Function of financial intermediaries:

1. Direct financing
The financial intermediaries help to mobilize of fund from
surplus unit to deficit unit. Deficit unit issue financial claims
on them and sell them for money to surplus unit.
2. indirect financing:
It involves indirect flow of funds through the involvement of
the

financial

intermediaries.

It

is

also

known

as

intermediation financing that emerged due to inefficiencies

found in direct financing.
3. Liquidity function:
It provides the consumers access to sufficient liquidity at
minimal transaction costs.
4. Risk diversification function:
It is able to spread risks by purchasing wide variety of
securities. It can minimize fluctuations in the principal value
of the portfolios if the securities purchased are perfectly
correlated with each other.
5. Maturity flexibility function:

The financial intermediaries bring flexibility since because

it buys direct securities issued by deficit unit and issue
indirect securities with precise maturity desired by the
surplus units.
6. Denomination divisibility function:
It pools the saving of many small investors and invested these
funds in securities of various sizes. It helps small saver to
invest their funds in a situation when they have no sufficient
fund to employ in a large denomination transaction.
In our county (NIDC) and Citizen Investment Fund are the
example of such institution,
7.

Other

benifict?

Money market instrument:

The characteristic of the various money market instruments that agree
in common are low default risk, short term maturity

and high

marketability.
The money market instrument are,,,T bills, Commercial Paper,
Certificates of Deposit, Bankers' Acceptance , Repurchase agreement,
government bond, euro dollars etc.
A. Treasury Bills:

T bills are shot term obligation of the government issued to cover

government budget deficit and to refinance maturity government
debt
In Nepal, Nepal Rastra Bank issues T-bills on a discount yield
basis..
T-bills can be sold or buy in an active secondary market through
government securities dealers who purchase T bills from the
government and resell them to investors, through an auction
process.
The minimum denomination for T-bills is Nrs.100, 000 and goes
up from that minimum in increments of Nrs.5, 000.
Note for U.S the minimum denomination is $1,000.
T-bills can be of three types depending upon the maturity period.--91days, 182days 364days
T-bills are normally sold on Monday and delivery normally takes
place on following Thursday.

B.Commercial Paper:
Commercial paper is theshort-term unsecured promissory note
issued by only the largest and most financially secured firms.
Commercial Paper is the largest (in terms of dollar value
outstanding) of the money market instruments.
One reason for large amount of commercial paper outstanding is
that companies with strong credit ratings can generally borrow

money at a lower interest rate by issuing commercial paper than by

directly borrowing from banks.
Commercial paper is generally sold in denomination of $100,000,
$250,000, $500,000, and $1million.
Maturity generally range from 1to 270daysthe most common
maturity are between 20 and 45 days.
Commercial Paper can be sold directly by the issuers to buyer or
can be sold indirectly by dealer in the commercial paper market.
Commercial paper is generally held from the time of issue until
maturity by investors. Thus there is not an active secondary market
for commercial paper. So it is called unsecured debt
main thing is the credit rating of the issuing firms.
Commercial paper are issued on a discount yield basis..
Suppose an investor purchases 95day commercial paper with a
par value of $1,000,000 for a price of $985,000. Find
The discount yield.
And bond equivalent yield.