Even so, there are some advantages and disadvantages of money market funds that should be considered before investing in them.
Money Market Instruments Money Market Instruments The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities. There is no physical "money market.
Money markets exist both in the United States and abroad. The short-term debts and securities sold on the money markets—which are known as money market instruments—have maturities ranging from one day to one year and are extremely liquid.
Treasury bills, federal agency notes, certificates of deposit CDseurodollar deposits, commercial paper, bankers' acceptances, and repurchase agreements are examples of instruments. The suppliers of funds for money market instruments are institutions and individuals with a preference for the highest liquidity and the lowest risk.
The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell securities or borrow funds on a short-term basis.
In essence the market acts as a repository for short-term funds.
Large corporations generally handle their own short-term financial transactions; they participate in the market through dealers. Small businesses, on the other hand, often choose to invest in money-market funds, which are professionally managed mutual funds consisting only of short-term securities.
Although securities purchased on the money market carry less risk than long-term debt, they are still not entirely risk free. After all, banks do sometimes fail, and the fortunes of companies can change rather rapidly.
The low risk is associated with lender selectivity. The lender who offers funds with almost instant maturities "tomorrow" cannot spend too much time qualifying borrowers and thus selects only blue-chip borrowers. Repayment therefore is assured unless you caught Enron just before it suddenly nose-dived.
Borrowers with fewer credentials, of course, have difficult getting money from this market unless it is through well-established funds. They come in three different lengths to maturity: The two shorter types are auctioned on a weekly basis, while the annual types are auctioned monthly.
T-bills can be purchased directly through the auctions or indirectly through the secondary market. Purchasers of T-bills at auction can enter a competitive bid although this method entails a risk that the bills may not be made available at the bid price or a noncompetitive bid.
T-bills for noncompetitive bids are supplied at the average price of all successful competitive bids. Federal Agency Notes Some agencies of the federal government issue both short-term and long-term obligations, including the loan agencies Fannie Mae and Sallie Mae.
These obligations are not generally backed by the government, so they offer a slightly higher yield than T-bills, but the risk of default is still very small. Agency securities are actively traded, but are not quite as marketable as T-bills.
Corporations are major purchasers of this type of money market instrument. Short-Term Tax Exempts These instruments are short-term notes issued by state and municipal governments. Although they carry somewhat more risk than T-bills and tend to be less negotiable, they feature the added benefit that the interest is not subject to federal income tax.
For this reason, corporations find that the lower yield is worthwhile on this type of short-term investment.
Certificates of Deposit Certificates of deposit CDs are certificates issued by a federally chartered bank against deposited funds that earn a specified return for a definite period of time. They are one of several types of interest-bearing "time deposits" offered by banks.
An individual or company lends the bank a certain amount of money for a fixed period of time, and in exchange the bank agrees to repay the money with specified interest at the end of the time period. The certificate constitutes the bank's agreement to repay the loan.
The maturity rates on CDs range from 30 days to six months or longer, and the amount of the face value can vary greatly as well. There is usually a penalty for early withdrawal of funds, but some types of CDs can be sold to another investor if the original purchaser needs access to the money before the maturity date.
There are also eurodollar CDs; they are negotiable certificates issued against U. Brokerage firms have a nationwide pool of bank CDs and receive a fee for selling them.Dow Stock Market Today – Advantages And Disadvantages Posted by Knowzo Staff Writers | Jun 7, Probably the most closely followed index in the stock market today is .
Single stock futures are a type of investment in which investors can take out a futures contract on a single stock. These investments are traded in many financial markets across the world. Here are some of the advantages and disadvantages of trading single stock futures.
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