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What are Money Market Instruments?

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  • Written By: Luke Arthur
  • Edited By: C. Wilborn
  • Last Modified Date: 04 December 2016
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Money market instruments are debt obligations that are used as investments by many brokerages and mutual fund companies. These could be any debt obligations that last for less than one year. Some examples of money market instruments are Treasury bills, commercial paper, and securities from government-sponsored enterprises. Individual investors can access money market instruments by investing in a money market account or a money market mutual fund. This type of investment is viewed as very safe in the investment community.

Considered to be short-term debt, money market instruments may be used by a business or government entity that needs to raise funds for a short-term purpose. To raise the money, they may issue this type of debt to investors. This debt will be paid back relatively quickly at low interest.

Individual investors can choose to invest in the money market. The two most common avenues of doing this are money market mutual funds and money market accounts. These investments are similar, but are provided by two different entities. Money market accounts are provided by financial brokerages while money market mutual funds are created by mutual fund companies.

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Both of these types of investments may use money market instruments in order to provide a return to the investors. Most of the time, the interest that is generated from these accounts is minimal compared to other investments. Most investors look at these types of investments as a safe place to park excess cash when no other investment is readily apparent.

Money market accounts and mutual funds invest in a variety of different money market instruments to provide returns for the investors. One of the most common instruments that is invested in is Treasury bills. The United States Treasury regularly issues short-term debt in the form of T-bills. These debt instruments are backed by the full faith and credit of the United States government and are therefore viewed as extremely safe to investors.

Another common instrument that is included in the money market is debt issued by government-sponsored enterprises. These companies are sponsored by the federal government and have government backing. This means that these debt securities are viewed as extremely safe as well.

Commercial paper is another type of money market investment. This is a short-term loan between businesses. In most cases, companies have to have a very good credit rating in order to issue this type of debt obligation. If a company does not have good credit, it will not be considered for money market instrument inclusion.

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