A company with a spare ₦50m for three months does not want to leave it in a current account earning nothing, and a company short of ₦50m for three months does not want to raise equity to cover it. Both go to the money market. This is where short-term money is lent and borrowed in large amounts, mostly through banks, and where short-dated securities are bought and sold.
The finance manager uses it to invest cash surpluses safely, to borrow quickly and cheaply and to finance trade, so the ability to recognise each instrument, say how it works and calculate its return or cost is a practical skill.
This topic covers what the money market is, its main markets, its role and participants, how it differs from the capital market, the role of banks and other financial institutions, and the main instruments: Treasury bills, bills of exchange and bankers’ acceptances, certificates of deposit and commercial paper, with numerical examples. The next topic covers capital markets and the stock exchange.
The topic also leads straight into cash management, where surpluses are invested in these instruments. Read monetary policy, interest rates, inflation and the exchange rate first, since the policy rate sets the level of money market rates.
In 30 seconds
The money market is a wholesale market (large transactions) for short-term lending and borrowing and for short-dated instruments of one year or less. Its main markets are the interbank market (loans between banks at floating rates) and the repo market (sale of securities with an agreement to buy back at a higher price, equal to a secured loan).
Its role is to provide short-term liquidity to those who need money and short-term investment for those with surplus cash. Instruments are coupon-bearing (such as certificates of deposit) or discount instruments issued below face value (Treasury bills, bills of exchange and bankers’ acceptances, commercial paper). Banks provide liquidity, assess risk, offer investment opportunities and settle transactions.
Compared with the capital market, the money market is short-term, lower in risk and return and more liquid.
The money market
Money markets are markets for financial instruments with a short maturity, usually up to one year. They are wholesale markets, for large-value transactions, in short-term lending and borrowing and in short-dated instruments (one year or less to maturity when issued): Treasury bills, bills of exchange, commercial paper and certificates of deposit.
A financial market in general is where buyers and sellers trade financial assets such as bonds, shares, currencies and derivatives. The main purposes are to raise capital, transfer risk, fix prices and provide liquidity. Besides bank lending, financial markets are classified as capital markets (equity and bond markets) and money markets.
The two main money markets
- The interbank market: lending and borrowing between banks, usually in large amounts and for short periods, at a floating interest rate linked to a benchmark rate. Internationally the benchmark was the London Interbank Offered Rate, which has now been replaced by other reference rates; in Nigeria interbank rates move with the Monetary Policy Rate.
- The repo market: a repo is a simultaneous contract to sell securities (especially Treasury bills and government bonds) and to buy them back later at a higher price. The difference is interest on a cash loan secured on the securities.
For example, a bank sells securities for ₦200m and agrees to buy them back after 14 days for ₦200.8m. The interest is ₦0.8m, which is 0.4% for 14 days, or about 10.4% a year. There are international money markets in all the main currencies; London, for example, has large markets in dollars, euros, yen, Swiss francs and Canadian dollars as well as sterling.
Instruments traded in the Nigerian money market include Treasury bills, Central Bank of Nigeria certificates, commercial bank deposits, negotiable and non-negotiable certificates of deposit, bankers’ acceptances and commercial paper.
The role of the money market and of the banks
The main purpose of the money markets is to provide short-term liquidity to entities that need money and short-term investment opportunities to entities with surplus liquidity. Banks are the most active participants, but some large companies deal directly. Smaller companies and individuals gain access through their bank, which allows them to borrow or lend much smaller amounts than the normal size of a money market deal.
The markets also give ready access to short-term borrowing and lending in foreign currency, which matters to companies in international trade.
Banks and other financial institutions are essential to the market. They provide liquidity (short-term loans and the creation of deposits), manage risk (assessing the creditworthiness of borrowers), offer investment opportunities for investors and facilitate transactions through payment and settlement, and they issue money market instruments.
Money market and capital market compared
| Basis | Money market | Capital market |
|---|---|---|
| Tenure | Less than a year | More than a year |
| Instruments | Treasury bills, commercial paper | Shares, bonds, funds |
| Participants | Banks, corporations, government | Banks, insurers, stockbrokers, underwriters, investors |
| Risk and return | Low risk, low return | Higher risk, higher return |
| Liquidity | Highly liquid | Less liquid |
| Purpose | Short-term funding needs | Long-term funding needs |
| Nature | Mostly over the counter and informal | Mostly on an exchange and formal |
The principal money market instruments
There are two broad categories. Coupon-bearing instruments pay interest at a stated rate on a fixed principal, and at maturity the holder receives the principal plus interest (for example certificates of deposit). Discount instruments are issued below face value and repay the face value at maturity; the difference is the interest (for example Treasury bills, bills of exchange and commercial paper).
Treasury bills
Treasury bills are short-dated government securities issued to meet a short-term financing need, normally for 91 days. They are discount instruments, regarded as risk-free because they are promises to pay by the government, and there is an active market in which holders may resell before maturity. A company with a short-term surplus can invest in them and sell them at any time.
