Money Markets

A money market is an organized exchange where participants can borrow and lend money for at most a period of one year.  This is an efficient area for governments, businesses, and banks to transact funds; however, individuals who wish to invest smaller amounts while enjoying considerable liquidity and safety also popularize money markets.

Purposes of the Money Market

The purpose of money markets for all entities – business, governments, individuals – is to generate funds.  Investors are attracted to the short-term money market instruments whose maturities, which range from one day to one year, tend to be around three months.  Individuals can usually sell the investments prior to maturity, though at the expense of foregoing interest they would have gained otherwise.

Money markets are also traded on secondary markets, which are markets where investors purchase assets and securities from other investors, instead of from the actual issuing companies.  Centralized markets have no central location, though there is an arbitrary association in New York City.

Types of Instruments

Many money market instruments are specialized and usually traded with banks and large financial institutions that have an intimate knowledge of the money market .  Federal funds, negotiable certificates of deposits, repurchase agreements, shares in market instruments, discount window, and futures options and contracts are all common money market instruments..

Additionally, mutual funds, commercial paper, bankers’ acceptances, and short-term municipal securities comprise money market instruments as well.

Short-Term Investment Pools

Short-term investment pools include short-term investment funds of bank trust departments, local government investment pools, and money market mutual funds.  They are a convenient way of accumulating different money market products into one product, and they make specialized money market instruments accessible to traders who do not have as much knowledge of the instruments.  Additionally, these pools lack the $100,000 minimum investments amounts usually required to purchase most money market instruments or Jumbo CD Rates .

Money market mutual funds are an accessible short-term investment pool, and bank trust departments operate them.  Money market mutual funds are either taxable exempt or taxable funds.  Tax-exempt funds invest in securities issued by state and local governments, which in turn are free from all federal taxation.  Taxable funds have investments in securities Treasury bills and commercial papers which pay interest income subject to federal taxation.

Eurodollars

Eurodollars are U.S.-dollar denominated deposits at banks outside of the United States and otherwise have little to do with Europe.  The name comes from the market’s evolution in Europe, and they can be held anywhere globally.  Banks can operate on narrow margins with Eurodollars, which are somewhat free of regulation and a means to circumvent regulatory costs.  Eurodollar deposits tend to be in the millions with maturity of several months.  Because of these high costs, only the largest institutions can reach the Eurodollar market and they do so through money market funds.  Additionally, a Eurodollar certificate of deposit is less liquid and offers higher yields.