How Do Money Market Mutual Funds Work?
Just like individuals, the government, corporations, and banks often need to borrow money for a short time to make ends meet. Unlike most individuals, however, the scale of this borrowing is phenomenal. The money market is the name given to the arena where most of this short-term borrowing takes place. In the money market, money is both borrowed and lent for short periods of time. For example, a bank might have to borrow millions of dollars overnight to ensure that it meets federal reserve requirements. Loans in the money market can stretch from one day to one year or beyond. The interest rate is fundamentally determined by supply and demand, the length of the loan, and the credit standing of the borrower. The money market was traditionally only open to large institutions. Unless you had a spare $100,000 lying around, you couldn’t participate. However, during the inflationary era of the 70s, when interest rates sky-rocketed, people began to demand greater returns on their liquid funds.
