MONEY MARKET.

MONEY MARKET.
CONSTITUENTS AND INSTRUMENTS OF MONEY MARKET : A money market may be defined as a collection of institutions engaged in the employment of short term -ftmds. The money market denotes a market for organized dealings in monetary assets providing the liquidity needed by lenders and, at the same time, satisfying the short - term requirements of borrowers .


Introduction to Economics and Finance
Financing requirements. Tax receipts do not flow into treasury at an even pace throughout year; these receipts are bunched at certain periods. But government expenditure is incurred a more even rate, although it certainly varies from month to month. This means that even with a balanced budget for the year as a whole there may be some months during which the treasury has a sizable deficit that can be bridged up through the sale of short-term treasury bills in the money market.
Specialized credit institutions also lend a portion of their surplus funds on call main participants in the call money market are the foreign banks, which are important borrowers of call money.
Discounting of bills of exchange is also an important function of the money mark
CONSTITUENTS OF MONEY MARKET : The banks and the other financial institutions operate the money market. Although this market largely involves wholesale borrowing lending by banks, some large companies and the govt also participate in money ma operations. Money market comprises the following constituents:
The Discount Market : It is the market where some banks (the discount houses) and sell bills of exchange. An important aspect of trading in bills is the daily trading in cei 'eligible bills' for cash between the discount houses and the central bank.
2. The Inter Bank Market: It is the market in which banks lend short-term funds tt-another. The principal interest rate in this market is the LONDON INTER-BANK OF RATE (LIBOR); which is used by individual banks to establish their own 'base interest rate Lending by banks to businesses is likely to be set at a certain margin above LIBOR which is the bench-mark base rate.
3. The Certificate Of Deposit Market: It is a market for trading in certificates of D (CDs). These instruments of money market are not only legally negotiable but have an active secondary market. (Secondary market is the one where an instrument of finance such as the CDs can be sold off at anytime by the holder). Presently in USA, the secondary market transactions in large negotiable CDs are close to $ 10 billion per day.
4. The Local Authority Market : In this market the local authorities, such as the s and municipal corporations, borrow short-term funds banks and other investors by issuing and selling short-term debt instruments i.e. bonds.
5. The Finance House Market: This market covers the short-term loans raised from th money market by finance houses e.g. hire-purchase finance companies.
6. The Inter-Company Market: This market refers to direct short-term lending
betv.,-companies without any financial intermediary. This market is restricted to the treasur departments of large companies.
7. The Commercial Paper Market : It is a market in which companies issue
securities carrying interest, known as Commercial Paper (CP) with a maturity of upto year, or Medium Term Notes (MTNg) with a period of between one and five years.
to the capital market rather than the money market, but it would be misleading to omit consideration of government bonds for the discussion of money market. This is because the government securities also serve as the basis for an important money market transaction called repurchase agreement. In a typical transaction, a government securities dealer may sell govt securities to a bank or corporation with temporary excess funds and simultaneously agree to repurchase the securities at a specified time in the future at a specified price. This represents a loan to the dealer secured by government securities so that it is virtually riskless. The difference between the sale price and the repurchase price represents the interest on the loan. In USA, the Federal Reserve frequently makes use of the repurchase agreement device when conducting its operations in the money market.
5. Certificate of Deposit : Certificate of deposit (CD) has become one of the most important money market instruments and important means by which commercial banks can raise short-term funds. CDs are negotiable instruments.
Since CDs, unlike Treasury bills, are subject to at least some risk of default, they tend to yield slightly more than Treasury bills of the same maturity.
6. Call Loans : Call loans is one of the oldest money market instruments, though its relative importance has declined in modern times. The call loan is a short-term loan by a bank to a securities dealer or broker for the purpose of financing his purchase of stock (i.e. inventory). The stock becomes the collateral for the loan, making this a rather riskless investment for the bank.
7. Tax-exempt Securities : While most of the financing of state and local government is on a long-term basis, there has been a market in short-term tax-exempt securities of such issues. Income from such securities is exempt from federal tax.
CAPITAL MARKET :
CONSTITUENTS AND INSTRUMENTS OF CAPITAL MARKET : Capital market is the financial market for raising and investing long-term and medium-term capital. The existence of an organized capital market is absolutely necessary to encourage and mobilize savings and to introduce profitable avenues of investment so that the capital formation can be paced up in the country. Business firms often raise their fixed capital in the capital market through the issue of shares which are purchased by the interested investors e.g. the individuals, insurance companies, pension funds and investment trusts etc. In this market they also borrow by means of debentures and commercial paper.
The governments and the local authorities also borrow long-term finance through capital market. For this purpose they issue new loan stock in the form of bonds or acquire funds through National Savings Schemes.

