Economics
Money Market Mutual Funds
Money market mutual funds are investment vehicles that invest in short-term, low-risk securities such as Treasury bills and commercial paper. They are known for providing investors with a relatively safe place to park their cash while earning a modest return. These funds are often used as a cash management tool and are considered to be highly liquid investments.
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10 Key excerpts on "Money Market Mutual Funds"
eBook - ePubBogle On Mutual Funds
New Perspectives For The Intelligent Investor
- John C. Bogle(Author)
- 2015(Publication Date)
- Wiley(Publisher)
First, money market funds of all types provide the most price stability and the most yield variability over time (i.e., the lowest principal risk and the highest income risk). In that sense, their investment characteristics closely resemble U.S. Treasury bills, whose rewards and risks were discussed in the first two chapters. Second, the money market fund is the only class of mutual fund whose total return in every period comprises 100% income return. Unlike stock and bond funds, it offers no opportunity for capital return.Money market funds have existed during a turbulent period for interest rates. At the beginning of 1972, short-term interest rates were relatively low, running about 4% on CDs. Rates then soared to the 12% level in 1974, fell back to 5% by 1976, and, incredibly, topped 15% on a number of occasions from the start of 1980 to mid-1982. Rates then settled into a range of about 6% to 10% through mid-1991, trailing off to less than 3.5% by the end of 1992. Figure 6.1 presents the picture.Figure 6.1Three-Month Certificates of Deposit—Quarterly Yields (1972–92)My analysis of money market funds will focus on three principal factors: (1) the quality of the fund's portfolio, (2) the yield it generates, and (3) the amount the yield is reduced by the fund's operating expenses. In combination, these factors determine virtually the entire return generated by each money market fund. While this may seem obvious today, it was not so long ago that money market funds employed any number of “strategies” to give the impression of relatively superior earning power.Prior to June 1991, for instance, it was possible for Money Market Mutual Funds to offer higher yields than their competitors by holding large positions in lower-rated—and therefore more risky—commercial paper or by extending their average maturities beyond the typical 30-day to 90-day range for the average money fund. This situation made it difficult for investors to determine the degree to which higher risk, in the form of lower quality and/or longer maturity, accounted for the relatively higher yield of one money market fund versus another.
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
Chapter 8
Money Market Instruments
An individual investor seeking to maximize the return on his short-term fixed income assets, or a cash manager looking to get the biggest bang for her buck on the firm’s liquid assets, must understand the money market (MM) with its unique characteristics and distinctive formulaic calculations. First, you should learn about the myriad MM products available, as well as the players in this unique market. You must understand the products’ characteristics and risk/reward trade-offs. Then, you need to determine the time horizon or duration of the assets purchased. Finally, you must compare the yields on these different products to assess whether you are being rewarded for any additional risks (credit and market) undertaken.The money market involves the borrowing and lending of money for periods of a year and less. Massive sums of capital can be transferred rapidly and efficiently from one economic unit (corporations, municipalities, banks, etc.) to another for relatively short periods of time. Institutions with short-term borrowing needs can meet these needs by maintaining access to the money market and raising funds when required. In the same way, holders of excess cash can maximize their returns by investing in money market securities.Money market securities are thus debt instruments characterized by short-term maturities ranging from overnight to one year. Money market securities are typically liquid, and possess relatively high credit quality and low interest rate risk. Trades in money markets are generally quite large (trades in the billions of dollars are common). Active secondary markets allow most MM securities to be sold prior to maturity if a need for cash emerges.These instruments are influenced by Federal Reserve policy and activity more than any other sector of the fixed income market. Utilizing the money market allows investors to enhance returns on cash reserves, while at the same time maintaining liquidity and preserving capital through high-quality investments. Investors managing large cash balances through the utilization of Money Market Mutual Funds can in effect cut out the middleman and purchase short-term securities directly in the money market.
