Is Your Money Market Investment Safe?

A Money market investment is an investment in short-term bonds and certificates of deposit. Money market investments are considered to be common market investments are usually considered more stable then other investments because they have fairly simple and rigid terms. In many cases, they are also backed by a government agency from loss. This article will cover the more common types of money market investments and explain what makes each one of them safe and what may threaten that safety in the future.

Treasury Bills

Treasury bills are securities that are issued by United States treasury. They are sold in terms ranging from a few days to a year. Their value is determined at weekly or monthly auctions (the time depends on the overall length). They are backed by the US government, which means that unless the government collapses, the treasure bills will not lose their value.

Municipal Bonds

Municipal bonds are bonds issued by city and state governments, either directly or though one of their agencies. They are used to raise funds, often for  specific projects. Depending on the bond, you can either take out all the money at once after (at most) a year or leave the deposit for several years and have the interest deposited on annual basis. Since they are issued by either city or state governments, they are secure, but not to the same extent as federally backed treasury bills because state budgets are self-governing and can run into financial trouble.

Certificates of Deposit

Certificates of deposit are time deposits made at banks, thrift institutions and credit unions. You deposit the money for a specific period of time. When you withdraw, the sum will be larger because of the interest that it accumulated.  The interest rates are locked in, which means that you will earn something from the deposits regardless of the economic conditions.

If, however, the bank fails, the assets are usually transferred to another bank and in most cases, the new bank will honor your deposit certificates.  The new bank is not always required to honor the guarantee.

Commercial Paper

Commercial paper is a note that signifies a promise that a bank or a corporation will agree to pay you a certain sum of money at a certain period of time. That is the only guarantee you have. It is more vulnerable then any other investment types listed in this article. Usually, the payments will be honored, even during the lean times, but if the financial situation gets particularly difficult for the issuing bank, it may default, leaving you out to dry.