Welcome to myschoollibrary! Today in our economics class, we will be looking at another form of financial institution which is the “Money Market”. Do have a great time studying with us.
Topic: Financial Institutions
Subtopic: Money Market
Learning Objectives: By the end of the lesson, the learners should be able to:
- Define the term money market;
- List and explain the instruments used in the money market;
- State and discuss the institutions involved in the money market;
- State the advantages of money market.
Money market can be defined as a market for short-term loan. The market consists of institutions or individuals who either have money to lend or wish to borrow on a short-term basis.
Instruments used in the money market
(1) Treasury Bills: Treasury bill is normally issued by the central bank of a country, which assists the government to borrow money from the money market on short-term basis.
(2) Bill of Exchange: Bill of exchange refers to a promissory note which shows the acknowledgement of indebtedness by a debtor to his creditor and his intention to pay the debts on demand or at an agreed time in future, normally ninety days.
(3) Call Money Funds: The call money fund or market is a special arrangement in which the participating institutions invest surplus money for their immediate requirement on an overnight basis with the interest and withdraw on demand. The call money has an advantage of early return and at the same time are withdrawable on demand. It provides solution to the immediate stock of liquidity pressures in the money market.
Institutions involved in the money market
i. Central bank
ii. Commercial banks
iii. Acceptance house
iv. Finance houses
v. Discount houses
vi. Insurance companies
Advantages Of Money Market
(1) Provision of finance: Money market enables entrepreneurs and investors to raise enough finance through borrowing to run their businesses.
(2) Creation of extra income: The money invested in money market is capable of yielding extra income in form of interest.
(3) Promotion of economic development: Economic growth and development is enhanced through borrowing from money market.
(4) Ability to recall invested funds: Funds invested in the money market are very easy to recall.
(5) It enhances savings: Money market provides opportunity for those having surplus fund to invest thereby enhancing savings.
Capital market is a market for medium-term and long-term loans. The capital market serves the needs of industry and the commercial sector. It comprises all the Institutions which are concerned with either the supply of or demand for long-term capital.
Instruments Used In Capital Market
The instruments used in capital market are mainly stocks and shares. Stocks and shares are securities purchased by individuals, which is an evidence of contributing part of the total capital used in running an existing industry. At the end of a normal business year, stock and share holders receive dividend as a reward for contributing the money in running the business.
Institutions Involved In Capital Market
i. Issuing houses
ii. Insurance companies
iii. Development banks
iv. Building societies
v. National Provident Fund
vi. Stock Exchange
Advantages of capital market
(1) Provision of long-term loans: Capital market provides long-term loans to the private and public sectors for investment.
(2) Mobilisation of savings: Savings are mobilised in the capital market.
(3) Growth of merchant banks: The existence of capital market helps the growth and development of merchant banks.
(4) General running of the economy: The existence of capital market encourages the general public to participate in the running of the economy of the country.
The Stock Exchange Market
Stock exchange market is a highly organised market when investors can buy and sell existing securities like shares, stocks, debentures etc. This is a market where those who are interested in the purchase of securities are brought into contact with the sellers. The stock exchange is an essential part of the capital market to serve as a source of raising capital as well as a forum for financial investment. The market deals in old existing shares only, i.e new ones are not traded on it.
The stock exchange market ensures that every transaction must follow prescribed set of rules and regulations, which are complex in nature. Quoted companies are organisations whose shares are quoted on the stock exchange market. The Nigerian Stock Exchange market is in Lagos with branches in Abuja and Port Harcourt. It was established in 1960 through the Act of Parliament. Some of the companies quoted on the stock exchange market include: Dunlop Nigeria Plc, Access Bank plc, First Bank of Nigeria plc, Zenith bank Plc, guiness Nig. Plc etc.
Importance of stock exchange
(1) An avenue for raising capital: Capital can be raised by companies nand governments through the stock exchange.
(2) Provision of employment opportunities: The stock exchange provides employment for brokers, jobbers, clerk’s and others.
(3) Provision of information to investors: Investors, especially foreign investors, can obtain necessary information about the investment situation of a country.
(4) Facilities transfer of investment: An investor can withdraw his investment from a company to invest in another company.
(5) It is a market for investment: The stock exchange provides an avenue for people to invest in any sector of the economy.
(6) It leads to increase in the standard of living: Investment opportunities will lead to more income, which will affect consumption, thereby increasing the standard of living of the people of a country.
Take a quick test for this lesson
WAEC PAST QUESTIONS AND ANSWERS ON FINANCIAL INSTITUTIONS FROM 1998 TO DATE
1. Which of the following is a function of merchant banks A. acting as banker’s bank. B. Lending to the
commercial banks as a last resort. C. Controlling inflation in the economy. D. Underwriting and issuing
2. Which of the following is an asset of a commercial bank A. Reserve funds. B. Shareholder’s capital. C. Customer’s deposits. D. Treasury bills.