For example, a bill with a face value of ₦500m is issued for 91 days at 97.60 per ₦100. The issue raises ₦488m and the holder receives ₦500m, so the interest is ₦12m, which is 2.46% for 91 days, or about 9.9% a year (2.459% × 365 ÷ 91).
Bills of exchange and bankers’ acceptances
A bill of exchange is a promise to pay a stated amount at a future date, usually in a few months. The drawer issues the bill on the drawee, who accepts it by signing, which becomes an undertaking to pay. A bill drawn on and accepted by a bank is a bank bill, and bills accepted by banks of high credit standing can be sold easily in the market.
They are used to finance foreign trade and, through bankers’ acceptances (BAs), to raise short-term finance as an alternative to a loan or commercial paper.
Under a BA programme the bank agrees to accept bills drawn on it by the company up to a limit; when the company needs funds it draws a bill, the bank accepts it and sells it at a discount, and at maturity the company pays the bank the face value. The interest cost is the discount.
For example, a bill with a face value of ₦5,000,000 for three months is sold for ₦4,925,000. The discount is ₦75,000 and the rate is (75,000 ÷ 4,925,000) × 12 ÷ 3 = 6.1% a year. A top-quality bank can make the rate low.
Certificates of deposit
A certificate of deposit (CD) is issued by a bank to confirm that a specified sum is held as a term deposit earning a specified rate. The deposit cannot be withdrawn until the end of the term, but the CD can be sold on a market for CDs.
For example, ₦40m is deposited for six months at 5.5%: interest is ₦40m × 5.5% × 6 ÷ 12 = ₦1.1m and the holder receives ₦41.1m at maturity, or sells the CD earlier for cash.
Commercial paper
Commercial paper (CP) is an unsecured promissory note, a promise by the issuer to pay the face value at a specified date. Non-financial companies issue it through a bank under a programme. It is negotiable, though investors normally hold it to maturity. Only companies with a good credit rating can issue it, and it is usually rated by an agency.
The company receives cash now at a discount to face value. For example, a company issues ₦80m of six-month paper at 9% a year. The interest for six months is 4.5%, so the company receives ₦80m ÷ 1.045 = ₦76.555m and pays ₦80m, an interest cost of ₦3.445m.
Derivative products
The money markets also deal in derivatives linked to short-term interest rates, such as forward rate agreements and interest rate futures. They are used to hedge, and are covered in the topics on interest rate risk.
The ideas in more depth
Why a discount rate understates the cost
The discount is expressed as a percentage of the face value in market quotations, but the borrower receives only the face value less the discount. The true cost is the discount divided by the amount actually received, which is higher, as in the example where ₦75,000 is divided by ₦4,925,000 and not by ₦5,000,000.
Why money market rates follow the policy rate
Banks fund themselves in the interbank and repo markets. When the central bank changes its lending rate, their funding cost changes and the rates they quote to companies change. This is the transmission effect described in the last topic.
Sources and references
- No accounting standard governs this topic. For market structure see the Central Bank of Nigeria and the FMDQ exchange, which operates the fixed income and money markets.
These points are stated as at 5 November 2026.
Worked examples
Example 1: a Treasury bill. A ₦500m, 91-day bill is issued at 97.60. Required: the annual return.
- Proceeds.
₦500m × 0.976 = ₦488m; interest ₦12m. - Annual rate.
(12 ÷ 488) × (365 ÷ 91) = 9.9%.
Example 2: a bankers’ acceptance. A three-month bill of ₦5,000,000 is sold for ₦4,925,000. Required: the annual interest rate.
- Discount. ₦75,000.
- Rate.
(75,000 ÷ 4,925,000) × 4 = 6.1%.
Example 3: commercial paper. A company issues ₦80m of six-month paper at 9% a year. Required: the cash received.
- Interest for six months.
9% × 6 ÷ 12 = 4.5%. - Proceeds.
₦80m ÷ 1.045 = ₦76.555m; interest cost ₦3.445m.
How to answer in the exam
- Define the instrument, say whether it is a discount or coupon instrument and who issues it.
- Calculate the cost or return on the amount received, not the face value, and annualise it.
- State the role of the banks in the market.
- Compare with the capital market on tenure, risk, return and liquidity.
Common mistakes in the exam
- Dividing the discount by the face value instead of the amount received.
- Forgetting to annualise a three-month return.
- Treating a Treasury bill as a coupon instrument.
- Saying that the money market is for long-term finance.
- Confusing a repo with an outright sale.
- Omitting the role of banks as providers of liquidity and settlement.
Quick revision
- Money market: wholesale, one year or less; interbank and repo markets.
- Discount instruments: Treasury bills, bills of exchange and acceptances, commercial paper; coupon: certificates of deposit.
