Comilla University

Department of Economics

Assignment on : Money market

Course Title : Money and Banking
Course Code : ECON-215
Submitted To:
Sharna Mazumder
Assistant Professor
Department of Economics
Submitted By: Members of Group A

1. Sadia Jahan ID-12202007

2. Tasnim Suraia Tahsin ID-12202011
3. MD. Sarowar Hosen Riyad ID-12202012
4. Most. Firoj Maliha Mazumder ID-12202019
5. Maksuda Akter ID-12202032
6. Mohibur Rahman ID-12202033
7. Forhad Sarkar ID-12202058
Money
Money has been defined in various ways. Some say, Money is what money does". In other
words, anything that performs the functions of money is money. In the widest says, the term
money includes all media of exchange, gold, silver, Copper paper claques commercial bill of
exchange etc. But this definition is too wide.

The moral commonly agreed vices is that, "anything, which is widely accepted in payment for
goods or in discharge of other kinds of obligation is money.

Evolution of Money
Money in the most important invention of modern times. It has undergone a long process of
historical evolution. Human beings passed through a stage.

1. Barter Exchange

2. Commodity Money

3. Metallic Money and Coinage

4. Paper Money

5. Credit Money

6. Electronic Money

Barter Economy: Barter is an economic system in which the members trade goods and
Services for other goods and services without using al medium of exchange. An example of a
barter exchange would be a farmer who specializes in growing fruits trading with another
farmers who specializes growing grains. The two farmers would come to an agreement on how
much fruit the to trade for grains to meet their individual needs..

Commodity Money: As bantering was difficult for trade, some common commodities
slowly took the function of money. Commodity money is an economic good that acts as money.
For example of commodity money included cocoa beans, tea, tobacco, salt and seashells etc.

Metallic Money: with progress of human civilization, commodity money changed into
metallic money metals such as gold, silver, copper were used instead of commodity money as
they could be easily handled and their quantity can be easily as curtained.
Paper Money: It was found in convenient as well as dangerous from to carry gold and silver
coins from place to place. So, the emergence of paper money is a significant milestone in the
evaluation of money. Paper money on banknotes regulated and controlled by central bank of the
country.

Credit Money: Emergence of credit money took place almost side by side with money that of
paper money. In this modern banking system has made it essential to make payment for
transaction through cheques. It is a safe and convenient way of value. The cheque know as credit
money.

Electronic Money: Until now it is the last stage of evolution of money. This is the age of
computer , now a days people avoid using cash and even cheques in their financial matters. All
kinds of debt cards, credit cards, ATM cards and smart cards are the examples of electronic
money.

Different Kinds of Money

Here describes some classification of money:

Money of Account: Money of account is the monetary unit in terms of which the accounts of
a country are kept and transactions made and in which general purchasing power, debts are
prices are expressed. The taka, for instance is our money of account. Rupee, dollar and frank are
the moneys of account respectively of India, the United States and France.

Legal Money: Denomination of a country's currency that, by law, must be accepted as a

medium for commercial exchange and payment for a money debt. While usually all
denominations of the circulating paper money are legal tenders, the denomination and amount in
coins acceptable as legal tender varies from country to country.

Optional Money: Optional money is the non-legal tender money, but it is generally
acceptable by the people in its final payments. Optional money consists of credit instruments like
bills of exchange, cheques, promissory notes etc., which does not enjoy any statutory backing.
The acceptance of optional money depends upon the choice of an individual person. However,
they are generally accepted because people have confidence in the credit of the paper

Standard Money: Usually it's real or 'intrinsic value' is equal to its face value. It is either
made of gold or silver, or sometimes both. At present, no country has such a money in Standard
Money.
Commodity Money: Commodity money is money whose value comes from a commodity of
which it is made (that is intrinsic value) and is used as a median of exchange. Commodity money
consists of objects that have value in themselves as well as value in their use as money.
Examples of commodities that have been used as mediums of exchange include gold, silver,
copper, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, cocoa beans,
cowries and barley.

Token Money: Currency and coins are said to be token money because their intrinsic value
(the value of paper and metal content) is but a small fraction of the value they represent. They
are also called convenience money because they are necessary for small purchases.

