Money Market Instruments

Common money market instruments are as follows:
Bankers’ Acceptance - A draft issued by a bank that will be accepted for payment, effectively the same as a cashier’s check. A check written by a financial institution on its own funds. It is then signed by a representative of the financial institution and made payable to a third party. A customers who purchases a cashier’s check pays for the full face value of the check and usually also pays a small premium for the service. These checks are secured by the funds of the issuer - usually a bank - and include the name of a payee (the entity to which the check is payable), and the name of the remitter (the entity that paid for the check).

Certificate of Deposit - A time deposit at a bank with a specific maturity date; large-denomination certificates of deposits can be sold before maturity. A time deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving advance notice. A time deposit is also known as an investment account or time certificate of deposit. Time deposit accounts, evidenced by either a paper certificate or a statement mailed to the depositor when interest is paid, normally pay a fixed rate of interest, and have maturities of seven days to seven years or longer. The notification of withdrawal requirement ordinarily is waived for consumer deposits, though not for large dollar corporate time deposit accounts. Consumer withdrawals still are subject to an Early Withdrawal Penalty and partial loss of interest.

Repurchase Agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date

Commercial Papers (CP) - A commercial paper is a short-term pormissory note issued by a reputed company to meet its working capital requirements. The maturity of such papers my vary from 3 months to 12 months. These instruments are generally purchased by commercial banks, insruance companies and unit trust. Commercial papers are not backed by any security, so they can be issued by credit-worthy companies only.

Treasury Bills - Treasury securities are government bonds issued on behalf of centray government to meet its short-term financial needs. They are the debt financing instruments and are often referred to simply as Treasuries or Treasurys. There are four types of treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Savings bonds. All of the Treasury securities (besides savings bonds) are very liquid and are heavily traded on the secondary market.

Municipal Bond - A bond issued by a state or local government body such as a county, city, or town. Interest paid on municipal bonds is exempt from federal income tax and from state and local income taxes within the state of issue. This tax exempt feature keeps interest rates paid on municipal bonds lower but it results in an effectively higher yield, especially for bond holders in higher tax brackets.

Money Market Fund (MMF) - Mutual fund that invests in short-term debt instruments, such as acceptances, Treasury bills, commercial paper, and negotiable certificates of deposit. Most funds invest in high-quality paper, although some funds have purchased noninvestment grade securities to offer a better yield. Money market funds, managed by investment companies registered with the Securities and Exchange Commission, typically buy paper with maturities of 60 days or less. A fund sells shares to investors, who receive regular interest payments. The amount of interest earned by an investor depends on several factors, including the general level of interest rates, the management fee or commissions charged by the fund’s manager, and whether there are redemption fees present. The fee structure in a money market mutual fund and investment characteristics of the portfolio are spelled out in the fund prospectus.

Call Money or Loans - Call money funds are for very short periods ranging from 1 day to 14 days. They may or may not be renewed. The liquidity of call loans is next only to cash. The borrowers of cll money are commercial banks, faced with a temporary shortage of cash. The suppliers of call money are generaly commercial banks with surplus funds. Mutual funds, financial institutions and insurance companies also supply short-term-funds.