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Money Market Securities are short-term assets typically with a maturity of one year or less. Treasury Bills (T-bills), Commercial Paper, Certificates of Deposit (CDs), and Bankers’ Acceptances are all types of Money Market Securities. These securities are generally considered to be high grade because the maturity is short and they are typically issued by large, trustworthy organizations including the United States government. This makes the risk associated with holding a Money Market Security very low. However, low risk also means low return.
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Treasury Bill (T-bill)
Treasury Bills are short-term securities issued by the United States government which typically have maturities of 13 weeks (quarter year), 26 weeks (half year), or 52 weeks (one year). Treasury Bills are normally sold in $10,000 denominations and do not have a stated interest rate of return. Instead they are sold at a discount in which the full amount can be redeemed at maturity. This is known as selling on a discount basis. Risk associated with Treasury Bills is so low that in some financial calculations the T-bill is considered a riskless investment.
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Commercial Paper is nothing more than a promissory note sold by a large organization with the minimum size usually set at $100,000. The maturity of Commercial Paper is anywhere between 1 and 270 days (9 months). Longer maturities must be registered with the Securities and Exchange Commission (SEC). Lines of credit from large banks ensure that there is plenty of cash available to pay off Commercial Paper reducing the risk taken on by their holders.
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Certificates of Deposit (CDs)
Certificates of Deposit are securities issued by commercial banks to raise cash for loans and other purposes. Maturities usually range from 6 months to 5 years. Unlike Treasury Bills, CDs are sold at face value and accumulate interest at a fixed rate with the principal (face value) and interest paid at maturity. Negotiable CDs have face values of $100,000 or more and can be traded in Capital Markets.
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Bankers’ Acceptances are short-term loans made to importers and exporters and help with international trade by allowing a customer to pay for products with the acceptance. The acceptance may either be held until maturity or cashed in at a discount. Since a Bankers’ Acceptance is a two-party obligation (the customer and the bank), the risk is low. Acceptances usually have a maturity of 180 days and are redeemable by any holder.
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The assets outlined here make up the majority of the Money Market Securities traded in Capital Markets. Their relatively low risk and, consequently, low return make them attractive investments in uncertain economic times.
A Brief Discussion of Money Market Securities
Capital markets are simply markets where securities are bought and sold. There are three main types of securities traded in capital markets: (1) Money Market Securities, (2) Stocks and Bonds, and (3) Derivatives.