CONSTITUENTS OF CAPITAL MARKET : Following are the constituent parts of capital market:
(1) The Stock Exchange : Stock exchange is the main market where: (i;) The quoted companies (ii) public limited companies whose shares are quoted on the stock exchange) can raise new funds by issuing new shares or through loan stock i.e. bonds and debentures.
ji). Investors can buy and sell existing stocks and shares. Most of the transactions on stock I exchange are in-existing securities rather than in new capital issues. It is the existence of this ready secondary market for selling financial instruments that makes investors so I willing to buy shares in the first place.

(2) The Gilt-edged Securities Market : This is the market for
government's long-term I debt securities.
(3) Banks : Banks can be approached directly by the firms and individuals for medium-term and long-term loans. Many merchant banks and foreign banks are willing to lend medium-term and long-term capital especially to well established companies.
(4) Non-bank Financial Institutions : Several non-bank financial institutions such as Mutual Funds, Investment Companies, Companies, and Leasing Companies play an important role in long-term financing in the capital market.
(5) National Savings : This is a capital market where the government obtains capital by borrowing from private investors.
INSTRUMENTS OF CAPITAL MARKET:
1. INSTRUMENTS OF BUSINESS FINANCE : Following are the salient financial instruments of capital market:
(i). Stock : A corporation's equity capital is raised through the sale of shares / stock. Ownership claim in a corporation is evidenced by the stock certificate which is a negotiable instrument. Following are the two prominent kinds of stock:
Common Stock : This kind of stock gives its holder complete claim to the profits of the business that remain after the holders of all other classes of debt and equity instruments have received their stipulated returns. In case of dissolution and liquidation of the firm the common stockholders receive their share of proceeds of liquidation only after all other classes of security holders (i.e. preferred stockholders and debenture holders) have received their specified return.
Common stock gives its holders the voting privilege for the election of the board of directors of the corporation.
Preferred Stock : This kind of stock is entitled to a limited dividend specified as either a percentage of par value of the stock or as a fixed number of dollars per year.

Preferred stock is a kind of hybrid between a common stock and a bond. These stocks are less risky than common stocks because they have a stated and specified rate of dividend payments. However, they are riskier than bonds because the holders of the preferred stock can be
paid only after bondholders have received their interest payments. Generally, the holders of this stock are entitled to vote for company officers.

(ii)» Corporate Bonds : A bond is simply an I.O.U. (e.g. I Owe You ) by a corporation that promises to pay its holder a fixed sum of money at the specified maturity date and the interest payment called coupon every year up to the date of maturity. Long term maturity bonds an important source of raising capital for the corporation. Usually, the Capital thus raised is to purchase fixed assets e.g. machines, workshops, building etc. of the corporation. Corporate bonds, being the debt instruments, are classified into two categories: the mortgage bonds which are the secured obligation The property specifically pledged to secure mortgage bonds may corporation or it may include only a part thereof. There is no pit bonds; these bonds are dependent upon the general credit and s their security. Bond-holders get a fixed return in the form of into instruments,
INSTRUMENTS OF GOVERNMENT FINANCE : 1 The government raises its long term finance through the following insturments.

(i).Federal Bonds : These bonds are negotiable and these are is government through Treasury. These bonds, known as government security he unlimited taxing power of the government. Federal agencies and goven enterprises also issue bonds of their own. All these bonds are considered to investments. Usually, these bonds are issued for the maturity period: 5 to 25 years.
Following are different kinds of bonds:

Zero-Coupon Bonds : Holders of these bonds do not get periodic interest payir^ they realize interest by buying the bond substantially below its face value i bond at a discount.

Floating Rate Bond : This bond has an interest rate that is changed periodic; an established formula.

Callable Bond : This bond entitles the issuer to pay off the principal prior to the stated maturity date.

Putable Bond : Holder of this bond can force the issuer to pay off the maturity date.

Convertible Bond : This bond gives its holder the right to exchange the bond for shares of the issuer’s common stock stock at a specified date.


ii). Treasury Notes : These securities are sold on coupon basis (just like maximum maturity often years. Recently, in USA, the Treasury Notes have account for about 50 % of the marketable debt outstanding.

ii). Non-marketable Federal Issues : Federal obligations also include some non-marketable issues which are redeemable at Treasury at the option of the I re mainly in the form of the savings bonds. Some such bonds are sold at a an their face value) while some others pay interest semiannually. In Pakistan, the federal saving bonds are important constituent of National Saving Schemes.

savings bonds are important constituent of National Savings Schemes.
(IV). Municipal Bonds : These bonds arc issued by State and Local Government and other public utilities such as power authorities, toll roads, and gas and water utilities. These bonds are quite attractive to investors because the interest received on account of these bonds is exepmt from Federal income tax and some local taxes. There for, these bonds are also called tex- Bax-exempt bonds.