Money Market Glossary: T-Bills, Commercial Paper, Repo and Overnight Rates
Money markets help governments, banks, companies and institutional investors borrow or place funds over short maturities. Instruments often look cash-like but differ in issuer credit, liquidity, collateral, maturity, benchmark convention and settlement. Understanding the vocabulary is essential for interpreting short-term rates, financing costs and periodic funding stress.
Key terminology at a glance
The definitions below separate the meaning of each term from the practical mistake it helps avoid. Exact calculations and legal rules may vary by market, product and data provider.
Money market
The segment of financial markets dealing primarily with short-term borrowing, lending and liquid investments, often with original maturities up to about one year.
Why it matters: A short maturity reduces some interest-rate sensitivity but does not make every instrument risk free.
Treasury bill (T-bill)
A short-dated government debt security, often issued at a discount and redeemed at face value, subject to the sovereign and instrument terms.
Why it matters: Bill yields reflect the relevant government’s credit, policy expectations, market liquidity and issue-specific demand.
Commercial paper (CP)
A short-term note issued by a company, bank or eligible programme to obtain funding, usually without a long coupon structure.
Why it matters: Rollover risk arises when maturing CP must be refinanced during stressed conditions.
Certificate of deposit (CD)
A bank-issued deposit instrument with specified terms; wholesale negotiable CDs can trade between institutional investors.
Why it matters: Bank credit exposure, deposit protection and marketability depend on the type, issuer and jurisdiction.
Repurchase agreement (repo)
An arrangement in which securities are sold with an agreement to repurchase them later, economically functioning as collateralised funding.
Why it matters: Haircuts and collateral price fluctuations can generate liquidity requirements even for strong borrowers.
Reverse repo
The same economic transaction described from the cash lender’s perspective: buying securities with an agreement to resell them.
Why it matters: An investor’s repo is its counterparty’s reverse repo; the terms depend on the direction of cash and collateral.
General collateral repo
Financing based on an eligible category of collateral rather than one uniquely demanded security.
Why it matters: The rate is often compared with benchmarks to assess broad secured funding conditions.
Special repo
A repo transaction whose financing rate reflects high demand for a particular security as collateral or for settlement delivery.
Why it matters: Specialness indicates collateral scarcity, not a standalone forecast of future bond returns.
Overnight benchmark
A reference rate based on specified overnight funding transactions or market calculations, such as SONIA, SOFR or €STR.
Why it matters: Benchmarks have different data sets, secured or unsecured structures and publication conventions.
Overnight index swap (OIS)
An interest-rate derivative exchanging a fixed rate for payments linked to compounded overnight benchmarks over an agreed period.
Why it matters: OIS pricing can indicate market-implied short-rate paths, but includes premia and contract conventions.
Funding spread
The interest-rate difference between a borrower’s funding cost and a comparable risk-free or benchmark rate at matched maturity.
Why it matters: Spread changes may reflect credit risk, liquidity, market plumbing or shifts in collateral rather than pure rate expectations.
Rollover risk
The danger that maturing debt cannot be replaced at acceptable terms or in sufficient volume.
Why it matters: A solvent business may face short-term distress if refinancing markets close.
Maturity mismatch
Funding assets with liabilities that mature sooner than the assets become cash.
Why it matters: This common structure creates liquidity transformation and exposure to withdrawals or rising refinancing rates.
Money-market fund (MMF)
An investment vehicle holding eligible short-term debt, repo or cash-like assets under its mandate.
Why it matters: A fund share is not the same legal claim as an insured bank deposit; structure and liquidity policies matter.
Worked example: a money-market discount calculation
A hypothetical government bill has a face value of £100,000 and is bought for £99,100 with 91 calendar days remaining until repayment. The cash gain at maturity is £900 if the issuer pays in full. The holding-period return is £900 ÷ £99,100, approximately 0.9082%.
Using an illustrative simple actual/365 money-market annualisation, the equivalent rate is 0.9082% × 365 ÷ 91 ≈ 3.64%. A bank discount yield measured against face value and using a 360-day base would produce a different result. Both can be valid quotation conventions if stated correctly.
Never compare two displayed short-term yields without checking day count, price basis, maturity, credit exposure, collateral, liquidity and the exact annualisation method.
Comparison and worked calculations
| Instrument | Typical issuer or counterparty | Typical exposure |
|---|---|---|
| Treasury bill | Government | Sovereign credit and interest-rate pricing |
| Commercial paper | Company or financial issuer | Credit and refinancing |
| Certificate of deposit | Bank | Bank credit, terms and liquidity |
| Repo | Cash borrower and collateral provider | Collateral, counterparty and margin |
| Money-market fund | Investment fund | Portfolio credit, liquidity and redemption rules |
All numerical values and scenarios are hypothetical illustrations rather than actual market prices, forecasts or investment outcomes.
Common interpretation mistakes
- A bank deposit, a government bill, a prime MMF and a secured repo are not interchangeable in every crisis.
- Compare secured and unsecured rates of the same currency and tenor before attributing spread differences to credit.
- A money-market investment that normally has low price volatility may still have settlement or redemption constraints.
- Funding-market stress can transmit to corporate borrowing and broader asset prices before policy rates change.
Frequently asked questions
Are all money-market investments guaranteed?
No. Guarantees and protections, if any, depend on the instrument, issuer, jurisdiction and account eligibility.
Why can repo rates differ from overnight unsecured rates?
Collateral type, transaction structure, credit and liquidity conditions differ.
Does a short maturity remove credit risk?
No. Default or inability to roll debt can occur before or at maturity.
Is a money-market fund identical to a savings account?
No. It is a fund whose value and redemption mechanics depend on its portfolio and legal structure.
Authoritative references and further reading
Continue learning: Commercial paper and rollover risk and How banks create deposits.
This guide provides financial education only, not personal financial advice, investment recommendations or trading signals. All instruments carry risks including potential loss.