market instrument known as “commercial bills”. This is how businesses would handle their urgent needs for cash flow. With these products, you can get access to more cash.
Commercial Paper
Money market funds are a types of money market investment that provide a low-risk, short-term investment option. When a business needs money quickly, it may give investors certificates of participation. So, this is an alternative to borrowing money from a bank.
Also, the time it takes for commercial paper to mature could be anywhere from 15 days to a whole year. So, a company must first get permission from RBI before giving a CP to the public. The discount rate is also based on what’s going on in the market.
Banker’s Acceptances
The interbank market is another types of money market where banks lend and borrow from each other on a short-term basis. A bank can provide backing for a type of short-term credit known as banker’s acceptances. A banker’s acceptance is a payment guarantee similar to a check with a future date. It lets the seller know that the importer will be able to pay for the goods.
Call Money
MARKET SECTION FOR THE SHORT-TERM In this part of the market, commercial banks that are on the schedule lend and borrow money from each other. To make good decisions about money every day. Since the market decides on interest rates, they change a lot when supply and demand change. Interest rates can also change by a big amount at any time, which is something everyone knows.
Repos
The repurchase agreement, which is sometimes called “repo,” is a part of the overnight lending money market. Securities repurchase agreements are sales contracts in which the seller and buyer agree that the seller will buy back the security at a later date. Repos are a great way for sellers to get money quickly, and they usually give a good return on the money the buyer puts in.
Money Market Funds
Any business or financial institution that lends or borrows between $5 million and $1 billion per transaction can use the wholesale money market. In other words, only people who know how to get in can shop here. The federal funds market is a types of money market where banks lend and borrow reserves held at the Federal Reserve.
Mutual funds give investors the chance to buy these bundled products in a lot of different ways. One of the funds fell below that level because of the financial crisis of 2008. There was panic on the market, and many investors pulled their money out. This made it harder for the funds to invest in riskier assets.
Certificate of Deposit
Commercial banks can accept and sell a term deposit known as a “Certificate of Deposit” (CD). Also, commercial banks on the list may give out certificates of deposit with less money (CDs). Also, the length of each of these can be anywhere from three months to a whole year. Most of the time, a bank will give out a certificate of deposit for one to three years.
Eurodollars
Banks in the Cayman Islands and the Bahamas have some of the biggest eurodollar deposits. Since their interest rate is just a little bit higher than that of U.S. government debt, money market funds, foreign banks, and big companies are willing to buy them. The eurocurrency market is a types of money market where banks lend and borrow in currencies other than their own.
Treasury Bills
On the money market, Treasury Bills are a common type of security that people buy and sell. Their short-term debt comes due at many different times. The Indian government sells this at a discount for terms between 14 and 364 days. You can buy TBs as an individual, a business, or an organization.
Frequently Asked Questions
Who Uses the Money Market?
Short-term financial instruments with maturities of one year or less are bought and sold in the money market. The main goal of this instrument is to help governments and businesses keep a steady flow of cash while also giving investors a chance to make a small profit.
What are the Main Purposes of Money Markets?
Money markets are mostly used to allocate capital, spread liquidity among financial institutions in an efficient way, and protect against short-term risks. Markets are important for figuring out how much credit someone has and for making big payments when a deal is done.
How are Money Market Rates Determined?
One can calculate the money market yield by dividing the interest for the holding period by the number of days until maturity, and then multiplying by 360 days in a bank year. Alternatively, the yield from a bank discount can also be used to calculate the money market yield.
Conclusion
Read more about sources of black money to learn more about it. The part of the financial market that deals with loans with very short terms is called the “money market.” But the capital market is a part of the financial market that makes it easy to trade equity and debt securities over the long term. This article discusses in detail about types of money market.