Money Market Securities: Characteristics and Types

Introduction

A capital market is defined as a market in which a government, a business organization, or a financial institution can accumulate funds to carry on its functions and long-lasting investments. Capital markets have grown in importance to such an extent that they are looked upon as the suppliers of the lifeblood of capitalism. Money Market Securities is one of the 3 principal kinds of securities that are purchased and sold in capital markets.

Characteristics of Money Market Securities

Money Market Securities constitute cheap ways to borrow funds to meet short-term obligations. They have 3 main features (Orrill).

Money Market Securities are very safe

These securities supply investors with a conservative and dependable way to maintain capital. Government watchdog agencies such as the U.K’s Financial Services Authority [FSA] and the Securities & Exchange Commission [SEC] of the U.S make sure of the safety of these securities by issuing regulations that a minimum of 95 percent of a money market fund’s securities should be those that have been given highest credit ratings by a minimum of 2 principal credit rating institutions in the country. As a result, the high credit ratings [provided by trustworthy credit rating institutions such as Moody’s and Standard & Poors] earned by Money Market Securities far exceed the ratings of nearly all other investment-grade securities (Orrill).

Money Market Securities have early maturity

The primary function of Money Market Securities is to cover the short-term capital needs of governments, business entities, and financial institutions. A majority of these securities have maturity dates below 3 months, while a few mature later – but not more than 12 months (Orrill).

Money Market Securities have high liquidity

These securities are highly liquid in the sense that they can be changed into cash rapidly. The short-term feature of such securities is largely responsible for the liquidity of money market investments because their principal is repaid very quickly. Such liquidity, in addition to the better return on principal as compared to savings accounts, serves to make Money Market Securities highly attractive to investors (Orrill).

Money Market Securities facilitate the creation of Money Market Funds

Given the fact that a majority of Money Market Securities are traded in big denominations, money market funds have become the ideal way for people to invest in them. The high safety and extreme liquidity features make money market funds highly appealing not only to investors who do not like taking risks but also to those looking for a haven to harbor money between high-risk and high-return investments (Orrill).

Types of Money Market Securities

There are 6 types of Money Market Securities.

Treasury Bills

They are short-term securities issued by the government with maturity dates up to or below 12 months. Treasury Bills are sold at prices below their face value, but when they mature, their full face value is paid. These securities are advantageous because they are easily affordable, easy to purchase, and free of risk. Their disadvantage lies in their extremely low return rate (Economywatch.com).

Certificates of Deposit

They are time deposits [varying from 3 months to 5 years] allotted by commercial banks. Certificates of Deposits are advantageous because their rate of return is higher than Treasury Bills or bank savings accounts, and they are considered very safe because not only is it possible to know the returns in advance, but the deposit certificate depicts the country’s national Insurance corporation as guarantor of the investment. These securities are disadvantageous because their rate of return is lesser than several other types of investments, and the funds are frozen as a result of the lengthy period of maturity, while high penalties are levied in case of premature withdrawal (Economywatch.com).

Commercial Paper

They are promissory notes issued by big business organizations. Their face value is higher than Treasury Bills and Certificates of Deposit. The maturity periods of these securities do not exceed 9 months. They are advantageous because they are considered very safe as it is fairly easy to correctly guess the financial status of the organization over a short period (Economywatch.com).

Bankers’ Acceptance

They are investments whose repayment is guaranteed by a bank. These securities are almost exclusively used to fund international trade [exports and imports]. The main advantage here is that holders need not wait until Bankers’ Acceptance matures, but can sell them in the secondary market whenever they like (Economywatch.com).

Euro Dollars

These securities are dollar-denominated deposits kept by non-U.S banks. As the Eurodollar market is not hampered by strict rules, such banks can function at margins lower than U.S banks. Maturity periods of Euro Dollars do not exceed 6 months. The main disadvantage of these securities is difficult attainability as the Eurodollar market is accessible only by big organizations, while individual investors can reach it only through the medium of money market funds (Economywatch.com).

Repurchase Agreements

Government security holders use Repurchase Agreements when they sell the securities to lenders while pledging to repurchase from them overnight. Repurchase Agreements, therefore, have terms varying from 1 night to 30 days. Their main advantage lies in their high safety factor brought about due to guarantee by the government (Economywatch.com).

Conclusion

It is a well-established fact that the capital market holds a position of vital importance in the modern world. Today, capital market investment is no longer limited to individual countries, but investors [subject to certain rules] can invest in the capital market of any nation; this has led to a significant increase and improvement in international trade. Due to the huge setbacks suffered by stock/bonds courtesy of massive, high-profile international scandals such as Enron and WorldCom [U.S], Vivendi Universal [France], and the U.K’s Oxford drugs company British Biotech, Money Market Securities have emerged as the favorite type of securities that are traded in capital markets.

References used

  • “Money Market Instruments.” Economywatch. (N.d). Web.
  • Orrill, Jim. “Characteristics of Money Market Securities.” eHow. 2010. Web.

Outline

Title: Money Market Securities.

  • Introduction
    • Governments, businesses and financial institutions get funds for their functions in capital markets.
    • A capital market supplies the lifeblood of capitalism.
    • Money Market Securities are one of 3 main types of securities traded in capital markets.
  • Characteristics of Money Market Securities
    • They are safe.
    • They have quick maturity.
    • They have high liquidity.
    • They facilitate creation of Money Market Funds.
  • Types of Money Market Securities
    • Treasury Bills.
    • Certificates of Deposit.
    • Commercial Paper.
    • Bankers’ Acceptance.
    • Euro Dollars.
    • Repurchase Agreements.
  • Conclusion
    • Capital markets are vitally important in the modern world.
    • Investors can today invest in the capital market of any nation in the world.
    • Huge scandals involving stocks/bonds have caused investors to prefer Money Market Securities.

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BusinessEssay. "Money Market Securities: Characteristics and Types." March 14, 2022. https://business-essay.com/money-market-securities-characteristics-and-types/.