How_Money_Works_-_The_Facts_Visually_Explained

The money market

Who uses the money market

The primary function of the money market is for banks and

other investors with liquid assets to gain a return on their

cash or loans. They provide borrowers such as other banks,

brokerages, and hedge funds with quick access to short-

term funding. The money market is dominated by

professional investors, although retail investors with more

than $50,000 can also invest. Smaller deposits can be

invested via money market funds. Banks and companies

use the financial instruments traded on the money market

for different reasons, and they carry different risks.

How it works

The money market exists to provide the loans that

financial institutions and governments need to carry

out their day-to-day operations. For instance, banks

may sometimes need to borrow in the short term to

fulfill their obligations to their customers, and they use

the money market to do so.

For example, most deposit accounts have a relatively

short notice period and allow customers access to

their money either immediately, or within a few days

or weeks. Because of this short notice period, banks

cannot make long-term commitments with all of the

money they hold on deposit. They need to ensure that

a proportion of it is liquid (easily accessible) in market

terms. Otherwise, if a large number of customers wish

to withdraw their money at the same time, there may

be a shortfall between the money the bank has lent

and the cash deposits it needs to return to savers.

Banks may also find that they have greater demand

for mortgages or loans than they do for savings

accounts at certain times. This creates a mismatch

between the money they have available and the money

they have loaned out, so the bank will need to borrow

in order to be able to fulfill the demand for loans.

Banks and companies use the money market to buy

and sell financial assets that have short maturity

dates, and that are easy and quick to exchange.

BANKS

If demand for long-term loans

and mortgages is not covered

by deposits from savings

accounts, banks may then issue

certificates of deposit, with a

set interest rate and fixed-term

maturity of up to five years.

COMPANIES

When companies need to

raise money to cover their

payroll or running costs,

they may issue commercial

paper—short-term,

unsecured loans for

$100,000 or more that

mature within 1−9 months.

FOR

QUICK ACCESS TO

SHORT-TERM

MONEY

COMMERCIAL PAPER

CERTIFICATES OF DEPOSIT

MONEY

MONEY

Money market

COMMERCIAL

PAPER

MONEY

$

US_056-057_Money_market.indd 56 07/11/2016 11:22