The Money Markets
Money Markets Defined
The term “money market” is a misnomer. Money (currency) is not actually traded in the money
markets. The securities in the money market are short term with high liquidity; therefore, they are
close to being money. Money market securities have three basic characteristics in common:
- Usually sold in large denominations ($1,000,000 or more)
- Low default risk
- Mature in one year or less from their issue date.
Why do we need Money Markets?
In an unregulated world, the money markets would not be needed as banks would be able to handle
the needs for short-term, such as short-term loans and accepting short-term deposits. Banks also
have an efficiency advantage in gathering information, which would eliminate the need for money
markets. However, banks are heavily regulated which creates a distinct cost advantage for money
markets over banks in providing short-term funds.
Purpose of Money Markets
The money market provides a place for a firm or financial institution to ‘warehouse’ surplus funds
for short periods of time. Also, the money markets provide a low-cost source of temporary funds to
firms, the government and intermediaries that need a short-term infusion of funds. Corporations
and U.S. government use these markets because the timing of cash inflows and outflows are not well
synchronized. For example, government tax revenues usually only come at certain times of the year,
but expenses are incurred all year long. The government can borrow short-term funds that it will pay
back when it receives tax revenues. Corporations also face problems caused by revenues and
expenses occurring at different times of the year. The money markets provide a way to solve these
cash-timing problems.
Who Participates in the Money Markets?
This table shows the money market participants:
Money Markets Defined
The term “money market” is a misnomer. Money (currency) is not actually traded in the money
markets. The securities in the money market are short term with high liquidity; therefore, they are
close to being money. Money market securities have three basic characteristics in common:
- Usually sold in large denominations ($1,000,000 or more)
- Low default risk
- Mature in one year or less from their issue date.
Why do we need Money Markets?
In an unregulated world, the money markets would not be needed as banks would be able to handle
the needs for short-term, such as short-term loans and accepting short-term deposits. Banks also
have an efficiency advantage in gathering information, which would eliminate the need for money
markets. However, banks are heavily regulated which creates a distinct cost advantage for money
markets over banks in providing short-term funds.
Purpose of Money Markets
The money market provides a place for a firm or financial institution to ‘warehouse’ surplus funds
for short periods of time. Also, the money markets provide a low-cost source of temporary funds to
firms, the government and intermediaries that need a short-term infusion of funds. Corporations
and U.S. government use these markets because the timing of cash inflows and outflows are not well
synchronized. For example, government tax revenues usually only come at certain times of the year,
but expenses are incurred all year long. The government can borrow short-term funds that it will pay
back when it receives tax revenues. Corporations also face problems caused by revenues and
expenses occurring at different times of the year. The money markets provide a way to solve these
cash-timing problems.
Who Participates in the Money Markets?
This table shows the money market participants:
