Money Market Instruments provide the tools by which one can operate in the money market.
Types Of Money Market Instruments
Treasury Bills: The Treasury bills are short-term money market instrument that mature in a year or less than that. The purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value.The Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very low returns.
Certificate of Deposit: The certificates 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.
Advantages of Certificate of Deposit as a money market instrument 1. Since one can know the returns from before, the certificates of deposits are considered much safe. 2. One can earn more as compared to depositing money in savings account. 3. The Federal Insurance Corporation guarantees the investments in the certificate of deposit.
Disadvantages of Certificate of deposit as a money market instrument: 1. As compared to other investments the returns is less. 2. The money is tied along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity.
Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers are a maximum of 9 months. They are very safe since the financial situation of the corporation can be anticipated over a few months.
Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.
Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are traded at very high denominations and mature before six months. The Eurodollar market is within the reach of large institutions only and individual investors can access it only through money market funds.
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. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due government backing.
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After wild swings at midweek (October 15), the US dollar spent the last two sessions of the week consolidating. While we expect the Federal Reserve will not be distracted by the recent market turmoil, or the softening of some market-based measures of inflation expectations, and will announce the finishing of its asset purchases, we recognize that Bullard's comments cast a greater element of doubt. This doubt may prevent a resumption of the dollar's uptrend. Broad consolidation is more likely in the days ahead.
Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago. IMF’s Chief Economist from September 2003 to January 2007. Inaugural recipient of the Fischer Black Prize.
Chancellor of the Exchequer of the United Kingdom from 1992 to 2007. Prime Minister of the UK between 2007 and 2010. Inaugural 'Distinguished Leader in Residence' at New York University. Advisor at World Economic Forum
Mario I. Blejer is a former governor of the Central Bank of Argentina and former Director of the Center for Central Banking Studies at the Bank of England. Eduardo Levy Yeyati is Professor of Economics at Universidad Torcuato Di Tella and Senior Fellow at The Brookings Institution.
QFINANCE is a unique collaboration of more than 300 of the world’s leading practitioners and visionaries in finance and financial management, covering key aspects of finance including risk and cash-flow management, operations, macro issues, regulation, auditing, and raising capital.
Vice President and Director of the Global Economy and Development Program at the Brookings Institution. Former Turkish Minister of State for Economic Affairs. Head of the United Nations Development Program (UNDP) from 2005-2009.