Primer on the Money Market
The "money market" consists of a number of short-term debt obligations issued by banks, large commercial and industrial companies, and the federal government.Skip to next paragraph
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Cash-management funds, also known as money market funds, invest mainly in the following types of debt securities:
* Commercial paper.These are notes that represent the unsecured debt of a large company that wants money for short-terms needs. The amount may be $1 million or more. The company agrees to repay on a specific date in a few weeks or a few months, depending on the term specified. As is the case with other money market instruments, commercial paper is sold at a discount; the interest earned is the difference between the purchase price and the price at which the company will redeem the paper at maturity.
* Certificates of deposit. Such certificates are much like the savings certificates offered to indiviual savers by banks and savings and loan associations, except that the amounts are much larger -- usually a minimum of $ 100,000. The CDs issued by big banks -- offered in exchange for the deposit of money for a certain period of time -- mature in a matter of days or months.
* Bankers acceptances. These are bank guarantees of the IOUs issued by large corporations. Typically, they represent assurances to exporters in foreign countries that a US buyer will pay promptly for the goods shipped to him. Banks often sell these obligations on the money market.
* US government securities. The most popular federal government obligations with money market funds are Treasury bills. The most frequently issued type of government security, they come to market every week and mature in three months, six months, or one year. The minimum denomination for a Treasury bill is $10, 000, but big buyers such as the money funds often purchase $1 million or more at a time. Treasury notes are issued for periods of two to 10 years. Treasury bonds are issued for 10 years or more.
* Government agency obligations. These are securities issued by such federal agencies as the Federal Home Loan Banks, Federal Land Banks, the Tennessee Valley Authority, and the Federal National Mortgage Association. Not all of these carry direct Treasury guarantees, but they are considered about as safe as Treasury securities.