Money market is not a homogeneous market. It is composed of heterogeneous sub-markets, each specialising in a specific short- term credit instrument. The following are the important constituents of money market:
1. Call Money Market:
The call money market deals with very short-period or call loans. Bill brokers and dealers in the stock exchange generally borrow money at call from the commercial banks.
These loans are granted for a very short period, not exceeding seven days in any case. The borrowers have to repay the loans immediately whenever the banks call them back. No collateral securities are required against these loans.
2. Collateral Loan Market:
Collateral loan market refers to a market for loans secured against collateral securities like stocks and bonds. The collateral is returned to the borrower at the time when he repays the loan. In case the borrower fails to repay the loan, the collateral becomes the property of the lender.
Collateral loans are mostly granted by the commercial banks to private parties in the market and for a short period of a few months. Sometimes smaller banks also receive collateral loans from bigger banks.
3. Acceptance Market:
Acceptance market is a market for banker’s acceptances. A banker’s acceptance is a draft drawn by a business firm upon a bank and accepted by it whereby the bank is required to pay to the order of a specific party or to the bearer a specific sum of money at a specific future date.
Banker’s acceptances are used mostly in financing the commercial transactions both within and outside the country.
The banker’s acceptance is different from a cheque in that while the former is payable at a specified future date, the letter is payable on demand. Banker’s acceptance can be easily sold or discounted in the money market, called acceptance market.
4. Bill Market:
Bill market specializes in the sale and purchase of different types of short-term papers or bills. The important types of bills are: (a) bills of exchange and (b) Treasury bills. Since discounting of bills is the main business in the bill market, it is also known as discount market.
It should be noted that the bill market does not deal with long-term treasury bonds and other long-term papers which involve long-term lending,
(i) Bill of exchange:
The bill of exchange is a written unconditional order signed by the drawer (seller) requiring the drawee (buyer) to pay on demand or at a fixed future date a definite sum of money. After the bill has been drawn by the drawer (seller), it is accepted by the drawee (buyer).
Once the buyer puts his acceptance on the bill, it becomes a legal document. Such bills of exchange are discounted and re-discounted by the commercial banks for lending credit to the bill brokers or for borrowing from the central banks.
(ii) Treasury Bills:
While the bill of exchange is a commercial paper, the Treasury bill is government paper. The treasury bills are short-term government securities generally of three months’ duration. They are sold by the central bank on behalf of the government.
They bear no interest rate and are offered on the basis of competitive bidding. Thus those who are satisfied with the lowest interest rate will be allotted the bills. Treasury bills, being government papers, inspire greater confidence among the investors.