Commercial paper:

For many corporations, borrowing short-term money from banks is often a laborious and annoying task. The desire to avoid banks as much as possible has led to the widespread popularity of commercial paper. Commercial paper is an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between one and two months being the average. 

For the most part, commercial paper is a very safe investment because the financial situation of a company can easily be predicted over a few months. Furthermore, typically only companies with high credit ratings and credit worthiness issue commercial paper. Over the past 40 years, there have only been a handful of cases where corporations have defaulted on their commercial paper repayment. 

Commercial paper is usually issued in denominations of $100,000 or more. Therefore, smaller investors can only invest in commercial paper indirectly through money market funds. 

Bond:

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. 

Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents. Investopedia explains Bond

The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries". 

Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.

What Does Money Market Mean?

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), banker’s acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos). Investopedia explains Money Market. The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term.  The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper. 

Corporate Bonds:

The corporate bond market is one of the largest and most liquid of the financial markets. Corporate bonds can be appealing for many reasons, as they are generally considered safer than stocks and they often provide higher returns than government bonds. However, until recently, investing in the corporate bond market was a more difficult task for individual investors. This has changed, with the introduction of exchange-traded funds (ETFs) focused on corporate bonds. This article will focus upon the corporate bond market and whether corporate bonds ETFs are an attractive option for individual investors. (For background reading, check out our tutorials on Bond Basics and Advanced Bond Concepts.)

Corporate Bond Market Characteristics

Corporate bonds are issued by companies ranging from the largest and most creditworthy to smaller and more speculative firms. One of the defining features of corporate bonds is that they carry more default risk than many other types of bonds. This increased default possibility, known as credit risk, means that investors in corporate bonds are required to do significant credit research prior to purchasing securities. (Learn more in Opportunistic Credit Investing.)

Corporate bonds are also analyzed by credit rating agencies, such as Moody's and S&P. These rating agencies assign credit ratings to corporate issuers. This rating is one of the most important factors in analyzing corporate bonds, and can serve as a starting point for analyzing the corporate bond market. Standard & Poor's ratings range from AAA to D - securities rated above BB are considered investment grade securities, while those with lower ratings are referred to as high yield (junk) securities. Generally speaking, the higher the rating the more creditworthy the company.

While credit ratings can serve as an excellent starting point for analysis, successful investors go beyond the ratings and analyze the underlying fundamentals of the company. By doing significant additional research on corporate bond issues, investors can be very successful over the long run.

Why Invest in Corporate Bonds?

Because they are generally considered riskier than many other types of bonds, corporate bonds provide higher returns. This makes them attractive to investors willing to accept a little more risk. At the same time, corporate bonds are considered safer than common stocks, because in the corporate structure of a company, bondholders receive priority over stockholders in the event of a corporate bankruptcy. Therefore, corporate bonds occupy an interesting niche - providing higher returns than government bonds with greater safety than stocks. Finally, because they are not perfectly correlated with stocks, government bonds or any other asset class, corporate bonds provide a means of bringing additional diversification to a portfolio. (For more on corporate bonds, see Corporate Bonds: An Introduction To Credit Risk.)

Corporate Bond Investing Options

As mentioned previously, investing in individual corporate bonds requires significant research. Individual investors interested in directly purchasing corporate bonds should be prepared to conduct this research. Because the structure of the bond market is so heavily tilted towards large institutional investors, it can sometimes be difficult for individual investors to receive reasonable pricing or to purchase bonds in small enough increments in order to build a well-diversified portfolio. Therefore, investors will ideally have a relatively large portfolio before considering purchasing individual bonds.

Because of the difficulties involved in purchasing individual corporate bonds, many individual investors seek other means of investing in the market. Some investors, particularly wealthy ones, will find that their best option is to hire a professional money manager with expertise in the bond market. This will provide them with the benefits of active bond management, personalized service and potentially above-index returns.

Investors with smaller portfolios may not be able to access professional management and may not have the expertise or ability to invest in individual bonds. For these investors, mutual funds and ETFs provide the best options for investing in the corporate bond market. (Learn more about investing in bonds in The Bear on Bonds.)

Pros and Cons of ETFs

As with any financial instrument, ETFs have both pros and cons. Some of these include:

Pros: 

Low fees - because ETFs are passively managed and designed to track an index, they generally have very low fees. In fact, the fees on ETFs are often lower than on index mutual funds. Ease of trading - because they trade on an exchange just like any other stock, ETFs are very easy to trade. Tax efficiency - because an ETF portfolio does not experience very high turnover, they are generally tax efficient. Diversification - in the corporate bond market, it can be difficult for smaller investors to build a well diversified portfolio. An ETF provides instant diversification. 

Cons:

Limited upside - an ETF limits an investor to the return on the index less any fees. In the corporate bond market, an active investor may be able to take advantage of market inefficiencies to produce above-index returns. However, by investing in leveraged ETFs, investors can create similar above-index returns.  

