INTRODUCTION

Money market is where financial instruments with high liquidity and very short maturities are traded.
Therefore money market is a market segment where financial institutions and governments manage
their short term cash needs.

Money markets are used by participants as a means of borrowing and lending in the short term with
maturities that range from overnight to just a year.

Among the common money market instruments are euro dollar deposits, negotiable certificate of
deposits, banker’s acceptances, treasury bills, commercial paper, municipal notes, federal funds and
repurchase agreements (repos).

Money market transactions are wholesale meaning that they are for large denominations and take place
between financial institutions and companies rather than individuals. Money market funds offer
individuals opportunities to invest small amounts in these assets.(Alex and Obed)

CHARACTERISTICS OF MONEY MARKETS

Some of the special characteristics of the money market are as follows;

The money market is a fixed income market which means it deals in financial instruments which pay a
fixed rate on the investment. This is the opposite of the capital markets where there is no fixed return on
investments.

Investing in the money markets is considered to be very safe as the returns are fixed in nature.Since
investing in this market is in this market is safe it also means that the returns are lower. This is on
account of the risk-return trade off. Higher the risk, higher is the return and vice versa. On the other
hand, the capital markets which do not have a fixed return on investments are volatile in nature and
riskier as compared to the money markets. However, capital markets present the opportunity to earn a
high rate of return.

Money market instruments are highly liquid in nature. This is the reason why financial institutions and
governments approach the market for short term needs rather than investing needs of various financial
institutions.

Money market instruments are short-term in nature. The maturity of these instruments is generally less
than a year. The maturity of these securities can be as one day also.

This money market is dominated by wholesale transactions and retail investors like you and me will not
have direct access to this market. The main reason for this is the ticket size or the value of transactions.
Money market transactions are high in value as opposed to capital market transactions. Individual
investors will not have enough funds to cope up with this market.(Racheal and Franklyn)

MONEY MARKET INSTRUMENTS AND THEIR CHARACTERISTICS

Treasury bills(Blessing)

They are issued by the central bank of the country on behalf of its Government. Whenever Government
is in need of funds, it raises money in the market through treasury Bills. This is considered as one of the
safest investment as it is backed by the government itself. The tenure of these bills is generally from 14
days to 364 days.

Treasury bills are used as a source of controlling liquidity in the market by the government. If the
government wants to curb theliquidity in the market, it will issue treasury bills which will be bought by
various financial institutions. By doing this, invested funds will be back with the government and will
reduce the money supply in the market. On the other hand, if the government wants to pump in money
in the financial system, it will buy back its treasury bills by means of which it can inject money into the
money.

Characteristics of treasury bills

They are short term notes issued by the government.

They come in 3 different lengths to maturity that is 90,180 and 360 days therefore they are issued not
more than a year.

The two shorter types are auctioned on a weekly basis while the annual type are auctioned on a monthly
basis.

Purchasers of treasury bills at the auction can enter a competitive bill or non competitive bill.

Treasury bills for non competitive bids issued at the average price of all successful competitive bid.

They are risk free because they are issued by the government of Uganda.

High degree of liquidity that is they can be easily converted into cash. This is because the money market
is highly organized and efficient.

COMMERCIAL PAPERS(Fortunate)

This is a short term unsecured debt issued by corporations to raise short term financing for capital
requirement.

They are generally used by various companies to fund their short-term working capital needs such as
payment of accounts receivables and buying of inventory. These are unsecured in nature which makes
that there is an underlying asset of the company attached to it.

In case of liquidation of the company, they will not have priority against other secured financial money
market instruments. Generally, banks and mutual funds are the investors of these commercial papers.

Characteristics of commercial paper

They are short term in nature with the average maturity being two odd months .

Just like the Treasury bills, these are also issued at a discount and therefore, interest is not paid separate.

The rate of interest is determined by the forces of demand and supply of liquid funds in the market.

Commercial ,paper has maturities of up to 270 days.

It is typically issued even by large credit worthy corporations with unsecured lines of a bank credit and
therefore carries low default risk.
CERTIFICATE OF DEPOSITS(Medrine)

This is a time deposit with the bank and only a bank can issue a CD. Like all other Time Deposits, even
CDs have a fixed maturity date and cannot be liquidated or withdrawn prior to the date. This tends to be
one of the major disadvantages of certificate of Deposit as it restricts its flexibility.

This disadvantage can be neglected by the fact that CD is a transferable security which means you can
easily sell it to someone else. This is the reason why CDs are also traded on the secondary market at a
brokerage.

Characteristics of Certificate of Deposits

CDs are certificates issued by federally chartered bank against funds with unspecified returns for a
definite period of time.

They are one of the several types of interest-bearing "time deposits" offered by banks.

The certificate constitutes the bank's agreement to repay the loan.

The maturity rates on CDs range from 30 days to 6 months or longer and the amount of face value can
vary greatly as well.

