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Investment Companies
Large diversified brokerage firms are active in the money markets. These firms are very important to the liquidity of the money market because they ensure that both buyers and sellers can readily market their securities.
Finance companies raise funds in the money markets primarily by selling commercial paper. They then lend the funds to consumers for the purchase of durable goods such as cars, boats, or home improvements.
Property and casualty insurance companies must maintain liquidity because of their unpredictable need for funds.
Pension funds invest a portion of their cash in the money markets so that they can take advantage of investment opportunities that they may identify in the stock or bond markets.
Individuals
When inflation rose in the late 1970s, brokerage houses began promoting money market mutual funds, which paid much higher rates.
The advantage of mutual funds is that they give investors with relatively small amounts of cash to invest access to large-denomination securities.
Treasury Bills
the U.S. Treasury Department issues a variety of debt securities.
The government does not actually pay interest on Treasury bills. Instead they are issued at a discount from par (their value at maturity). The investor's yield comes from the increase in the value of the security between the time it was purchased and the time it matures.
Treasury bills have virtually zero default risk. The risk of unexpected changes in inflation is also low because of the short term to maturity. The market for Treasury bills is extremely deep and liquid. A deep market is one with many different buyers and sellers. A liquid market is one in which securities can be bought and sold quickly and with low transaction costs.
Federal fundsare short-term funds transferred (loaned or borrowed) between financial institutions, usually for a period of one day.
The Federal Reserve has set minimum reserve requirements that all banks must maintain to ensure that they have adequate liquidity. To meet these reserve requirements, banks must maintain a certain percentage of their total deposits with the Federal Reserve. Banks can borrow directly from the Federal Reserve, but many prefer to borrow from other banks.
Repurchase agreements (repos) work much the same as fed funds except thatnonbanks can participate. Most repos have a very short term, the most common being for 3 to 14 days. There is a market, however, for one- to three-month repos.
Securities dealers use the repo to manage their liquidity and to take advantage of anticipated changes in interest rates.
A negotiable certificate of deposit is a bank-issued security that documents a deposit and specifies the interest rate and the maturity date. Because a maturity date is specified, a CD is a term security as opposed to a demand deposit: Term securities have a specified maturity date; demand deposits can be withdrawn at any time.
Commercial paper securitiesare unsecured promissory notes, issued by corporations, that mature in no more than 270 days. Because these securities are unsecured, only the largest and most creditworthy corporations issue commercial paper.
A banker's acceptance. They are used to finance goods that have not yet been transferred from the seller to the buyer.
Eurodollars
Eurodollars are a United States dollar held as Eurocurrency.
The Eurodollar depositors receive a higher rate of return on a dollar deposit in the Eurodollar market than in the domestic market. At the same time, the borrower is able to receive a more favorable rate in the Eurodollar market than in the domestic market.