Money Market Short-Term Debt


The money market refers to short-term debt instruments issued by the Federal Government, commercial banks, and corporations with high credit ratings. Money market instruments provide safety of principal and a rate of interest income, which is a reflection of current short-term borrowing rates. For example, a three-month certificate of deposit issued by a bank might provide the investor with a 3% annualized return over the period. In essence, the bank is borrowing from the investor at a rate, which is competitive with other short-term investment alternatives available to the investor.

Money market investments are usually taxable at the State and Federal level.

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Types of Investments

There is a wide variety of short-term money market investments. Among the best known are:

Certificates of Deposit
A CD is an interest-bearing time deposit in a bank, usually maturing anywhere from one month to one year from the date of issuance and usually negotiable.

U.S. Treasury Bill
A type of U.S. Government obligation which is bought at a discount and matures at par value, in most cases within 13 weeks, 26 weeks, or one year. The difference between the purchase price and the redemption value represents the investor's return.

Commercial Paper
Notes sold by large business firms and some finance companies through commercial paper dealers. Maturities range from 30 days to six months.

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There is an extremely low degree of risk associated with an investment in a money market instrument. While it may not be said that all money market instruments are guaranteed, the risk of default on interest or principal payments from the U.S. Government, a major bank, or a major corporation issuing highly rated commercial paper is remote.

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Money Market Funds

Money market funds are portfolios consisting of a number of money market instruments. Large funds may hold hundreds of different issues simultaneously. Investor capital is pooled and each investor owns shares representing fractional interest in the portfolio. The value of the shares should not change. This arrangement permits the investor to participate in the money market without having to come up with a large cash outlay. Other advantages are automatic reinvestment of dividends, a high degree of liquidity, professional management, and diversification of assets. These characteristics are common to most mutual funds, and market funds are essentially a type of mutual fund. The yield, or interest return, on a money market fund will change because as issues in the portfolio "mature," the proceeds are "rolled," or reinvested, into other issues. The result is that the yield is being adjusted regularly, usually on a daily basis.

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Primary Benefit

The primary benefit of a money market fund is a safety of principal. While many investors have concentrated on the interest yield for the last several years, this has been largely due to the unusually high level of short-term interest rates. Money market funds are designed to provide safety of principal while providing a level of income as is compatible with the objective of current income.

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Investment Considerations

Money market rates run very near to the rate of inflation, so the investor is earning a pre-tax return which is roughly comparable to the rate of inflation. Since interest on a money market fund is usually taxable, the after-tax rate of return will probably be such that the investor has not kept pace with inflation. There are several money market funds in which the objective is to provide current income that is exempt from Federal income taxes, through a portfolio of short-term municipal securities. Persons in high tax brackets should give this serious consideration.

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Securities offered through WesBanco Securities, Inc. a U.S. broker/dealer and a member

Not a deposit       Not FDIC insured       Not insured by any federal government agency
Not guaranteed by the bank       May go down in value

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