Types of Money Market Instruments
Money market instruments are also called as debt securities. When the maturity date is one year or less, the debt contracts are called as "money market instruments" and they trade on the "money market." The money market consists of individual investors and governments, corporations and municipal borrowers. The instruments include treasury bills, commercial paper, certificates of deposit and short-term or medium-term notes.
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Treasury Bill
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Treasury bills are issued by the U.S. Department of Treasury and include the three-month and six-month maturity bills. The purchase price of the bills is generally lower than the face value of the bills. The debtor receives the face value at maturity. The difference between the purchase price and face value is considered the interest payment that the debtor receives at maturity.
Commercial Papers
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Commercial papers are short-term unsecured promissory notes that are issued by corporations to raise funds. The maturity dates usually vary from 90 days to 270 days. Commercial papers offer higher interest rates because they are more risky for investors.
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Certificate of Deposit
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Certificate of Deposit (CD) is a financial asset issued by a bank or other depository institution that requires a certain amount to be deposited with the institution. The CD will carry a specified maturity date and interest rate higher than treasury bill that varies by institution.
Bankers' Acceptance
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Bankers' acceptance is a financial instrument created to facilitate commercial trading. Basically it indicates that the bank assumes the responsibility of the loan on behalf of the holder of the bankers' acceptance.
Considerations
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Money market instruments vary in terms of risk and complexity, widely based on the issuer and other economic factors. Therefore, expert advice is always recommended before investing and trading in the money market.
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