Money Market Overview

  

The money market overview gives a birds eye view of what the money market is all about. Basically the money market deals with short term debt securities that mature in a year. The money market , which is another form of the dealer market, is very secure as compared to the bonds market . This security comes at the cost of very low rates of return.

The money market securities are extremely liquid and are issued by government, financial institutions or large corporations. The money market securities are traded over the phone or any electronic system unlike the bond market that trade in exchanges through brokers.

There are many money market instrument s and the simplest way to gain access to the money market is through the money market mutual fund s or the money market bank account .

The types of 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 face value. At maturity the government pays the Treasury Bill holder the full face value. They are marketable, affordable and risk free. They are also free from local and state tax impositions.

But the disadvantage is that the security attached to the treasury bills comes at the cost of very low returns.

•  Certificate of Deposit: The certificate of deposit is basically time deposits that are issued by the commercial banks wit 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.

Certificates of Deposit are much safe since they are guaranteed by the Federal Insurance Corporation. One can earn more as compared to depositing money in savings account.

Certificate of deposit has low returns as compared to other investments. The money is tied along with the long maturity period of the Certificate of deposit.

•  Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories.

•  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.

•  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.

Find out more about Money Market Accounts as Cash Investment.