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Money Market Guide
Long-term bonds and stocks get most of the attention, but a huge share of the financial system runs on much shorter money. Every day, corporations, banks, governments and funds borrow and lend trillions of dollars for periods measured in days, weeks or months. That short-term world is the money market.
If you run a company's treasury, raise working capital, or are studying for the Securities Industry Essentials (SIE) exam, you need to know how these instruments work. This guide explains the main money market instruments in plain language, including repurchase agreements, commercial paper and medium-term notes, and shows how each one is likely to appear on the SIE.
The money market is the market for short-term debt, generally instruments that mature in one year or less. It is where borrowers go to cover short-term cash needs and where investors park cash they want to keep safe and easy to access.
Money market instruments tend to share a few traits:
Short maturities. Most mature in a year or less, many in days or weeks.
High liquidity. They can be sold or redeemed quickly with little price change.
Low risk. Short maturities mean little interest rate risk, and most issuers have strong credit.
Discount pricing. Many are sold below face value and pay face value at maturity. The difference is the investor's return.
Large denominations. Many trade in amounts that suit institutions rather than individual savers. Individuals usually get access through money market mutual funds.
That last point matters. Money market funds pool investor cash and buy these instruments directly. When people say they keep cash "in the money market," they usually mean a money market fund holding the instruments below.
Treasury bills, or T-bills, are short-term debt issued by the U.S. government with maturities of up to 52 weeks. They are sold at a discount and pay face value at maturity, with no periodic interest payments.
Because they are backed by the full faith and credit of the U.S. government, T-bills are treated as the benchmark for a near risk-free short-term rate. Their interest is subject to federal income tax but exempt from state and local income tax.
A repurchase agreement is a short-term loan dressed up as a sale. One party sells securities, usually Treasuries, to another and agrees to buy them back at a slightly higher price on a set date. The difference between the sale price and the repurchase price is effectively the interest on the loan, expressed as the repo rate.
Here is how it works in practice:
A bank or dealer needs cash overnight.
It sells $10 million of Treasury securities to a money market fund and agrees to repurchase them the next day for a bit more.
The fund earns a return on its cash, and it holds the Treasuries as collateral the whole time.
The next day, the dealer buys the securities back and the trade unwinds.
A few key terms:
Repo vs. reverse repo. The same trade is a repo from the side selling securities and borrowing cash, and a reverse repo from the side buying securities and lending cash.
Overnight vs. term repo. Most repos last one day. Term repos run for a set number of days, and open repos roll until one side ends them.
Haircut. Lenders often lend a little less than the collateral's value, building in a cushion in case its price falls.
Repos are the plumbing of the financial system. Dealers use them to finance their securities inventories, and money market funds use them to earn a return on cash. The Federal Reserve also uses repos and reverse repos to manage short-term interest rates. The Secured Overnight Financing Rate (SOFR), the main U.S. benchmark that replaced LIBOR, is based on overnight Treasury repo transactions.
Commercial paper is short-term, unsecured debt issued by corporations and financial companies to fund day-to-day needs like payroll, inventory and receivables. It's essentially a corporate IOU backed only by the issuer's credit.
Key features:
Maturity of 270 days or less. Commercial paper that matures within 270 days and funds current transactions is exempt from SEC registration under the Securities Act of 1933. That exemption keeps issuing costs low, and it's why the 270-day limit matters so much.
Usually sold at a discount to face value, like T-bills.
Unsecured. No collateral stands behind it, so only companies with strong credit ratings can issue it at attractive rates.
Backup lines of credit. Issuers often keep bank credit lines in place to repay maturing paper if they can't roll it over.
Because it skips registration and bank lending spreads, commercial paper is usually a cheaper way for a highly rated company to borrow short-term than a bank loan.
There's also asset-backed commercial paper, which is secured by a pool of assets such as receivables. It works like regular commercial paper but relies on the cash flow of the underlying assets rather than the issuer's general credit.
A banker's acceptance is a short-term instrument tied to trade. An importer's bank guarantees a payment, called a time draft, that is due on a future date. Once the bank "accepts" the draft, the obligation carries the bank's credit rather than the importer's.
The exporter can then hold the acceptance until maturity or sell it at a discount in the money market to get cash right away. Banker's acceptances are used mostly in international trade and are sold at a discount to face value, like commercial paper and T-bills. Their maturities usually run for a few months, so they're less common today than they once were, but they still show up on exams.