Fiat money: Fiat money refers to currency that a government has declared to be legal tender,
but it's not backed by a physical commodity like gold or silver. Its value is based on the trust and
confidence people have in the issuing government, its stability, and the economy. This type of
money is widely used in today's economies, including the US dollar, euro, and many others.

Bank money: Bank money refers to bank deposits the bank deposits can be turned into money
by their depositors by means of cheques. In advanced countries the cheques, are as good as
money and circulate as Such

Near money: Near money is term used a to describe non-cash, assets that are very liquid and
that are easily convertable into cash. It is also referred to money or cash equivalents.
Example of near money are savings accounts government treasury (T-Bills).

High-powered money: High-powered money in a country is defined as the portion of a

commercial banks reserves that consist of the commercial banks accounts with its central bank
plus the total currency circulating in the public, plus, currency.

Now, I describe the next topic measure of money:

Mo→ Currency coins + notes

M1→ Some of currency (Mo) + Demand deposits + Travelers checks + other checkable deposits

Mo and M₂→ Narrow money (No time deposits)

M₂→ Sum of M₂ + Overnight purchase agreement + money market deposits account + money
market mutual funds share + saving and small time deposits.

M3₂→ sum of M2 and large time deposits + term repurchases agreements.

Function of Money
Traditionally, money performs only fore functions which one best summed. money is a matter of
your functions- - a medium, a measure, a standard --and a store. But in the modern world money
performs so many functions. The functions of money are now a days classified into two main
categories:

 Primary functions:
Under Primary Functions, money hos been considered an a passive tools. It has been
considered as a common medium through which goods and services are exchanged and
also as a generate medium through which the value of goods and services measured. The
primary function of money include the following:

►Medium of exchange:
The most important primary function in that money serves as a common medium of
exchange of good and services and also a general medium of payment/ In the present day
world economy, money in the only medium through which goods and services are
exchange. Hence money servers as a common medium of exchange. Payments are also
made for the buying and selling of goods and services through money.

►Measure of value:
Another important primary function is that money serves a common measures of value of
goods and services or an unit of account. As a measure of valve, money serves as a
common denominator representing the value of goods and services in term of price.

As a unit of account, money also helps accounting. Just as the meter is the unit of
measuring length and kilogram is the unit of measuring weight money is the unit of
measuring the value of goods and services.

An a common measure of value money also helps in the comparison of relative value of
goods and services by comparing their prices. Will remain stable. Hence, money serves
as the link between the present and the future transaction. It makes borrowing and
lending lens risky. It has made future transactions possible. Money, thus, serves an the
standard of deferred payments.
 ►Transfer of value:
Money also serves as a transfer of valve. It facilities the transfer of valve from one person
to another person and also from- one place to another place. There is no difficulty in
transferring a few cores of rupees from someone in Delhi to in Tamil Nadu. Such a value
transfer generally taken place either, through cheques or through bank drafts but not by
means of money paper.

 Secondary Functions:
Under secondary functions, money has been considered an a dynamic tool. It has been
considered as a variable medium through with goods and services are stored for future as
a suitable medium through which future payment are easily be transferred. The secondary
functions of money including follow:

►Store of value:
In a monetary economy, money serve an a store of valve by virtue of its function as a
medium of exchange. The valve of goods can be stored for any length of period in terms
of money. Storing of money means storing of wealth itself.

►Standard of deferred Payments:

By deferred payment, we mean that the value in received but the payment is to be made
at a future dale, which is based on the assumption that the value of money.

Contribution of Money Market in Modern Economy:

Here are the key contributions of money to the modern economy presented in bullet points:

1. Facilitates transactions: Money serves as a medium of exchange, enabling the

smooth exchange of goods and services, which promotes economic activity.

2. Unit of account: Money provides a common measure for the value of goods and
services, making it easier to compare prices and assess the relative worth of different
items.

3. Store of value: Money allows individuals and businesses to save purchasing power for
future use, promoting savings, investment, and economic growth.
 4. Enables specialization and trade: Money allows individuals to specialize in
particular skills or industries and trade their products or services for money, promoting
efficiency and productivity.

