8463683689_baa33ca431What is the Money Market? An Introduction – Part 2 of 2

Certificate of deposit

Most of the confusion surrounding certificate of deposit comes from the fact that its called by various names in other countries. For example, in

  • India it goes by the name of – Fixed deposit
  • UK – Bond
  • Australia, New Zealand – Term deposit
  • USA – Certificate of deposit/ Time deposit.

Certificate of deposit is basically a “certificate” issued by banks. The certificate among other things mentions the interest which the bank pays on the deposit and the time period after which the deposit can be withdrawn (premature withdrawal usually warrants a penalty).

A typical transaction involves an individual going to the bank to deposit his money for a fixed period of time (say 3 years) at a fixed interest rate (say 1.450% APY – Annual Percentage Yield) and the bank in return gives him a certificate of deposit with all the details. More »

8474532085_6d010ee8d0What is the Money Market? An Introduction – Part 1 of 2

The money market is basically one of the component of the financial markets. The key feature of the money market is that at its fundamental level it involves trading of financial instruments which are

1) Debt based
2) Short term in nature (maturing in a year or less) and
3) Traded OTC (Over the counter) i.e. not on an exchange.

A typical money market transaction involves an entity (either a large corporation, a bank or the government) borrowing money and in exchange giving an IOU to the lender. The IOU among other things specifies when the amount which was borrowed needs to be repaid (usually ranging from overnight repayment to a year) and at what interest. More »