Money Market Short-Term Debt
Definition
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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Risk
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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Downloads: Business Continuity Plan & WesBanco Securities Privacy Policy.
Securities offered through WesBanco Securities, Inc. a U.S. broker/dealer and a
member
FINRA and
SIPC.
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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