5. Supports economic growth: By facilitating transactions, enabling specialization

and trade, and promoting savings and investment, money contributes to economic growth
and development.

6. Enhances financial markets and institutions: Money provides the foundation

for financial markets and institutions, enabling borrowing, lending, investing, and risk
management activities that drive economic activity and allocate resources efficiently.

7. Promotes economic stability: Effective monetary policy and a stable currency help
maintain price stability, manage inflation, and reduce uncertainty, fostering economic
stability and confidence in the economy.

Evaluation of The Payment System:

Evaluation a payment system involves assessing various aspects such as efficiency, security,
convenience, cost-effectiveness, scalability, and regulatory compliance. Here's a breakdown of
key factors to consider when evaluating a payment system:

1. Efficiency: The efficiency of a payment system refers to how quickly and smoothly
transactions are processed. Factors to consider include transaction speed, settlement times, and
the ability to handle high volumes of transactions without delays or disruptions.

2. Security: Security is paramount in any payment system. Evaluate the system's security
measures, such as encryption, tokenization, multi-factor authentication, and fraud detection
capabilities, to ensure the protection of sensitive financial information and prevention of
unauthorized access or fraudulent activities.

3. Cost-effectiveness: Evaluate the cost structure of the payment system, including

transaction fees, setup costs, maintenance fees, and any additional charges. Consider the overall
value proposition in terms of cost savings, efficiency gains, and potential revenue generation
opportunities.
4. Integration: Evaluate the ease of integration with existing infrastructure, software
applications, and third-party services such as accounting software, e-commerce platforms, and
point-of-sale systems. A flexible and well-documented API (Application Programming Interface)
can facilitate seamless integration and interoperability.

5. Customer Support: Evaluate the quality and responsiveness of customer support services
provided by the payment system provider. Access to timely technical assistance, troubleshooting
resources, and dedicated account management can help resolve issues quickly and ensure a
positive user experience.

6. Innovation and Future Readiness: Consider the payment system provider's

commitment to innovation and ongoing development to stay ahead of emerging trends and
technology advancements. Look for features such as support for emerging payment methods,
integration with emerging technologies and readiness for future regulatory changes and market
shifts.

By evaluating these factors comprehensively, businesses and organizations can choose a

payment system that best meets their needs, enhances operational efficiency, and delivers a
secure and seamless payment experience for all stakeholders.

Money Market
The money market is a marketplace for trading short term debt investments for a short period of
time, usually one year or a less. Examples of money market instruments include certificates of
deposit (CDs), Commercial paper, Treasury bills (T-bills) and banker's acceptances. Central
bank is the sole regulator of the money market and monetary policy.

Features of Money Market

Features of a well- developed Money Market

The developed money market is a well organized market which has the following main features :

1. A Central Bank: A developed money market has central bank at the top which is
the most powerful authority in monetary and banking matter. It controls, regulates and
guides the entire money market.
2. Organized banking system : An organized and integrated banking system is the
second feature of a developed money market. It is the commercial bank which supply
short term-loans and discount bill of exchange.
 3. Specialized sub market : A developed money market consists of a number of
specialized sub markets dealing in various types of credit instruments. There is the call
loan market, the bill market, the Treasury bill market, the collateral loan market and the
acceptance market and the foreign exchange market.
4. Existence of large near-money assets : A developed money market has a large
number of near money assets of various types such a bills of exchange, promissory
notes, treasury bills, securities, bonds etc.
5. Adequate Financial Resources : A developed money market has easy access to
financial sources from both within and outside the country.
6. Remittance facilities : A developed money market provides cash and cheap
remittance facilities for transferring funds from one market to the other.
7. Miscellaneous factors: Besides the above noted features, a developed money
market is highly influenced by such factors as restrictions on international transactions,
crisis, depression, war, political instability etc.
8. Short term maturities: These instruments typically have maturities of less than one
year. This means that they are used to finance short term needs. Examples include
Treasury bills, commercial paper, certificates of deposit and repurchase agreements.
9. High liquidity : These market instruments are highly liquid meaning that they can be
easily bought and sold because there is a large pool of buyers and sellers.
10. Low risk: Money market instruments are generally considered low risk investments
compared to other forms of investments like stocks and bonds.
11. Role of Monetary Policy : Central bank often use the money market as a tool to
implement monetary policy objectives such as controlling inflation, managing interest
rates and influencing liquidity conditions in the economy.