3. Which of the following is the most liquid asset to a commercial bank A. Money at call and short notice.
B. Treasury Bills. C. Commercial Bills. D. Cash.
4. The drawer of a cheque is the A. person who is to be paid the sum of money as written on the cheque.
B. person who takes the cheque to the bank. C. bank on which the cheque is drawn. D. person who writes out the cheque.
5. The financial institution that specializes in risk spreading is called A. an investment bank. B. a development bank. C. an insurance company. D. the stock exchange.
6. The clearing house of all commercial banks in Nigeria is the A. General Post Office. B. Bank for Commerce at Industry. C. Nigerian Industrial Development Bank.
D. Central Bank.
7. In open market operations, what the Central Bank sells or buys are A. shares. B. debentures. C. securities.
8. Deposits held in a commercial bank are part of A. money supply. B. transfer payments. C. ordinary shares. D. treasury bills.
9. One profitable form of business undertaken by the commercial banks is A. the issuing of cheques. B. the
payment of standing order. C. lending money to borrowers. D. accepting cheques from customers.
10. Which of the following is not a function of the West African Development Bank A. Promotion of both private and public investments in member states.
B. Financing and executing projects in member states.
C. Promotion of social development of member states. D. harmonization of oil prices to the advantage of member states.
11. Time deposit has the same meaning as A. current account. B. demand deposit. C. deposit account.
D. bank deposit.
12. In order to develop the banking habit of rural dwellers, the traditional money lenders should be A. proscribed. B. legalized. C. subsidized. D. heavily taxed.
13. All rates of interest in a country are influenced by the A. bank rate. B. population growth rate. C. wage rate. D. mortgage rate.
14. The liquidity ratio of a commercial bank refers to the A. proportion of the bank’s total assets which should be held in cash and liquid form. B. total amount of cash for the bank’s treasury. C. total amount of cash for the bank in the central bank. D. proportion of the bank’s cash that should be on loan.
15. Open market operations are the processes by which
A. the Central Bank purchases and sells securities. B. commercial bankS purchase and sell securities.
C. business firms buy raw materials freely. D. households buy consumer goods openly.
16. Examples of joint stock banks are A. commercial banks. B. co-operative credit societies. C. central banks. D. development banks.
17. One major function of the central bank is to A. mint
money. B. hold demand deposits and honour cheques. C. act as a medium of exchange. D. control and regulate money supply.
18. The amount of money to be created by commercial banks is actually influenced by the A. legal reserve ratio. B. external reserve. C. external borrowing. D. availability of money and capital market.
19. A financial institution established for the purpose of providing specialized services like acceptance of bills of exchange and equipment leasing is known as A. merchant Bank. B. development Bank. C. central
Bank. D. insurance Company.
20. Which of the following is a liability of a commercial bank A. Deposits. B. Money at call. C. Loans to customers. D. Overdrafts.
21. Which of the following is a function of the Central Bank of Nigeria A. Serving as custodian of important valuables. B. Giving advice to customers. C. Serving as bankers’ bank. D. Creating credit.
22. Which of the following is specialized in lending money
for the purpose of developing real estate A. Merchant
banks. B. Mortgage banks. C. Discount houses. D. Commercial banks.
23. The marketing of government securities by the Central Bank is termed A. retail banking. B. open
market operations. C. selective credit control. D. credit
24. Which one of the following serves as a banker’s bank A. Commercial Bank. B. The Mortgage Bank.
C. The Central Bank. D. Development Bank.
25. Which of the following is a function of merchant banks A. Minting of coins. B. Preparation of government budget. C. Keeping watch on external reserves of the country. D. Acting as acceptance
26. Open Market Operation (OMO) means the A. provision of credit facilities by commercial banks.
B. provision of credit facilities by the mortgage banks. C. buying and selling of government securities
by the central bank. D. procedure for the establishment of commercial banks.
27. Commercial banks settle their inter-bank indebtedness through A. merchant banks. B. central bank. C. development banks. D. stock exchange.
28. Which of the following banks grant credit facilities to individuals wishing to build houses A. Central Bank of Nigeria. B. Nigerian Industrial Development Bank. C. Agricultural Credit Bank. D. Federal Mortgage Bank of Nigeria.
29. The primary objective of the Nigerian Industrial Development Bank (NIDB) is the provision of loans to A. farmers. B. manufacturers. C. estate agents. D. transporters.
30. The proportion of commercial bank’s total assets kept in the form of highly liquid assets is known as A. demand deposit. B. fixed deposit. C. cash ratio. D. moral suasion
Done studying? Its been a great moment learning the concept of financial institutions. As we have rounded up the topic, take a quick test to justify the lesson objectives.
See All Previous Lessons In Economics
- Define the term money market.
- List and explain the instruments used in the money market.
- State and discuss the institutions involved in the money market.
- State the advantages of money market.
- What are financial institutions?
- State and explain the various types of financial institutions.
- Define the term bank account.
- State and explain the types of bank accounts.
- Differentiate between current and savings accounts.
- What is a cheque?
- Mention the parties to a cheque.
- What dounderstand by fixed deposit account?
- State the features of each type of bank accounts.
- State the differences between central bank and commercial banks.
- State the way by which central bank control commercial banks.
Were you able to answer those questions correctly? Bravo!!
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