eBook - PDF- Jhajra, Anil Kumar(Authors)
- 2021(Publication Date)
- Scholars World(Publisher)
Chapter 4 Money Market Basically the money market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The average amount of time that companies borrow money in a money market is about thirteen months or lower. Some of the more common types of things used in the money market are certificates of deposits, bankers’ acceptance, repurchase agreements and commercial paper to name a few. Basically what the money market consists of is banks that borrow and lend to each other, but other types of finance companies are involved in the money market. What usually happens is the finance companies fund themselves by issuing large amounts of asset backed commercial paper that is secured by the promise of eligible assets into an asset backed commercial paper conduit. Your most common examples of these are auto loans, mortgage loans, and credit card receivables. 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). Money Market Instruments The money market instruments are amongst the safest forms of investment in the United States because the principals of these forms of investment are assured. The money market instruments are normally This ebook is exclusively for this university only. Cannot be resold/distributed. provided in the minimum denomination of $1 million. The term periods of the money market instruments could vary from a single day to a year itself. However the most commonly observed term periods are three months or less.
eBook - ePubThe Handbook of Global Shadow Banking, Volume I
From Policy to Regulation
- Luc Nijs(Author)
- 2020(Publication Date)
- Palgrave Macmillan(Publisher)
133Footnotes1See for an historical overview: T. Cook, et al., (1979), Money Market Mutual Funds: A Reaction to Government Regulation or a Lasting Financial Innovation? Federal Reserve Bank of Richmond. Economic Review, July/August 1979, pp. 15–31.2Another argument of its rapid emergence was that money market funds could gain nationwide scale as they did not fall under the legal restrictions on interstate banking; D. Luttrell, et al., (2012), Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned Federal Reserve Bank of Dallas Staff Papers Nr. 18, November.3 H. Mai, (2015), Money market Funds- an Economic Perspective, Deutsche Bank Research, February 26, pp. 2–3.4 H. Mai, (2015), Ibid. pp. 10–16.5The US had MMF incoming regulation both in 2010 and 2014. The European Commission issued its proposal in 2013, which were also based on their experiences with the 2012 eurozone sovereign crisis.6Mai indicates (regarding the European model): ‘[b]ut in case the industry nevertheless experiences a loss of investor confidence, mitigating the risk of an investor run would probably still be difficult. VNAV funds (with a variable NAV (ed.)) in tight financial conditions might still face accelerated redemption requests, and financial distress might still spread via counterparty or market channels . CNAV funds would be able to draw on a significant 3% capital buffer as a line of defense. However, pairing a CNAV with a capital requirement further blurs the difference between a mutual fund investment and a bank
eBook - PDF- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
However, high leverage means high risk, and unfavorable interest rate swings of only a few basis points can mean catastrophic losses. 7.9 The Impact of The 2007–2008 Financial Crisis on the Money Markets 213 Money Market Mutual Funds Money Market Mutual Funds (MMMFs) are investment funds that pool funds from numer- ous investors and invest in money market instruments. Being portfolios of liquid invest- ments with low default risk, MMMFs often provide investors with check‐writing abilities and thus may be viewed as an alternative to bank deposits. Some MMMFs cater to institu- tional (corporate) investors; they set high minimum investment levels (e.g., $50,000). Others are known as retail MMMFs; their minimum investments are within reach of most individu- als. Some MMMFs specialize in investing in Treasury bills only, while others invest in a variety of money market instruments. Total assets of retail and institutional MMMFs were $2.61 trillion as of June 2015. This represents a very large fraction of total money market instruments (see Exhibit 7.1), making MMMFs, as a group, one of the most important money market investors. These institutions will be covered in more detail in Chapter 19. NONFINANCIAL CORPORATIONS Although not as severe as the liquidity problems facing commercial banks, liquidity manage- ment problems also plague nonfinancial corporations. For them, the inflow of cash usually comes from the collection of accounts receivable that have been generated from sales. Corporate cash disbursements take place in various forms, such as expenditures for tax obli- gations, payrolls, inventory purchases, and payments for services necessary to do business. Because cash flows rarely balance, corporate treasuries are constantly juggling their cash positions. The focal point of corporate cash management strategy is the relationship with commercial banks.
