Money-Market Securities

Repurchase agreement: Money-market securities are liquid, marketable, safe investments that have maturities of one year or less. They are used, generally, for emergency funds investments and short-term cash. Examples of this type of investment are certificates of deposits (CDs), money-market mutual funds, treasury bills, commercial papers, banker’s acceptances, and purchase agreements. These investments are also used as temporary short-term cash substitutes. The money market is a sub-sector of the bond market and includes debt securities with maturities of one year or less. A money market is not located in a single place, but in banks and dealers connected by phone and computers nationwide.

The advantage of investing in the money market securities is that that “unemployed” money earns a return while one looks something more permanent. The features of these short-term investments are few negligence risks, high liquidity and its marketability.

However, many money market securities negotiate under high denominations, being many individual investors excluded from their investments. The money-market mutual funds are a convenient means so that individual investors can invest their short-term funds in money-market securities.

Although money-market funds offer you better and more convenient ways to invest your funds, you should understand the characteristics of the different short-term investments such as treasury bills, commercial papers, banker’s acceptances, and purchase agreements for two reasons:

  • Money-market mutual funds invest their pooled funds in these individual short-term fixed income securities. Understanding how these securities work you will assess the risks and returns of the different money-market mutual funds.
  • There are periods in which these individual securities offer greater advantages and returns than a money-market mutual fund.