Money Market Review

Money Market

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

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 money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper.

Money Market Account

A savings account that offers the competitive rate of interest (real rate) in exchange for larger-than-normal deposits. Also known by the acronym "MMDA", which stands for "money market demand account" or "money market deposit account".

Many money market accounts place restrictions on the amount of transactions you can make in a month (such as five or less). Furthermore, you usually have to maintain a certain balance in the account to receive the higher rate of interest. Some banks require at least $500, others require a much higher balance.

Money Market Fund

An investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments.

A money market fund's purpose is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterized as a low-risk, low-return investment. Because of their relatively low returns, investors, such as those participating in employer-sponsored retirement plans, might not want to use money market funds as a long-term investment option.

Money Market Investor Funding Facility - MMIFF

A facility created by the Federal Reserve board on November 24, 2008, in an effort to stimulate institutional investors to assume investments that have longer terms. The Money Market Investor Funding Facility (MMIFF) is designed to support a private sector initiative to provide liquidity to money market investors. Financial crisis fears caused an influx of institutional investors to assume overnight positions toward the end of 2008, placing a strain on short-term debt markets. Funding is provided by the Federal Reserve Bank of New York through special purpose vehicles (SPVs).

Eligible investors can sell assets worth no less than $250,000 (such as commercial paper and certificates of deposit (CDs)) with maturities between seven and 90 days to the SPV. The SPV then borrows from the MMIFF and sells asset-backed commercial paper (ABCP) in order to fund the purchase of these assets. The Federal Reserve Bank of New York is repaid by the SPVs as the assets mature. As of February 3, 2009, the MMIFF is authorized to lend a maximum of $600 billion in assets to five SPVs, $540 billion of which is to be funded by the Federal Reserve.

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