Overall, the money market plays a crucial role in facility short term borrowing and lending
activities, providing liquidity to financial markets and serving as a benchmark for short term
interest rates.

Function of Money Market

A well-developed money market is essential for a modern economy. Though, historically, money
market has developed as a result of industrial and commercial progress, it also has important role
to play in the process of industrialization and economic development of a country. Importance of
a developed money market and its various functions are discussed below:

1. Provides Funds:
It provides short-term funds to the public and private institutions needing such financing
 for their working capital requirements. It is done by discounting trade bills through
commercial banks, discount houses, brokers and acceptance houses. Thus the money
market helps the development of commerce, industry and trade within and outside the
country.

2. Use of Surplus Funds:

It provides an opportunity to banks and other institutions to use their surpius funds
profitably for short period. These institutions include not only commercial banks and
other financial institutions but also large non-financial business corporations, states and
local governments.

3. No Need to Borrow from Banks:

The existence of a developed money market removes the necessity of borrowing by the
commercial banks from the central bank. If the former find their reserves short of cash
requirements they can call in some of their loans from the money market. The
commercial banks prefer to recall their loans rather than borrow from the central banks at
a higher rate of interests.

4. Helps Government:
The money market helps the government in borrowing short-term funds at low interest
rates on the basis of treasury bills. On the other hand, if the government were to issue
paper money or borrow from the central bank. It would lead to inflationary pressures in
the economy.

5. Helps in Monetary Policy:

well-developed money market helps in the successful implementation of the monetary
policies of the central bank. It is through the money market that the central banks are in a
position to control the banking system and thereby influence commerce and industry.

6. Helps in Financial mobility:

By the transfer for founds from one sector to another, the money market help in financial
mobility. Mobility in the flow of funds is essential for the development of commerce and
industry in an economy.

7. Promotes Liquidity and Safety:

One of the important functions of the money market is that it promotes liquidity and
safety of Financial assets. It thus encourages savings and investments.
 8. Equilibrium between Demand and Supply of Funds:
The money market brings equilibrium between the demand and supply of loanable funds.
This it does by allocating saving into investment channels. In this way, it also helps in
rational allocation of resources.

9. Economy in Use of Cash:

As the money market deals in near-money assets and not money proper, it helps in
economizing the use of cash. It thus provides a convenient and safe way of transferring
funds from one place to another, thereby immensely helping commerce and industry.

Participants of money market:

The participant In money markets include individual investor, banks and larger companies.
These entities land to other companies ore banks on behalf of commercial papers. The borrower
raises money by Lending their vital financial securities these securities are referred to as papers.

Participant of money market in Bangladesh:

In Bangladesh the participant in money market include various institution involve in short term
borrowing lending and liquidity management, Some key participants of the money market in
Bangladesh.

 Bangladesh Bank (BB): The central Bank of Bangladesh to regulates and oversee
the country's money market operations. It conducts monetary policy through various tools
such as open market Operation (OMO), Repo transaction and reserve requirement.

 Commercial Banks : Commercial banks play a vital role in the money market by
offering Various short term financial products such as: Call money, treasury bills and
manage liquidity and meet regulatory requirement.

1. CVC Finance limited

2. Delta Brac Housing Corporation (DBH) Finance PLC.
 Government securities Dealers: These are Authorized financial Institution that
deal in government securities such as treasury bills and bonds they facilitate the buying
and selling of government securities in the secondary market.

 Primary Dealers (BDS): Primary Dealers are financial institutions authorized by the
central bank to participate in government securities auctions they play a crucial role in the
primary market for government securities.

