Money markets

A The money markets

The money markets consist of a network of corporations, financial institutions, investors and governments, which need to borrow or invest short-term capital (up to 12 months). For example, a business or government that needs cash for a few weeks only can use the money market. So can a bank that wants to invest money that depositors could withdraw at any time. Through the money markets, borrowers can find short-term liquidity by turning assets into cash. They can also deal with irregular cash flows - in-comings and out-goings of money - more cheaply than borrowing from a commercial bank. Similarly, investors can make short-term deposits with investment companies at competitive interest rates: higher ones than they would get from a bank. Borrowers and lenders in the money markets use banks and investment companies whose business is trading financial instruments such as stocks, bonds, short-term loans and debts, rather than lending money.

B Common money market instruments

• Treasury bills (or T-bills) are bonds issued by governments. The most common maturity - the length of time before a bond becomes repayable - is three months, although they can have a maturity of up to one year. T-bills in a country's own currency are generally the safest possible investment. They are usually sold at a discount from their nominal value - the value written on them - rather than paying interest. For example, a T-bill can be sold at99% of the value written on it, and redeemed or paid back at 100% at maturity, three months later.

(Professional English in Use. Finance)

• Commercial paper is a short-term loan issued by major companies, also sold at a discount. It is unsecured, which means it is not guaranteed by the company's assets.

• Certificates of deposit (or CDs) are short- or medium-term, interest-paying debt instruments - written promises to repay a debt. They are issued by banks to large depositors who can then trade them in the short-term money markets. They are known as time deposits, because the holder agrees to lend the money - by buying the certificate - for a specified amount of time.

C Repos

Another very common form of financial contract is a repurchase agreement (or repo). A repo is a combination of two transactions. The dealer hopes to find a long-term buyer for the securities before repurchasing them.

• Short-term investor buys securities. Amount investor lends to dealer, by buying securities, is less than the market value of the securities. This is so investor avoids a loss if price of securities, and their value as collateral, falls.

2. Read the text and answer the questions.

1. What is money market?

2. Where is it possible for a business to get a short-term capital?

3. Where do businesses go to get a long-term capital?

4. What institution does it pay to deposit money with? Why?

5. What is the safest possible investment?

6. Why are certificates of deposit called time deposits?

7. What market instruments are considered to be written promises to repay a debt?

8. In what way does the investor avoid a loss?