- Michael Brandl(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
309 CHAPTER 15 Money Markets are not uncommon. Thus it is all but impossible for individuals to be directly involved in these markets. Instead, these markets are dominated by a network of brokers, dealers, investment banks, and commercial banks. Individuals usually access the market through a variety of brokers and dealers. • “Short-term debt instruments” refers to the fact that this is a market for promises to repay with interest and that the repayment will take place very quickly. This is not the market for equities or currencies; instead, this is a market of IOUs. These IOUs mostly mature within a year and often in fewer than 30 days. Thus money market instruments are very short-term or short-lived financial assets. • In part because of their short term to maturity, money market instruments have a high level of liquidity. The money market has both a primary market, where a given IOU is issued for the first time, and a much larger secondary market. In these markets over a trillion dollars is traded every working day. As described in the next two sections, the market is made up of thousands of traders each looking to buy and sell these short-term IOUs. Since there is so much volume in these markets, buying and selling these securities is relatively easy; that is, the market has a great deal of liquidity. • In addition, because money market instruments are issued by only the biggest and safest borrowers, these IOUs have a “low level of default risk.” Buyers of these securities can be relatively sure that the issuers will make good on their promises to repay. This is important because many money market instruments are unsecured IOUs; there is no collateral to back up this borrowing. But, because most of the borrowers in the money market do not have problems paying their debts, this lack of collateral is usually not a problem. This is true most of the time; however, this was no longer the case during the 2007–2009 financial crisis.
eBook - PDFIf You're So Smart, Why Aren't You Rich?
A Guide to Investing Fundamentals
- Ben S. Branch(Author)
- 2006(Publication Date)
- Praeger(Publisher)
One can participate directly in the money market by buying, holding until maturity, and sometimes selling the various money market securities. Most small investors will, however, find indirect participation in the money market to be a much more convenient approach. The minimum denomination of money market securities is high ($10,000 for Treasury bills, $100,000 for large, marketable CDs, and larger still for the others). Moreover, the market for individual investor participation is not well developed. Indeed, with the ex- ception of T bills, the minimum denominations are very high and the markets are almost exclusively the preserve of institutions, large corporations, and large individual investors. Thus the money market is not well suited to direct par- ticipation by small investors. And yet many small investors would like to invest in the very safe short-term securities that make up the money market. Re- sponding to this reality, a number of instruments have been developed to provide the small investor with indirect access to the money market. One alternative to direct participation in the money market is to access the market via an intermediary such as a money market mutual fund. Such funds assemble and maintain large, diversified portfolios of money market instru- ments. The net returns (after subtracting fees and expenses) are passed through to their fundholders. Their fees and expenses typically amount to between 20 and 50 basis points annually. That cost is, however, a rather small price to pay for the convenience and diversification provided by money funds. Fundholders have immediate access to their funds via check-writing privileges. Because the portfolios are composed of very-short-term, highly secure debt instruments, losses on those types of diversified money market portfolios are almost non- existent. To compete with the Money Market Mutual Funds, banks offer a product called a money market account.