A regular bank CD is a deposit you hold until it matures. A negotiable CD, often called a jumbo CD, is a large-denomination CD, typically $100,000 or more, that can be sold to another investor before it matures.
That tradability makes negotiable CDs a money market instrument. Unlike T-bills, they generally pay interest rather than being sold at a discount. FDIC insurance covers deposits only up to $250,000 per depositor, per bank, per ownership category, so the amount of a jumbo CD above that limit carries the bank's credit risk.
Federal funds are overnight loans between banks of the reserves they hold at the Federal Reserve. A bank with more reserves than it needs lends them to a bank that is short, usually for one day and without collateral.
The rate on these loans is the federal funds rate, which the Federal Reserve targets as the main tool of monetary policy. Individual investors don't buy fed funds, but the rate influences short-term borrowing costs across the whole economy.
Medium-term notes, or MTNs, often come up alongside money market instruments, but they sit just outside the money market. MTNs are corporate debt securities with maturities that typically range from about nine months to 30 years.
What makes MTNs different isn't their length so much as how they're sold:
Continuously offered. Instead of selling one large bond issue at once, an issuer registers an MTN program, often under a shelf registration, and sells notes continuously in smaller amounts.
Flexible maturities. Investors and dealers can request specific maturities, so the issuer can match its debt to its funding needs.
Sold through dealers. Notes are usually placed by investment banks acting as agents, at rates the issuer posts and updates as markets move.
For corporate treasurers, MTNs fill the gap between commercial paper, which tops out at 270 days, and traditional long-term bonds. For SIE candidates, the key point is that MTNs are a debt product with a continuous offering structure, not a true money market instrument.
| Instrument | Issuer | Typical maturity | How it pays | Secured? |
|---|---|---|---|---|
| Treasury bills | U.S. Treasury | Up to 52 weeks | Sold at a discount | Backed by the U.S. government |
| Repurchase agreements | Banks, dealers | Overnight to a few weeks | Repurchase price above sale price | Yes, by securities |
| Commercial paper | Corporations, finance companies | Up to 270 days | Usually sold at a discount | No (except asset-backed CP) |
| Banker's acceptances | Banks, for trade transactions | A few months | Sold at a discount | Bank guarantee |
| Negotiable CDs | Banks | Up to a year or more | Interest | FDIC-insured up to the limit |
| Federal funds | Banks | Overnight | Interest | No |
| Medium-term notes | Corporations | About 9 months to 30 years | Interest | Usually unsecured |
The SIE is FINRA's entry-level exam for anyone starting a career in the securities industry. It has 75 scored questions plus 5 unscored ones, a time limit of 1 hour 45 minutes, and a passing score of 70%. Anyone 18 or older can take it without a sponsoring firm, and a passing result stays valid for four years.
Money market instruments fall under "Understanding Products and Their Risks," the largest section of the exam at 44% of the scored questions. Expect questions like these:
Definitions and maturities. Which instruments count as money market instruments, and what maturity range defines the money market.
The 270-day rule. Why commercial paper's maximum maturity is 270 days, and that it's exempt from SEC registration.
Repo vs. reverse repo. Which side is borrowing cash and which is lending it.
Discount pricing. Which instruments are sold at a discount, and how the investor earns a return.
Risk. Why money market instruments carry low interest rate risk, and how credit risk differs between T-bills, commercial paper and jumbo CDs.
Trade finance. Recognizing a banker's acceptance from a description of an import transaction.
The exam leans on application, not memorization. A question might describe a company that needs to fund inventory for four months and ask which instrument fits, or describe a dealer financing its Treasury holdings overnight and ask what the transaction is called.
The best way to get comfortable with that style is practice under real exam conditions. Resources like Career Employer's SIE exam prep offer free, full-length practice tests weighted like the real exam, with explanations for every answer. Use them to find the product topics you miss most, then come back to guides like this one to fill the gaps.
Money market instruments are short-term, liquid and low-risk, but they each do a different job. T-bills fund the government. Repos finance dealers and let cash investors lend against collateral. Commercial paper funds corporate working capital. Banker's acceptances support trade. Jumbo CDs and fed funds move money among banks. Medium-term notes bridge the gap to longer-term corporate debt.
Whether you're managing a company's cash, raising short-term capital, or preparing for the SIE, understanding how these pieces fit together gives you a clearer view of how money actually moves through the financial system.
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