Professional Documents
Culture Documents
Identify and
describe four types of interest-bearing money market instruments.
• Bank Products
Savings and money market accounts provide investors with a guaranteed rate of
return from the financial institution. The Federal Deposit Insurance Corporation
(FDIC) or the National Credit Union Administration, respectively, insures the
balances in these accounts up to a certain limit. Similarly, bank or credit union
certificates of deposit (CDs) offer investors a guaranteed rate of return for a set
period of time, as well as insurance on the balance. These investment options
do not have investment risk, but they do have interest rate risk.
• Preferred Stock
Preferred stock is an equity investment option for risk-averse investors.
Individuals are given preferred shares in exchange for their investment, which
gives them equity and debt ownership in the issuing company. Preferred
shareholders benefit from regular dividend payments and the possibility of
capital appreciation if the stock's value rises in value. Preferred shareholders
receive dividends before common stockholders, and preferred shareholders rank
higher on the creditor hierarchy than common stockholders if a company
declares bankruptcy.
• Corporate and Municipal bonds
Corporate bonds are debt instruments issued by well-established businesses that
pay a specified dividend to bondholders. If a company defaults or becomes
insolvent, bondholders are first in line behind creditors, making bonds a safer
investment than common stock. A municipal bond, on the other hand, is a debt
instrument issued by municipalities like state or local governments that pays a
regular dividend to bondholders. Due to the financial stability and credit of the
municipality, this investment option is typically safer than a corporate bond.
Municipal bonds are tax-free at the federal level and may also be tax-free at the
state level, resulting in a higher real rate of return than comparable securities.
• Certificate of Deposits
A certificate of deposit is a safe investment option for risk-averse investors who
don't need access to their money right away. CDs pay slightly higher interest
than savings accounts, but they require the investor to keep the money in the
account for a longer period of time. Early withdrawals are possible, but they are
subject to penalties that could wipe out any earnings or even eat into the
principal. CDs are especially beneficial to risk-averse investors who want to
diversify their cash holdings. That is, they may put some of their money in a
savings account for quick access and the rest in a longer-term account with a
higher interest rate.
3. How banks and business corporations use the money market instruments to meet
liquidity requirements?
• The assets are a close substitute for money, and they facilitate money exchange
in the primary and secondary markets. To put it another way, the money market
is a mechanism that facilitates the lending and borrowing of instruments with a
term of less than a year. In the money market, high liquidity and short maturity
are common characteristics. A money market instrument is a low-cost
investment mechanism that allows banks, businesses, and governments to meet
large, short-term capital needs. They have the dual purpose of allowing
borrowers to meet their short-term needs while also providing lenders with easy
liquidity.
4. Money market instruments are important to facilitate the monetary policy roles of the
BNM. Explain how the instruments are used for liquidity requirements of the market.