Money markets are the global financial markets for borrowing and lending in the short term. On these markets, Treasury Bills are bought and sold, as are commercial deposits and bankers’ acceptances. Financial institutions and those who deal in money are the main participants in this market when they wish to borrow or lend money. They can engage in these dealings for short-term periods of up to thirteen months. Many people do not realize that banks borrow from each other using this type of market.
Finance companies gain the funding they need through commercial paper that is backed by their assets. The eligible assets they can use for borrowing on the money markets include loans for automobiles, credit card loans and mortgages. Some companies will issue commercial paper based on their own credit ratings. For businesses, using commercial paper to secure funding is a cheaper alternative than borrowing the money from a traditional source, such as a bank. Governments are also participants in the money market.
Some of the common terms associated with money markets include:
• Bankers’ Acceptance – This is similar to a cashier’s check in that it is issued by a bank and is legal tender.
• Certificate of deposit – This is a timed deposit with a maturity date. Once this date arrives, the bank pays out the agreed upon amount of interest. However, the certificates can be sold before the maturity date.
• Repurchase agreement – This is a short-term loan where an investor will agree to complete a purchase the loan within a relatively short period of time – usually less than two weeks.
• Commercial paper – This is an unsecured IOU with a term not to exceed 270 days and is usually sold at a discount substantially less than the face value.
• Short Term Securities – securities issued by businesses with government sponsorship
• Federal Funds – This term refers to the US money market. These funds are deposits that banks and other financial institutions have at the Federal Reserve for which they earn interest.
• Treasury Bills – The debt obligations of a government that will come due anywhere from 3 to 12 months.
• Mutual Funds – High quality investments that allow investors to purchase securities on behalf of companies or individuals