Money Market Instruments: What, Why, How, etc

Banks, Corporates, Government often need to 'borrow money for their needs. The method of Long term borrowing by Corporates and Governments is usually by issuing bonds. Read the detailed wikipedia article on Bonds. However, bonds are usually for Debt Instruments for long term borrowing and the financial instruments used for short term borrowing are called money market instruments.

Forget about all the jargon of instruments and all that. The underlying idea is very simple. Suppose a Bank or a Company needs to borrow money for lets say 4 months. It will then go to the 'money market' and after some paper work (which are called money market instruments) they borrow it. Whom lends them money? For example funds like Liquid Funds which invest in Money Market Instruments. Thus in this sense, investing in Money Market Instruments can be compared to making a short term fixed deposit. After all short term fixed deposit can all be called debt instruments if you think of it as money you 'lend' to the bank, so that the bank can use it to give loans etc.

Oct 17, 2008

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