eBook - PDFBond and Money Markets
Strategy, Trading, Analysis
- Moorad Choudhry(Author)
- 2003(Publication Date)
- Butterworth-Heinemann(Publisher)
. 507 31 The Money Markets In terms of trading volumes the money markets are the largest and most active market in the world. Money market securities are securities with maturities of up to twelve months, so they are short term debt obligations. Money market debt is an important part of the global financial markets, and facilitates the smooth running of the banking industry as well as providing working capital for industrial and commercial corporate institutions. The diversity of the money market is such that it provides market users with a wide range of opportunities and funding possibilities, and the market is characterised by the range of products that can be traded within it. Money market instruments allow issuers, who are financial organisations as well as corporates, to raise funds for short term periods at relatively low interest rates. These issuers include sovereign governments, who issuer Treasury bills, corporates issuing com-mercial paper and banks issuing bills and certificates of deposit. At the same time investors are attracted to the market because the instruments are highly liquid and carry relatively low credit risk. The Treasury bill market in any country is that country’s lowest-risk instrument, and consequently carries the lowest yield of any debt instrument. Indeed the first market that develops in any country is usually the Treasury bill market. Investors in the money market include banks, local authorities, corporations, money market investment funds and individuals; the money market is essentially a wholesale one and the denominations of individual instruments are relatively large. Although the money market has traditionally been defined as the market for instruments maturing in one year or less, frequently the money market desks of banks trade instruments with maturities of up to two year, both cash and off-balance sheet.
- Michael Brandl(Author)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
A money market, on the other hand, does not take place in one physical place. Instead, it takes place during tele-phone calls and on blinking computer screens, through which more than a trillion dollars trade hands every business day. While many of these traders and brokers are in the financial districts of New York, London, Tokyo, and Frankfurt, they hardly ever come face-to-face with each other. Thus, a formal definition of a money market would be “a wholesale market of short-term debt instruments that have a high level of liquidity and a low level of default risk.” Money market: A segment of a financial market where short-term debt instruments with high levels of liquidity and low default risk are traded. Let’s look at each part of this definition: • “Wholesale market” means that the transactions that take place in the money markets are large in volume. While some smaller transactions do take place, most of the transactions are for $1 million to $10 million or more. Single trades of $50 million to $100 million are not uncommon. Thus, it is all but impossible for individuals to be directly involved in these markets. Instead, these markets are dominated by a network of brokers, dealers, 1 See Louis Uchitelle, “Ideas & Trends: The Bondholders Are Winning; Why America Won’t Boom.” The New York Times , June 12, 1994. 15-1 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 331 CHAPTER 15 Money Markets investment banks, and commercial banks. Individuals usually access the market through a variety of brokers and dealers.
eBook - PDFWiley Pathways Personal Finance
Managing Your Money and Building Wealth
- Vickie L. Bajtelsmit, Linda G. Rastelli(Authors)
- 2012(Publication Date)
- Wiley(Publisher)
13.1 What Is a Mutual Fund? A mutual fund is technically an open-end investment company, but the term is often applied more broadly to any arrangement in which investors’ funds are pooled and used to purchase securities. Although the mechanism can differ across funds, the cash flows generated by the securities in the pool are later distributed to the investors. Investors who purchase shares in mutual funds are like other corporate shareholders: They have no say in the day-to-day decisions about buying and selling securities for the pool, but they have an equity interest in the pool of assets and a residual claim on the profits of the pool. What does a mutual fund investor actually own? One measure of the value of an investor’s claim on mutual fund assets is called the net asset value. This is calculated as assets minus liabilities, per share: Net asset value (Market value of assets Market value of liabilities) Number of shares For example, suppose you own one share of a mutual fund that has 5 mil- lion shares outstanding. The fund portfolio is currently worth $100 million, and its liabilities include $2 million owed to investment advisors and $1 million in rent, wages, and other expenses. The per share net asset value is calculated as: Net asset value ($100,000,000 $3,000,000)/ 5,000,000 $97,000,000/ 5,000,000 $19.40 If the securities that are held in a mutual fund increase in value, the net asset value of the shares of the mutual fund should also increase in value, even though these increases are technically unrealized capital gains. A mutual fund share- holder can capture that gain in value by selling his or her shares of the fund for 13.1 WHAT IS A MUTUAL FUND? 353 a price that reflects the higher net asset value. The objective of fund managers is thus to invest in assets that will continue to grow in value over time.
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