Financial markets can be broadly divided into short-term
finance and long-term finance. Long-term finance is provided by
capital markets. Short-term finance is provided by money
markets.
The borrowing and lending in money markets is high volume, low
risk and short-term. Because it is short-term, transaction
costs are high relative to the interest that can be earned. And
because transaction costs are high relative to the interest
that can be earned, transactions in the money market tend to be
for very large amounts.
Short-term is generally
understood as 'less than one year', although, in fact, most
money market activity is concentrated in
terms to maturity between overnight and one-week.
Money market borrowing and lending utilise a variety of
different instruments. These include:
and number
of
securitised debt instruments:
Borrowers in money markets are all high quality names and so
the securities issued and traded have low risk, low
yield, high
liquidity characteristics which are attractive to risk
averse lenders.
In this context, quality means creditworthiness (the ability to
repay debt) and, as with capital market debt,
rating agencies analyse and rate the credit standing of
issuers (borrowers). The two best known rating agencies are
Moody's and Standard and Poor's.
