Money Market – Short term debt security
Financial house or large corporation and government institution can raise capital through issuing money market securities. It’s a short term debt instrument used by government institution or large financial company to meet short term capital expenditure. Money market securities and bond are not similar. The main difference is maturity period. Bond usually matured in ten years of time. But money market securities take few days to maximum one year. Another characteristic I; money market securities are very easy to be liquid. The money market is very attractive place for investor because of its short tenure and its nature of easy to turn cash. There are different types of money market securities. Like Treasury bill (popularly known as T bill), commercial paper, bankers acceptance, certificate of deposit and Eurodollar.
Money market is very unlike to stock market. Most of the money market securities are traded in very high denomination which accesses the limit of general investor. In money market transaction occurs through a dealer which means that firms buy and sell securities in their own accounts, at their own risk. Whereas buyer bear the whole risk to buy a share and brokers acts as an agent and get commission.
Among the money market securities T-Bill is very popular among the investors. U.S government usually issues T-Bill to collect money from public. T-bill is very easy to liquid with three, six and nine month tenure. Below we have a discussion about different money market securities.
T-Bill: An attractive money market security among the investors. The main characteristic of T-Bill is very easy nature to liquid. It has a maturity of few days to one year from the date of issuance. Three and six month’s tenure is very common. T-bills are purchased with a discount rate and in maturity investor gets the full price of the T-Bill. For example you bought a 90-day T-bill at $ 95000 and held it until maturity; you would earn $500 on your investment.
Commercial Paper: A short term unsecured debt security issued by large corporation with high credit ratings. Maturity period nine month. Issuer uses the money for accounts receivable and inventories. Though most of the time commercial paper treated as an unsecured debt security, but default rate of commercial paper is very low. Because only the company which posses a higher credit rating are permitted to issue commercial paper.
Bankers’ acceptance: Another popular money market security. It’s almost like pay order. Bank plays the role as a guarantor on behalf of issuer. Receiver enjoys the selling power before maturity in secondary market. Export, import and other transaction of goods all can be done through banker’s acceptance certificate. Particularly when the foreign partner is not very known or foreign partners credit worthiness is not very clear.
Certificate of deposit: Little bit different from other securities. Main difference is maturities. Maximum Tenure one month to five year. Receiver enjoys a certain interest rate. Mainly issued by commercial bank.
Re Purchase agreement: A short term debt instrument issued by government. A dealer usually sells government securities to the other parties. usually on an overnight basis, and buys them back the following day.
It’s an interesting agreement. Broker who sells the security (and agreeing to repurchase it in the future) it is a repo; for the buyer, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.