What are the common money market instruments and what do they offer?

The money market is where you can get more dividends on your savings account which is federally insured and higher than the normal savings account. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. This is used by a wide range of participants.

The money market is generally perceived as a safe place to invest money due to their highly liquid nature. There are however risks in the market that a potential investor must be aware of; this includes the risk of default in commercial papers.

The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves:

• Cert. of deposit – is actually time deposit.   You can have them through brokerages but they are usually obtained from commercial banks. They have a specified maturity date; a minimum of three months and a maximum of five years, have a particular interest rate, which can be given in all kinds of denominations.
• Treasury Bills (T-Bills) – the most marketable money market security. T-bills are a way for the government to raise money from the public. T-bills popularity is mainly due to the simplicity of their nature.
• Repurchase Agreement – A form of short-term borrowing. It is selling securities to a given investor and agreeing to buy them back at a fixed rate on an agreed period which is usually on an overnight basis.
•  Commercial paper – Short-term, discounted, unsecured, and negotiable notes sold by one company to another in order to satisfy immediate cash needs. This investment matures before 270 days.  
• Eurodollar deposit – U.S. Dollar deposits made at a bank located outside the U.S.
• Federal agency short-term securities – are debt obligations that are issued by government agencies or government sponsored agencies.
• Federal funds – Short-term transactions that offer immediately available funds in depository institutions as well as other institutions that have accounts with the Federal Reserve
• Municipal notes – A debt incurred by local governments, states, and special jurisdictions. The maturity length of Municipal notes is usually issued with a period of 12 months. However, maturities may range from a period of 3 months to 3 years.
• Money funds – these are investments in banker’s acceptances, commercial paper, repurchase agreements, government securities, as well as other highly liquid securities. It pays money market interest rates.
• Foreign Exchange Swaps – this involves the exchange of a set of a given currency in a spot date and exchanging the same at a predetermined future time.

A volatile market is too much to stomach for many investors. The money market offers an alternative to these high risk investments.