- Banks: liquidity, risk assessment, investment opportunities, settlement.
- Cost = discount ÷ amount received, annualised.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. The money market deals in:
- Long-term shares
- Property
- Short-term lending and borrowing and instruments of up to one year
- Long-term bonds only
Show the answer
C. It is a wholesale market.
Question 2. A Treasury bill is:
- A coupon-bearing bond
- A discount instrument issued by the government
- A bank loan
- A share
Show the answer
B. Issued below face value and repaid at face value.
Question 3. A repo is:
- A sale of securities with an agreement to buy them back later at a higher price
- A permanent sale
- A share issue
- A tax refund
Show the answer
A. Equivalent to a secured cash loan.
Question 4. A certificate of deposit can:
- Never be sold
- Be redeemed at any time without notice
- Be issued by a company
- Be sold on a market before the term ends
Show the answer
D. Although the deposit itself cannot be withdrawn early.
Question 5. Commercial paper is:
- A secured loan
- An unsecured promissory note issued by creditworthy companies
- A government bond
- A share certificate
Show the answer
B. Usually rated by an agency and sold at a discount.
Question 6. Under a bankers’ acceptance programme:
- The bank accepts bills drawn on it by the company and sells them at a discount
- The company accepts bank bills
- The bank buys shares
- The government guarantees the bills
Show the answer
A. The company pays the face value at maturity.
Question 7. The interbank market is:
- A market for shares
- A market for lending and borrowing between banks at floating rates
- A tax market
- A retail market
Show the answer
B. Usually in large amounts and for short periods.
Question 8. Compared with the capital market, the money market has:
- Higher risk and return
- Longer tenure
- Less liquidity
- Lower risk and return and higher liquidity
Show the answer
D. It is for short-term needs.
Question 9. Banks in the money market provide:
- Only shares
- Only insurance
- Liquidity, risk assessment, investment opportunities and settlement
- Only tax advice
Show the answer
C. They are the most active participants.
Question 10. A discount instrument is issued:
- Below its face value
- Above its face value
- At no price
- Only to banks
Show the answer
A. The difference to face value is the interest.
Section B style: written questions
Question 11 (10 marks). (a) Define the money market. (2 marks) (b) State TWO main money markets and describe each. (4 marks) (c) State FOUR functions of banks in the money market. (4 marks)
Question 12 (15 marks). A 91-day Treasury bill with a face value of ₦250m is issued at 97.80. A company also issues ₦60m of three-month commercial paper at 8.4% a year. (a) Calculate the proceeds of the bill, the interest and the annual return. (6 marks) (b) Calculate the cash received from the commercial paper and the interest cost. (6 marks) (c) State why only some companies can issue commercial paper. (3 marks)
A further written question
Question 13 (20 marks). A company needs ₦90m for three months. A bank loan costs 11.0% a year. A bankers’ acceptance would sell a ₦90m bill for ₦87.9m. Commercial paper at 9.2% a year is also available.
(a) Calculate the interest on the bank loan for the three months. (3 marks) (b) Calculate the annual rate on the acceptance. (5 marks) (c) Calculate the cash received and interest cost on the commercial paper. (6 marks) (d) Recommend the cheapest source and state any condition. (6 marks)
Model answers
Show the model answer to Question 11
(a) A wholesale market for short-term lending and borrowing and for short-dated instruments with a maturity of one year or less (2).
(b) The interbank market: lending and borrowing between banks at floating rates (2); the repo market: the sale of securities with an agreement to buy back later at a higher price, equal to a secured loan (2).
(c) Provide liquidity; assess risk; offer investment opportunities; facilitate payment and settlement; issue instruments (1 each, any four).
Show the model answer to Question 12
(a) Proceeds ₦250m × 0.978 = ₦244.5m (2); interest ₦5.5m (1); return (5.5 ÷ 244.5) × (365 ÷ 91) = 9.0% a year (3).
(b) Interest for three months 8.4% × 3 ÷ 12 = 2.1% (2); cash received ₦60m ÷ 1.021 = ₦58.766m (3); interest cost ₦1.234m (1).
(c) It is unsecured, so only companies with a good credit rating can issue it and investors rely on that rating (3).
Show the model answer to Question 13
(a) ₦90m × 11.0% × 3 ÷ 12 = ₦2.475m (3).
(b)
- Discount ₦90m − ₦87.9m = ₦2.1m (2)
- rate (2.1 ÷ 87.9) × 4 = 9.6% a year (3).
(c) Interest for three months 9.2% × 3 ÷ 12 = 2.3% (2); cash received ₦90m ÷ 1.023 = ₦87.977m (2); interest cost ₦2.023m (2).
(d) Commercial paper at 9.2% is the cheapest, then the acceptance at 9.6%, then the loan at 11.0% (3), provided the company has a good enough credit rating to issue paper (2) and the cost of the programme and fees is included (1).
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