What are money market instruments and their examples?

May 1, 2010 by Victorino
Filed under Business Finance

What are money market instruments?

Money market instruments are short-term low risk financial instruments which are involved in short-term borrowings and lending with original maturities of one year or shorter periods. These instruments are composed of financial institutions and dealers in money or credit who intend to either borrow or lend. The instruments are traded in the money market. Money market, as contrast to capital market, refers to the borrowing and lending for periods of a year or less. Capital market involves long-term funding. They are usually supplied by bonds and equity instruments.

Types of money market instrument:

The following are the common types and examples of money market instruments:

Certificate of deposit or CD – This comes from insured time deposits offered to consumers by banks, thrift institutions, and credit unions.
Repurchase agreements also know as Repo – These are short-term borrowings normally for less than two weeks and often for an overnight basis – arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
Commercial paper – These are unsecured short-term debt instruments with fixed maturity dates of one to 270 days, usually sold at a discount from face value.
Eurodollar deposit – Deposits made in U.S. dollars at a bank or bank branch located outside the United States.
Federal agency short-term securities – (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.
Federal funds – (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
Municipal notes – (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
Treasury bills or (T-Bills) – Short-term debt obligations of a national government that are issued to mature in three to twelve months. The returns generated from T-bills are in the form of appreciation of the bond rather than in the form of interest payments.
Money funds – Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.
Foreign Exchange Swaps – Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.
Short-lived mortgage-backed and asset-backed securities