Money market transactions are an important part of the global credit and financial system. They refer to the buying and selling of short-term financial instruments. These transactions involve Treasury bills, commercial paper, Eurodollars, certificates of deposits and other securities with a maturity of one year or less.
U.S. Treasury Bills
U.S. Treasury Bills are issued by the federal government and sold to individuals, governments and institutions. U.S. Treasury bills come in minimum denominations of $100 and mature in one year or less.
Commercial paper is a money market instrument issued by a corporation and used to fund current operations. The total amount of commercial paper outstanding averaged $98.56 billion in June 2010.
Eurodollars are deposit liabilities of banks that are U.S. dollar denominated. They are typically issued by foreign banks and therefore not subject to U.S. regulations.
Certificates of Deposits
Certificates of deposits (CDs) are also important money market instruments. They are issued by banks and insured by the Federal Deposit Insurance Corporation (FDIC).
The Federal Reserve can lend money directly to banks through the discount window. This borrowing is infrequent and is used to cover deficiencies in banks' required reserves.