Money markets help governments, businesses, and financial institutions manage short-term borrowing and lending needs. Their securities are generally short-term, liquid, and low risk, although risk differs by issuer and instrument.
Money market securities are debt instruments with maturities of less than one year. They are commonly used to meet temporary financing needs, such as covering inventory purchases, receivables, or government cash-flow gaps. Many are considered relatively low risk and liquid: investors can generally convert them to cash quickly without a substantial loss of value.
All flashcards
What is a money market security?
A short-term debt instrument, generally with a maturity under one year, used to meet financing or cash-management needs.
How does a T-bill work?
The federal government sells it at a discount, and the investor receives the bill's face value at maturity rather than periodic coupon payments.
What is commercial paper?
Short-term unsecured debt issued by corporations and financial institutions, often to finance needs such as inventory and receivables.
How does an NCD differ from an ordinary CD?
An NCD is much larger, usually not FDIC-insured, and can generally be traded in a secondary market before maturity rather than withdrawn with an early-withdrawal penalty.
Why does the federal funds rate matter?
It is an important monetary policy rate influenced by the Federal Reserve and reflects the cost of very short-term lending among financial institutions.
Quiz questions
What maturity characteristic generally defines a money market security?Answer: It matures in less than one year.
How do T-bills typically provide a return to investors?Answer: They are sold at a discount and pay face value at maturity.
Why are commercial paper issuers generally highly rated?Answer: The debt is unsecured, so repayment depends on the issuer's creditworthiness.
How can a small investor gain diversified access to short-term instruments without buying each security directly?Answer: Invest through a money market mutual fund.
What is the traditional purpose of the federal funds market?Answer: To facilitate overnight lending and borrowing of reserve balances among institutions.
Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.