Money market

The money market is a component of the financial markets for assets involved in short-term borrowing and lending with
original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial
paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities.[1]
It provides liquidity funding for the global financial system.

Common money market instruments

• Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift institutions, and credit
unions.
• Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—
arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
• Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a
discount from face value.
• Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States.
• Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored
enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage
Association.
• Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the
Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight
basis. They are lent for the federal funds rate.
• Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other
revenues.
• Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve
months. For the U.S., see Treasury bills.
• Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of
retail or institutional investors.
• Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of
currencies at a predetermined time in the future.
• Short-lived mortgage- and asset-backed securities

• Money market" refers to the buying and selling of short-term securities made available by financial institutions.
Most short-term securities have maturities of less than one year. Municipal securities are considered short-term if
they have maturities of three years or less. There is no meeting place where buyers and sellers come together.
Instead, money market transactions take place virtually through the Internet, by telephone or via fax machine.

Treasury Bills

• Treasury bills are issued by the federal government in lengths of 90, 180 or 360 days. The Treasury sells Treasury
bills at scheduled auctions to refinance current debt that is maturing. The Treasury also sells Treasury bills on an
as-needed basis when necessary to meet government expenses. Treasury bills carry no risk of default for investors.
They are highly liquid and can be converted into cash easily. Investors who purchase Treasury bills are not
required to pay income tax on the interest income earned. Investors can purchase Treasury bills with a minimum
investment of $10,000.

Certificate of Deposit

• Certificates of deposit, or CDs, are offered through commercial banks for periods ranging from three months to
more than a year. CDs assume a higher level of risk than a Treasury bill and pay a higher interest rate. The
minimum investment in a CD varies widely from bank to bank. Investors who purchase CDs commit their money
to the bank for the duration of the CD. Investors are able to withdraw their money early, if necessary, but with
significant penalties. CDs with denominations of $100,000 or more pay higher interest than those with lesser
amounts.
Municipal Securities

• Municipal securities are issued by state and local governments to finance major government expenditures.
Municipal securities are also issued to acquire funding for tax-exempt entities like colleges or hospitals. These
securities are riskier than Treasury bills and pay a higher interest rate. The interest income earned by investors
who hold municipal securities is tax-deductible. Municipal securities are normally issued in denominations of
$5,000.

Read more: List of Different Instruments in Money Market | eHow.com http://www.ehow.com/list_7182960_list-different-

instruments-money-market.html#ixzz1JPPmedDa

Money Market Instruments: Treasury Bills and Certificate of Deposit

Money Market Instruments provide the tools by which one can operate in the money market.

Types Of Money Market Instruments

Treasury Bills: The Treasury bills are short-term money market instrument that mature in a year or less than that. The
purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value.The
Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very
low returns.

 Certificate of Deposit: The certificates of deposit are basically time deposits that are issued by the commercial banks
with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the
Treasury Bills because it assumes a higher level of risk.

Advantages of Certificate of Deposit as a money market instrument

1. Since one can know the returns from before, the certificates of deposits are considered much safe.
2. One can earn more as compared to depositing money in savings account.
3. The Federal Insurance Corporation guarantees the investments in the certificate of deposit.

Disadvantages of Certificate of deposit as a money market instrument:

1. As compared to other investments the returns is less.
2. The money is tied along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets
out of it before maturity.

 Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use for financing accounts
receivable and inventories. Commercial Papers have higher denominations as compared to the Treasury Bills and the
Certificate of Deposit. The maturity period of Commercial Papers are a maximum of 9 months. They are very safe since
the financial situation of the corporation can be anticipated over a few months.

 Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's
Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and
other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to
sell it off in the secondary market whenever he finds it suitable.

 Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United
States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as
compared to the banks in U.S. The Eurodollars are traded at very high denominations and mature before six months. The
Eurodollar market is within the reach of large institutions only and individual investors can access it only through money
market funds.

 Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a
lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They
are very safe due government backing.