Introduction to Finance

Personal Financial Planning

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34
C H A PT E R 2 Money and the Monetary System
expected to meet their debt obligations when due, and short maturities and secondary markets 
for many of these securities allow them to be sold with little loss of value.
Figure 2.6
identifi es characteristics of major money market securities. A 
Treasury bill
is a short-term debt obligation issued by the U.S. federal government to meet its short-term 
borrowing needs when imbalances exist between tax revenues and government expenditures. 
Treasury bills are generally issued with maturities between three months (technically, 90 days) 
and one year. Investors buy Treasury bills for safety and liquidity reasons. First, it is extremely 
unlikely that the federal government will default on its debt obligations. Second, there is an 
active secondary money market for Treasury bills, so investors can easily sell them at any time 
before maturity if cash needs arise.
Businesses often fi nd it necessary to borrow in the short-term to meet temporary imbal-
ances between when cash is received from sales and when bills must be paid. 
Commercial 
paper
is a short-term unsecured promissory note issued by a high credit–quality corporation. 
Maturities on commercial paper are generally one to three months in length. However, since 
there is an active secondary money market for commercial paper, purchasers can easily sell 
their commercial paper holdings at any time to meet their cash needs.
A 
negotiable certifi cate of deposit (negotiable CD)
is a short-term debt instrument 
issued by depository institutions to individual or institutional depositors. Negotiable certifi cates 
of deposit are issued by commercial banks in denominations of $100,000 or more with typical 
maturities ranging from one month to one year. Negotiable CDs are money market securities 
with an active secondary market that allows short-term investors to easily match their cash or 
liquidity needs when they arise. It is important, of course, to recognize that negotiable CDs 
diff er from smaller-denomination CD time deposits off ered by depository institutions to indi-
vidual depositors. Small-deposit CDs are nonnegotiable and must be redeemed with the issuer, 
and thus no secondary securities market exists for them. In fact, owners of nonnegotiable CDs 
redeemed before maturity usually are charged an interest deduction penalty.
A