Instruments Traded in the Money Market

What is Money Market?

The money market is a market where money market instruments are sold and bought. It is a market where short-term securities are traded. But it is not exact, precise and physical market, rather it is just administrative and commercial arrangements or framework for the buying and selling of short-term securities. It is a financial market made up institutions which provide short-term finance for investment. The loans provided in the money market for periods from a few months to two years. It is of great importance to government and other institutions in need of short-term funds and for suppliers of short-term funds who because of the nature of their liabilities need part of their assets in relatively liquid form.

Considering the liquidity of the financial instruments traded in this market, and it implications for the volume of credit in the economy, monetary authorities exert much influence on activities in the market as a means of meeting government financial requirements and to regulate money supply.

Participants in the Money Market

The principal participants in the money market are:

1. Commercial Banks: Commercial banks are the major participants in the money market because most of the traded instruments in the money market qualify as liquid assets for purposes of meeting liquidity requirements. Securities provide commercial banks with the outlet for investing part of their cash assets in income-generating assets.

2. Central Bank: The central bank has statutory regulatory mandate over the money market. That means, central bank is the regulator of the market.

3. Governments: Governments at all levels raise short-term funds in the money market to carry out developmental projects.

4. Statutory Corporations

5. Merchant banks

6. Hire-purchase companies

7. Other financial institutions

What are the Instruments Traded in the Money Market?

Money Market Instruments

The following are the instruments traded in the money market

1. Treasury bills

2. Treasury certificates

3. Bankers' unit funds

4. Eligible development stocks

5. Stabilization securities

6. Call money

7. Certificates of deposit (CDs)

8. Banker's acceptances

9. Commercial paper

Treasury Bills

These are financial instruments (documents) evidencing Federal Government’s indebtedness to some persons or instruments such as banks. They are issued regularly by the central bank on behalf of the government. The Treasury Bill Act gives the Federal Government power to borrow money by issuing Treasury Bills through the Central Bank or Federal Reserve Bank, as the case may be. Treasury Bills usually have about 91 days maturity period.

Treasury Certificates

Treasury Certificates are medium-term government securities which mature after a period of one to two years. They are intended to bridge the gap between the Treasury Bill and long-term Government Securities such as the development stocks. Treasury Certificates are discounted at the Central Bank.

Bankers’ Unit Funds

This is the fund operated by the Central Bank to provide avenue for banks and other financial institutions to invest part of their funds in a money market asset linked to Federal Government stocks.

Eligible Development Stocks

These are Federal Government stocks issued by the Central Bank. The maturity structure of eligible development stocks is less than 3 years, and they count as part of banks' liquid assets in calculating their statutory liquid ratio.

Stabilization Securities

Stabilization securities are special securities which the Central Bank is empowered to sell by allocation of banks and other financial institutions at the rate determined by it so as to control the liquidity position of the commercial banks and other financial institutions. Each institution is required by law to take up any amount allocated to it, otherwise the Central Bank can impose stiff sanctions on it. This accounts for their effectiveness as an instrument of monetary policy.

Call Money

This is an arrangement in which the participating institutions, usually banks and other financial institutions, invest moneys surplus to their immediate requirements on overnight basis with other banks or financial institutions with interest. Such investments are withdrawable on demand or at short notice.

Certificates of Deposit (CDs)

These are interbank instruments with maturity periods ranging from 3-36 months with which banks lend to, and borrow from one another. There are two types of Certificates of Deposit: negotiable or transferable, and nonnegotiable. 

Banker's Acceptances

A banker’s acceptance is a trade bill that has been accepted by a bank. Banker’s acceptances are associated with trade, particularly foreign trade

Commercial Paper

Commercial paper means unsecured, short-term, negotiable, promissory note or IOU of a large and credit worthy company or financial house issued to raise funds on short-term basis. The lenders look at the credit worthiness of the issuer as their security. CPs are sold in the money market to large investors such as corporate organizations, banks, insurance companies, pension funds administrators, etc seeking a short-term investment opportunities for temporary excess funds.

Functions of Money Market

1 The money market offers good opportunity for the Federal Government to mobile domestic resources for development purposes. In other words, it is an important source of short-term funds/ borrowing for the government

2 It acts as a machinery for transmitting the effects of the Central Bank’s minimum rediscount rate into the economy.

3 Where the money market is well integrated, it helps to speed the effects of monetary policy in the economy.

4 It enables the commercial banks to invest part of their cash in income-generating assets without jeopardizing their liquidity requirements.

5 It provides business organizations the opportunity to raise short-term capital for their businesses

6 Money market encourages the general mobilization of short-term funds to ensure that no loose funds lie idle.

Demerits of Money Market

Despite the benefits of money market, it still has some disadvantages, which are as follows:

Low Return 

Although money market is less risky, it however has low returns compared to other investments.

Limited Investment Options

There are no much investment options as few instruments are being traded in the market.

Susceptibility to Economic Fluctuations and Interest Rate Changes

The money market is prone to economic instabilities and changes in interest rates.

Less Liquid for Individual Investors

Instruments traded in the money market are more available to corporate investors than individual investors, thereby making it less liquid individual investors compared to other markets.

Ikechukwu Evegbu

Ikechukwu Evegbu is a graduate of Statistics with over 10 years experience as Data Analyst. Worked with Nigeria's Federal Ministry of Agriculture and Rural Development. A prolific business development content writer. He's the Editor, Business Compiler

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