2.1.2 - money market instruments

*commercial paper*

- Short term, unsecured promissory notes issued by a corporation or a bank to meet immediate short term needs for cash. - Maturities typically range from 2 days to a maximum of 270 days. - usually issued by corporations with high credit ratings and sold at a discount from face value. - also known as "prime paper" or "promissory notes"

money market instruments

- short-term debts and securities sold on the money markets - people/entities sell money market instruments to obtain *short-term financing*. - relatively safe short-term loans that can be issued by corps, banks, the US gov't, and municipalities. - Most have maturities of one year or less, and they're usually issued at a discount and mature at par. - are referred to as "cash equivalents" because of their great liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice and with very low transaction costs. - The suppliers of funds for money market instruments are institutions and individuals with a preference for the highest liquidity and the lowest risk.

*Negotiable Certificates of Deposit (NCDs)*

- sometimes called Jumbo CDs - issued primarily by banks and backed by the issued bank - minimum face amount denomination is $100,000 and are traded in blocks of $1 million

*Federal funds*

- the shortest term money market instrument - available only to member institutions of the Federal Reserve System.

reverse repos

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*Banker's Acceptance (BA)*

A money market instrument used to finance international and domestic trade. A banker's acceptance is a check drawn on a bank by an importer or exporter of goods and represents the bank's conditional promise to pay the face amount of the note at maturity (normally less than three months). used primarily to finance imports and exports. They are short-term time drafts with a specified payment date drawn on a bank—essentially lines of credit.

*repurchase agreement (repos)*

In a repo, the initiating government securities dealer sells securities to another dealer and agrees to buy back the securities at a later date.

Negotiable Certificates of Deposit

Large-dollar-amount, short-term certificate of deposit. Issued by large banks and bought mainly by corporations and institutional investors. Although they can be issued in any denomination from $100,000 up, the typical amount is $1 million.

T-bills

direct obligation of U.S. Government. Sold at discount, mature at par. Pays interest only at maturity. Maximum maturity is 1 year.

Reverse Repurchase Agreement

money money instrument a dealer agrees to buy securities from an investor and sell them back later at a higher price

Municipal Notes

tax-free money market instruments