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Lesson 6: 1.5: Money Markets & Short-Term Debt
Examine highly liquid, short-term debt instruments that facilitate overnight lending and corporate cash management.
1. The Role of Money Markets
Money markets provide short-term funding for corporations, financial institutions, and sovereign governments. They deal in highly liquid debt instruments with maturities ranging from overnight up to one year.
These markets act as a warehouse for short-term cash surpluses, allowing institutions with temporary cash needs to borrow cheaply, supporting daily liquidity across the banking system.
★ Core Concept: Money market instruments are characterized by very low default risk and extremely high safety.
2. Key Money Market Instruments
• Treasury Bills (T-Bills): Short-term debt issued by the sovereign government, backed by the full faith of the treasury.
• Commercial Paper: Unsecured, short-term debt issued by highly rated corporations to fund payroll, inventory, and working capital.
• Repurchase Agreements (Repos): Collateralized loans where a dealer sells government securities to an investor and agrees to buy them back at a slightly higher price the next day.
Click to enlargeKNOWLEDGE RECONNAISSANCE
What is the typical maximum maturity of an instrument traded in the money market?
How does a Repurchase Agreement (Repo) function?
More lessons in this module
- 1.0: Introduction to Financial Markets
- 1.1: Equity Markets & Common Stock
- 1.2: Fixed Income & Debt Instruments
- 1.3: Foreign Exchange & Currency Markets
- 1.4: Commodity & Raw Materials Trading
- 1.6: Primary vs. Secondary Markets
- 1.7: Market Indexes & Benchmarks
- 1.8: Trading Venues (Exchanges vs. OTC)
- 1.9: Market Microstructure & Order Types
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