2.15  Money Market Securities

Money market securities are debt securities that mature in one year or sooner. Money market securities are usually highly liquid, meaning they can be easily bought and sold. They are also considered very safe. In fact, they are often referred to as cash equivalents because they are almost as liquid and safe as cash. They usually offer interest payments, but the yields are small compared to riskier, longer-term investments. Money market investments are subject to purchasing power risk because they offer such low yields that there is a risk that their values won’t keep up with inflation. This is referred to as inflation risk or purchasing power risk. Some of the more common money market securities are T-bills, commercial paper, bankers’ acceptances, and money market funds. Certificates of deposit (CDs) are not considered securities, but are still considered part of the money market.

Investing directly in money market securities is more common for institutional investors than individuals. However, individual investors can invest in the money market by buying shares in a money market fund. Money market funds are mutual funds that invest in highly rated, short-term money market debt securities. Typically structured to maintain a $1 per share price, they are used by individual and institutional investors to park money they may need to use in the near future. Money market funds may be taxable or tax-exempt, and they offer investors the benefit of check writing. Like the securities they invest in, money market funds are highly liquid. And while they are considered highly secure, as the financial crisis of 2007–2009 reminded us, money market funds do not offer the safety of an insured bank deposit. The SEC prohibits money market funds from investing in any security with a remaining maturity of greater than 397 days, with two exceptions: government securities and shares in other money market funds.

Commercial paper. Larg