Question

Commercial Banks can issue (as liabilities) and also invest in (as assets) different Money Market instruments.

a. Identify at least three of the common money market instruments that are used by Commercial Banks. For each of your selections, indicate whether a Commercial Bank would issue as a liabilities or invest in as an asset.

  b. What are the characteristics of these instruments that make them useful and attractive to Commercial Banks?

Answer 1

a. Three of the money market instruments that would be used by the Commercial Banks:

(i) Repurchase agreements Banks issue repurchase agreements usually with a days time. It is a liability to the bank.

(ii) T Bills : Banks invest in Treasury bills issued by the government. This is an asset to the bank.

(iii) Certificate of Deposits: Banks issue certificate of deposits for a short term issued for a period of six months to one year. It is a liability to the bank.

b. The characteristics of these instruments that make them useful and attractive to Commercial Banks are :

(i) Repurchase agreements is the easiest way to raise short term funds with a lesser rate of interest.

(ii) T bills are the safest source of investment for the bank in case of volatile markets ,hence makes it an attractive source of investment.

(iii) CD's are issued by the banks at a higher interest rate than savings account which attracts more investors when the bank is in immediate needs of funds.