Money market instruments in Nigeria, your ultimate guide to viable investment
Money market instruments concept is adopted to further enlighten you into the world of financial literacy and investment.
Financial investment is one core aspect of healthy tonic you must strive to take and maintain, if your financial security is anything of utmost importance to you.
What is money market? Money market is that market where short and long term securities are traded.
This is a section of financial market where financial instruments with increase liquidity and short term maturities are likewise traded.
It can be perceived as a market where borrowing and lending takes place, which could experience rapid maturity within a short while of about one year. https://www.en.m.wikipedia.org
The above definition is a simple aspect you need to be acquainted with about money market as a beginner.
MONEY MARKET INSTRUMENTS DEFINITION
Money market instruments are referred to debt securities which will normally give the custodian wholesome right without any form of condition to receive a pre stated fixed sum of money on a particular specified date ahead.
In organized settings, these instruments are usually traded at a discounted rate.
MONEY MARKET INSTRUMENTS EXAMPLE
- Treasury bills (TB)
- Commercial paper (CP)
- Call Money (CM)
- Certificates of Deposit (CD)
- Bills of Exchange (BE) etc. These few are the ones mostly traded
TEASURY BILLS AS A MONEY MARKET INSTRUMENT #1
Treasury bills are short term debt instruments issued normally by the federal government through the Central Bank aimed at providing short term funding for the government to undertake its projects.
As an investor, treasury bills is one of the most viable and stable investment you should look out for, in the sense that you will have to receive your yield/interest at the investment point.
What this really means is that say you are investing N5m in treasury bills, your interest will be calculated depending on the offer rate and will be paid to you immediately without further delay, you equally are at liberty to re-invest your interest if you so wish.
Treasury bills as money market instruments usually have maturity dates in days which range from 91 days, 182 days and 364 days that’s how long your investment can last on treasury bills and is usually sold bi-weekly. Let me teach you how to calculate treasury bills yield to ascertain your interest on projection before ever investing.
The formula I=PXR/100 X T/365 days applies
Where I = Interest, P = Principal (amount) to be invested, R = Rate at which the investment is offered while T = Time taken for the investment to mature in days.
Example: Say you invested N5,000,000 at the rate of 15% for 364 days
See how it goes:
I = 5,000,000 X 15/100 X 364/365
= 5,000,000 X 0.15 X 0.99726027
= N747,945.2025. Read: How to invest in treasury bills in Nigeria for clarity
It then implies that on your investment of N5,000,000 at the rate of 15% for 364 days, you will receive N747,945.2025 as interest immediately at the point of investment which is as well tax free.
Hope you’re enjoying this, that’s how easy it is to make money from your investment on money market instruments.
COMMERCIAL PAPERS AS MONEY MARKET INSTRUMENTS #2
Commercial paper is a kind of unsecured short term loan used by corporations, usually aimed at financing their short term working capital, even meet their cash needs as it concerns their businesses which could be seasonal one.
Commercial papers usually have maturity days of 15 days to one year as the case may be, offered at a discount, interest is determined by market forces of demand and supply of liquid funds in the market.
CALL MONEY AS MONEY MARKET INSTRUMENTS #3
Call money is one of the money markets instruments, Banks can have shortfalls which they can fund by borrowing call money from the money market.
There’s no statutory organize market for this call money, banks can carry out these transaction between themselves through ordinary phone calls.
Call money is usually required to maintain a daily liquidity reserve as a mandatory requirements by most country’s Central bank.
CERTIFICATE OF DEPOSIT AS MONEY MARKET INSTRUMENTS #4
A certificate of deposit is a savings certificate with a fixed maturity date to it, issued by financial institutions, the interest rate is specified available in any denomination apart from minimum investment requirements.
It’s money market instruments issued at a discount, still an interest bearing term deposit, it cannot be terminated until maturity which is a disadvantage that implies the depositor cannot make withdrawal on demand.
It’s however transferable from one person to another.
Banks issue certificate of deposit when the deposit growth is comparatively slow, and demand on credit is high while call rate tightens, which is the rate at which CD is being given or measured.
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CHARACTERESTICS OF MONEY MARKET INSTRUMENTS
Money market allow businesses, commercial banks and government opportunity to finance their short term cash projects. As such has the following characteristics
- Liquidity: Money market instruments are liquid in the sense that they can easily be converted to cash which is a great valuable quality for any business.
- Safe: Money market instruments are relatively and highly safe investment, which is the first thing an investor watch out for during investment, security of funds is paramount and should be treated with every diligence it deserves.
- Discount pricing: Usually issued at discount value, which is a plus for every investor.
FUNCTIONS OF MONEY MARKET INSTRUMENTS
- Trade financing: It provides funds to both local and international traders who wish to finance their business for a short period of time.
- Central bank policies: The central bank is responsible for guiding the monetary policy of a country and applying measures to ensure a healthy financial system.
- Industries grow through funding.
- Commercial banks funds their business sufficiently through this medium.
Money market instruments are veritable instruments that stimulate the growth and development of the economy. For responsive decision making process in a business setting, money market occupies a center stage that will always provide that much needed and required funding for short term business purposes. Are there areas you need clarity, kindly use the comment box below.
Raphael is a seasoned and dynamic writer, with interest in Banking, personal finance, entrepreneurial development. A councillor and motivational speaker.