Money Market Instruments

A Safer Investment Alternative In Volatile Bear Market

SmartInMoney
U.S. stock markets are officially in bear market territory in this July 2008 with all three major indexes, the S&P 500, the Dow, and the Nasdaq, plunged from their peak in October 2007. When official bear market strikes, investors usually begin to dump stocks and seek refuge for their money to safer investment in money market instruments.

Cash Equivalents (Money Market Instruments) are investment securities that are short-term, have a low-risk, low-return profile and are highly liquid. Money market instruments are considered as a unique asset class commonly used in building an investment portfolio as they have distinct risk and return characteristics from other asset classes. Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, commercial paper and other money market instruments.

Treasury Bill (T-Bill)
This short-term debt obligation is issued by the U.S. government and backed by its full faith and credit, with a maturity of less than one year, and exempt from state and local taxes. T-bills are sold in denominations of $1,000 and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the T-Bill provides the return to the holder.

Certificate of Deposit (CD)
A short- or medium-term debt instrument offered by commercial banks. CDs bear a specified fixed interest rate and can be issued in any denomination. CDs are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. Money withdrew before maturity is subject to a penalty. CDs are FDIC-insured, low risk, low return investments.

Banker's Acceptance (BA)
A short-term credit investment which is created by a non-financial firm and whose payment is guaranteed by a bank. BA is originated merely as an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft. Upon acceptance by a bank, which occurs when an authorized bank employee stamps the draft "accepted" and signs it, the draft becomes a primary and unconditional liability of the bank. BA is often used in international trade (importing and exporting). Banker's acceptances are traded at a discount from face value on the secondary market.

Commercial Paper (CP)
An unsecured, short-term debt instrument issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. Commercial paper is available in a wide range of denominations, can be either discounted or interest-bearing. Companies with high credit ratings usually issue commercial paper, meaning that the investment is almost always relatively low risk. It does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days).