MONEY MARKET

INSTRUMENTS
C H A P T E R 11 FIM
What Is the Money Market?
The money market is the trade in short-term debt investments.
At the wholesale level, it involves large-volume trades between
institutions and traders. At the retail level, it includes money
market mutual funds bought by individual investors and money
market accounts opened by bank customers.
Money Market Participants
Institutions that participate in the money market include banks
that lend to one another and to large companies in the
eurocurrency and time deposit markets; companies that raise
money by selling commercial paper into the market, which can
be bought by other companies or funds; and investors who
purchase bank CDs as a safe place to park money in the short
term. Some of those wholesale transactions eventually make
their way into the hands of consumers as components of money
market mutual funds and other investments.
The U.S. government issues Treasury bills in the money market,
with maturities that range from a few days to one year. Primary
dealers buy them in large amounts directly from the government
to trade between themselves or to sell to individual investors.
Individual investors can buy them directly from the government
through its TreasuryDirect website or through a bank or a
broker. State, county, and municipal governments also issue
short-term notes.
Types of Money Market Instruments
Money Market Funds
The wholesale money market is limited to companies and
financial institutions that lend and borrow in amounts ranging
from $5 million to well over $1 billion per transaction.
Mutual funds offer baskets of these products to individual
investors. The net asset value (NAV) of such funds is intended
to stay at $1. During the 2008 financial crisis, one fund fell
below that level. That triggered market panic and a mass exodus
from the funds, which ultimately led to additional restrictions
on their access to riskier investments.
Money Market Accounts 
Money market accounts are a type of savings account. They pay
interest, but some issuers offer account holders limited rights to
occasionally withdraw money or write checks against the
account. (Withdrawals are limited by federal regulations. If they
are exceeded, the bank promptly converts it to a checking
account.) Banks typically calculate interest on a money market
account on a daily basis and make a monthly credit to the
account.
In general, money market accounts offer slightly higher interest
rates than standard savings accounts. But the difference in rates
between savings and money market accounts has narrowed
considerably since the 2008 financial crisis.
Certificates of Deposit
Most certificates of deposit (CDs) are not strictly money market
funds because they are sold with terms of up to 10 years.
However, CDs with terms as short as three months to six
months are available.
As with money market accounts, bigger deposits and longer
terms yield better interest rates. Rates in mid-2019 for six-
month CDs ranged from about 0.02% to 0.65% depending on
the size of the deposit.
Commercial Paper
This is where we get into the professional market for
institutions and traders who deal in large-volume transactions.
The commercial paper market is for buying and selling
unsecured loans for corporations in need of a short-term cash
infusion. Only highly creditworthy companies participate, so
the risks are low.
Banker's Acceptances
Another professional money market trade, the
banker's acceptance is a short-term loan that is guaranteed by a
bank. Used extensively in foreign trade, a banker's acceptance is
like a post-dated check and serves as a guarantee that an
exporter can pay for the goods. There is a secondary market for
buying and selling banker's acceptances at a discount.
Eurodollars
These are not to be confused with the euro currency.
Eurodollars are dollar-denominated deposits held in foreign
banks and thus not subject to Federal Reserve regulations. Very
large deposits of eurodollars are held in banks in the Cayman
Islands and the Bahamas. Money market funds, foreign banks,
and large corporations invest in them because they pay a
slightly higher interest rate than U.S. government debt.
Repos
The repo, or repurchase agreement, is part of the overnight
lending money market. Treasury bills or other government
securities are sold to another party with an agreement to
repurchase them at a set price on a set date.
Promissory Note:
The promissory note is the earliest types of bill. It is a
written promise on the part of a businessman today to
another a certain sum of money at an agreed future data.
Usually, a promissory note falls due for payment after 90
days with three days of grace. A promissory note is drawn
by the debtor and has to be accepted by the bank in which
the debtor has his account, to be valid. The creditor can
get it discounted from his bank till the date of recovery.
Promissory notes are rarely used in business these days,
except in the USA.
2. Bill of Exchange or Commercial Bills:
Another instrument of the money, market is the bill of
exchange which is similar to the promissory note, except
in that it is drawn by the creditor and is accepted by the
bank of the debater. The creditor can discount the bill of
exchange either with a broker or a bank. There is also the
foreign bill of exchange which becomes due for payment
from the date of acceptance. The rest of the procedure is
the same as for the internal bill of exchange. Promissory
notes and bills of exchange are known as trade bills.
3. Treasury Bill:
But the major instrument of the money markets is the
Treasury bill which is issued for varying periods of less
than one year. They are issued by the Secretary to the
Treasury in England and are payable at the Bank of
England. There are also the short-term government
securities in the USA which are traded by commercial
banks and dealers in securities. In India, the treasury bills
are issued by the Government of India at a discount
generally between 91 days and 364 days. There are three
types of treasury bills in India—91 days, 182 days and 364
days.
Money Markets vs. Capital Markets
The money market is defined as dealing in debt of less than one
year. It is a means for governments and corporations to keep
their cash flow steady, and for investors to make a modest
profit.
The capital market is dedicated to the sale and purchase of long-
term debt and equity instruments. The term encompasses the
entire stock and bond markets. Certainly, anyone can buy and
sell a stock in a fraction of a second these days. However, the
company issued the stock for the purpose of raising money for
its long-term operations. Its value fluctuates but it has no
expiration date unless the company itself ceases to operate.