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Submitted By:: Piano, Ma. Nadine & Ansano, Divine Jhane N

The document discusses the use of money market instruments, such as commercial paper and Treasury Bills, for securing short-term financing by businesses and governments. It outlines the benefits, including immediate access to capital and lower interest costs, as well as risks like market uncertainty and repayment obligations. The conclusion emphasizes the importance of managing these instruments to maintain financial stability while addressing urgent financial needs.

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Divine Jhane Ansano
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7 views2 pages

Submitted By:: Piano, Ma. Nadine & Ansano, Divine Jhane N

The document discusses the use of money market instruments, such as commercial paper and Treasury Bills, for securing short-term financing by businesses and governments. It outlines the benefits, including immediate access to capital and lower interest costs, as well as risks like market uncertainty and repayment obligations. The conclusion emphasizes the importance of managing these instruments to maintain financial stability while addressing urgent financial needs.

Uploaded by

Divine Jhane Ansano
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

DIVINE WORD COLLEGE OF LEGAZPI

2ND SEMESTER A.Y. 2024-2025

ACTIVITY IN FINANCIAL MARKET

Block B

INSTRUCTOR: Armario, Marivic Alemani. DAY/TIME: Tue&Fri 4:00-5:30 pm DATE: 03/07/25

Submitted by: Piano, Ma. Nadine & Ansano, Divine Jhane N.

1. Reasons for Using Money Market Instruments

Money market instruments like commercial paper and Treasury Bills (T-Bills) provide a fast and
flexible way to secure short-term financing.

The retail store chooses commercial paper to quickly raise funds for holiday inventory without
committing to long-term debt. This allows it to stock up in anticipation of increased demand while
avoiding unnecessary interest payments from a long-term loan.

The city government issues T-Bills to cover immediate infrastructure expenses while waiting for
tax revenue. This enables essential road repairs to begin without delay, ensuring public services
continue smoothly.

2. Benefits and Risks of This Approach

Benefits:

Immediate Access to Capital: Both instruments provide businesses and governments with fast funding
to address urgent financial needs.

Lower Interest Costs: Short-term borrowing is often more cost-effective than long-term loans.

Financial Flexibility: The retail store avoids the burden of prolonged debt, while the government can
maintain public services without waiting for tax collections.

Investor Interest: T-Bills (backed by the government) and commercial paper (issued by reputable
companies) attract investors looking for safe, short-term investments.
Risks:

Market Uncertainty: If investor demand is weak, securing the necessary funds may become difficult.

Repayment Obligations: The store must repay its commercial paper even if sales underperform, while
the government must rely on tax revenues to settle its T-Bill debt.

Interest Rate Variability: Rising interest rates could increase borrowing costs, making short-term
financing more expensive.

3. Impact on Financial Stability

Positive Effects: Proper use of money market instruments helps maintain liquidity in the economy,
ensuring businesses and governments can meet short-term financial needs without disruptions.

Potential Risks: Excessive reliance on short-term borrowing can create financial stress if expected
revenue (sales or taxes) falls short. If multiple entities struggle to repay, it could lead to wider
financial instability.

Conclusion

Money market instruments are a valuable tool for short-term funding, offering quick access to
capital with minimal long-term obligations. However, both businesses and governments must carefully
manage repayment risks to maintain financial stability.

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