2.2:
Money Market
The money market is a financial system where debt instruments are traded with a maturity of one year or less.
The instruments mainly include treasury bills, commercial paper, and certificates of deposit, which are offered by the government, big companies, and banks having a maturity ranging from a few days to a year.
Imagine an investor, Jerry. He has one thousand dollars that he does not need right away. Instead of letting it sit idle, he can invest it in the money market instrument issued by Peoples Bank for a brief period of six months at an interest rate of five percent per annum.
When Jerry invests in these money markets, he essentially loans his money to the bank for six months. In return, the bank promises to pay Jerry back his initial investment of one thousand dollars, plus interest of twenty-five dollars.
Since the instruments in the money market are typically issued by reliable entities, the risk of default is relatively low, making them a safe bet for investors.
Overall, the money market helps grow the investor's money by offering a low-risk option and earning a little interest.
2.2 Money Market
Money market instruments are financial vehicles that provide businesses, financial institutions, and governments a means to finance their short-term cash requirements. These instruments typically possess high liquidity and very short maturities and are considered safe investments due to their stable value.
The money market includes treasury bills, commercial paper, certificates of deposit, and repurchase agreements. Investors prefer these instruments for their conservative risk profile, especially in volatile economic conditions. In addition, the money market is a critical component of the global financial system, influencing overall interest rates and liquidity in the economy. Providing a platform for the exchange of short-term debt facilitates a smoother financial system where institutions can efficiently manage their short-term funding needs.
Money market instruments are constantly evolving and adapting to the changing economic landscape. One such example is the introduction of money market funds, which allow investors to participate in the money market without directly purchasing individual instruments.
These funds provide a diversified portfolio of money market investments, making them attractive options for risk-averse investors.