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FIN255 Foundations Of Financial Institutions And Markets

Foundations Of Financial Institutions And MarketsTU Board 2076

Define money market.

1

Answer

· Based on the official syllabus and past papers
Updated
≤ 1 yearMoney Market> 1 yearCapital Market
Money Market vs. Capital Market (by Instrument Maturity)

The money market is a segment of the financial market where short-term funds (typically with maturity of one year or less) are borrowed and lent. It facilitates the flow of liquidity between surplus and deficit units by trading highly liquid, low-risk financial instruments such as:

  • Treasury bills (T-bills)
  • Commercial paper (CP)
  • Certificate of deposit (CD)
  • Repurchase agreements (Repo)
  • Banker’s acceptance (BA)
  • Interbank loans

Key features:

  • Short-term financing (≤ 1 year)
  • Low-risk instruments (government-backed or high-credit-rated)
  • High liquidity (easily convertible to cash)
  • Interest rate-sensitive (rates like repo rate, call money rate)

It plays a crucial role in monetary policy transmission, liquidity management, and interest rate determination in an economy.

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