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What is Money Market its Function and Types

What is Money Market

The money market defines it as a set of wholesale markets where short-term financial assets are exchanged. Its participants are large institutions and specialized financial intermediaries (eg banks).

The connection established between its members is purely financial, where they go to the market to exchange financial assets short – term (up to 18 months) with a low level of risk, derived from the high creditworthiness of their issuers and high liquidity.

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In addition, the securities listed in this market are also characterized by:

  • Use simple capitalization.
  • They do not consider reinvestment of coupons.
  • They use base 360 to calculate their operations.

Money Market Functions

  • It is a market of execution of the decisions of the economic agents.
  • The market for financing the public deficit.
  • Market where the Monetary policy 
  • It is a necessary market for the formation of the temporary structure of interest rates (ETTI).

Types of Money Markets

  • Interbank money markets: in this market, financial institutions carry out loan and credit operations through interbank deposits, short-term derivatives (FRAs), short-term interest rate swaps or other financial assets,  generally with a maturity of one day or one week.
  • Business asset market: in this market, the corporate promissory notes stand out,  whose debt instruments are issued by short-term companies and incorporate a payment obligation (whose payment guarantee is themselves). It is, therefore, a form of business financing.
  • Public debt money market: in this market is where the public debt issued by the Treasury in Spain is negotiated. To do this, the Treasury issues a series of annual auctions, with prior notice of the calendar.

In the primary market ( a market where new securities are issued), it is where the company promissory notes are issued, usually at discount and can be issued in two different ways; In series (prior notice to the CNMV) or to measure (depending on the requirements of the plaintiffs). Once issued, these assets can be bought and sold (trading) in the secondary market.

On the other hand, in the secondary market (where the securities already issued are traded, that is, the claimants of the securities buy them from their owners and not the issuer), it may be unorganized or organized. In Spain, there are two organized markets where short-term financial assets can be traded:

  • Association of financial intermediaries (AIAF): has a great importance in the issuance of corporate debt.
  • Fixed Income Market: is the one used in large part by companies to issue promissory notes.

About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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