Concept
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1. Money market instruments involve a loan between two entities, albeit an implicit loan. 2. The nature of the entities affects the nature of the loan; lending money to the United States government is a very different prospect to lending money to an unknown individual. 3. Money-market instruments are relatively liquid. Even those with longer terms are limited to a year, and secondary tradability enhances this liquidity. 4. Money-market loans are typically unsecured: they usually do not involve collateral, with repurchase agreements being the exception rather than the rule. This means that the lender usually faces default risk (i.e. they stand to lose in the event that the borrower defaults). However, this default risk is relatively minor — we will shortly see how the relatively short- term nature of money-market loans ensures this.