Money, Banking and Financial System

This document provides an overview of the money market, bond market, equity market, and foreign exchange market. It discusses the key factors influencing short term interest rates and the role of banks in this process. It also explores the connections between money supply and banks and the impact on monetary policies. The document includes references for further reading.

MONEY, BANKING
AND FINANCIAL
SYSTEM

Table of Contents
MAIN BODY...................................................................................................................................3
Section (A) Compare and contrast about money market, bond market, equity market and
foreign exchange market..............................................................................................................3
Section (B) Key factors which helps in determining short term interest rates and role of banks
in this process...............................................................................................................................5
Section (C) The main set of connections between money supply and banks. As well as key
influences which can impact to the monetary policies................................................................6
REFERENCES................................................................................................................................8

MAIN BODY
Section (A) Compare and contrast about money market, bond market, equity market and foreign
exchange market.
In the aspect of economy of a nation, a vital range of financial instruments and markets
are included which have own importance. Below some types of markets are mentioned that are
as follows :
Money market – The term money market can be defined as a kind of market in which short term
funds are provided. Basically, this market deals in short term loans for time period of less then
one year (Powell, 2017). The money market is main framework of global financial system. As
well as the participants of this market are banks, big companies who make transaction of short
term financial instruments. Under this market, various kind of items are traded which are as
follows such as :
 Commercial paper – It can be defined as a kind of money market instrument which is
issued for short term debts by corporations. This is issued for time period of less then 270
days. This is included as instrument of money market because its maturity is of less then
270 days which indicates that it is suitable for short term loans.
 Bills of exchange – The term bills of exchange can be defined as a kind of document
which is written by one party to another party for paying a fixed some of amount. Under
this, three parties are included which are drawee, payee and drawer.
 Banker's acceptance – This can be defined as a document which is given by bank to a
party promising to pay the amount in case when another party fails to pay. Herein, it is
important to know that bank accepts this document only when liable party fails to make
payment.
Bond market – The bond market is categorised into two silos which are primary and secondary
market (Bao and Zhou, 2018). In this primary market can be defined as a market in which new
securities are issued. While in the secondary market those securities are issued which have been
already issued in primary market. In this market, different kind of items are traded such as :
 Treasury bill – This can be defined as a short term debt instrument which is issued by
treasury department whose maturity is of less then one year.

 Corporate debt – It is a kind of bond which is issued by corporations for various kind of
purposes such as for expansion of business operations and many more. These are issued
with maturity of minimum one year.
Equity market – It can be defined as a kind of market in which shares are issued and traded via
exchanges or over the counters (Grobys, 2015). This market is also known by share market or
stock market. Under this market shares of different companies are issued and traded. Below, the
items which are traded in this market are as follows :
 Commodities – In the stock market, different kind of commodities are traded such as
produced products by companies. These commodities should be in physical form and
should have some value.
 Shares – Under this market, equity shares of different companies are traded. In this
process shareholders trade the companies' share when prices are high. As well the trade
of these shares are done by the brokers on the behalf of shareholders.
Foreign exchange market – It can be defined as a kind of market in that foreign currencies are
buy and sell (Brown, 2017). The parties which are included in this market are firms, foreign
exchange brokers, individuals and many more. Herein, this is important to know that foreign
exchange market is a system not a particular place. In addition, the rate of exchange never
remain fix of countries, it changes as per the economical conditions. This market generally trades
the currencies of various nations that are traded by different brokers.
Comparison of these markets :
Basis Money market Bond market Equity market Foreign exchange
market
Issue In this market short
term debts are
issued.
While in this
market medium to
long term debts are
issued.
In this market long
term debts are
issued.
Under this only
currencies are
issued.
Types of This is the source It is also non While it is the It is source of non

funding of non permanent
funding.
permanent source
of funding.
permanent source of
funding.
permanent funding.
Maturity In this maturity
time period can be
of one day to one
year.
On the other hand,
in this market, the
maturity can be of
one year to thirty
years.
Under it, maturity is
perpetual.
No maturity time
period is included.
Traders can
exchange currencies
as per the rates.
Items
which
are
traded
In the money
market items like
bills of exchange,
commercial paper
etc. are traded.
Under the bond
market treasury
bills, corporate
debts etc. are traded
by different parties.
On the other hand in
equity market items
which are traded are
commodities and
shares.
Apart from it, under
foreign exchange
market only
currencies are issued
or traded by
different nations.
Section (B) Key factors which helps in determining short term interest rates and role of banks in
this process.
The short term interest rates can be impacted due to various kind of factors as well as role
of bank is also crucial in this aspect. Herein, below some factors are mentioned below that are as
follows such as :
 Inflation – This is the main factor which impact on short term interest rates. It is so
because if inflation rate is higher then interest rate will be higher and if inflation rate is
lower then the interest rate will also lower. Thus, this is important for government of any
particular country to keep control over the inflation rates. In addition, the higher inflation
rate is not a positive sign for a nation's economy.
 Supply and demand – In addition, the supply and demand of short term loans also effect
to interest rates (Morris, 2018). Such as if demand will increase then interest rate will be
higher as well as decrease in demand leads to lower interest rate. On the other hand, if
supply of loans will be higher then customers will have more alternatives and due to it
interest rate will decrease. In addition, if in the market there will not enough availability
of short term loans then interest rate will be higher. This is so because some financial

