The money market is a short term debt market that deals with different money market instruments '- is the common money market definition .
To understand the money market definition some important issues need to be discussed and they are the money market instruments , the money market account and the money market funds .
Money Market Instruments
The money market instruments are basically the tools through which investment in the money market is done. The money market instruments are discussed under the following heads:
- Treasury Bills: The Treasury bills are the short term money market security that mature in a year or less than that. The purchase price is less than the the face value.
- Certificate of Deposit: The certificate of deposit are basically time deposits that are issued by the commercial banks with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.
- Banker's Acceptance: It is a short term credit investment . It is guaranteed by a bank to make payments. The Banker's Acceptance are traded in the Secondary market.
- EuroDollars : The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States.
- Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight.
Money Market Funds
To have an insight into the money market definition one needs to understand what are the money market funds.
The money market fund is a type of mutual fund that is invested in money market instruments only.There are two types of money market funds and each of them is discussed under the following heads:
Taxable Funds
For the taxable money market funds the returns are subject to local,state and federal taxes. Tye portfolio of the taxable funds comprise of the U.S Treasury securities, Repos, Commercial Paper and bankers' acceptances.
Tax-free Funds
Unlike the taxable funds the tax free funds do not invest in a wide variety of money market instruments. They generally invest in short term debt obligations that are issued by the federal tax exempt units. The tax free funds generally generate very low yields. There are also tax free funds that are exempt from state and local taxes, but these funds are not the general norm but exceptions to the rule. Hence a thorough investigation of such tax free funds may be conducted before investing.
Another important aspect of the money market definition is the money market account.
Money Market Account
The money market account is a high interest savings account. The money market account is most commonly known as the MMA . It is also known as the Money Market Demand account or the money market deposit account . In the money market account competitive rates of interest are offered in lieu of larger than average deposits.
The money market account can be opened at any bank. The money that is kept in the bank is then invested into low risk, short term money market instruments like the Commercial Deposits, Certificate of deposit and T-bills. The money market account holder then earns interest for allowing the bank to make such money market investments.
For more details about the money market definition important sites to be viewed are answers.com, investopedia.com, thefreedictionary.com etc.