BANKING #3 MONEY MARKET INSTRUMENTS

Aug 21, 2021 Banking and Money
Money; corporate bond

We first focus on the instruments traded in the money market and then turn to those traded in the capital market.

Because of their short terms to maturity, the debt instruments traded in the money market undergo the least price fluctuations and so are the least risky investments. The money market has undergone great changes in the past three
decades, with the amount of some financial instruments growing at a far more rapid rate than others.

We can read about the money structure of financial markets in previous post. (link below)

BANKING #2 STRUCTURE OF FINANCIAL MARKETS | Econfin-invest

Treasury bills

  • This is the most liquid of all the money market instruments because they are the most actively traded.
  • They are also the safest of all money market instruments because there is almost no possibility of default, a situation in which the party issuing the debt instrument (the federal government, in this case) is unable to make interest payments or pay off the amount owed when the instrument matures

Certificate of deposit

  • A certificate of deposit (CD) is a debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the original purchase price.
  • CDs are often negotiable, meaning that they can be traded, and in bearer form (called bearer deposit notes), meaning that the buyer s name is neither recorded in the issuer s books nor on the security itself. And, CD can be sold in a secondary market.

Commercial paper/ Corporate Bonds

  • Commercial paper is an unsecured short-term debt instrument issued by large banks and wellknown corporations. Or the other common name is the corporate bond. Because commercial paper is unsecured, only the largest and most creditworthy corporations issue commercial paper.
  • The interest rate the corporation is charged reflects the firm’s level of risk. The interest rate on commercial paper is low relative to those on other corporate fixed-income securities and slightly higher than rates on government’ treasury bills.

Repurchase Agreements

Repurchase agreements, or repos, are effectively short-term loans (usually with a maturity of less than two weeks) for which treasury bills serve as collateral, an asset that the lender receives if the borrower does not pay back the loan

Overnight Funds

These are typically overnight loans by banks to other banks. The overnight funds designation is somewhat confusing, because these loans are not made by the federal government or by the Central Bank, but rather by banks to other banks.

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