Key Concepts
1. Explain the main role of money market securities.
2. Identify the more popular money market securities, and elaborate where necessary.
3. Explain how financial institutions participate in money markets.
POINT/COUNTER-POINT:
Should Firms Invest in Money Market Securities?
POINT: No. Firms are supposed to use money in a manner that generates an adequate return to
shareholders. Money market securities provide a return that is less than that required by shareholders.
Thus, firms should not be using shareholder funds to invest in money market securities. If firms need
liquidity, they can rely on the money markets for short-term borrowing.
COUNTER-POINT: Yes. Firms need money markets for liquidity. If they do not hold any money market
securities, they will frequently be forced to borrow to cover unanticipated cash needs. The lenders may
charge higher risk premiums when lending so frequently to these firms.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: Firms should not hold an excessive amount of money in the form of money market securities.
But they should invest in money market securities so that they have access to funds before being forced to
rely on short-term loans.