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Chapter 5 The Money Market Warming up Look at the pictures and answer the following questions. 1. What do people do with their money? 2. Why is money often likened to a plant, as shown in some of the pictures above? 3. What message did you get from the picture of money and umbrella together? 4. What is Yu’ebao? Why is it compared to a flourishing tree of money? Text A The Money Markets The Money Markets Defined P1 The term money market is actually a misnomer. Money—currency—is not traded in the money markets. Because the securities that do trade there are short-term and highly liquid, however, they are close to being money. Money market securities, which are discussed in detail in this chapter, have three basic characteristics in common: ? They are usually sold in large denominations. ? They have low default risk. ? They mature in one year or less from their original issue date. Most money market instruments mature in less than 120 days. P2 Money market transactions do not take place in any one particular location or building. Instead, traders usually arrange purchases and sales between participants over the phone and complete them electronically. Because of this characteristic, money market securities usually have an active secondary market. This means that after the security has been sold initially, it is relatively easy to find buyers who will purchase it in the future. An active secondary market makes money market securities very flexible instruments to use to fill short-term financial needs. For example, Microsoft’s annual report states, “We consider all highly liquid interest-earning investments with a maturity of 3 months or less at date of purchase to be cash equivalents.” P3 Another characteristic of the money markets is that they are wholesale markets. This means that most transactions are very large, usually in excess of $1 million. The size of these transactions prevents most individual investors from participating directly in the money markets.