Uttara Bank is an active primary Dealer of Government securities. In order to active a

vibrant secondary market for Government securities, Bangladesh Bank nominated,
Uttara Bank PLC as a primary Dealer in the year of 2003. Since Inception we are actively
trading government securities in the secondary market

 Insurance companies: Insurance companies often invest surplus funds in short term
money market Instruments to earn returns while ensuring liquidity for policy holdere
claims.
• Bangladesh General Insurance company LTD.

 For example:
AB Bank PLC
Bangladesh Commercial Bank Limited
BRAC Bank Plc.
City Bank Plc.
Community Bank Bangladesh Limited
Dhaka Bank Limited.

 Non Bank financial institutions (NBFI): A Non banking financial institutions is

a financial institution that does not have a full banking license and cannot accept deposits
from the public NBFIs such as leasing companies financial institution and micro
financial Institutions also participant in the money market by offering short term financial
products and engaging in money market transaction. There are 35 %in the country.
 Agrani small to medium enterprise (SME) Financing company limited.
 Bangladesh finance and Investment company Limited (BIFC)
 Bangladesh Infrastructure Finance Fund Limited (BIFFL)
 Bay leasing investment limited.
 Chartered Life Insurance Continental Insurance. Limited.
 Express Insurance Limited.
  Insurance Agent
 OLIC Bangladesh Ltd.
 Mercantile Islami Life Insurance Ltd.
 MetLife . bd

 Mutual Funds : Mutual Funds in Bangladesh "invest in various money market

instruments such as treasury bills, commercial papers and certificates of deposits to
provide Investors with short term investment opportunities.

 Capital Grameen Bank Growth Fund.

 ICB AMCL CMSF Golden Jubilee Mutual Fund.
 SENL FBLSL Growth Fund
 CAPM IBBL Islamic Mutual Fund.

 Corporate Entities: Large corporations and Financial Institutions may also

participate In the money market for short term, finance needs on investment opportunities
 Bangladesh Petroleum Corporation.
 Bangladesh railway
 Bangladesh shipping corporation.
 Bangladesh telecommunication company limited.

Instruments of Money Market

Money market instruments are short term financing Instruments aiming to increase the financial
liquidity of businesses.

The main characteristic of money market instruments is that they can be easily converted to cash,
thereby preserving an investor's cash requirements.

The list of money market instruments treaded in the money marked are:

 Treasury Bills
 Repurchase Agreements (RPs)
 Negotiable Certificates of Deposit (CDs)
 Banker's Acceptances
 Commercial Paper
1. Treasury Bills:
Treasury Bills are short-term debt securities government. issue to raise funds. They are
one of the safest investments due to their backing by the government. Treasury Bills have
maturities ranging from a few days to one year.

There are several different types of Treasury Bills;

►Regular series → Regular series bills are issued routinely every week ore month in
competitive auctions. Bills issued in regular series carry original maturities of

(i) 91 Days (7 weeks)

(ii) 182 Days (13 weeks)
(iii) 364 Days (52 weeks)
Today regular-series bills are auctioned, weekly.

►Irregular series → These are issued when the treasury has an emergency need for cash.
Treasury bills have an advantage over other market instruments because of the zero-risk
weightage associated with them. The secondary market of treasury is very active and they
have a higher degree of tradability.

Principal holders of treasury bills include commercial banks, nonfinancial corporations

state and local governments and the Federal Reserve banks. Commercial banks and
private corporations hold large quantities of bills as a liquidity until cash is needed.

 Bangladesh Treasury Bills

Bangladesh Treasury Bills (T-bills) are short-term debt instruments issued by the
Government of Bangladesh to raise funds from the money market. Here are some details:

1. Purpose: The government issues T-bills to finance its short-term cash needs or
to manage the country's money supply.
2. Maturity: T-bills typically have short maturities, ranging from 28 days to 1
year.
3. Denominations: They are issued in specific denominations, usually starting
from a minimum investment amount.
4. Interest: T-bills are sold at a discount to face value, and the difference between
the purchase price and the face value at maturity represents the interest earned.
5. Liquidity: They are highly liquid instruments, meaning they can be easily
bought or sold in the secondary market before maturity.
6. Risk: T-bills are considered relatively low-risk investments because they are
backed by the government's creditworthiness.
 7. Taxation: The interest earned on T-bills is usually exempt from local taxes,
making them attractive to investors.
8. Market: T-bills are typically traded in the money market through auctions
conducted by the Bangladesh Bank, the central bank of Bangladesh.

