oe, What is a Money Market ? The money market is a segment of the financial market where short-term borrowing and lending of funds take place, involving highly liquid and low-risk instruments with maturities of one year or less. Its purpose is to facilitate the efficient allocation of short-term funds and provide liquidity to participants. Importance of the Money Market in the Overall Financial System: Examples: Relative distribution of various money market instruments : The money market holds significant importance in the overall financial system due to the following reasons: * Liquidity Management: The money market provides a platform for managing short-term liquidity needs, allowing entities to invest surplus funds in highly liquid instruments and easily convert them into cash when required. * Short-Term Financing: It enables borrowers to meet their immediate funding requirements, such as operational expenses, cash flow gaps, or unforeseen financial obligations. + Interest Rate Benchmarking: The money market plays a crucial role in establishing interest rate benchmarks that influence the cost of borrowing for various financial products, including bank loans, corporate bonds, and mortgages. + Risk Mitigation: Participants can invest in money market instruments with relatively low risk. These instruments, backed by the creditworthiness of issuers, offer a safer investment option compared to long-term investments. L.Money market instruments include Treasury bills, certificates of deposit (CDs), commercial paper, and repurchase agreements (repos). 2.A government treasury bill is a common money market instrument that helps the government raise short-term funds to cover budgetary gaps. 3.Commercial paper is a short-term debt instrument issued by corporations to meet their immediate financing needs. 4,Money market mutual funds are investment vehicles that pool funds from individual and institutional investors to invest in money market instruments, providing them with a low-risk and easily accessible investment option. Repurchase Agreaments (Repos) 10% ‘Tresury Bills Certfistes of Deposit (CDs) 30% Hablighting the prevalence of treasury bills and certificates of deposit as the dominant instruments in the market. 1What are securities ? Securities refer to financial instruments that represent ownership or a creditor relationship with an entity. They are commonly issued and traded in financial markets. Securities can be categorized into three main types: equity securities, debt securities, and derivative securities. Types of Equity Securities: Equity securities represent ownership in a company and Secutities : provide shareholders with a claim on the company's assets and earnings. The most common type of equity security is common stock, which entitles the holder to voting rights and a share of the company's profits. Example: ABC Corporation issues common stock to raise capital. Debt Securities: Debt securities represent loans or bonds issued by governments, municipalities, or corporations to raise capital. Investors who purchase debt securities become creditors and are entitled to receive periodic interest payments and the return of the principal amount at maturity. Example: XYZ Municipality issues municipal bonds to fund infrastructure projects. Role of Securities play a crucial role in financial markets by facilitating the transfer of Securities in capital, allocating risk, and enabling investment opportunities. Financial Markets: * Capital Formation: Securities allow companies, governments, and other entities to raise capital for various purposes, such as funding growth, financing projects, or meeting financial obligations. * Investment Opportunities: Securities provide individuals and institutional investors with opportunities to invest their funds and potentially earn returns through dividends, interest payments, or capital appreciation. * Risk Management: Securities, particularly derivative securities, enable investors to manage and hedge against various types of risks, such as price volatility, interest rate fluctuations, or currency exchange rate risks. * Market Liquidity: Securities traded in financial markets enhance market liquidity by providing investors with the ability to buy or sell assets easily. This liquidity promotes efficiency in price discovery and facilitates the flow of capital. 2