The money market is the sector of the financial market that includes financial instruments with a maturity or redemption date of one year or less at the time of issuance. Money market instruments are generally debt instruments and include treasury bills, commercial paper, negotiable certificates of deposit, repurchase agreements and bankers' acceptances.

Treasury bills, also known as T-bills, are short-term securities issued by the US government, with original maturities of four weeks, three months, or six months. T-bills do not have any stated interest rate. Instead, the government sells these bonds on a discounted basis. This means that the T-bill holder gets a return by buying these securities at a price lower than the maturity value and then receiving the maturity value.

Commercial paper is a promissory note (a written promise to pay) issued by a large, creditworthy corporation or municipality. This financial instrument has an original maturity that generally ranges from one day to 270 days. Most issuers of commercial paper back up the paper with a bank line of credit, meaning that the bank is prepared to pay the liability if the issuer is unable. Commercial paper can either be interest bearing or sold on a discount basis.

Certificates of Deposits are written promises by a bank to pay a depositor Certificates of Deposits are also called CDs. Investors can buy and sell negotiable certificates of deposit, which are CDs issued by major commercial banks. Negotiable CDs typically have original maturities between one month and one year and are valued at $100,000 or more. Investors pay face value for a negotiable CD and receive a fixed interest rate on the CD. On the maturity date, the issuer repays the principal and interest.

Eurodollar CDs are issued outside of the United States or within the U.S. A bank with international banking facilities has a negotiable CD for US dollar deposits. The interest rate on Eurodollar CDs is the London Interbank Offered Rate (LIBOR), the rate at which major international banks are willing to offer each other term Eurodollar deposits.

Another form of short-term borrowing is a repurchase agreement. We will briefly describe why companies use this tool to understand repurchase agreements. There are participants in the financial system who use leverage to implement trading strategies in the bond market. Instead of borrowing from a bank, a market participant can use the borrowed securities as collateral for the loan. Typically, a lender will lend a certain amount of funds to an organization in need of funds using bonds as collateral. We refer to this general loan agreement as a repurchase agreement or repo because it specifies that the borrower sells the bonds to the borrower in exchange for proceeds, and at some specified future date the borrower repurchases the bonds from the borrower at a specified price. The specified price, called the repurchase price, is higher than the price at which the bonds are sold because it reflects the interest expense charged to the borrower. The interest rate in repo is the repo rate. Thus a repo is nothing more than a collateralized loan; It means a loan backed by a specific asset. We classify it as a money market instrument because the term of repo is usually less than one year.

Bankers' acceptances are short-term loans, usually granted by banks to importers and exporters to finance specific transactions. An acceptance is created when a bank customer writes a draft i.e. a promise to pay and the bank accepts it promising to pay. Acceptance of a draft by a bank is a promise to pay the face amount of the draft to whoever presents it for payment. The bank customer then finances the transaction using a draft, which he issues to the supplier in exchange for goods. Because acceptances arise from specific transactions, they are available in a variety of principal amounts. Bankers' acceptances generally have a maturity of less than 180 days. Bankers' acceptances are sold at a discount to their face value and the face value is paid at maturity. There is very little chance of default on bankers' acceptances as both the bank issuing the acceptance and the buyer of the goods are backed.

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