Definitions

money-market fund

money-market fund

money-market fund, type of mutual fund that invests in high-yielding, short-term money-market instruments, such as U.S. government securities, commercial paper, and certificates of deposit. Returns of money-market funds usually parallel the movement of short-term interest rates. Some funds buy only U.S. government securities, such as Treasury bills, while general-purpose funds invest in various types of short-term paper. They became enormously popular with investors in the early 1980s because of their high yields, relative safety, and high liquidity. Investment in money-market funds soared from $20 billion in the late 1970s to over $150 billion in the early 1980s. Much of the growth came at the expense of banks and thrift institutions. With the recession of the late 1980s and early 1990s, interest rates (and, temporarily, the popularity of the funds) dropped. By 2008, some $3.5 trillion was invested in U.S. money-market funds when concerns about real and potential investment losses as a result of the global financial crisis led to sizable withdrawals from the funds; as a result, the Treasury dept. temporarily guaranteed the funds against losses.
In finance, the money market is the global financial market for short-term borrowing and lending. It provides short-term liquidity funding for the global financial system. The money market is where short-term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold.

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked (i.e. priced over and above) to the London Interbank Offered Rate (LIBOR).

Finance companies, such as GMAC, typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt.

  • Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers.
  • Retail and institutional money market funds
  • Banks
  • Central Banks
  • Cash management programs
  • Arbitrage ABCP conduits, which seek to buy higher yielding paper, while themselves selling cheaper paper.

Common money market instruments

See also

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