Money Markets, Banker's Acceptance, Treasury Bills...Oh My!

Money Markets Account Interest

Putting money into a money market savings account is very much like putting it into a savings account. The process is similar. The investor opens a money market account at the bank, the bank pays interest based on the deposits that gets put into the account, and then the bank loans that money to other people with a higher rate of interest than what they paid the initial investor. The interest on money market accounts is compounded daily and paid monthly, though interest rates can vary from bank to bank as some incentive potential customers with higher rates. Unlike savings and checking accounts, the more money a person puts into a money market account, the higher the interest rate he will receive. It is important that those interested in putting their money in such accounts talk with the banks about how the interest rates can fluctuate, and shop around for the best deals.

Banker's Acceptance

Non-financial firms form banker's acceptances, which are short term credit investments. Banks are guaranteed to make payments, and these acceptances are traded at discounts from the face value in the secondary market. A banker's acceptance acts as a negotiable time draft for financing various transactions in goods for corporations, which is useful when a foreign trade partner's creditworthiness is unknown. A baker's acceptance also does not need to be held until maturity, in fact, it can be sold off in secondary markets where institutions and investors trade such acceptance.

Treasury Bills

Treasury bills are a very marketable and popular money market security. This stems from their simplicity. Treasury bills are short term securities that mature in at most one year from their issue date, and their interest is the difference between that of the security's purchase price and what one receives upon maturity. To purchase a treasury bill, one must submit a bid. Bidding is done non-competitively, where the bidder receives the full amount, or competitively, where the bidder has to specify the desired return. With that latter, if the return is too high, it is likely the bidder will not receive any or all of the desired securities.

Treasury bills are popular due to their affordable nature, and they are considered risk free. In fact, they are exempt from state and local taxes. Unfortunately, one does not receive a large return of treasury bills as he would with corporate bonds, certificates of deposits, and money market funds; additionally, there are penalties for cashing out prior to the maturity dates.

Treasury bills also sell cash management bills by re-opening sales of bills that mature at the same time as an outstanding issue of bills. Large investors and institutions purchase these bills through the commercial book entry system, which distributes such bills to individual investors. Additionally, the individual bidders can utilize Treasury Direct, which is a non-competitive holding system for small investors who hold their securities until maturity. If the investor wishes to sell the bills prior to maturity, he must first transfer them to the commercial book entry system, and this transfer can only occur with a depository institution, which holds an account at the Federal Reserve Bank.