BORGONIA, VIKTORIA VENICE

3030

Money Markets: Overview and Types

MONEY MARKET SECURITIES
-securities which are short term
-maturity values of one year or less
-highly liquid thus close to being money
 BASIC CHARACTERISTICS
1. Often sold in large denominations
2. Low default risk
3. Mature in one year or less
- transactions are usually participated OVER THE PHONE and completed ELECTRONICALLY
-flexible instruments that can be readily used to meet short-term financial needs
-issued in BULK; WHOLESALE MARKETS
-transactions are fairly large making it difficult for individual investors to participate that is why dealers
and brokers of large banks and brokerages bring interested investors together to allow them to
participate in retail amounts
 MONEY MARKETS ARE IDEAL FOR THOSE WHO CANNOT OR ARE NOT WILLING TO COMMIT TO
LONG-TERM INVESTMENTS.

MONEY MARKETS
-most investors temporarily house their extra funds in the HIGHLY LIQUID INVESTMENTS; low risk
-higher return than depositing in banks
 MAJOR PARTICIPANTS OF MONEY MARKETS
1. Treasury Department
-they issue treasury bills to raise funds for the government until taxes are collected
2. Federal Reserve System
-treasury’s agent for issuing government securities
-controls money supply with the help of money market securities
3. Commercial Banks
-invests in money market securities because they are not risky; issues money market
securities to raise funds
4. Businesses
-corporations buy and sell money market securities to temporarily invest their extra
funds
-raise funds to finance their short-term needs
5. Investments and Securities Firms
-investment companies, finance companies, insurance companies, and pension funds
also trade these securities
6. Individuals
 TYPES OF MONEY MARKET SECURITIES
1. Treasury Bills
-are issued by the government when they need to raise/borrow funds and come with a
very short maturity
-issued at a DISCOUNT-below par value
-DEEP MARKETS-many different buyers and sellers
-LIQUID MARKETS- can be traded quickly with low transactions costs
-ZERO DEFAULT RISK; lower returns
2. Federal Funds
-short-term funds transferred between financial institutions, usually for a period of one
day
-provide banks with an immediate infusion of reserves should they run short of
minimum reserve requirements
-Effective Federal Fund Rate(EFFR) is influenced by supply and demand
-normally higher than the returns of a t-bill
3. Repurchase Agreement(REPO)
-one party sells securities to another with an agreement to repurchase the securities at
a specified date and price
-similar to a LOAN backed by securities
-most repos have a very short term
-usually low-risk investments because they are collateralized with treasury securities
4. Negotiable Certificate of Deposit (NCD)
-bank-issued securities that document a deposit and specify the interest rate and the
maturity date
-BEARER INSTRUMENTS= whoever holds the instrument at maturity, receives the
maturity value
-typically have a maturity of 1 to 4 months
-THE LONGER THE MATURITY, THE LESSER IS THE DEMAND FOR IT
-interest rate is negotiated between the bank and the customer
5. Commercial Paper
-unsecured promissory notes, issued only by the largest and most creditworthy
corporations, that mature in a short period of time generally NO MORE THAN 270 DAYS
-issued on a discount
-less secured compared to government securities
6. Banker’s Acceptance
-a bank accepts responsibility for a future payment
-“an exporter that is sending goods to an importer whose credit rating is now known will
often prefer that a bank act as a guarantor”
-bearer instruments and are sold at a DISCOUNT