As well as the credit quality of the issuers themselves,
different types of security have inherent risk and return
characteristics by virtue of the type of issuer implicit in the
security's definition. These differences are reflected in the
yield spread between competing paper.
Regular issues of
Treasury bills backed by central government have the lowest
default risk, creating the deepest market segment of
homogeneous, highly liquid paper - with consequently the lowest
yield. This is because governments' are generally assumed
to have a very low default risk.
Bankers' Acceptances are also very safe investments as they
carry the obligation to honour payment by both a corporate and
a bank, and in addition, because they usually represent a
business transaction with specific underlying goods.
Certificates of Deposit, honoured by a single bank,
generally trade a few
basis points higher, but this can only be a generalisation
as the market segment is itself tiered; the range of names
issuing resulting in different credit and liquidity premiums.
The
Commercial Paper segment presents the greatest degree of
tiering. Prime grade CP generally trades a few basis points
over CDs, but again, some corporates are perceived as being
more creditworthy than some banks. Medium grade CP offers the
highest yields to attract investors.
A distinct market
The ability of borrowers and lenders to choose between
alternative money market instruments results in a close
relationship between the return offered by those different
instruments.
So although, technically, a money market is a collection of
markets for several distinct instruments - the
interrelationship between these various forms of short-term
debt finance create a distinct market. This market's
primary use is what is known as, liquidity management. Let's
see what it is.
