A money market is a market for instruments and a means of lending (or investing) and borrowing funds for relatively short periods, typically regarded as from one day to one year. It is a market for short-term securities issued on a negotiable basis. These short-term securities are actively traded in a secondary market. The prices and yields of these securities are closely related to those of the newly issued instruments.
Due to short-term maturity characteristics, money market securities fluctuate very little in price when interest rates change. These securities sell before maturity at very close to their purchase price. A large volume of daily transactions takes place in the money market. The various money market instruments such as government treasury bills, negotiable certificate of deposit, bankers’ acceptance, Eurodollars, commercial papers, short-term bank loans, etc., are traded in this market.
The trading is conducted largely over-the-counter or more precisely over-the- telephone trading. In our country, not all these money market instruments are traded. Even then, there had been sample trading in T-Bills issued by the government and other government securities with current yields stated in the daily newspaper.
Nepal Rastra Bank has frequently issued 91 days T-Bills and other taxable government securities in the money market. Banks are using certificates of deposit to create adequate liquidity and marketability in the money market. However, in our country, corporations and public limited companies are not carrying a good reputation to win public confidence to raise capital through the issue of commercial paper capital Market It is a market for long-term securities issued under various terms and conditions.
In this capital market, trading is conducted on the long-term marketable government securities, corporate bonds, common stocks, municipal bonds, and mortgage bonds. Government securities, corporate bonds, common stocks. Government securities pay low-interest rates and they are not so much profit as capital market investment vehicles. Other market instruments provide substantially a higher rate of return.
Even then, government securities used in the capital market as they ensure considerable liquidity and safety for financial institutions. Thus, banks and financial institutions are the principal buyers of these securities. A corporate bond is another important instrument used in the capital market. Non-bank financial institutions such as insurance companies, pension funds, and individuals are the buyers of corporate bonds because of its tax deduction feature on interest paid.
However, at present, this tax deduction is not provided. Municipal bonds issued by the state and local government also provide additional outlets for the capital market. These are tax-exempt bonds attractive to lenders like banks, insurance companies, and individuals under high-income tax brackets. Mortgages are in fact the largest element in the capital market in terms of amounts outstanding.
The capital market provides some degree of liquidity but it is not as important as the money market. However, the capital market is more important than the money market in the channeling of long term-funds for investment projects. In our country, the capital market has developed gradually especially with the growth of the public limited companies that have been successful to raise long-term funds to finance various capital investment projects.
The recent success of Targau Regency Hotel is an outstanding event in the capital market of this country as it has been able to win public confidence in attracting to purchase shares worth Rs.160 million which is one of the biggest issues in Nepal’s capital market. At present, many primary issues have been floated with over-subscription by many times like that of Sanima Development Bank, Gorkha Development Bank, Kist Merchant Bank, Imperial Finance Company, IME Finance Company, Shikhar Insurance, and so on. Loan and Securities Market Another way of classifying the financial market is to divide them into markets for loans and markets for securities.
The loan market is negotiated face to face directly between the borrower and lender. In contrast, the securities market is an impersonal or open market where buyers and sellers of securities are unknown to each other. However, they trade with the help of brokers or dealers. In the loan market, the loan made by one institution may be sold to another institution.
But, borrowers directly negotiate securities issues with the lenders through a private placement of bonds issued by business firms and sold to insurance companies. Likewise, there is a market for bonds and equities such as common stock. Bonds involve obligations of companies or government to the creditors while equities involve evidence of ownership of companies by the stockholders.
In our country, these markets are slowly developing according to the needs of the economy although they are not as sophisticated as in the financial market of the advanced countries. There is a greater demand for a bond market in the country as an alternative way to enhance the financial market base.
However, the regulating authorities like Nepal Rastra Bank, Securities Exchange Board, etc., have thought that this is too early to think about introducing this kind of market in the country. The equity market taking its ride in the boom period of the capital market tends to be inactive due to the unsatisfactory financial performance of the public limited companies.