Money Market Securities

Money market securities are debt securities that mature in 397 days or less. Since 397 is around one year, you may see one year on your exam. Money market securities are usually highly liquid, meaning they can be easily bought and sold. They are also considered very safe. In fact, they are often referred to as cash equivalents because they are almost as liquid, and safe, as cash. They usually offer interest payments, but the yields are small compared to riskier, longer term investments. Money market investments are subject to purchasing power risk because they offer such low yields they often can’t keep up with inflation. Some of the more common money market securities are U.S. Treasury bills, commercial paper, and banker’s acceptances, defined next. Certificates of deposit (CDs) are not considered securities, but are still considered part of the money market.

While the definition of a money market security is an investment that matures in less than one year (or 397 days), many money market securities mature in 270 days or less. As such, they are considered exempt securities and are not required to register with the SEC. Exempt securities are subject to anti-fraud laws, however.

Commercial paper. Large corporations, banks, and financial firms with high credit ratings may issue commercial paper to cover short-term needs, such as payroll and inventory, and to finance general operations. Commercial paper is unsecured and issued at a discount, and typically matures in less than 90 days, although it can have a term as long as 270 days. It is generally issued in lots of $100,000. Even though it is unsecured, commercial paper is generally considered safe enough to be purchased by money market funds because it is short-term and issued only by banks and large corporations with high credit ratings.

Banker’s acceptance. A banker’s acceptance is a short-term credit instrument issued by a business for the purchase or sale of goods,