Examples of money market in the following topics:
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- Why would people deposit their savings into financial intermediaries, instead of directly investing in the financial markets?
- Why did the financial markets in the modern world become international?
- Distinguish between a money-market mutual fund and a money-market deposit account.
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- Financial markets are of many types, including general and specialized; capital and money; and primary and secondary.
- Examples of financial markets include capital markets, derivative markets, money markets, and currency markets.
- There are many different ways to divide and classify financial markets: for example, into general markets and specialized markets, capital markets and money markets, and primary and secondary markets.
- for short-term finance (maturity up to one year), money markets are used.
- While capital markets and money markets constitute the narrower definition of financial markets, other markets are often included in the more general sense of the word.
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- Investment institutions include mutual funds and finance companies.A mutual fund manager groups together funds from many investors and invests the money in a variety of stocks.Consequently, a mutual fund diversifies stocks, and it lowers investors' risk.For example, you start your own mutual fund and offer investors a chance to invest in this fund.You take the money and buy 30 different corporate stocks.The Coca-Cola stock rises one day while the value of IBM stock falls.Overall, the average of the fund's 30 stocks should earn a return to your fund and to the investors.If you bought only Kmart corporate stock, you would lose your investment if this company bankrupts.
- Money-market mutual funds are similar to mutual funds.However, the fund manager buys only money market securities, and the fund excludes corporate stock.Theory behind money-market mutual funds is simple.If you have five friends with $2,000 each, and they want to buy a Treasury bill with a minimum face value of $10,000, then your friends can pool their money together and buy one T-bill.Once the T-bill matured, your friends split the interest among themselves.
- Money-market mutual funds are very popular because these funds offer check-writing privileges, and some investors do not want to tie up their funds for a long time.Moreover, the value of the fund does not change much, when interest rates changes because money market securities have maturities less than one year.In 2008, money-market mutual funds had assets of $3.8 trillion.
- Commercial banks offer money market deposit accounts that are similar to the money-market mutual fund.Two funds differ because the Federal Deposit Insurance Corporation (FDIC) insures the money market deposit accounts, while it does not insure money-market mutual funds.If your bank bankrupted and you invested in money market deposit accounts, subsequently, you are guaranteed not to lose you funds up to the maximum insured amount.
- Finance companies are another investment institution, and they raise money by selling stock, bonds, and commercial paper.Commercial paper is a short-term loan with a maximum maturity of 270 days, and a well-known bank or corporation can issue it.Commercial paper is a form of direct finance and has no collateral.Furthermore, finance companies lend to consumers for furniture, appliances, cars, home-improvement loans, or they lend to small businesses.Some corporations created their own finance companies to help consumers buy their products.For example, General Motors Acceptance Corporation (GMAC) lends money to people, so they can buy cars from General Motors (GM).However, GM sold its 51% stake in GMAC to Cerberus Capital Management in 2006.Then GMAC expanded into the mortgage market and was caught in the 2008 financial storm, when the housing bubble deflated.Currently, GMAC was renamed Ally Bank in 2010 and became part of the bank holding company, Ally Financial, Inc.
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- Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finance: the capital markets for long-term finance and the money markets for short-term finance (maturity up to one year).
- Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.
- Money markets allow firms to borrow funds on a short-term basis, while capital markets allow corporations to gain long-term funding to support expansion.
- Funds borrowed from the money markets are typically used for general operating expenses, to cover brief periods of illiquidity.
- Intermediaries like banks can then lend money from this pool of deposited money in the form of loans to those who seek to borrow.
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- A market interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market.
- Deferred consumption: When money is loaned the lender delays spending the money on consumption goods.
- In a free market there will be a positive interest rate.
- If people are willing to hold more money in hands for convenience, the money supply will contract, increasing the market interest rate.
- There is a market for investments which ultimately includes the money market, bond market, stock market, and currency market as well as retail financial institutions like banks.
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- Students will learn the purpose of financial markets and its relationship to financial institutions.
- Consequently, consumers, investors, savers, and government officials would make better informed decisions if they understood how the financial markets and money supply influence the economy.
- A financial market could occupy a physical location like the New York Stock Exchange where buyers and sellers come face-to-face, or a market could be like NASDAQ where computer networks connect buyers and sellers together.
- Why would someone deposit money at a bank instead of directly buying securities through the financial markets?
- In countries with sophisticated financial markets like the United States and Europe, the definition of money becomes complicated because money includes liquid assets, such as cash, checking accounts, and savings accounts.
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- Under a barter system, the author would search a market extensively to find a person who would exchange goods and services that the author needs.
- With money, the author does what he does best and teaches for money.
- Then he takes this money to the market and buys goods and services that he wants.
- Money must retain its value.
- Businesses and people can borrow or lend money based on future transactions that createthe financial markets.
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- In the T-bill market as represented in Figure 1, the original market price and quantity for T-bills are P* and Q*.
- Consequently, both the market price andquantity of T-bills rises.
- Consequently, the market price of T-bills falls while the market interest rate for T-bills rises by using the present value formula.
- For example, the Fed increases the M1 money supply by 3%.
- The Federal Reserve decreases the money supply by selling T-bills
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- Purpose of financial markets and financial institutions is to connect the savers to the borrowers.
- Wealthy countries have developed financial markets.
- Finally, commodity money retains its value and has other purposes than as money.
- People can convert some assets to money easily, so they are almost money.
- Large differences imply a country has more developed financial markets.