Printer-friendly version Send to friended version Money Market securities are some of the safest and most liquid of all investments available. Risk-averse investors that have a quick need for cash often find money market securities a good investment choice.
arket itself operates through dealers, Money Center Banks, and the Open Market Trading Desk at the New York Federal Reserve Bank. The five basic money market securities we’ll cover are: Treasury Bills Certificates of Deposit Commercial Paper Money Market Funds Treasury Bills (T-Bills) the most common of the money market instruments available today are Treasury Bills, or T-Bills.
Treasury bills are short-term obligations of the US government, highly liquid and considered the safest of all securities issued. They are issued by the Federal Reserve Bank on behalf of the US Treasury Department with maturities of thirty, sixty, ninety, and 180 day, as well as a maturity of one full year.
Being backed by the US government means that they are low risk and therefore offer a lower return than would normally be found with a riskier security. Certificates of Deposit (CD’s) In contrast to T-Bills that are backed by the government, CD’s are obligations of individual Banks. CD’s carry the bank’s guarantee to repay the principal and interest at an agreed upon rate after a set period of time.
These obligations are negotiable and extremely liquid – ownership can be transferred or sold to another party. The quality of the bank’s balance sheet and its financial strength play an important role in the rate that the bank will offer the purchaser of the CD.
The higher the quality of the institution, the lower the risk, and therefore the lower the rate of interest offered to the purchaser. Commercial Paper Commercial paper is a short-term promissory note issued by a corporation to raise working capital. The paper carries a life of no more than 270 days and is secured by a corporate IOU. Commercial paper is perceived to be riskier than government backed security, so the rate paid by the issuing corporation will reflect a premium over the T-Bill rate. This premium is dependent upon both the financial strength, and the credit quality of the corporate issuer. Money Market Funds money market fund is a mutual fund that invests in a number of money market vehicles (CD’s, T-bills, etc.
These funds are designed to pay the owner interest, as well as provide the owner with the ability to sell at any time. The fund managers are primarily concerned with holding’s credit quality, tax implications of investments, and investor safety.