Financial Markets and Institutions (2-downloads)

Money Market

Security

Issuer

Buyer

Usual

Maturity

Secondary

Market

Treasury bills

U.S. government

Consumers and 

companies

4, 13, and

26 weeks

Excellent

Federal funds

Banks

Banks

1 to 7 days

None

Repurchase

agreements

Businesses

and banks

Businesses

and banks

1 to 15 days Good

Negotiable

certificates of

deposit

Large money 

center banks

Businesses

14 to 

120 days

Good

Commercial paper Finance companies

and businesses

Businesses

1 to 

270 days

Poor

Banker’s 

acceptance

Banks

Businesses

30 to 

180 days

Good

Eurodollar deposits Non-U.S. banks

Businesses,

governments, 

and banks

1 day to 

1 year

Poor

S U M M A R Y

1. Money market securities are short-term instruments

with an original maturity of less than one year. These

securities include Treasury bills, commercial paper, fed-

eral funds, repurchase agreements, negotiable certifi-

cates of deposit, banker’s acceptances, and Eurodollars.

2. Money market securities are used to “warehouse” funds

until needed. The returns earned on these investments

are low due to their low risk and high liquidity.

3. Many participants in the money markets both buy

and sell money market securities. The U.S. Treasury,

commercial banks, businesses, and individuals all

benefit by having access to low-risk short-term

investments.

4. Interest rates on all money market securities tend to

follow one another closely over time. Treasury bill

returns are the lowest because they are virtually

devoid of default risk. Banker’s acceptances and nego-

tiable certificates of deposit are next lowest because

they are backed by the creditworthiness of large

money center banks.

---

Chapter 11 The Money Markets

277

K E Y   T E R M S

asset-backed commercial paper,

(ABCP) p. 270

bearer instrument, p. 267

book entry, p. 263

competitive bidding, p. 263

deep market, p. 263

demand deposit, p. 267

direct placements, p. 269

discounting, p. 261

liquid market, p. 263

London interbank bid rate, (LIBID),

p. 271

London interbank offer rate,

(LIBOR), p. 271

noncompetitive bidding, p. 263

term security, p. 267

wholesale markets, p. 255

Q U E S T I O N S