Exercise Solutions Available
Step-by-step answers for all textbook questions in this chapter
Quick Summary
The money market deals in short-term funds. It helps banks, businesses, and governments meet temporary cash needs without arranging long-term finance. When writing answers, keep the central idea clear: short maturity, high liquidity, working-capital support.
Features
- Deals in short-term funds
- Maturity is usually up to one year
- Instruments are highly liquid
- Mainly used for working-capital and temporary liquidity needs
- Participants are usually institutions rather than small individual investors
Main Participants
- Reserve Bank of India
- Commercial banks
- Financial institutions
- Government
- Large business firms
Important Instruments
| Instrument | Meaning |
|---|---|
| Treasury Bill | Short-term government borrowing instrument |
| Commercial Paper | Unsecured short-term promissory note issued by companies |
| Certificate of Deposit | Negotiable deposit certificate issued by banks |
| Call Money | Very short-term funds borrowed and lent between banks |
| Commercial Bill | Bill arising from credit sale of goods |
Importance of Money Market
1. Provides short-term finance to trade and industry. 2. Helps banks manage liquidity. 3. Assists monetary policy because the central bank influences short-term rates. 4. Uses surplus funds efficiently for short periods. 5. Supports smooth business operations by meeting working-capital gaps.
Money Market vs Capital Market
| Money Market | Capital Market |
|---|---|
| Short-term funds | Medium-term and long-term funds |
| Maturity up to one year | Maturity above one year |
| Instruments: treasury bills, commercial paper | Instruments: shares, debentures, bonds |
| Main use: working capital | Main use: fixed capital |
| High liquidity, relatively lower risk | Comparatively lower liquidity, wider risk-return range |
Important Questions
One Mark
1. What is the maximum usual maturity in money market? 2. Name one money-market instrument issued by government. 3. What is call money?
Short Answer
1. State any three features of money market. 2. Explain any three money-market instruments. 3. Distinguish between money market and capital market.
Long Answer
1. Explain the importance of money market. 2. Describe the main instruments of money market. 3. Explain the role of money market in business and banking.
Common Mistakes
- Calling shares a money-market instrument.
- Forgetting that money market is mainly short-term.
- Writing only names of instruments without meaning.
- Mixing up commercial paper and commercial bill.
Revision Checklist
- [ ] Meaning and maturity period
- [ ] Five instruments with definitions
- [ ] Participants
- [ ] Importance points
- [ ] Money market vs capital market table