Money markets financial institutions provide the opportunity to purchase and sell different securities. These markets provide this opportunity to many borrowers and investors for short periods. These money markets don’t have any physical existence.
Smart Money
Actually it is much of a network in which banks and traders are liked. They make use of different media like telephones, computers and fax machines in order to connect to each other. These markets are found in US along with many other countries.
Money markets are used to sell short-term debts and other securities. These debts and securities are called money market instruments. These instruments are liquid in nature and have maturity periods in the range of one day to one year. Some examples of these instruments are federal agency notes, repurchase agreements and certificates of deposit. Individuals or the institutions that supply the funds for these money markets prefer high liquidity and less risk.
Money Sense
The money markets actually act as a storage area for your short-term funds. Large organizations participate in money markets via dealers. They handle their short-term funds themselves. Small businesses often choose to invest their funds in money markets.
Money market securities are not free from risks but they still minimize their intensity. This little risk is due to the fact that banks can also fail. The low risks are associated with the lenders that you select.
Different Money Market Instruments
Federal Agency Notes:
Short-term and long-term obligations are issued by some of the federal agencies. Government doesn’t often back these obligations. They can yield more than treasury bills but still the risk is very small. These money market instruments are generally purchased by the corporations.
Repurchase Agreements:
Treasury securities that are purchased by the dealers are called repurchase agreements. Like a Derivatives Future Contract, these agreements are on the basis of the condition that they will be sold at some future date for higher prices. Ranging from 24 hours to several months, these instruments tend to be more liquid than any other money market investments. They have much resemblance with the bank deposit accounts. Some corporations have such arrangements with their bank that the excess amount is automatically transferred to such funds.
Tax exempts for short-term:
Municipal government and states issue these short-term notes. The risk involved in them is a bit more than what we have in T-bills. They are also less open to discussion. The feature they add in it is the interest they earn, that is not subjected to income tax.
Bankers’ Acceptances:
Non financial corporation produce this instrument in the name of some bank. It is a document that indicates that who will pay the face amount of the instrument in the future. Foreign trade is often financed through bankers’ acceptance. Companies also use them when they need to finance their inventory or to purchase goods on credit. Bankers’ acceptances have maturity period ranging from one to six months.
Certificates of Deposit:
Federally licensed banks issue these certificates of deposit. They issue them on the basis of deposited funds and specified return that can be earned after predefined time period. A company or an individual can lend certain amount from some bank for a given time period. The bank also agrees to repay the amount after the fixed time period with interest. This certificate comprises of the agreement with the bank to repay the loan.
