Money Market

Definition

The money market is a segment of the financial market where financial instruments with high liquidity and short maturities are traded. This segment of the market is characterized by the issuance and trading of debt instruments that mature in one year or less. Money market instruments are typically low-risk and highly liquid.

Examples of Money Market Instruments

1. Treasury Bills (T-Bills): Short-term government securities with maturities ranging from a few days to one year.
2. Commercial Paper: An unsecured promissory note issued by corporations to finance their short-term liabilities, typically maturing within 270 days.
3. Certificates of Deposit (CDs): A time deposit with a bank, maturing in one year or less.
4. Repurchase Agreements (Repos): Short-term loans with securities as collateral, typically maturing overnight or within a week.

Frequently Asked Questions

What is the primary purpose of the money market?

The primary purpose of the money market is to provide liquidity to the financial system, enabling institutions to meet their short-term funding requirements efficiently and affordably.

How do Treasury Bills work?

Treasury Bills are issued at a discount to their face value and mature at their face value. The difference between the purchase price and the face value represents the interest earned by the investor.

Are money market instruments risk-free?

While money market instruments are considered low-risk due to their short maturities and high liquidity, they are not entirely risk-free. For example, commercial paper carries credit risk, although it is generally issued by highly rated corporations.

Can individuals invest in the money market?

Yes, individuals can invest in money market instruments directly or through money market mutual funds, which pool investments in various short-term instruments to provide liquidity and safety.

What is the role of the Federal Reserve in the money market?

The Federal Reserve influences the money market through open market operations, setting interest rates, and providing short-term funds to banks to regulate liquidity and stabilize the financial system.

Related Terms

• Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
• Debt Instrument: A financial obligation that involves repayment of borrowed money along with interest at an agreed-upon date.
• Yield: The earnings generated and realized on an investment over a particular period.
• Interest Rate: The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage.
• Capital Market: A financial market in which long-term debt or equity-backed securities are bought and sold.
• Federal Funds Rate: The interest rate at which depository institutions trade federal funds with each other overnight.

Online Resources

• Investopedia - Money Market
• U.S. Treasury Direct - Treasury Bills
• Federal Reserve Education - Money Market
• Yahoo Finance - Money Markets

References

• Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. Pearson, 2018.
• Fabozzi, Frank J. The Handbook of Fixed Income Securities. McGraw-Hill Education, 2012.
• Brigham, Eugene F., and Michael C. Ehrhardt. Financial Management: Theory & Practice. Cengage Learning, 2019.

Suggested Books for Further Studies

• Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger
• The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More by Annette Thau
• Principles of Money, Banking, and Financial Markets by Lawrence S. Ritter, William L. Silber, and Gregory F. Udell
• Money Market and Bond Calculations by Yertzer Van Zyl

Real Estate Basics: Money Market Fundamentals Quiz