Financing of Working Capital and the Money Markets Essay

Financing of Working Capital and the Money Markets - Essay Example [http://www.hnb.hr/financijska_stabilnost/efinancijka_sustav.htmtsfsg=79cfa8abff72343c706696777f2a1c18]. The most marketable money market security available in Croatia are the "Government Treasury Bills" that are issued with the maturity deadline of 91, 182 and 364 days [http://www.mfin.hr/en/public-debt]. The second form of money market instrument used in Croatia is the "Certificate of Deposit" that is issued by commercial banks and available through brokers. Certificate of Deposit is a kind of time deposit offered by banks to corporations, local & state governments, and foreign investors that competes with other instruments of the money markets. It is the mechanism by which banks consolidate surplus funds from entities and lend them to other entities in need of short term funds whereby they make money by charging higher interest rates to borrowers than what is offered to the depositors. Hence banks function as financial intermediaries that are primarily interested to channel money to the customers paying highest interest rates and manage the risk of defaults effectively. They compete in the money markets primarily by virtue of their services and interest rates (McKinney Jr. 1967. pp71-73). In Croatia, the certificate of de... Banks prefer to pool certificate of deposits from smaller investors and lend limited money to borrowers to reduce risk of defaults. Hence, such instruments are used primarily for short term cash requirements by firms. On the other hand, treasury bills allow deposits of large amounts and are also tax free. Firms can purchase treasury bills for as short as 91 days using surplus cash and achieve returns that are realized at the maturity. Given that treasury bills are available through auctions, firms can plan the minimum desirable returns that they plan from the T-bills. Some firms also prefer investing in treasury notes issued by Croatian government. The current accounts held by the firms for receivables & payables does not provide any returns and hence the firms are compelled to invest in such short term highly secured financial instruments in Croatia. To avail short term loans from banks, the Croatian firms avail bank acceptance & letter of credit in which the treasury bills become h andy as they are considered as kind of secured collaterals by the banks when issuing the finance. The difference between interest paid to bank and the return from treasury bills reduce the interest burden on the firms from short term financing. The other form of short term financing popular in Croatia is Commercial Paper. As defined by Nayar and Rezoff (1994. pp1433-1434) that Commercial Paper issues with backup lines of credits from banks ensures higher ratings and hence both are almost always simultaneously used. Moreover, unrated Commercial Papers (without bank's credit guarantee) are subject to negative perceptions and hence are not preferred. Overall, money