Money market instruments

Money market instruments are short-term debt securities, with maturities ranging from overnight to one year, that are issued and traded in the money market. Money market instruments are primarily used by corporations, governments, and other institutions to raise short-term capital.

The main money market instruments are:

• Certificates of Deposit (CDs): CDs are deposits issued by banks and thrift institutions and are available in a variety of maturities and denominations. They are typically insured by the Federal Deposit Insurance Corporation (FDIC) and are considered one of the safest investments.
• Treasury Bills (T-Bills): T-Bills are short-term debt securities issued by the United States Treasury. They are generally issued with maturities ranging from a few days to one year and are available in denominations ranging from $100 to $1 million.
• Commercial Paper (CP): CP is a short-term debt security issued by corporations with maturities ranging from one to 270 days. CP is typically used to finance accounts receivable, inventory, and other short-term liabilities.
• Repurchase Agreements (Repos): Repos are short-term loans secured by collateral such as Treasury bills or other debt securities. They are typically used by corporations and governments to raise short-term capital.

Money market instruments are an important tool for raising short-term capital for corporations, governments, and other institutions. They provide a low-risk investment option for investors looking for safe, short-term investments.

Example of Money market instruments

Money market instruments are short-term debt securities with maturities ranging from overnight to one year that are issued and traded in the money market. The main money market instruments are Certificates of Deposits (CDs), Treasury Bills (T-Bills), Commercial Paper (CP), and Repurchase Agreements (Repos). Each of these instruments are used by corporations, governments, and other institutions to raise short-term capital and provide a low-risk investment option for investors.

When to use Money market instruments

Money market instruments are ideal for investors looking for a safe, short-term investment option. They can be used for a variety of purposes, such as financing accounts receivable, inventory, and other short-term liabilities. Additionally, they can be used to manage cash flow by providing a low-risk, liquid investment option. Money market instruments are also ideal for investors looking for higher yields than traditional savings accounts.

Types of Money market instruments

Money market instruments comprise a variety of debt securities with maturities ranging from one day to one year. The main money market instruments are certificates of deposit (CDs), treasury bills (T-bills), commercial paper (CP), and repurchase agreements (Repos). CDs are deposits issued by banks and thrift institutions and are available in a variety of maturities and denominations. T-bills are short-term debt securities issued by the United States Treasury with maturities ranging from a few days to one year. CP is a short-term debt security issued by corporations with maturities ranging from one to 270 days. Repos are short-term loans secured by collateral such as Treasury bills or other debt securities. Money market instruments provide a low-risk investment option for investors looking for safe, short-term investments.

Advantages of Money market instruments

• Liquidity: Money market instruments are highly liquid, meaning they can be easily converted into cash. This makes them an attractive investment option for investors looking for quick access to their funds.
• Low Risk: Money market instruments are generally considered to be low-risk investments, as they are typically backed by the full faith and credit of the issuing government or entity.
• High Returns: Money market instruments offer higher returns than traditional savings accounts, making them an attractive option for investors looking for a higher return on their investments.

Limitations of Money market instruments

Money market instruments are not suitable for long-term investments as they typically have short maturities and limited returns. Additionally, they are often subject to liquidity risk as they are not as liquid as other investments such as stocks and bonds. Lastly, they are subject to credit risk as they are often exposed to default risk if the issuer fails to meet its obligations.

Other approaches related to Money market instruments

• Asset-backed securities: Asset-backed securities are debt securities that are collateralized by a pool of assets, such as mortgages, auto loans, student loans, and credit card receivables.
• Structured Investment Vehicles (SIVs): SIVs are special purpose vehicles that are used to issue debt securities backed by a portfolio of assets. SIVs are typically used to provide funding for investments in the money market.
• Money market mutual funds: Money market mutual funds are mutual funds that invest in a variety of money market instruments, including CDs, T-Bills, CP, and Repos.

Money market instruments provide an important source of short-term capital for corporations, governments, and other institutions. There are a variety of other approaches related to money market instruments, such as asset-backed securities, structured investment vehicles, and money market mutual funds, which provide alternative ways for investors to access the money market.

Money market instruments — recommended articles

Financial instrument — Short-term investments — Conservative investing — Sukuk — Private reit — Investment product — Negotiable certificate of deposit — Eurocommercial Paper — Cash and cash equivalents

References

• Mengle, D. (1992). Behind the money market: clearing and settling money market instruments. FRB Richmond Economic Review, 78(5), 3-11.
• Okoyan, K., & Eze, P. G. (2021). Effect of money market instruments on Capital market performance in Nigeria. European Journal of Accounting, Auditing and Finance Research, 9(2), 67-80.