Types of Money Market Instruments

by Mack Mitzsheva

Investors generally want to grow their money. An investor has many options to choose from in creating a diversified portfolio and generating a return on his investments. Stocks and bonds are often a part of a solid investment plan. Money market instruments may also offer an option. These instruments are low-risk investments, and each type has its own attributes.

Certificate of Deposit

A certificate of deposit, or CD, is a type of receipt issued to a depositor who opens a time deposit account. The receipts states the amount of the deposit, the interest rate, and the minimum time period the funds are to remain in the account. Removal of the funds before this time period will require the depositor to pay an early withdrawal penalty. The interest rate paid on the account is tiered and generally rises higher the longer the depositor leaves the money in the account.

Treasury Bills

A Treasury bill -- also called a T-Bill -- is a promissory note issued by the federal government to an investor. It is a short-term note with a maturity period of less than one year and is often considered a risk-free investment. The government issues a Treasury bill as a way to raise revenue and regulate the money supply. The bill does not have a set interest rate. An investor purchases the note at a discount, and the yield -- or gain -- is the difference between what the note was purchased for and its value at the time of redemption, called the par-value.

Bankers Acceptance

Banker's acceptance is an endorsement of a bill of exchange by the bank of the importer or buyer. A bill of exchange is a written order by which one party agrees to pay a certain sum of money to another party for the purchase of goods or services, either immediately or at a set date in the future. The purpose of this instrument is to help facilitate commercial trading. Payment of the bill of exchange is guaranteed by the endorsing bank. Endorsement of the bill is based upon the financial standing of the buyer.

Commercial Paper

Commercial paper is a promissory note with a maturation period of -- usually -- two to 30 days but no more than 270 days. The notes are issued by financial institutions or large firms and are secured by the reputation of the issuer. The notes are sold at a discount instead of on an interest bearing basis, meaning the notes do not pay regular, periodic interest. These notes are a form of a negotiable instrument, which means they are freely transferable in trading as a substitute for money. Another example of a negotiable instrument is a written check.

About the Author

Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.