Money Market and Capital Market

Money Market and Capital Market

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Money Market and Capital Market

The money market is the market where short term financial instruments are transacted. The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year.

Players of Money Market:

Money Market Instruments:

  • Treasury Bills
  • commercial Paper
  • Banker’s acceptance
  • Certificate of Deposit
  • Call Money
  • Notice Money
  • Inter Bank Placement
  • Repo and Reverse Repo

What are Treasury Bills?

Debt obligations of the Government used financial deficits. Bangladesh Bank treasury bills are used in 1,3,6,12, & 24 month’s maturity. They pay at a set amount at maturity. These carry great weight in the financial system due to zero risks, ready marketability, and high liquidity.

What is a Commercial Paper?

Commercial paper is defined as a commercial promissory note which has an original maturity between a minimum of 7 days and a maximum one year, issued/sold usually by highly rated large companies. As an alternative to Bank financing. It enables the issuers of CPs to diversify their sources of short terms borrowings and promotes the competitiveness of the financial sector.NBFIs and corporate bodies are the major investors in CP.CPs are cheaper than bank loans.

Commercial Paper, in the global financial market, is an unsecured promissory note with a fixed maturity. Commercial Paper is money market security issued by large corporations to obtain funds to meet short term debt obligations and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized credit rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold a discount from face value, and generally carries lower repayment inerest rates than bonds due to the shorter maturities of commercial paper.

What is a certificate of Deposit?

It is a short term borrowing likely a bank’s term deposit to raise the fund. It is a promissory note issued by a bank in the form of a certificate entitling the bearer to received interest. The certificate bears the maturity date, the fixed rate of interest and the value.

What is the call money? 

Interbank short term lending and borrowing is called call money. a term used for funds borrowed and lent mainly by banks for overnight use. The situation arises when banks face an unforeseen shortfall in funds, perhaps because they have invested a large amount in other assets and loans or due to heavy withdrawal by depositors for different reasons. Call money is a very short term bank loan that does not contain regular principal and interest payments.

What is notice money?

The call money is usually available for one day. If the bank needs funds for more days, it can avail money through notice market. Here, the loan is provided from 2 days to 1 days.

What is term Money?

Loan of money more than 14 days is called Term Money.

Capital Market:

Capital market is the market where long term financial instruments are transacted. Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks etc.

Capital markets help channelize surplus funds from savers to institutions which then invest them into productive use. Important division in the capital market is made on the basis of the nature of security traded, i.e, stock market and bond market.

Types of Capital Market:

The capital market consists of primary and secondary markets.

  1. Primary Market: The primary market is the market where securities come to existence for the first time through IPO.
  2. Secondary Market: Secondary market is the market where existing securities are transacted. There are 2 secondary markets in Bangladesh: DES, CSE.