Money Market Instruments
Chapters in this video
- 0:00 What the money market is, and why buyers are lenders
- 1:37 Commercial paper: Carl's unsecured 270-day IOU
- 2:47 SEC registration trap: 271 days kills the exemption
- 3:52 Treasury bills: risk-free lending to Uncle Sam
- 4:31 Competitive vs non-competitive auction bids
- 5:04 T-bill yield quotes and tax treatment traps
- 6:38 Money market mutual funds and the $1 NAV target
- 7:11 Breaking the buck: why FDIC does not apply
- 7:59 Rapid-fire exam recap
What this video covers
- Why every money market instrument matures in one year or less, and why the buyer is always the lender while the issuer is the borrower
- How commercial paper works as an unsecured corporate IOU sold at a discount, and why the 270-day maturity threshold determines Securities and Exchange Commission (SEC) registration
- The distinction between competitive and non-competitive bids at T-bill auction, and why retail investors use non-competitive bids for guaranteed fills
- Why T-bills are quoted on a bank discount yield basis (360-day year) and how the bond equivalent yield (365-day year) gives a truer comparison
- The exact tax treatment of T-bill interest: federally taxable but fully exempt from state and local taxes
- Why retail money market mutual funds target a $1 net asset value (NAV), and how institutional prime funds use a floating NAV instead
- The critical difference between a money market mutual fund (security, no Federal Deposit Insurance Corporation (FDIC) insurance) and a money market deposit account (bank product, FDIC insured to $250,000)
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