Money market instruments: certificates of deposit, bankers' acceptances and commercial paper, short-term vs. long-term

Recognize the money market

Money market instruments are short-term debt instruments, generally maturing in one year or less. Longer-term debt belongs to the capital market. Identify the obligor, payment structure, and maturity rather than relying on a product name.

Four instruments

• Treasury bills: Short-term direct Treasury obligations without periodic coupon payments. Commonly purchased at a discount and redeemed at face value. A bill bought for $9,800 and paid at $10,000 produces $200 of income at maturity; this is not an annualized yield.
• Commercial paper: Generally unsecured corporate promissory notes used for short-term financing, including inventory and payroll. Commonly sold at a discount; repayment depends on the corporate issuer.
• Bankers' acceptances: Time drafts, often used in international trade, that a bank accepts and undertakes to pay at maturity. They may be traded before maturity, often at a discount. They are distinct from bank deposits.
• Negotiable certificates of deposit: Transferable bank time deposits with stated terms. Large-denomination, short-term negotiable CDs are money market instruments. Selling one to another investor differs from withdrawing funds early from the issuing bank. CDs can also have longer maturities.

One year is not the exemption test

Under 15 U.S.C. § 77c(a)(3), the short-term exemption covers specified notes, drafts, bills of exchange, and bankers' acceptances arising out of current transactions or whose proceeds have been or are to be used for current transactions. Maturity at issuance must not exceed nine months, exclusive of days of grace; a renewal's maturity must be likewise limited. Short maturity alone does not establish this exemption.

Maturity and risk

Short maturity generally means less interest-rate sensitivity than otherwise similar longer-term debt. It does not eliminate credit, market, liquidity, or reinvestment risk. A sale before maturity depends on the available price, and reinvesting maturity proceeds may earn a different rate.