The money market is a market in which its life usually lasts for the short term. Securities which are in form of monetary terms are used by traders and businessmen in the money market. That usually mature within a year are commonly traded in the money market. This paper discusses in general how the money market yields on market securities. And finally, the paper concludes by briefly explaining the importance of securities in encouraging liquidity planning for businesses and individuals.
The money market plays an important role in many financial institutions. It is a place whereby financial institutions provide a “wide range of borrowers” and other investors an “opportunity” to either buy or sell different varieties of short-term securities (Choudhry 67).
A major characteristic of the money market is that it is not physically present, but it utilizes the power of networks that are made up of banks and traders that are connected by telecommunication lines such as telephone, high-speed internet connection, and fax machines.
Money markets comprise “short-term securities “which are known to many as security bonds. Securities are mainly liquid “instruments”. The commonly used “money market instruments” include; treasury bills, dollar deposits, and purchase agreements among other instruments (Choudhry 78). The money market provides a better business opportunity for institutions and individuals who prefers to receive higher liquidity and are vigilant not to anticipate monetary risk.
Money markets are advantageous to businesses because it increases revenues on securities and help to facilitate businesses that have a temporal surplus of cash to plan and invest in securities which takes a shorter term to mature. Moreover, it also provides an affordable alternative for businesses with “temporal cash fall” to sell or borrow money in a short-term period to cover the unexpected deficiency (Choudhry 93). It also serves as a safe depository for keeping short-term funds. Furthermore, the money market is important for small business because of the professionalism it practices in the management of mutual funds that consists of securities lasting for a short term.
Securities that are purchased on money markets have less risks unlike “long term debt”, banks sometimes have been known to fail hence fortunes of companies and businesses altered a bit rapidly. Money markets allow well-established businesses to borrow from their reserves this is because, they see a sense that if they lend money for a day, they do not have much time in evaluating loans and this makes it easy to consider only “blue-chip borrowers” (Choudhry 98).
Money market instruments
A money markets instrument provides an efficient way in which businesses can acquire money because of their security. Treasuries bills, issued by the United States government are “short term notes” they take a different length of time to reach maturity; i.e. can take 360,180 or 90 days (Choudhry 107).
Purchasing of treasury bills is done directly in auctions, the purchaser has a choice of either being subjected to a competitive bid which sometimes is risky because sometimes bills might not be available at reasonable bit price or a purchaser can be subjected to a noncompetitive bid and this kind of bids which is supplied averagely in tandem with the price of “successful competitive” bids (Walmsley 56).
Bankers’ acceptances also contribute significantly to yields in securities that emanate from the money market. Bankers’ acceptance exists when a written order to a bank is done to pay the stated amount of money written on it at a future date. Once it has been accepted by the bank, the bankers’ acceptance security serves as a tool for negotiation and can be sold or bought at a discount which is slightly higher (Walmsley 68). Bankers’ acceptances are mostly used in financing foreign trade and the maturity range from within one to six months.
Commercial paper a form of discount security is whereby a financial or corporations issues a “short term promissory” which is “unsecured”. Acceptance paper is normally issued by large and financially stable corporations. The corporations should have “unused credit lines of a bank” to decrease or lower the risks of default. Commercial paper is issued by either company which is well established directly or through financial institutions (Walmsley 76).
This is unlike other money market instruments where a bank serves as a link between the buyers and sellers. By eliminating the role of intermediaries, companies can be able to borrow at a lower rate than how the bank charges. Banks may be left therefore to serve as agents about the transaction. Moreover, banks would have no role regarding acceptance paper and the repayment of the commercial paper. Certificate of deposit security provides a record that an investor or certificate holder has made a “time deposit” with a bank. Time deposit involves depositing a specified amount of money forgiven fixed period (Walmsley 88).
This method involves some restriction regarding withdrawal of money till the tenure agreed is over. The amount of money deposited has a fixed amount of interest that is earned and is spread over the tenure period. After deposit tenure is complete, the investor can have his or her principal money back, in addition, there is some interest issued based on the agreed rate.
Some government agencies provide federal notes for either short or long-term obligations. This obligation is rarely supported by the government and therefore, they provide much higher yields (Walmsley 135). The risk of defaulting agency security is minimal. Agency security is sold highly but is not as highly marketable as treasury bills.
The use of repurchase agreements as security has tended to yield much more money regarding securities. Repurchase agreements are sometimes called paybacks or repos. They are treasury securities that are purchased from a dealer in agreement that at a future date, they will” be sold back” for a higher price (Walmsley 95). The agreement tends to mature a bit faster and can be cashed in the next 24 hours after the deposit has been made.
Money markets funds
Contribute to stabilizing the money markets by ensuring that a balance exists between securities. They have been designed in a way that guarantees “stability of net valuation” and the ability to give the investors interest on dividends (Walmsley 110). A money fund is a convenient way of diversifying risks at the same time realizing yields within the short term. Money market funds comprise tax exemption funds, treasury funds, and general funds among other kinds of funds. Hence they do yield much revenue (Walmsley 123).
Money markets provide an environment where short-term and long-term monetary benefits can be achieved. securities such as treasury bills, bankers acceptances, and commercial papers give investors and individuals access to short-term liquidity assets this is because securities mature within a short time i.e. within a year. When investors do invest in securities they have a sound money market investing plan.
Choudhry, Moorad. The Bond and Money Markets: Strategy, Trading, Analysis. Amsterdam: Butterworth-Heinemann, 2001.
Walmsley, Julian. The Foreign Exchange and Money Markets Guide. New York: John Wiley and Sons, 2000.