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Treasury bills and other money market securities

The money market offers a variety of securities with maturities that range from a few days to 1 year. Overall, these are safe investments. Here's a brief description of this market's principal instruments.

Treasury bills

Treasury bills, or T-bills, are the most marketable money market securities. Governments issue them to borrow money for a short period.

T-bills are issued with maturities that range from 1 month to 1 year. They're sold at a discount, i.e., the government sells them for less than par value (face value) and, when they mature, buys them back at par value.

In practice, the interest you receive is the difference between the purchase price and what you get at maturity. In other words, if you pay $9,800 for a T-bill with a face value of $10,000 and keep it until maturity, you'll earn $200 in interest.

T-bills are very popular because they're one of the few affordable money market instruments. They're usually issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million. Note that brokers generally require a minimum purchase of $10,000.

T-bills (and other Treasuries) are considered to be the safest investments in the financial market because governments back them.

However, their exceptional safety means a lower return than provided by corporate bonds, certificates of deposit and money market funds. Also, you don't automatically get back all of your investment if you cash out your T-bills before the maturity date.

Commercial paper

Many corporations prefer, as much as possible, to avoid borrowing short-term money from banks. Therefore, they use commercial paper.

Commercial paper is an unsecured short-term debt instrument issued by a corporation. On average, maturities range from 1 to 2 months and are usually no longer than 9 months. Commercial paper is issued at a discount, reflecting current market interest rates.

Commercial paper provides a better return than T-bills, as corporations have a higher risk of default than governments do.

Commercial paper is usually issued in denominations of $100,000 or more. As a result, smaller investors can only access commercial paper indirectly, through their broker or money market funds.

Bankers' acceptances

A banker's acceptance (BA) is a short-term debt instrument issued by a corporation. In fact, BAs are commercial papers that are secured by a bank.

Corporations use banker's acceptance to finance imports, exports and other merchandise transactions. Bankers' acceptances are especially useful when the creditworthiness of a foreign trade partner is unknown.

Banker's acceptance are traded at a discount from face value and can be sold in the secondary market prior to maturity. Of course, in that case, their return isn't guaranteed.


Eurodollars are U.S. dollar-denominated deposits at banks located outside the United States. They're called Eurodollars because they first appeared in Europe (in London, in 1957, to be precise), but they can be held anywhere outside the United States.

As Eurodollars are held outside the United States, they're not subject to the rules of that country's central bank. They aren't as liquid as term deposits held in the United States but provide greater return.

Eurodollar deposits are valued in the millions and have maturities of less than 6 months. Individuals can therefore only buy them indirectly, through a money market fund.

Repurchase agreements

Repurchase agreements are also known as repos. Corporations and others use them as a form of very short-term borrowing (overnight). With a repurchase agreement, an institution temporarily transfers the securities to a lender as collateral, in exchange for liquidity. The securities act as collateral on the loan.

A repo involves 2 transactions that are staggered over time, with the second transaction reversing the first. A dealer or other holder of government securities sells the securities to a lender and agrees to repurchase them on a given date at a given price. The maturities are usually very short, ranging from 1 to 30 days, but can be longer.

Their very short maturities and government backing mean that lenders incur little risk. Repos are very popular as they can eliminate credit problems. Unfortunately, they have led to major fraud when backed by unreliable assets. Lenders have lost a lot of money because they didn't sufficiently verify the validity of the collateral offered to them.

There are several variations on repos:

  • Reverse repurchase agreement. This is the opposite of a repo, in which a dealer buys government securities from an investor and sells them back later at a higher price.
  • Term repo. The principle is the same as a repo, but the term is more than 30 days.

Tools and tips

Understanding money markets

Governments and corporations borrow huge sums on the money market.

Read tip - Understanding money markets

Understanding bonds

When you buy a bond, you're lending money to a government or corporation.

Read tip - How bonds work

Understanding the stock market

Find out more about stock basics.

Read tip - Stock basics

Understanding options

Options are versatile securities that can be used to make a profit when a stock price goes down (put option or option to sell) or when the stock price goes up (call option, or option to purchase).

Read tip - How options work

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