Corporations and banks raise short-term funds in the money market in various ways:
- Repurchase Agreements (repos)
- Reverse Repurchase Agreements
- Banker's Acceptance notes (BAs)
- Commercial Paper
- Certificates of Deposit
- Negotiable Certificates of Deposit (NCDs)
- Federal funds
- Brokers' and dealers' loans
Of these, the three most commonly used money market instruments are:
- bankers' acceptances
- commercial paper
- negotiable certificates of deposit
We will discuss these instruments further below in the following section.
Exam Tips and Tricks
Make sure you know which short-term investments make up money market instruments. Along with T-bills, these three investments are the most commonly cited in the exam.
Certificate of Deposit (negotiable)
Negotiable CDs - Negotiable CDs are time deposits with a minimum face value of $100,000. Most, however, are issued for $1 million or more. They are unsecured promissory notes guaranteed by the issuing bank. Most negotiable CDs mature in one year or less. However, since they are negotiable, these CDs can be traded in the secondary market. FDIC only insures the first $250,000 of the CD.
Banker's Acceptance Notes - A banker's acceptance is a short-term time draft drawn on a bank with a specified payment date, usually between one and 270 days. U.S. corporations typically use bankers' acceptances to buy goods and services in foreign countries.
- Commercial Paper - Corporations use short-term, unsecured commercial paper to raise cash to finance accounts receivable and seasonal inventory declines. Paper maturity usually ranges from 30 to 270 days, although most paper matures within 90 days. It is issued in bearer form at a discount to the face value.
U.S. Government Securities
InvestingCommercial paper is a short-term instrument that can be a viable alternative for retail fixed-income investors looking for a better rate of return on their money.
Personal FinanceA banker's acceptance, a common way of financing international trade activity, provides a relatively safe, short-term vehicle for investors. An acceptance is a negotiable time draft that a bank ...
Personal FinanceA negotiable certificate of deposit, or NCD, is a large certificate of deposit that is typically purchased by institutional investors.
InvestingEquity Index CDs are perfect for investors who don't mind hanging in for the long term.
InvestingIf you need liquidity and safety on a sum of money, don't forgo potential interest by keeping the funds as cash.
InvestingA time deposit is an interest-bearing bank deposit that has a specific maturity date.