Money-market
trading process
carried out by a clearing house.
money markets and monetary policy
central bank interest rates
players in the money market
money-market funds individual sweep account institutional investors
money market funds
money-market funds reduce investors' search costs. This is because money-market funds do not need to maintain branch offices, small accounts, and diverse customers' demands like banks. Money-market funds also reduces investors' risk by pooling money-market securities and diversifying, as well as being required by laws to invest only in cash equivalents (securities whose safety and liquidity make them almost as good as cash).
How does money market facilitate the development of a market for longer-term securities?
the interest rate for extremely short-term use of money serve as a benchmark for longer-term financial instruments. If the money markets are active, or "liquid", borrowers and investors always have the option of engaging in a series of short-term transactions rather than in longer-term transactions, and this usually holds down longer-term rates. In the absence of active money markets to set short-term rates, issuers and investors may have less confidence that longer-term rates are reasonable and greater concern about being able to sell their securities should they choose.
money market
network of corporations, financial institutions, investors and government that deal with the flow of short-term capital
individual sweep accounts
people with large amounts of assets often invest in money-market instruments through sweep accounts. Sweep accounts are multipurpose accounts at banks or brokerage firms, with the assets used for paying current bills, investing in shares and buying mutual funds. Any uncommitted cash is automatically "swept" into money-market funds or overnight investments at the end of each day, in order to earn the highest possible return.
watching short-term interest rates
spreads overnight rates the prime rates UK mortgage rates
credit ratings and the money market
tier importance
how is money-market similar to bond market?
both involve extending credits without taking any ownership or control over management of the borrowing entity.
types of instruments
commercial paper bankers' acceptances Treasury bills government agency notes local government notes interbank loans time deposits (certificates of deposit/CDs) international agency paper repos
how does money-market differ from bond market?
Bond is typically used to finance investment. Money-market instruments are usually used to solve cash management issues and financing portfolios of financial assets
institutional investors
all sizeable banks maintain trading department actively speculating in short-term securities. Investment trusts normally keep a small portion of their assets in money-market instruments to meet investors' requests to redeem shares in the trust without having to dispose of long-term holdings. Pension
function of money market
allow firms and government to borrow at lower cost; reduce risks perceived by investors; buying and selling debt instruments maturing in one year or less.
what caused the money market to expand in the US
deregulation -> disintermediation The Monetary Control Act of 1980 allowed interest rates to be determined by market forces rather than regulators. This led to competition that enabled investors to invest in short-term deals (lower perceived risk) with higher interest rates. The money markets bring these borrowers and investors together without the costly intermediation of banks. It's thus possible for borrowers to meet short-run liquidity needs and deal with irregular cash flows without more costly means of raising money.
