# Money Market Securities

There are a variety of securities that can be traded, such as money markets, commercial paper, and bankers' acceptance securities, each with its own trade market.

A money market security is a debt security that matures within a short period of time. Typically the term is a year or less. These securities are liquid, or easily converted to cash, and therefore are easily transferable. Money securities are available in diverse categories: Treasury bills, commercial paper, negotiable certificates of deposit, bankers' acceptance securities, repurchase agreements, and federal funds.

A Treasury bill is a government security issued by the U.S. Treasury representing a short-term debt obligation, with a relatively low interest rate and maturity period within one year. Simply stated, Treasury bills help the government to satisfy its short-term debt. This debt is usually the difference between tax revenue collected and federal spending. The typical maturity term varies from three months to one year. Investors are attracted to the near-zero risk of default that federal government–issued securities provide. Investors in Treasury bills are often individual investors, businesses, and financial institutions. In contrast, a commercial paper security is a short-term note that originates from a corporation. Corporations often choose to issue this type of security as a means to fund increases to inventory and to satisfy current liabilities. Typically, these securities mature within nine months of origination. Investors frequently have high net worth.

Banks also issue securities. A negotiable certificate of deposit is a security issued by banks of $100,000 or more that matures within one year of issuance. Commonly, businesses invest in this type of security. A bankers' acceptance security is a debt contract originated by a business and insured by a bank. Businesses often use this kind of security as one method of funding international commerce. The investors in bankers' acceptance securities mostly consist of businesses, and the maturity term is generally within six months of issuance. For example, Mary Nelson owns a business selling widgets and sells them to Cogs Inc. Mary has a contract with Cogs Inc. that states that they will purchase a determined amount of Mary’s products and Cogs Inc. will use her widgets to finalize their own products to sell to their end consumers. However, Mary cannot fulfill the contract until Jim Smith, owner of Jim’s Materials, a third-party contractor, supplies Mary with the necessary raw materials to manufacture Mary’s products--the widgets. Thus, Mary could use a bankers' acceptance security to lower the risk of Jim's defaulting on the obligation to provide her with the necessary raw materials and to protect herself against contractual default from Cogs Inc. if Mary’s widgets are not delivered to Cogs. Inc. If Jim does not default, the security is never tendered. Other securities in the private market include repurchase agreements and federal funds. A repurchase agreement is the sale of a security where the seller promises to purchase back the security from the buyer at an agreed-upon price and date. Typically, these are in the form of Treasury bills, but they can be different money market securities. The repurchase agreement's maturity term could be up to one year from issuance, and the investors are financial institutions and businesses. For example, Mary buys a$10,000 10-year security from Money Company LLC as a repurchase agreement. It will be repurchased for $11,000 in one year. This way, Money Company has the use of$10,000, and Mary makes \$1,000 at the end of the year. The underlying security does not change in value. A federal fund is a fund that the Federal Reserve temporarily lends to financial institutions that have inadequate cash. The monies are comprised of other banks' deposits of surplus cash. Also, federal funds are given at a low interest rate to financial institutions to fulfill their cash reserve requirements. The maturity term for federal funds may be up to one week from issuance, and the investors are financial institutions.

Money Market Securities
Treasury Bills Bankers' Acceptance Securities Commercial Paper Negotiable Certificates of Deposit Federal Funds Repurchase Agreements