Definition: Banks and financial institutions use the money market to borrow and lend large sums of money. The term “money market” doesn’t imply that there is a formal market. Instead, it refers to a group of brokers, dealers, banks, and other market participants who transact with each other on a regular basis.
What does Money Market mean?
The money market is restricted to financial instruments that have a short maturity period. This period could range from a few hours to 12 months. The most common forms of money market instruments are commercial paper, certificates of deposit, Treasury bills, banker’s acceptances, and repurchase agreements. One of the key features of the money market is that it is highly liquid. Banks and other participants know that they can access funds when they need and liquidate their holdings whenever they require money. Another important feature of this market is that it is very safe. All the issuers have high credit ratings. The instruments traded on the money market include Treasury Bills, which are issued by the U.S. government and Commercial Paper, which is issued by banks and corporations.
Example of Money Market
Here are brief details about some of the financial instruments that are traded in the money market: Treasury Bills – these are short-term debt instruments issued by the U.S. government. They have a maturity of one year or less. These don’t pay interest. Instead, they are sold at a discount to their face value. Certificate of Deposit – these are issued by commercial banks and carry a fixed interest rate. Commercial Paper – this is a short-term loan raised by a corporation. Typically, commercial paper is issued at a discount. Bankers’ Acceptance – a bankers’ acceptance is a short-term fixed-rate loan that is guaranteed by a bank.
The money market helps to stabilize the financial system by providing it with liquidity. Governments, banks, and other large financial institutions use it.