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The money market is a subsection of the fixed income market. We generally think of the term "fixed income" as synonymous with bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in continual buying and selling of short-term liquid investments (debt that matures in less than a year), including Treasury bills, certificates of deposit (CDs), commercial paper, and other debt issued by corporations and governments. Money market investments are also called cash investments because of their short maturities.

Money market securities are essentially IOUs issued by governments, financial institutions, and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower return than most other securities.

One of the main differences between the money market and the stock market is that most money market securities trade in awfully high denominations. This limits the access of the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. If you want to learn more on Money Markets, Instruments of the Money Market has an extensive guide to money market securities from the Federal Reserve Bank of Richmond.

Treasury Bills (T-bills):
T-bills are the most popular and marketable money market security. Their popularity is mainly due to their simplicity. T-bills are basically a way for the U.S. government to raise money from the public. T-bills are short-term securities with a maturity date of 4, 13, or 26 weeks. You buy T-bills for a price less than (discount) to their par (face) value, and when they mature, the government pays you their par value. This is different than coupon bonds, which pay interest semi-annually. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity. If a bought a 90 day T-bill at $9,500 and held it until maturity, your interest would be $500.

Treasury bills (as well as notes and bonds) are issued through a competitive bidding process at auctions. If you want to buy a T-bill, you submit a bid that is prepared either non-competitively or competitively. Noncompetitive bidding means you'll receive the full amount of the security you want at the return determined at the auction. Competitive bidding means you have to specify the return that you would like to receive. If the return you specify is too high, you might not receive any securities, or just a portion of what you bid for. More information on auctions is available at: www.treasurydirect.gov/sec/secfaq.htm#secfaq4

The biggest reasons that T-Bills are so popular is because they are one of the few money market instruments that are affordable to the individual investors. T-bills are usually issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000, and $1 million. Other positives are that T-bills (and all treasuries) are considered to be the safest investments in the world because the U.S. government backs them. In fact, they are often considered risk-free investments. Also, interest is federally taxable but exempt from state and local taxes. The only downside is that you won't get a great return because Treasuries are exceptionally safe. Corporate bonds, CDs, and money market funds will often give higher rates of interest. What�s more, you might not get back all of your investment if you cash out before the maturity date.

Why would the government need to borrow money? Doesn't it get all that tax revenue?

It's a fact that US government receive huge amount of tax revenue. But it spends more money than it receives in tax revenues. So they borrow money just like us. Let's suppose ordinary Joe spends more money this month than his income. This situation would be called a "budget deficit". So you borrow. The amount you borrowed (and now owe) is called your debt. You have to pay interest on your debt. If next month you don't have enough money to cover your spending then you would incur another deficit, you must borrow some more, and you'll still have to pay the interest on the loan. If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget.

Each year since 1969, Congress has spent more money than its income. The Treasury Department has to borrow money to meet Congress's appropriations. The total borrowed is well over $9 trillion ($9,000,000,000,000) and growing. Check it yourself (it changes daily), at the U. S. Treasury Department web site. Even when government officials claim to have a surplus, they still spend more than they get in.

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