The Federal Reserve plays an important role in the money markets, since it buys and sells many of these instruments to either reduce or increase the amount of cash available in the marketplace. However, it trades only in the safest instruments.
Note that commercial paper is NOT eligible for Fed trading.
For a better understanding as to what the Fed does and how it influences the economy, refer to the tutorial: The Federal Reserve.
Exam Tips and Tricks
Here is another topic that is likely to have only two questions on the exam. You might encounter a question like this one:
- The maximum maturity on commercial paper is:
- Six months
- Nine months
- Three months
- Twelve months
The correct answer is "b". While other money market instruments can have a maximum maturity of 12 months, commercial paper has a maximum maturity of 270 days.
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.
InvestingCommercial paper is a short-term debt security issued by financial companies and large corporations. The corporation promises the buyer a return, or profit, for making the loan. The return is ...
InvestingLearn about the tools the Fed uses to influence interest rates and general economic conditions.
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InsightsRead about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
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TradingFind out how this institution has stabilized the U.S. economy during economic downturn.