The Money Market and he Factors Determined the Short Term Interest - Assignment Example

The money market is a market for short-term, highly liquid debt securities, whereas Bond Market indulges in trading in all kinds of bonds, whether on exchanges or over-the-counter (OTC). Again Equity markets deal with equity trading, very much seen traded on floors of stock exchanges. Coming to foreign exchange markets, it could be said to be a place where convertible currencies are traded and their conversion rates are determined. In order to sustain specialized functions and ensure accountability short-term debts and securities are trading in money markets, bonds and long term securities in bond markets, equity shares in equity markets and foreign exchange trading in foreign exchange markets.

This decentralization of market functioning ensures efficiency and better control. The factors that determine the short term interest would be the rate of inflation in the economy, savers’ time preferences for current and future consumption, risk factors that are inherent in any economy and the expected rate of return on investments by investors. The government‘s monetary policy is also a major determinant of short term interest rates. The roles of banks are important in that when inflation is on high, banks adjust interest rates, which serve to reduce the money supply and bring inflation done.

During times of recession, interest rates are lowered which favors investments and capital formation. The factors that constitute the structure of interest rates are state of the economy, level of risks, government policies and the inflationary trend in the economy. The main connection between the money supply and banks lies in the fact that banks, especially the central bank are authorized to control the flow of money currency into, and out of the country. It is also empowered to issue currency notes and coins for use in the economy.