Question

Describe the following money market instruments, and how they are issued and utilized: T-bills, Fed funds, repos, commercial paper, negotiable CD’s, and banker’s acceptances.

Answer 1

T-bills

US T-bills are US government securities that mature in less than one year and are safe securities. There is no risk of default. Because of the short-term maturity period, the prices are relatively stable, even though they are subject to inflation. T-bills offer the most conservative rate of return.

Fed funds

Federal funds, often referred to as fed funds, are excess reserves that commercial banks and other financial institutions deposit at regional Federal Reserve banks; these funds can be lent, then, to other market participants with insufficient cash on hand to meet their lending and reserve needs.

Repos

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price

Negotiable certificates of deposit

They are CDs with a minimum face value of $100,000. They are guaranteed by banks, cannot be redeemed before their maturation date, and can usually be sold in highly liquid secondary markets. Along with U.S. Treasury bills, they are considered a low-risk, low-interest security.

Commercial paper

It is an unsecured short-term promissory note issued by a corporation. CP is sold at a discount from par value and is backed by the corporation to buy back the paper at maturity by paying the par value.

CP's interest rates vary. The rate is market-based and is a function of the issuing company's credit rating, the size of the issue, and the market short term interest rates.

it provides a board distribution for borrowing, which results in more funds at lower rates than other methods provide.

Banker's Acceptances

It is a negotiable short term instrument used primarily to finance the import and export of goods. Some issues maybe used for the domestic shipment and storage of readily marketable goods. It is a time draft drawn by a borrower and accepted by the bank on which it is drawn. Accepting the drafts implies that the bank assumes the obligation for the payment of drafts ay maturity to the investor who purchased it.