Unlike other financial markets, money markets help short term borrowers in finding lenders and vice versa. Moreover, money market does not deal in long term issues. When the borrowers need loans for short term, then they go to the money market where the creditors provide them the required financing. However, both lenders and borrowers do not do their business in cash but in securities, which are known as money market instruments.
Commercial paper is one of the money market instruments that have gained immense popularity recently. Normally, financial institutions and banks issue commercial papers which are promissory notes, entitling the note holder to receive the face amount on a particular date.
Generally, these commercial papers get issued for short term and the maturity period of these instruments may range anywhere between 1 and 270 days. The only guarantee while purchasing commercial papers is the bank or the corporation itself and that is why, they are termed as unsecured promissory notes. Because these offer very high risks, the issuing companies usually offer very high rates of interest to the investors.
Treasury bills are very similar to commercial papers; however, the bills come with a guarantee from the Treasury Department of the US. The maturity period may extend form 4 weeks to one year and no payments are to be made before the maturity date. Because these treasury bills involve much less risk, you will not get as high an interest rate as in a commercial paper.
Another popular money market instrument is the certificate of deposit. When investors deposit money into the banks or financial institutions, they get a certificate called as Certificate of Deposit. The interest rate you receive depends upon the amount you deposit, which means that the higher the amount is, the higher the rate of interest will be. Because it is deposited for a fixed period of time, you will not be able to withdraw the money before a specified date and even if you really need to take out cash, then you will need to pay penalty for that.
The Banker’s Acceptance is a drafted signed by a bank, making it an instrument to be used in the money market. Once a draft is accepted by a bank, you can sell it in the secondary market if you need immediate cash. In that case, you will obviously receive a lower price than its actual face value. It is very much similar to a US Treasury bill; however, it is a reputed bank that guarantees it, instead of the US government.