Money and capital Market

Learning objectives:
After study this lesson students are able to
understand the following:
• Introduction about money market,
• essentials of money market,
• functions and players of money market,
• institutions involved in money market.

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 Money and capital Market
 Introduction about money market :
When we are the need of anything we go to the market and
purchase it. When a retailer goes out of stock, he goes to
the whole sale market and purchases desired goods.
But just think what happens when commercial bank or the
financial institution feels shortage of cash? The answer is
that it will go to money market and will purchase the
money from here. Of course the central bank is always
there to help the commercial banks. But the central bank is
lender of last resort.

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 Money and capital Market
Defining money market:
Money market is such a market in which short term monetary assets
also called near money are purchased and sold. The dealings are
mainly done by the central bank and the commercial banks besides
some non banking financial institution. In case these institutions
face any short term liquidity problems, the can sell their monetary
assets in the money market to increase their liquidity.
According to G. Crowth
“The money market is the collective name given to the various firms
and institutions that deals in various grades of near money.”
According to S.M Goldfeild and L.V. Chandler
“In money market short term debt obligations are traded”
.

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 Money and capital Market
Money Market instruments:
The short term debts and securities sold on the money
markets which are known as money market instruments
have maturities ranging from one day to one year and
are extremely liquid.
Treasury bills, Promissory note, bill of exchange,
certificates of deposit, commercial paper, bankers'
acceptances, and repurchase agreements are examples
of instruments.
The suppliers of funds for money market instruments are
institutions and individuals with a preference for the
highest liquidity and the lowest risk.
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 Money and capital Market
Money Market is unsystematic market and so the
trading is done off exchange, i.e. Over the Counter
between two parties by using phones, email, fax,
online, etc. It plays an important role in the
circulation of short term funds in the economy. It
helps the industries to fulfill their working Capital
requirement.

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 Money and capital Market
1.T Bills:
Treasury bills, or T-bills, are short-term debt instruments
issued by the U.S Treasury. T-bills are issued for a term of
one year of less. T-bills are considered the world’s safest
debt as they are backed by the full Faith and credit of the
United States government.
The T-bill rate is a key barometer of short-term interest rates.
Treasury bills are sold with maturities of four, thirteen,
twenty-six and fifty-two weeks. They do not pay interest,
but rather are sold a discount to their face value. The full-
face value is paid at maturity, and the difference between
the discounted purchase price and the full-face value
equates to the interest rate.

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 Money and capital Market
2.Promissory notes:
Promissory notes are bill that contains a promise to pay.
Usually promissory notes are used to take credit of 90 days
with 3 days of grace. Just like a bill of exchange, the
promissory note can also be discounted at bank.

3.Bill of exchange:
Bill of exchange is similar to a promissory note. It is also a
negotiable instrument. It can be used to take credit for one,
two or three months or even longer.

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 Money and capital Market
4.The Certificate of Deposit
A Certificate of Deposit (CD) is a time deposit with a bank. CDs are
generally issued by commercial banks but they can be bought through
brokerages. They bear a specific maturity date (from three months to five
years), a specified interest rate, and can be issued in any denomination,
much like bonds. Like all time deposits, the funds may not be withdrawn
on demand like those in a checking account.

5.Commercial paper:
is an unsecured and discounted promissory note issued to finance the
short-term credit needs of large institutional buyers. Banks, corporations
and foreign governments commonly use this type of funding.
Exempt from SEC registration, commercial paper generally matures in a
short period of time and usually does not exist for more than 270 days.
The average maturity of commercial paper is between 30 and 35 days.

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6.Money Market Mutual Fund
A money market fund (also called a money market mutual
fund) is an open-ended mutual fund that invests in short-
term debt securities such as US Treasury
bills and commercial paper. Money market funds are
widely regarded as being as safe as bank deposits yet
providing a higher yield. Regulated in the United States
under the Investment Company Act of 1940 money
market funds are important providers of liquidity to
financial intermediaries.
Securities in which money markets may invest
include commercial paper, repurchase agreements, short-
term bonds and other money funds. Money market
securities must be highly liquid and of the highest quality.
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 Money and capital Market
Financial institutes of Money Market
Central Banks
Commercial Banks
NBFI
Discount houses
Acceptance houses

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 Money and capital Market
Functions of Money Market:
1. To maintain monetary balance between demand and supply of
short term monetary transactions.
2. Money market plays a very important role of making funds
available to many units or entities engaged in diversified field of
activities like agriculture, industry, trade, commerce or any other
business.
3. By providing funds to developing sectors it helps in growth of
economy .
4. Another important feature that money market provides is
discounting of bills of exchange which facilitates growth of trade.
5. No doubt it provides a base for the implementation of monetary
policy.
6. The money market provides opportunity for short term
investments, which provide for short term savings, which in turn
help formation of capital base.
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Components of money market
1.Call money market
In call money market, short term loans (7 days) are advanced.
It is characterized by the fact that the money advance can
be called back by the lender. Usually loans are advanced
without keeping any security in call money market.
2.Treasury bill market
In treasury bill market negotiable and non interest bearing
short term securities are traded. The sale are made by
bidding at a discount. However they are repaid at par.
Treasury bills can also be traded at stock exchange.

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 Money and capital Market
Money market in Pakistan.
Pakistan is developing country. The money market is still
under developed. The participant of money market in
Pakistan includes, commercial banks, saving banks,
Government and financial institutions. In Pakistan money
market, the acceptance houses and discount houses are
not efficient. However, sales/ purchase of treasury bills is
often made by the central bank as monetary tools.

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