Money market interest rates are determined by factors including Treasury bill and federal funds rates, the Federal Reserve Bank of San Francisco explains. In addition, supply and demand levels for specific money market instruments affect the rates of the money market as a whole.
Money markets enable funds organizations with significant excess liquidity to lend to those lacking liquidity, FRBSF states. As a short-term source of relatively large loans, they play a key role in the economy. Most money market operations are processed with very low transaction costs, and unlike markets that may involve trading on a physical exchange, transactions in the money market are executed electronically or via telephone, Investopedia explains. Market agents including individuals, corporations and governments participate in money markets.
The likelihood of keeping invested principal safe is very high in money markets, Investopedia notes. Overall risk is extremely low, but that also means that the money market offers much more modest returns than other capital markets.
The majority of instruments traded on money markets can be quickly and easily converted to cash, FRBSF notes. Important money market instruments include certificates of deposit valued at $100,000 or higher, federal funds, short-term securities issued by federal agencies, Treasury bills, commercial paper and borrowings in Eurodollars from foreign branches of domestic banks.