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Questions and Answers
What is the primary purpose of the money market?
What is the primary purpose of the money market?
Which of the following entities is NOT typically associated with the money market?
Which of the following entities is NOT typically associated with the money market?
What characteristic of the money market is emphasized?
What characteristic of the money market is emphasized?
Which statement best describes government involvement in the money market?
Which statement best describes government involvement in the money market?
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Who are likely participants in the money market?
Who are likely participants in the money market?
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What is an example of a money market instrument?
What is an example of a money market instrument?
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Which of the following best describes short-term financing?
Which of the following best describes short-term financing?
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What is a common source of short-term financing for businesses?
What is a common source of short-term financing for businesses?
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Why is liquidity management important for companies?
Why is liquidity management important for companies?
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How do interest rates influence the money market?
How do interest rates influence the money market?
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What is a key feature of money market instruments?
What is a key feature of money market instruments?
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Which strategy can companies use to improve liquidity?
Which strategy can companies use to improve liquidity?
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What does short-term financing primarily address?
What does short-term financing primarily address?
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Study Notes
Money Market
- A market for short-term funds, with maturities below 1 year. It deals with "near money" assets.
- Highly developed commercial banking system
- No fixed geographical location; transactions can occur via telephone or internet.
- Central bank presence is crucial for managing banking habits and loans.
- Availability of near money assets – easy access to financial resources throughout the country.
- Perfect mobility of funds; collection of diverse instruments.
- Key players include RBI, DFHI, NBFCS, commercial banks, PSUs, and NRIs.
- Demand and supply of funds shape the market.
Functions of Money Market
- Balances demand and supply of short-term funds.
- Meets borrowing/investment requirements of the government.
- Ensures liquidity and safety of funds.
- Supports economic growth and development.
- Mobilizes funds for short-term investments.
- Lowers interest rates for short-term borrowing.
- Maximizes profits for commercial banks through investment securities.
- Makes commercial banks self-sufficient by providing funds when needed.
- Allows banks to manage risk from interest rate fluctuations.
- Lowers the cost of borrowing short-term funds.
- Provides investment opportunities for savers, with a wide variety of securities.
- Meets government requirements for short-term funds.
Players in Money Market
- RBI (Central Bank)
- DFHI (Discount and Finance House of India)
- NBFCS (Non-Banking Finance companies)
- Commercial Banks
- PSUs (Public Sector Undertakings)
- NRIs (Non-Resident Indians)
Defects of Indian Money Market
- Existence of an unorganized money market; underestimating the role of RBI.
- Lack of integration between different market segments.
- Wide fluctuations in interest rates.
- Underdeveloped bill and discount markets.
- Lack of a well-organized banking system.
- Corrupt practices within the market.
- Instability in demand and supply of funds.
- Insensitivity to international influences.
Instruments of Money Market
- Call money market: Short-term funds exchanged overnight or for 1-14 days. No collateral required; high liquidity.
- Treasury Bills (T-Bills): Short-term instruments issued by RBI on behalf of the government to overcome temporary finance gaps. Negotiable, highly liquid, low transaction cost, and dependable yield.
- Commercial Bills (CBs/Bills of Exchange): Short-term instruments traded by commercial banks for discounting; helps banks manage risk and liquidity.
Commercial Paper (CP)
- Short-term unsecured promissory notes issued by companies with good credit standing.
- Allows diversification of funding options for companies.
- Flexible maturity periods.
Certificate of Deposits (CDs)
- Short-term, negotiable, unsecured instruments issued by commercial banks and financial institutions.
- Represent time deposits with specific maturities and are traded easily.
Term Money
- Money market where funds are traded for 3-6 months.
- Not extensively used in India.
- Banks use this market less - prefer overnight money market for convenience.
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Description
This quiz explores the fundamentals of the money market, where short-term funds are exchanged. It covers key players, functions, and the importance of liquidity in managing economic growth. Test your knowledge on how the demand and supply of funds influence this essential financial market.
