Chapter: 1 Financial Markets, Instruments and Investment Basics

Section: 4 Money Market Securities

Money market securities sometimes are called cash equivalents, or just cash for short. The money market is a sub-sector of the fixed-income market. It consists of very short-term debt securities that are highly marketable. Many of these securities trade in large denominations and are out of the reach of individual investors. Money Market Mutual Funds, however, are easily accessible to small investors. These mutual funds pool the resources of many investors and purchase a wide variety of money market securities on their behalf. Most commonly traded money-market instruments include:

  • Treasury Bills: Government debt security with a maturity that is less than one year. Treasury bills are issued through a competitive bidding process at a discount from par. This means they do not pay fixed interest payments like most bonds do.

  • Certificates of Deposits (CDs): A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified interest rate, and can be issued in any denomination. CDs are generally issued by commercial banks.

  • Commercial Paper: An unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount reflecting prevailing market interest rates.

  • Bankers’ Acceptances: A short-term credit investment created by a non-financial firm and guaranteed by a bank. Acceptances are traded at discounts from face value in the secondary market. Bankers' acceptances are very similar to T-bills and are often used in money market funds.

  • Eurodollars: U.S. dollar-denominated deposits at foreign banks or foreign branches of American banks. By locating outside of the United States, Eurodollars escape regulation by the Federal Reserve Board.

  • Repurchase Agreement (Repos): A form of short term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.

  • Federal Funds: Funds deposited to regional Federal Reserve Banks by commercial banks, including funds in excess of reserve requirements. These non-interest bearing deposits are lent out at the Fed funds rate to other banks unable to meet overnight reserve requirements.

  • Brokers’ Call: The interest rate relative to which margin loans are quoted. Also known as the call loan rate.

An important measure that differentiates money market securities from capital market securities is the time to maturity. Money market securities, essentially, have maturity period of one year or less.