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if you were to review microsoft s annual report for 2009 you would find that the com 638271

If you were to review Microsoft”s annual report for 2009, you would find that the company had over $6 billion in cash and equivalents. The firm also listed $25 billion in short term securities. The firm chose to hold over $30 billion in highly liquid short term assets in order to be ready to take advantage of investment opportunities and to avoid the risks associated with other types of investments. Microsoft will have much of these funds invested in the money markets. Recall that money market securities are short term, low risk, and very liquid. Because of the high degree of safety and liquidity these securities exhibit, they are close to being money, hence their name. The money markets have been active since the early 1800s but have become much more important since 1970, when interest rates rose above historic levels. In fact, the rise in short term rates, coupled with a regulated ceiling on the rate that banks could pay for deposits, resulted in a rapid outflow of funds from financial institutions in the late 1970s and early 1980s. This outflow in turn caused many banks and savings and loans to fail. The industry regained its health only after massive changes were made to bank regulations with regard to money market interest rates. This chapter carefully reviews the money markets and the securities that are traded there. In addition, we discuss why the money markets are important to our financial system.

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