institution will like to gain more profit in the case of less supply of short term loans in
market.
 Unemployment rate – The rate of unemployment impacts to rate of short term loans. It is
so because if in a nation the unemployment rate is higher then people will depend on
loans which may cause to increase in short term interest rate. On the other hand, if the
unemployment rate is lower or decreasing continuously then number of customers will
reduce who want to take loan and as a result rate of short term interest will decrease.
So these are some key factors which can impact to the short term interest rates.
Role of banks in determining short term interest rates :
The banks are major financial institutions who provide financial assistance to customers
and their role is crucial in the aspect of determining short term rates. Herein, this is important to
know that central banks of different nations play a significant role in the context of setting short
term interest rate (Strange, 2015). It is so because banks borrow funds from central bank and if
rate of borrowing is higher then banks will charge more interest from customers with an
increased interest rate. Thus, in this aspect role of central bank is too crucial because as they
change in the repo rate it is indirectly effect to customers. Apart from it, there are some other role
of banks in determining the short term interest rates such as change in the government rules and
regulation can lead to variation in interest rates. Basically, the role of bank is beneficial for
customers because in the absence of involvement of banks other private financial entities can
raise their interest rates as per own suitability.
Section (C) The main set of connections between money supply and banks. As well as key
influences which can impact to the monetary policies.
In the aspect of money supply and banks there is a critical relation. The supply of money
depends on efficiency of banks that how well they manage supply and demand of financial need
of people. The supply of money is a critical aspect for any nations' economy. This is so because
it is linked with the inflation (Perna, Baraldi and Waluszewski, 2015). In the case when money
supply is effective then it may lead to reduction in the investment amount of companies. As well
as if money supply is lose then inflation can be increase and purchasing power of customers will
lose. Herein, the banks are important to control of supply of money. It is so because if banks will

raise their interest rates then customers will prevent to take financial loans and supply of money
in market will be effective. On the other hand, if banks decrease the rate of interest then
customers and companies will acquire more funds which may lead to unbalanced flow or supply
of money. As well as money will be controlled by some powerful business entities or
individuals. Thus, both money supply and banks are interrelated with each other. In addition, this
is important for banks to control the supply of money as accordance of demand in the market. In
the absence of intervention of banks in this aspect a lot of issues may arise in economy such as
increased inflation rate, ineffective purchasing power of customers and many more.
Impact on monetary policy of interrelation between money supply and banks :
Monetary policy – This can be defined as a kind of policy which is acquired by monetary
authority of a nation in order to control supply of money and rate of interest on loans (Galbraith,
2017). It can be effected due to interrelation of money supply and banks because if banks
manage the supply of money as per the requirement in market then it becomes easier to this
policy to control the flow of money. Basically, the main objective of monetary policy is to
control interest rates of loans and money supply. By integration of banks with supply of money,
the monetary authorities can easily control the flow of financial resources in economy. On the
other hand, in absence of this interrelation of bank with money supply it can be difficult for this
policy to make a balance between supply and demand of money. Thus, it can be stated that
monetary policy is impacted in a positive manner due to integration of banks with money supply.
Otherwise the objective of this policy can not be achieved because demand of customer for
money changes timely and this can be controlled by banks.

REFERENCES
Books and journals :
Powell, E .T., 2017. The Evolution of the Money Market 1385-1915: An Historical and
Analytical Study of the Rise and Development of Finance as a Centralised, Co-
ordinated Force. Routledge.
Bao, J., O’Hara, M. and Zhou, X. A., 2018. The Volcker Rule and corporate bond market
making in times of stress. Journal of Financial Economics. 130(1). pp.95-113.
Grobys, K., 2015. Are volatility spillovers between currency and equity market driven by
economic states? Evidence from the US economy. Economics Letters. 127. pp.72-75.
Brown, B., 2017. The forward market in foreign exchange: a study in market-making, arbitrage
and speculation. Routledge.
Morris, R., 2018. Early Warning Indicators of Corporate Failure: A critical review of previous
research and further empirical evidence. Routledge.
Strange, S., 2015. Casino capitalism. In Casino Capitalism. Manchester University Press.
Perna, A., Baraldi, E. and Waluszewski, A., 2015. Is the value created necessarily associated
with money? On the connections between an innovation process and its monetary
dimension: The case of Solibro's thin-film solar cells. Industrial Marketing
Management. 46. pp.108-121.
Galbraith, J. K., 2017. Money: Whence it came, where it went. Princeton University Press.