- Finance 101

Understanding Money Markets

In a nutshell, money market provides both the lenders and borrowers useful means to satiate their financial needs in a short-term basis. However, when you crack it open you will find a lot of bits and pieces that make a single nut, the money market. If you are into money lending and do it successfully as others then you will need to assemble these useful bits and pieces and put them into the right place.

However, it is easier said than done as the money market is subject to constant changes according to the political, economic and social conditions of a country. Adding to the complicacy is the issues that cropped up during the global financial crisis faced recently that resulted in the Great Recession. Therefore, it will be utterly unwise for you to take money markets for granted and consider it to be a low-volatility segment of the entire financial system of the nation as a whole.

The partners in a money market are lenders that provide other people with funds. These lenders include banks, other financial organizations, retail investors and money managers. They offer financial help to borrowers from a safe, liquid and short-term investment. The category of borrowers is not only common individuals but may include other banks and hedge funds, broker and dealers, nonfinancial corporations and others that provide low-cost funds.

Ideally, the money market is a broad term and an umbrella that protects different market types by providing financial assistance that may vary according to the needs of the borrowers and lenders.

A short-term analysis

You will come to know a lot about money market and money lending when you visit official sites of financial regulatory authorities. For simpler explanations, you may visit websites such as https://www.libertylending.com/ and others. You will have a lot of help in making a few short-term analyses on the money market.

One of the most significant consequences of the recent financial crisis is the focus on the differences among different segments of this money market. Few of these segments turned out to be very fragile while others proved to be extremely resilient.

For the short term, assets are bought and sold in the money market and the maturity may range anywhere from a day to a year.

These assets are usually convertible into cash very easily with the help of the money market that includes different instruments such as:

  • Different bank accounts
  • Term certificates of any deposit
  • Interbank loans
  • Mutual funds operating in the money market
  • Commercial paper
  • Treasury bills and
  • Securities of lending and repurchase agreements or repos.

This money market also comprises an enormous share of different financial systems that accounts for not less than one-third of the total credit. This fact is further corroborated by the studies and reports of the Federal Reserve Board’s Flow of Funds Survey.

Money market instruments

The money market instruments include different securities that differ in trading principles. These securities are treated under and regulated by the financial regulatory laws. These laws control all aspects of money lending so that the lender knows exactly how much to rely on the value of the fundamental collateral instead of the assessment of the ability of the borrower.

However, the most familiar and significant money market instrument is the bank deposits. These are essentially not considered as securities even though sometimes the certificates of deposits are traded just like securities.

Depositors who lend money to the bank usually look for the creditworthiness of the bank and other financial institutions while making such deposits. The government programs also play a very significant part in raising and ensuring such bank deposits.

Assess the repayment probabilities

To be a successful moneylender and do well in the business it is very important to know and assess the repayment possibilities of the borrowers along with their creditworthiness. This is especially required as interbank loans are usually not secured by any collateral.

If you watch the interbank market closely then you will see that the interbank offered rate is usually determined and changes daily. It represents the average rate of interest at which most of the banks especially the major ones are willing to lend money to each other.

  • However, during the crisis, the money market was not so reliable a source for funding. The interbank lending rates rose sharply as compared with other money market rates. This called for the creditworthiness of the banks.
  • Moreover, the lending volume significantly decreased as the banks were found to be struggling to fund all their existing assets. It was also found that the banks were least interested in making new loans.
  • The situation called for the central banks for emergency lending so that this contraction in the funding source can be dealt with successfully and effectively.

All this led to the questionable working of the regulatory authorities to determine the interbank lending rates.

On the other hand when the commercial paper is considered it is said to be nothing more than a promissory note making it an unsecured debt. These are usually issued by highly rated banks and several other large non-financial corporations. Another problem with the commercial paper is that it can be traded just like security in the short term and therefore by nature, it is not purchased by the retail investors. It is also exempt from most of the securities laws. It is once again required by the investors to look to the creditworthiness of the issuer solely for repayment of their deposits.

The safest investment

When you look up into reliable sites such as https://www.libertylending.com/ and others or consult with the experts you will know that the safest instrument is the treasury bills. These are issued by the government and the maturity period is less than a year. The market is deep and liquid and all trading are covered by securities laws. These electronically issued bills can also be used to settle transactions as readily as liquid money.

Therefore, you must secure short-term borrowing and lending in such volatile money markets.

Understanding Money Markets

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