Asset Classes In The Money Market
The money market is an exchange market where financial institutions can lend and borrow short-term securities at a low risk. Most of these security trades are traded in large denominations that they are beyond the reach of individuals. Money market funds allow individual investors to invest in securities at a smaller amount. Instruments found at the money market are treasury bills (T-bills), certificate of deposits (CDs), commercial paper (CP), banker’s acceptance, Eurodollars, repos and reverses, and federal funds. Participants of the money market include banks, time deposit markets, and the U. S. government, to name a few.
Banks issue certificates of deposits that are time deposit. CDs are usually electronic and renew automatically when the original CD reaches its maturity date. Early withdrawals of money from a CD will incur a penalty. Treasury bills are issued by the U. S. government and are short-term debts that range from days to a year. From all money instruments, T-bills are the most marketable and is sold on a discount basis, risk-free. The bond market is a financial market that provides long-term fixed securities. The bond market includes treasury notes and bonds, inflation-protected treasury bonds, federal agency bonds, international bonds, municipal bonds, taxable and tax-exempt bonds and corporate bonds. Treasury notes and bonds maturity at different time frames.
T-notes are issued to mature up to 10 years, bonds mature between 10 to 30 years. These notes and bonds are most commonly traded at a par value of $1, 000. International bonds are made up of Eurobonds and Yankee bonds. Eurobonds are bonds denominated in a currency other than the home currency where it is being issued. Yankee bonds are issued in sold in the U. S. market by a non-U. S. issuer. Both bonds are dollar-denominated.
Equity securities are investments in stock held by shareholders in a company. Equity securities consist of common stock, preferred stock, and depository receipts. Common stock has two important characteristics; residual claim and limited liability. Shareholders come last when it comes to residual claims. They must wait for the company to pay debt holders and preferred stockholders before they can receive their share. Limited liability is a “worst case scenario” type of feature. There is a possibility the shareholder holds worthless stock. Preferred stock promises to pay their shareholders a fixed income without maturity. Derivatives markets are financial markets that specialize in derivatives. Derivatives derive their value from other assets. Options such as call option give the holder the right to buy its asset at a strike price. The put option is the opposite of the call option whereas the holder has the right to sell its asset at a strike price.
