Question

Why was there a run on money market funds at the beginning of the current crisis? Be sure to describe what the money market is, who buys and sells money market funds, and why this may have been the asset that experienced runs (versus other financial assets).

Answer 1

The following questions are given below:-

What is money market fund?

A securities industry fund could be a reasonably open-end investment company that invests in extremely liquid, near-term instruments. These instruments embody money, debt instrument securities, and high-credit-rating, debt-based securities with a short maturity (such as U.S. Treasuries). securities industry funds area unit supposed to supply investors high liquidity with a really low level of risk. securities industry funds also are referred to as securities industry mutual funds.

While they sound similar in name only, a securities industry fund isn't a similar as a securities industry account . A securities industry fund is associate investment that's sponsored by associate investment fund company. Therefore, it carries no guarantee of principal. A securities industry account could be a variety of interest-earning bank account. securities industry accounts area unit offered by monetary establishments. they're insured by the Federal Deposit Insurance Corporation (FDIC), and that they usually have restricted dealings privileges.

A market fund may be a sort of fund that invests in high-quality, short-run debt instruments, cash, and money equivalents.

Though almost as safe as money, market funds are thought-about extraordinarily low-risk on the investment spectrum.

A market fund generates financial gain (taxable or untaxed, betting on its portfolio), however very little capital appreciation.

Money market funds ought to be used as an area to park cash quickly before investment elsewhere or creating Associate in Nursing anticipated money outlay; they're not appropriate as long investments.

How a Securities Market Fund Works

Money market funds work sort of a typical investment firm. They issue redeemable units or shares to investors, and that they square measure mandated to follow the rules written by monetary regulators (for example, those set by the U.S. Securities and Exchange Commission (SEC)).

A securities industry fund could invest within the following forms of debt-based monetary instruments:

Bankers' Acceptances (BA)—short-term debt secure by a poster bank

Certificates of deposit (CDs)—bank-issued savings certificate with short maturity

Commercial paper—unsecured short company debt

Repurchase agreements (Repo)—short-term government securities

U.S. Treasuries—short-term government debt problems

Returns from these instruments square measure obsessed on the applicable market interest rates, and so, the general returns from the money market funds are obsessed on interest rates.

Regulation of cash Market Funds

In the U.S., market funds are below the range of the SEC. This restrictive body defines the mandatory tips for the characteristics, maturity, and form of allowable investments in an exceedingly market fund.

Under the provisions, a cash fund primarily invests within the top-rated debt instruments, and that they ought to have a maturity amount below thirteen months. The money market fund portfolio is needed to keep up a weighted average maturity (WAM) amount of sixty days or less. This WAM demand implies that the typical maturity amount of all the endowed instruments—taken in proportion to their weights within the fund portfolio—should not be over sixty days. This maturity limitation is finished to confirm that solely extremely liquid instruments qualify for investments, and therefore the investor’s cash isn't fastened into long-maturity instruments that may mar the liquidity.

A market fund isn't allowed to speculate over five-hitter in anyone institution (in order to avoid issuer-specific risk).

However, government-issued securities and repurchase agreements give an exception to the current rule.