MONEY MARKET AS LIQUID SOURCE OF INVESTMENTS

2007-03-08 10:33:40

( Financial )



Money market only trades short-term debt instruments with maturity of less than one year. These instruments are considered to be the least risky investments since it experiences minimal fluctuations in its prices. U.S. treasury bills, negotiable bank certificates of deposits, commercial papers, banker’s acceptances, repurchase agreements, federal funds and Eurodollars are short term debt instruments traded in money market.

U.S. Treasury Bills

The United States government issues treasury bills to finance its budget deficit. It matures in 3 to 12 months. Treasury bills are sold at a discount and redeemed at a full amount during maturity.

U.S. treasury bills are the best money market instrument. It’s considered to be the highest liquidity value among money market debt instruments. It is actively traded and is the safest due to the impossibility of default on the part of the federal government. It can raise taxes or issue currency to pay off its debt.

Negotiable Banks Certificates of Deposit

Commercial banks sell certificates of deposits and pay annual interest for it. Purchase price are redeemed at maturity. Negotiable certificates of deposits are issued in large denominations for reselling to secondary markets.

Commercial Papers

Large banks and corporations issue commercial papers to generate immediate funds. The market for commercial papers has increased due to the improvements in information technology and the development of money market mutual funds.

Banker’s Acceptances

Firms issue banker’s acceptance which is a bank draft payable in the future. A deposit account is created for the firm to deposit the money to cover payment for the bank draft. The bank assumes payment of the draft in case the firm that issued it goes bankrupt or unable to generate funds to cover payments.

Repurchase Agreements

Repurchase agreements are short term loans with treasury bills as collateral. It usually matures in less than two weeks. Large corporations lend idle funds in their bank accounts through purchase of treasury bills from the bank. The bank will repurchase it in less than two weeks.

Federal Funds

Federal funds are overnight loans from one bank to another using its deposits at the Federal Reserve. The federal funds rate indicates the tightness of money in the banking system. Banks are short of funds when federal fund rates are high while sufficient funds are indicated when federal fund rates are low.

Eurodollars

Eurodollars are U.S. dollars deposited in banks outside the United States. American banks can borrow these dollar deposits when they need funds.

The money market debt instruments are crucial in the performance of the financial market. Channeling of idle funds to those who needs it contribute to the efficiency of the economy.


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