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Question

Difficulty: MediumMoney Market: Institutions and Instruments

Commercial banks experiencing immediate liquidity shortages often seek to rediscount short-term government and corporate debt securities or raise short-term funds through specialized financial intermediaries. Which of the following institutions primarily performs this function in the money market?

  1. Discount housesAnswer
  2. B
    Mortgage banks
  3. C
    Development banks
  4. D
    Stock exchanges

Answer

Discount houses serve as specialized money market intermediaries that discount short-term securities and support commercial bank liquidity.
Discount houses operate specifically within the money market to promote liquidity by discounting, rediscounting, and trading short-term debt instruments like Treasury Bills and Commercial Papers, aiding commercial banks in adjusting their cash reserve positions.

Step-by-Step Solution

1
Determine the time horizon and market segment implied by short-term liquidity management.
Short-term debt instruments (maturity of one year or less) fall exclusively under the scope of the money market.
The money market provides mechanisms for short-term borrowing and lending to balance immediate cash flow deficits and surpluses.
2
Identify the financial institution specifically tasked with discounting and rediscounting short-term bills.
Discount houses act as financial intermediaries that buy, discount, and hold short-term securities such as Treasury Bills, Treasury Certificates, and Commercial Papers for commercial banks.
Mortgage banks, development banks, and stock exchanges operate in the capital market, which deals with long-term investment capital.

Key Concept

Money Market Institutions and Intermediation
Estimated Time:1m 0s
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Topics

Money Market: Institutions and Instruments

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