Unformatted text preview: porarily idle funds that they wish to put to some
interest-earning use. At the same time, other individuals, businesses, governments, and financial institutions find themselves in need of seasonal or temporary
financing. The money market brings together these suppliers and demanders of
Most money market transactions are made in marketable securities—shortterm debt instruments, such as U.S. Treasury bills, commercial paper, and Funds money market
A financial relationship created
between suppliers and
demanders of short-term funds. Funds
Securities 24 PART 1 Introduction to Managerial Finance negotiable certificates of deposit issued by government, business, and financial
institutions, respectively. (Marketable securities are described in Chapter 14.) The Operation of the Money Market federal funds
Loan transactions between
commercial banks in which the
Federal Reserve banks become
involved. Hint Remember that the
money market is for short-term
fund raising and is represented
by current liabilities on the
balance sheet. The capital
market is for long-term fund
raising and is reflected by longterm debt and equity on the
balance sheet. The money market is not an actual organization housed in some central location.
How, then, are suppliers and demanders of short-term funds brought together?
Typically, they are matched through the facilities of large New York banks and
through government securities dealers. A number of stock brokerage firms purchase money market instruments for resale to customers. Also, financial institutions purchase money market instruments for their portfolios in order to provide
attractive returns on their customers’ deposits and share purchases. Additionally,
the Federal Reserve banks become involved in loans from one commercial bank
to another; these loans are referred to as transactions in federal funds.
In the money market, businesses and governments demand short-term funds
(borrow) by issuing a money market instrument. Parties who supply short...
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