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Key Types of Securities
Securities are commonly classified as either money market securities or capital market securities.
Key Money Market Securities
Money market securities tend to have a high degree of liquidity, which means that they can be easily converted into cash without a major loss in their value. This is important to firms and investors who may need to sell the money market securities on a moment's notice in order to use their funds for other purposes. The money market securities most commonly used by firms and investors are Treasury bills, commercial paper, negotiable certificates of deposit, and foreign money market securities. These are described below.
The ease with which securities can be converted into cash without a major loss in value.
Treasury bills are short-term debt securities issued by the U.S. Treasury. Every Monday, Treasury bills are issued in two maturities, 13 weeks and 26 weeks; 1-year Treasury bills are issued once a month. The Treasury uses an auction process when issuing the securities. Competitive bids are submitted by 1:00 p.m. eastern time on Monday. Noncompetitive bids can also be submitted by firms and investors who are willing to pay the average accepted price paid by all competitive bidders. The Treasury has a plan for how much money it would like to raise every Monday. It accepts the highest competitive bids first and continues accepting bids until it has obtained the amount of funds desired.
The par value (principal to be paid at maturity) on Treasury bills is a minimum of $10,000, but those purchased by firms and institutional investors typically have a much higher par value. When Treasury bills are issued, they are sold at a discount from the par value; the par value is the amount received at maturity. The difference between the par value and the discount is the investor's return. Treasury bills do not pay coupon (interest) payments. Rather, they pay a yield equal to the percentage difference between the price at which they are sold and the price at which they were purchased.
Treasury bills are commonly purchased by firms and investors who wish to have quick access to funds if needed. They are very liquid because of an active secondary market in which previously issued Treasury bills are sold. Treasury bills are backed by the federal government and are therefore perceived as free from the risk of default. For this reason, the return that can be earned from investing in a Treasury bill (a risk-free security) and holding it until maturity is commonly referred to as a risk-free rate. Investors know the exact return they can earn by holding a Treasury bill until maturity.
Short-term debt securities issued by the U.S. Treasury.
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