Characteristics of Money Market Securities

Businesses, governments and financial institutions issue money market securities as an inexpensive means to borrow money to cover short-term liabilities. Money market securities are typically debt instruments such as bonds and commercial paper having the highest credit ratings issued by institutions such as Moody's and Standard & Poors. Money market securities provide investors with a safe means of preserving capital, though this safety comes at the expense of the higher yields attainable through riskier investments.

  1. Types of Securities

    • Money market securities are typically debt instruments with a face value of $100,000 or more. These securities include federal and municipal bonds, certificates of deposit from financial institutions, and commercial paper, a kind of unsecured IOU, from large corporations. Certain money market funds specialize in one type of money market security, such as tax-free municipal bond funds, but most include a mix of various security types.

    Rapid Maturity

    • Money market securities are designed solely to meet the short-term capital requirements of government and business. Most money market securities mature in less than three months, and all mature within one year. Money market instruments such as federal funds and repurchase agreements exemplify the short maturity of money market securities; they represent significant holdings in most money market funds and typically mature in less than one week.

    Safety

    • Money market securities are the safest investments available, with credit ratings that surpass almost all other investment grade debt instruments. The SEC helps ensure this safety by mandating that at least 95% of a money market fund's securities must be ones that have earned the highest rating of at least two of the five major credit rating institutions. Investors can take reassurance in knowing that since money market funds were introduced in 1983, only once has a fund declined in value.

    Liquidity

    • Money market securities are extremely liquid and can be converted into cash quickly. The short-term nature of these securities contributes to the liquidity of money market investments, as the principal of these debt instruments is repaid very rapidly. This liquidity, combined with a higher return on principal than an investor would receive from a savings account, make money market securities an excellent place for investors to relegate the cash portion of their diversified portfolios.

    Money Market Funds

    • Since most money market securities trade in large denominations, money market funds provide the best way for individuals to invest in these securities. Their safety and high liquidity make money market funds attractive vehicles for risk-averse investors as well as those wanting a safe place to hold funds between more risky, high-yield investments.

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