Money Market Definition
The money market is a segment of the financial market in which financial instruments with high liquidity and short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year. These instruments include Treasury bills, commercial paper, bankers’ acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage- and asset-backed securities.
Money Market Key Points
- The money market is a sector of the financial market in which highly liquid and short-term instruments are traded.
- It is used by participants for borrowing and lending in the short term, typically with maturities of less than a year.
- Common instruments traded in the money market include Treasury bills, commercial paper, and certificates of deposit.
What is the Money Market?
The money market is a subsection of the fixed income market. We generally think of the term fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities.
Why is the Money Market important?
The money market is important because it is a fast and secure way for companies and governments to raise money. By selling a short-term obligation, they can get the cash they need to meet their financial obligations. The money market is also good for investors because it’s a safe place to invest money with little risk, and it offers the opportunity to earn interest.
Who uses the Money Market?
The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The U.S. government, through the Treasury Department, is also a major participant in the money market, with the U.S. Treasury bill being one of the most common money market instruments.
When is the Money Market used?
The money market is used whenever short-term funds are needed. For example, a company might need to cover payroll for the next week, or a bank might need to cover a predicted shortfall in its reserves. In these cases, the money market provides a way to borrow or lend money for a very short period of time, usually overnight.
How does the Money Market work?
The money market works by providing a place for borrowers and lenders to trade in short-term debt. Borrowers issue money market instruments, such as Treasury bills or commercial paper, to raise funds. Lenders, such as banks, mutual funds, or individuals, buy these instruments, effectively lending money to the issuer. The borrower pays interest to the lender, and the lender can sell the instrument on the secondary market if they need to access their money before the instrument’s maturity date.
