Money Market Rates

  

The interest paid depositors who invest in the money market instruments or the federally insured deposits pay the money market rates. The money market rates are found daily in the newspapers. The money market rates include the broker call loan rate, federal funds rate, rates on bankers’ acceptance, the rates on the Eurodollar time deposits, the 3 month and the 6 month T- Bill rate and the London Interbank Offered Rate. Each of the mentioned money market rates may be elucidated as follows.

•  Broker Call Loan Rate

When one wants to invest in any money market instrument but is suffering from lack of funds then he can borrow the funds from a broker. This loan that is taken from the broker is known as the margin loan and the interest rate charged on such loan is known as the broker’s call loan rate. The Broker’s call loan rate is published on a daily basis in the Wall Street Journal.

•  Federal funds rate

The federal funds rate is the interest rate that is charged by one depository institution to another overnight for borrowing funds. Any particular US depository institution may need extra funds to maintain its reserves with the Fed at the legally required level. Now the depository bank has the option to augment its reserves with the Fed by borrowing from another depository bank, which is running at a surplus. The federal funds rate is controlled by the open market operations . The Federal Funds rate is fixed by the Federal Open market Committee (FOMC).

•  Rate on Bankers’ Acceptance

The Banker’s Acceptance 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. The rate at which the trading of banker’s acceptance occurs is the banker’s acceptance rate. The banker’s acceptance rate is used as an index in interest rate swaps and derivatives.

•  Money market rate on 3 month and 6 month T- Bill

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. According to its maturity there are 3 months and the 6-month Treasury Bill. The rate at which the T-bills traded are the rates of 3 month and 6 month T- Bill.

•  London Inter Bank Offered Rate

The interest rate that is charged by banks for borrowing funds to other banks in the Interbank Market is the London Inter Bank Offered Rate, commonly known as the LIBOR. The British Banker’s Association sets the LIBOR on a daily basis. The LIBOR is the index used for short-term interest rates. US, Canada, Switzerland rely on LIBOR for a reference rate.