2.3:
Money Market Instruments
Money market instruments provide investors with relatively safe and liquid investment options while allowing borrowers to access short-term financing, providing liquidity and stability.
These instruments include treasury bills, commercial paper, and certificates of deposit with a maturity of less than one year.
Treasury bills are issued by the government with a maturity of four to fifty-two weeks to raise funds for temporary cash flow needs and are considered the safest investment.
They are sold at a discount from their face value and pay interest at maturity.
Commercial paper is issued by large corporations with a maturity of one to nine months and are also sold at a discount from their face value.
They are unsecured, signifying it has no collateral backing it. However, it is considered a relatively safe investment because well-established and creditworthy companies usually issue it.
Certificates of deposit are issued by banks and credit unions with fixed maturities ranging from a few months to several years and offer higher interest rates. Usually, the longer the maturity period, the higher the interest rate.
2.3 Money Market Instruments
Money market instruments, designed for liquidity management and capital preservation, offer a relatively secure haven for your investments. These short-term, low-risk financial securities are a reliable choice for those seeking stability in their financial portfolios.
Treasury bills are government-issued securities and are considered among the safest investments because the full faith and credit of the issuing government backs them. Due to their high liquidity and safety, Treasury bills typically offer lower yields, making them attractive for risk-averse investors.
Commercial paper represents short-term unsecured promissory notes issued by corporations with high credit ratings. It is not backed by collateral and carries a slightly higher risk than treasury bills, but it also provides a marginally higher return.
Certificates of deposit are time deposits offered by banks and credit unions with specific fixed terms. They usually pay interest at maturity. The government insures them up to a certain amount, making them low-risk investments.
Money market instruments, with their diverse risk/return profiles, play a crucial role in the financial markets. This variety empowers you to choose the instrument that best aligns with your investment goals and risk tolerance.