Investors in T-bills include individuals, financial institutions, and foreign investors looking for
short-term investment opportunities with minimal risk.

2. Repurchase Agreements (RPs):

A repurchase agreement is a contractual arrangement between two parties, where one
party agrees to sell securities to another party at a specified price with a commitment to
buy the securities back at a later date fore another (usually higher) specified price

• Langer banks provide both demand loans and RPs-to dealers, and larger bank's in turn,
borrow from dealers and other nonbank institutions through RPs in order to avoid deposit
reserve requirements and prohibitions against their paying interest on demand deposit
accounts.
• Non-financial corporations have provided a growing volume of funds to dealers through
RP's in recent years. Other lenders active in the RP market include state and local
governments, insurance companies and foreign financial institutions who find the market
a convenient, relatively low-risk way to invest temporary cash surplus that may be
retrieved quickly when the need arises.

Interest income from RPs is determines from the formula:

RP interest income = (amount of loan) * (current RP rate) * (Number of days loaned/360

days)

For example,
An overnight loan of $ 200 million to a dealer at 9% RP rate would yield interest income
of 50,000.

That is,
RP interest income = $200,000,000 x 0.09 × (1/360)
=50,000

3. Negotiable Certificates of Deposit (CDs):

A negotiable certificates of deposit (NCD) refers to a certificate of deposits with a
minimum per value of $100,000 although typically, NCDs will carry a much higher face
 value.

The interest rate on a large negotiable CD is set by negotiation between the issuing
institutions and its customer.

►CD interest rates rise in periods of tight money, when loanable funds are scarce.
►CD interest rate fall in periods of easy money when loanable funds are more abundant.

The principal buyers of negotiable CDs include.

►Corporations
►State
►local governments
►foreign central banks and governments
►Wealthy individuals
►A wide variety of financial institutions. The latter include insurance companies,
pension funds, investment companies, savings banks, credit unions and money market
funds.

4. Banker's Acceptances:
A banker's acceptances refers to a financial instrument that represents a promised future
payment from a bank. It states the name of the entity to which the funds need to be
transferred, along with the amount and date of payment. Banker's acceptances are short-
term instrument that generally come with a maturity between 30 days and 180 days.

The role of acceptance is most easily understood from an example. a primary use of a
banker's acceptance is to finance the purchase of internationally traded goods • While
those goods are in transit. Suppose for example, a U.S importer receives coffee from a
Brazilian grower, and the exporter requires payment from the coffee before it leaves
Brazil. However, the US importer may wish to borrow cash to finance this purchase then
repay the borrowing from the resale of coffee once it reaches the united states. The
Brazilian grower may be reluctant ban due to credit risk.

5. Commercial paper:
Commercial paper is one of the oldest of all money market instruments dating back to the
eighteen century in the united states.
 By definition, commercial paper consists of short-term, unsecured promissory notes
issued by well-know Known companies that are financially strong and carry high credit
ratings. The funds raised from a paper issue normally are used for current transactions -
to purchase inventories, pay taxes, meet pay- Rolls, and cover other short-term
obligations.

There two major types of commercial paper :-

• Direct paper: Direct paper are, large finance companies and bank holding companies
that deal directly with the investor rather than using a securities dealer as an intermediary.

• Dealer paper: The other major variety of commercial paper is Dealer paper, issued by
security dealers on behalf of their corporate customers.

 Difference between Direct paper and Dealer paper

Direct paper Dealer paper

1. Direct paper is a method by which a 1. Dealer paper refers to the sale of
firm sells its commercial paper commercial paper through dealers .
directly to investors.
2. Direct paper allows a firm to save 2. Dealer paper is named as such
issuing costs by selling its when a firm is acting as the dealer
commercial paper directly to by issuing commercial paper
dealers. directly to investors.