An Introduction to Banking, 2nd Edition

Chapter 4THE MONEY MARKETS

Part of the global debt capital markets, the money markets are a separate market in their own right. Generally, money market securities are defined as debt instruments with an original maturity of less than 1 year.

Money markets exist in every market economy, which is practically every country in the world. They are often the first element of a developing capital market. Money market debt is an important part of global capital markets, and facilitates the smooth running of the banking industry, as well as providing working capital for industrial and commercial corporate institutions. The market provides users with a wide range of opportunities and funding possibilities, and is characterised by the diverse range of products that can be traded within it. Money market instruments allow issuers, including financial organisations and corporates, to raise funds for short‐term periods at relatively low interest rates. These issuers include sovereign governments, who issue Treasury bills (T‐bills), corporates issuing commercial paper (CP), and banks issuing bills and certificates of deposit (CDs). At the same time, investors are attracted to the market because the instruments are highly liquid and carry relatively low credit risk. The Treasury bill market in any country is that country's lowest risk instrument, and consequently carries the lowest yield of any debt instrument. Indeed, the first market that develops in any country is usually the Treasury bill ...