The Money Market - Money Market Instruments
Money market instruments are highly liquid, fixed-income securities issued by govern- ments and corporations with high credit ratings. Because of the high quality of the issuers and because of the short-term maturities, money market instruments are considered very safe.
Corporate Money Market Instruments
Both corporations and banks sell money market instruments to obtain short term financing. These money market instruments issued will include:
- Banker’s acceptances
- Negotiable certificates of deposit
- Commercial paper
- Federal funds loans
- Repurchase agreements
- Reverse repurchase agreements
Corporations, in order to facilitate foreign trade, import/export, use banker’s acceptances. The banker’s acceptance acts like a line of credit or a post-dated check. The BA (Banker’s Acceptance) is a time draft that will be cleared by the issuing bank on the day it comes due to whomever presents it for payment. The maturity dates on BA’s range from as little as one day to a maximum of 270 days (9 months).
Negotiable Certificates of Deposit
A negotiable CD is a time deposit with a fixed interest rate and a set maturity ranging from 30 days to 10 years or more. A negotiable CD, unlike the traditional CD, may be exchanged or traded between investors. The minimum denomination for a negotiable CD is $100,000. Many negotiable CD’S are issued in denominations exceeding $1,000,000 but FDIC only insures the first $250,000. Negotiable CDs trade will accrued interest.
The largest and most creditworthy corporations use commercial paper as a way to obtain short-term funds. Commercial paper is an unsecured promissory note or an IOU issued by the corporation. Corporations will sell commercial paper to finance such things as short- term working capital or to meet their cash needs due to seasonal business cycles. Commercial paper maturities range from one day to a maximum of 270 days. It is issued at a discount to its face value and has an interest rate that is below what a commercial bank would typically charge for the funds. Commercial paper is typically issued in book entry form. There are two types of commercial paper: direct paper and dealer paper. With direct paper, the issuer sells it directly to the public without the use of a dealer. Dealer paper is sold to dealers who then resell the paper to investors.
Federal Fund Loans
Federal fund loans are loans between two large banks that are typically made for short periods of time in amounts of $1,000,000 or more. These loans may be exchanged in the money market between investors.
A repurchase agreement is a fully collateralized loan made between a dealer and a large institutional investor. These loans are usually collateralized with US Government securities that have been sold to the lender. The borrower (Seller) agrees to repurchase the securities from the lender at a slightly higher price. The slightly higher price represents the lender’s interest.
Reverse Repurchase Agreement
In a reverse repurchase agreement, the institutional investor initiates the transaction by selling the securities to the dealer and agrees to repurchase them at a later time. In a reverse repurchase agreement the borrower (seller) is the institution, not the dealer.
Fixed Vs. Open Repurchase Agreements
With a fixed repurchase agreement, the borrower (seller) agrees to repurchase the securities at a fixed price on a specified date. With an open repurchase agreement, the date of the repurchase is not fixed and the open repurchase agreement becomes a demand note for the lender and may be called in.
Corporate issues with less than one year to maturity, regardless of the original maturity, may be traded in the money market.Other Money Market Instruments
Bonds & Fixed IncomeCommercial 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.
Investing BasicsA reverse repurchase agreement is the buyer side of a repurchase agreement (also called a repo).
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 ...
InvestingA repurchase agreement is the equivalent of a short-term collateralized loan. An owner of marketable securities sells those securities to a buyer for cash. As part of the deal, the seller agrees ...
Stock AnalysisCompanies with a heavy dependence asset-backed commercial paper are doomed if investors get cold feet. Learn which companies have the most to lose.
RetirementWe hope this tutorial has given you an idea of the securities in the money market. It's not exactly a sexy topic, but definitely worth knowing about, as there are times when even the most ...
Mutual Funds & ETFsLearn information on some of the most promising money market mutual funds for investors to consider adding to their portfolio in 2016.
Investing BasicsFinancial instruments with high liquidity and short maturities trade in money markets. Long-term assets trade in the capital markets.
Stock AnalysisLet's look at share repurchases to demonstrate why special dividends are far superior to buybacks.
InvestingWal-Mart announced huge internal investments along with an aggressive share repurchase program that isn't as good as it initially sounds.
A form of short-term borrowing for dealers in government securities. ...
Under a term repurchase agreement, a bank will agree to buy securities ...
A market maker that buys and sells extremely short-term corporate ...
The purchase of securities with the agreement to sell them at ...
An unsecured, short-term debt instrument issued by a corporation, ...
A program instituted in October of 2008 that created the Commercial ...
Learn about the tax consequences that the buyer can face as a result of a reverse repurchase agreement ("reverse repo") with ... Read Answer >>
Learn about examples of securities found in money market accounts. These securities need to be safe, liquid and of short-term ... Read Answer >>
Find out how individual retail investors can purchase short-term commercial paper, but why it rarely makes good investment ... Read Answer >>
Read about the lender risks of participating in reverse repurchase agreements or for dealers who use the Fed's overnight ... Read Answer >>
Learn about the role of each party in a reverse repurchase agreement transaction, and find out why it's different if the ... Read Answer >>
Learn the difference between a stock repurchase and a stock redemption, and find out about the reasons why a company might ... Read Answer >>