The money market is an exchange market where participants can lend and borrow high-quality,

short-term debt securities with maturities of one year or less.

It enables governments, banks, and other large institutions to sell short-term securities to meet
their short-term cash flow requirements.

In addition, the money market allows individual investors to invest a small amount of money in a
low-risk setting.

Functions of Money Market

The money market contributes to a nation's economic stability and growth by providing
governments, commercial banks, and other large organizations with short-term liquidity.

1. Financing Trade

Local and international merchants urgently need short-term capital can obtain financing on the
money market. It offers the ability to discount bills of exchange, thereby providing immediate
funding for the payment of goods and services.

2. Central Banking Policies

The central bank directs a country's monetary policy and ensures a healthy financial system. The
central bank can efficiently carry out its policy-making through the money market.

For example, the short-term interest rates in the money market reflect the prevalent conditions in
the banking industry, guiding the central bank in formulating a suitable interest rate policy. In
addition, integrated money markets assist the central bank in influencing sub-markets and carrying
out its monetary policy objectives.

3. Growth of Industries

The money market facilitates businesses' access to short-term loans for financing their working
capital requirements. Due to the high volume of transactions, companies may experience cash flow
problems when purchasing raw materials, paying employees, or meeting other immediate
expenses.

Commercial paper and finance bills make it simple for businesses to obtain short-term loans.
Although money markets do not offer long-term loans, they impact the capital market and aid
enterprises in obtaining long-term financing.
4. Commercial Banks Self Sufficiency

The money market provides a ready market for commercial banks to invest their excess reserves
and earn interest while maintaining liquidity. Bills of exchange and other short-term investments
can be easily converted to cash to support customer withdrawals.

In addition, when faced with liquidity issues, the business can obtain short-term loans from the
money market as an alternative to borrowing from the central bank. This has the advantage that
the money market may charge lower interest rates on short-term loans than the central bank.

Types of Instruments Traded in the Money Market

1. Treasury bills

Treasury bills are considered the safest instruments because they are issued with a full
government guarantee. Regularly issued by the U.S. Treasury to refinance maturing treasury bills
and finance the federal government's deficits. Their maturities are one, three, six, and twelve
months.

Treasury bills are sold at a discount to their face value. The difference between the discounted
purchase price and face value represents the interest rate. Banks, broker-dealers, individual
investors, pension funds, insurance companies, and other large institutions purchase these
securities.

2. Deposit Certificate (CD)

A commercial bank issues certificates of deposit (CDs), which can be purchased through
brokerage firms. The maturity date ranges from three months to five years, and any denomination
can be issued.

Most certificates of deposit have a fixed maturity date and interest rate, and early withdrawal is
subject to a penalty. Certificates of deposit, like bank checking accounts, are insured by the
Federal Deposit Insurance Corporation (FDIC).

3. Commercial Paper

Commercial paper is an unsecured loan issued by large institutions or corporations to finance

short-term cash flow requirements, including inventory and accounts payable.

Commercial paper is considered a safe investment because it can only be issued by institutions
with a high credit score.
4. Acceptance by a Bank

A banker's acceptance refers to a financial instrument that represents a promised future payment
from a bank. It states the name of the entity to which the funds need to be transferred, along with
the amount and date of payment.

The banker's acceptance is a form of payment that is guaranteed by a bank rather than an
individual account holder. The bank guarantees payment at a later time. BAs are most frequently
used in international trade to finalize transactions with relatively little risk to either party.

5. Repurchase Agreement

The repo, or repurchase agreement (repo), is part of the overnight lending money market. Treasury
bills or other government securities are sold to another party with an agreement to repurchase
them at a set price on a set date.

The Risk Associated With Money Market.

Inflation Risk: This risk occurs when a money market fund's cash flows decrease due to inflation.
In other words, inflation can reduce the performance of money market funds.

Credit Risk: Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan
or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the
owed principal and interest, which results in an interruption of cash flows and increased costs for
collection

Interest Rate Risk: This is the risk associated with interest rate fluctuations. Interest rates and
yields have an inverse relationship, the interest rate rises, the yields may fall and vice versa.