REPOS AND REVERSES(Dickson)

Repo is a short repurchase agreement. This is an agreement involving the purchase of securities by one
party with a promise to sell them back at a given date between 1 to 14 days.

There is something also known as a reserve repo. This is just the opposite of Repos. Here, a bank having
excess funds will approach another bank. Instead of selling the securities, the bank will look for buying
securities from another bank with the agreement of selling it at a later date.

Characteristics of Repo

They are very short-term in nature.

They can be for just an overnight purposes or up to a period of one month depending on the agreement
between the banks.

The minimum amount that can be borrowed using a repurchase agreement is $100,000 with increments
of $5,000 above the minimum permitted.

The repurchase price of the securities is predetermined in the agreement that is between the buyer and
the lender.

BANKERS ACCEPTANCE(Gilbert)

This is an instrument produced by a non financial corporation but in the name of a bank. It is a document
indicating that such a bank shall pay the face amount of the instrument at some future time.

The bank accepts this instrument, in effect acting as a guarantor. To be sure the bank does so because it
considers the writer to be credit-worthy.
Bankers acceptance are generally used to finance foreign trade although they raise when companies
purchase goods on credit to finance inventory.

Their maturity acceptance ranges from one to six months.

SHORT TERM TAX EXEMPTS(Happy)

These instruments are short term notes issued by the state and municipal government. Although they
carry more risk than Treasury bills and tend to be less negotiable.

Characteristics of Short term tax exempts

They are riskier than Treasury bills

Yield better returns than Treasury Bills

They are less negotiable.

They are exempted from tax.

PARTICIPANTS IN THE MONEY MARKET( Joyce and Jillian)

Government

The government raises funds by selling short term securities like Treasury Bills to the public. These
instruments are also used to manage the government's cash flow.

Corporations

Non financial and non bank financial businesses raise funds in the money market primarily by issuing
commercial paper. Businesses also raise funds through banker's acceptance. Commercial papers are
issued when corporations want to raise short term capital without borrowing from banks.

Government sponsored enterprises

These are a group of privately owned financial intermediaries with ties to the government. These
agencies borrow funds in the financial markets and channel these funds primarily to farming and
housing sectors of the economy.

Banks

Banks issue certificate of deposits which are unsecured negotiable instruments usually issued at a
discount to face value . They are issued in periods when bank deposit volumes are low and banks
perceive that they can get funds at low interest rates. Their period of issue ranges from 7 days to 1 year.

Insurance companies

These have to maintain certain funds which have to be invested appropriately. They participate in the
money market as lenders.

Life insurance companies

They also invest their funds in the money markets. They have a certain predetermined threshold as to
how much they can invest in each category of instruments.
Mutual funds

These are investment programmes funded by shareholders for the purpose of investing in securities.

Non banking finance companies

These invest their funds in debt instruments to fulfill certain regulatory mandates.

Provident fund

This is an investment fund contributed to by employees, employers and sometimes the state out of
which a certain amount is provided to each employee on retirement. They usually have short term and
long term surplus funds. They invest their funds in debt instruments according to their internal
guidelines as to how much they can invest in each instruments category.

FUNCTIONS OF THE MONEY MARKET(Blair and Gwendoline)

The money market contributes to the economic stability and development of the country by providing
short term liquidity to the government, commercial banks and other large organizations. Investors with
excess money that they dont need can invest it in the money market and earn interest.

The following are the functions of money market

Financing trade; The money market provides financing to the local and international traders who are in
urgent need of short term funds. It provides a facility to discount bills of exchange and this provides
immediate financing to pay for goods and services. International traders benefit the acceptance houses
and discount markets. The money market also makes available for other units of the economy such as
agriculture and small scale industries.

Central bank policies; The central bank is responsible for guiding the monetary policies of a country and
taking measures to ensure a healthy financial system. Through the money market, the central bank can
perform its policies making the function efficient forexample the short term interest rate in the money
market represent the prevailing conditions in the banking industry and can guide the central bank in
developing an appropriate interest rate policy.

Growth of industries; The money market provides an easy avenue where businesses can obtain short
term loans to finance their working capital needs. Due to large volumes of transactions, businesses may
experience cash shortages related to buying raw materials, paying employees or meeting short term
expenses. Through the commercial paper and finance bills, they can easily borrow money on short term
basis.

Although the money market doesnt provide long term loans, it influences the capital market and can
also help a business to obtain long term financing. The capital market benchmarks its interest rates
based on the prevailing interest rate in the money market.

Commercial banks self sufficiency; The money market provides commercial banks with a ready market
where they can invest their excess reserves and earn interest while maintaining liquidity. Short term
instruments such as bills of exchange can easily be converted into cash to support customer withdraws.
Also when faced with liquidity problems, they can borrow from the market on short term basis as an
alternative to borrowing from the central bank. The advantage of this is that the money market may
charge lower interest rates than central bank typically does.

CHALLENGES FACED IN THE MONEY MARKET(Sebastian and Justus)