Money market is the trading activities in loans and financial instruments between financial institutions including banks with short-term maturities in lending and borrowing. It is normally of high liquidity instruments and duration is from a day to just under a year.
A number of Participants assumes that traded instruments including loans are highly liquid and secured however there this is not necessary correct as there are inherent risk associated with issuer and default risk.
Example of money market securities include:
- Certificates of deposit (CDs) - issued by a bank against deposited funds that earn a specified return for a definite period of time,
- Bankers acceptances – written demand for the bank to pay a given sum at a future date with the bank agreeing to demand by writing ‘accepted’ and this IOU becomes a negotiable draft security,
- Treasury bills (T-bills) – short-term notes issued by governments with 90, 180, and 360 days maturity and these are auctioned primary auctions or indirectly through the secondary market.
- Commercial paper – unsecured short-term promissory notes issued by corporations with no intermediaries,
- Repurchase agreements – securities that are purchased with agreement that they will be sold back at a future date for a higher price.
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