Money Market Instruments - Definition, Types, & Objectives (2024)

FAQs

Money Market Instruments - Definition, Types, & Objectives? ›

Money market instruments are short-term financing instruments which can be converted easily to cash. Interbank loans (loans between banks), money market mutual funds, commercial paper, Treasury bills and securities lending and repurchase agreements, are all examples of money markets instruments.

Objectives of Money Market

To provide borrowers with short-term funds at a price that is considered reasonable. To provide lenders with sufficient liquidity due to short-term securities. To enable lenders to convert idle funds into profitable investments.

The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.

Money market funds are divided into two categories: taxable and tax-free. If you're buying a taxable fund, any returns from the fund are generally subject to regular state and federal taxes.

Money market instruments are a great low-risk investment option for investors looking for safety and liquidity. However, the lack of long-term capital appreciation makes them an unsuitable option for all kinds of investors.

The primary purpose of a money market fund is to provide investors with a safe avenue for investing in secure and highly liquid, cash-equivalent, debt-based assets using smaller investment amounts. In the realm of mutual-fund-like investments, money market funds are characterized as low-risk, low-return investments.

To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.

Many accounts have monthly fees

Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.

Banks often require a minimum deposit to open the account, then a minimum balance to keep in the account. It's usually much higher than regular savings accounts. This often means $5,000, but can be up to $10,000 at some banks.

The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.

Are money markets FDIC insured? ›

Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners.

For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.

All investments are subject to market risk, including possible loss of principal. Retail Money Market Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.

Liquidity Management: One of the primary goals of the money market is to facilitate liquidity management for financial institutions, corporations, and governments. Liquidity refers to the ease with which assets can be converted into cash without significantly affecting their market value.

Money markets serve five functions—to finance trade, finance industry, invest profitably, enhance commercial banks' self-sufficiency, and lubricate central bank policies.

The International Money Market is a large-scale money market that allows many central banks to conduct transactions from different countries. This includes both lending and borrowing funds. It handles funds in trillions, with the main actors being central banks and major commercial banks.

Money market instruments are financial instruments which are issued with a maturity of one year or less. They provide a market for investors to earn a return on liquid assets; borrowers who need short-term liquidity have access to these funds; and they provide the Fed with a means to effect monetary policy.