Money and Banking

Meeran Arshad

What is Money..??
Any object that is portable, divisible, durable and stable and that serves as a medium of exchange, a store of value and a unit of account

Characteristics of Money
Durable Portable

Divisible
Stability

Durable:

must be able to withstand wear and tear in exchange.

Portable:
carry.

money must be easy to

Divisible:

money must be able to be divided into smaller parts so change can be given.

Stable:

money must be stable in value; cant change rapidly.

Functions of Money
Medium Unite Store

of exchange

of Account of Value

Medium Of Exchange
A seller will accept something in exchange for goods or services.

Unite of Account
Use of money for comparing the values of goods and services in relation to one another.

Store of Value
Use of money to store purchasing power for later use.

Money Supply
The Spendable Money Supply: M-1
M-1

counts only the most liquid, or spendable, forms of money. It includes:

Currency
Checks Demand Deposits

M-1 Plus the Convertible Money Supply: M-2

M-2

includes everything in M-1 plus items that cannot be spent directly but are easily converted to spendable forms. Major components of M-2:
M-1 Time

Deposits Money Market Mutual Funds Savings Deposits

Money Market (Definition)

A

financial market where short term securities (maturing within 1 year) and which are highly liquid are traded. markets provide an ideal means to invest idle funds and to reduce opportunity costs

Money

Understanding Money Markets

The

term money market is misleading, because actual trading of money does not take place. is no physical market as such, instead purchases and sales are made over the phone and electronically. the volume/amount of these transactions are so large that individuals are usually not able to participate.

There

Since

 Apart

from banks there are brokers and dealers (commonly known as primary dealers) who act as intermediaries to bring customers together. is also a very active Secondary market, i.e. after the securities have been sold initially (in the primary market), its relatively easier to find buyers later on.

There

Money Market Instruments

Treasury

Bills Federal Funds Repurchase Agreements Commercial Paper Bankers Acceptance Certificate of Deposits (CODs) Eurodollars

Characteristics of Money Market instruments

They have a low default risk

They mature within 1 year from their date of issue

Are usually sold in large denominations

Why do Banks need Money Markets..?

The

banking industry is subject to more regulations and governmental costs than the money markets. Advantage

Cost

Cost Advantage
Bank

deposits are subject to certain reserve requirements (e.g. CRR, SLR). This reduces the available amount that can be lent out, while depositor has to be paid returns on the whole deposit.

Purpose of Money Markets

A

well developed secondary market for money market instruments makes money market an ideal place to utilize spare funds for short period of time money market instruments act cost source of Short Term

Furthermore,

as a low requirements

 Most

investors who are placing their funds in the money market are not looking for a high yield (return) but as short term placement that is better than holding cash or depositing in a bank

They

may think that this may not be a good time to invest in stocks or are refraining from investing in bonds due to an anticipated increase in interest rates

 Investment

managers hold some portion of their funds in money markets, thus enabling them to liquidate and quickly take advantage of quality investment opportunities also hold money market instruments to meet some unexpected cash outflow and to bridge the timing difference between receipts and payments

FIs

Participants of Money Markets

Government/Central

Bank

Commercial
Businesses Investment

Banks

and Securities Firms (Insurance, Pension Funds etc) Individuals

Thank You.. :)