The money market is a market where participants can lend and borrow short-term, high-quality debt securities for an average duration of one year or less.

It offers individuals (investors) and financial institutions a place to invest excess cash for the short term and get a return. Government, companies, and financial institutions can also fund their cash flow shortages by lending from the market.

Treasury Bills: Also referred to as T-bills, these are short term bonds issued by the government, backed by the treasury or central bank as the case may be. They are usually issued in denominations of $1000 (US). They are referred to as short term bonds because their maturity date is usually a year or less. They provide short-term funding for the government.

T-bills are sold at a discount and redeemed at par value.

Commercial Paper: Commercial papers are used to trade unsecured loans for companies in need of a short-term cash infusion. Only highly creditworthy companies participate, so the risks are low.

Commercial paper is issued in denominations of $100,000 and above

Banker’s Acceptance: is a short-term loan that is guaranteed by a bank. However, it is issued by a company. It is often used in international trade because of the benefits It is often used in international trade because of the benefits to both parties. Think of it as a post-dated check.

Other instruments traded include CDs(Certificate of Deposit)and repurchase agreement.

Individuals can invest in the money market through:

  • A money market fund: Since most money market transactions are wholesale, i.e involve a large amount of cash, individuals can pool their money together and invest as mutual funds.
  • A money market account: Money market accounts pay rates similar to savings accounts and have some checking features. They offer interest usually higher than a savings account and also gives rights to occasional withdraw

Funds in money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) at banks and the National Credit Union Administration (NCUA) in credit unions.

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