Monday, August 31, 2009

The Goals of Money Market Investors

investors in the money market seek mainly safety and liquidity plus the opportunity to earn some interest income. this is because funds invested in the money market represent only temporary cash surpluses and are usually needed in the near future to meet tax obligations, cover wage and salary costs, pay stockholder dividends, and so on. for this reason money market investors are especially sensitive to risk.
the strong aversion to risk among money market investors is especially evident when there is even a hint of trouble concerning the financial condition of a major money market borrower. for example, when the huge Penn central transportation company collapsed in 1970 and defaulted on its short-term commercial notes, the commercial paper market virtually ground to a halt because many investors refused to buy even the notes offered by top-grade companies. Similarly,in 1974 when Franklin National Bank of New York, holding nearly $4 billion in assets, closed its doors, the rates on short-term certificates of deposit (CDs) issued by other big New York banks surged upward due to fears on the part of money market investors that all large-bank CDs had become more risky.

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