Lack of transparency - although they regularly post their holdings, an investor may not know exactly what bonds an ETF holds at any given time. Investors with direct corporate bond holdings will have the advantage of tracking their holdings on a more consistent basis. Lack of customization - an ETF investor is forced to hold all the bonds in the underlying ETF and cannot decide to overweight or underweight some bonds relative to the index. Active investors may be able to use their skill to select corporate bonds they deem to be superior and produce higher returns over time. (For more on ETFs, read How to Use ETFs in Your Portfolio.) 

Available ETFs

In recent years, a number of corporate bond ETFs have come to market. There are ETFs available for both high grade corporate bonds and high-yield corporate bonds. When constructing a portfolio of corporate bond ETFs, the most important decision will be whether to purchase high-grade or high-yield corporate bonds.

The choice depends on individual circumstances and the goals of the investment portfolio, but it is important to remember that returns on high-grade bonds will generally be lower than high-yield bonds. However, high-grade bonds are also significantly safer than high-yield bonds. Therefore, if the corporate bond investment is intended to provide a measure of safety to a diversified portfolio, high-grade bonds may be more appropriate. If, on the other hand, the goal of the corporate bond investment is to generate the highest return possible, an investor may wish to investigate high-yield bonds further.

Conclusion

Like all investment vehicles, corporate bond ETFs has attractive features and drawbacks. For many individuals, including those with relatively small portfolios, a corporate bond ETF may prove the best alternative for achieving corporate bond exposure. The purchase of a corporate bond ETF can provide a well-diversified high-grade or high-yield corporate bond portfolio at a reasonable cost. However, investors with larger portfolios may find that they are able to better customize their portfolio and/or possibly achieve higher total returns by directly owning corporate bonds or hiring a professional manager.

Agency discount notes

What Does Discount Note Mean?

A short-term debt obligation issued at a discount to par. Discount notes are similar to zero-coupon bonds and Treasury bills and are typically issued by government-sponsored agencies or highly rated corporate borrowers. Discount notes do not make interest payments; instead the bond is matured at a par value above the purchase price, and the price appreciation is used to calculate the investment's yield.  Discount notes will have maturity dates of up to one year in length.   Investopedia explains Discount Note. The biggest issuers of discount notes are Freddie Mac and the Federal Home Loan Banks. Most institutional fixed-income buyers will compare the yield-to-maturity (YTM) of various zero-coupon debt offerings with standard coupon bonds, looking for yield pickup in discount bonds.   

What Does Agency Security Mean?

Low risk debt obligations issued by enterprises that the U.S. Government sponsors. Investopedia explains Agency Security. Agency securities are similar to U.S. Treasury Bills in that they pay interest and have low default risk. However, the main differences are that they are not backed entirely by the U.S. Government and the interest income is taxed differently. 

Mutual Funds:

Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner. Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices. These things help the fund managers to speculate properly in the right direction.

The investors, who invest their money in the Mutual fund of any Investment Management Company, receive an Equity Position in that particular mutual fund. When after certain period of time, whether long term or short term, the investors sell the Shares of the Mutual Fund, they receive the return according to the market conditions.

The investment companies receive profit by allocating people's money in different stocks and bonds according to their Speculation about the Market Trend. 

Other than some specific mutual funds which carry certain Maturity Term, Investors can generally sell the shares of their mutual funds at any time they want. But, the return will vary according to market value of the stocks and bonds in which that particular mutual fund made investment. But, generally the share holders of mutual fund sell their share when the prices are up and Capital Gain is sure to happen.

To get more detailed information on Mutual Funds one is advised to browse through the following links:

Scope of Mutual Funds has grown enormously over the years. In the first age of mutual funds,when the investment management companies started to offer mutual funds, choices were few. Even though people invested their money in mutual funds as these funds offered them diversified investment option for the first time. By investing in these funds they were able to diversify their investment in common stocks, preferred stocks, bonds and other financial securities. At the same time they also enjoyed the advantage of liquidity. With Mutual Funds, they got the scope of easy access to their invested funds on requirement.

But, in today’s world, Scope of Mutual Funds has become so wide, that people sometimes take long time to decide the mutual fund type, they are going to invest in. Several Investment Management Companies have emerged over the years who offer various types of Mutual Funds, each type carrying unique characteristics and different beneficial features.

To understand the broad scope of Mutual Funds we need to discuss the main types of Mutual Funds that are normally offered by the Mutual Companies.

The wide choices in Mutual Funds go as the following: 

 Equity Funds or Stock Funds These types of Mutual Funds generally invest in stocks which are publicly traded. Amount of risk, involved with these funds vary according to different types of Equity Funds.

Types of Equity Funds are; 

Growth Funds-These funds invest in the stocks, which are undervalued compared to their worth. As these stock prices tend to rise in future and carry good growth potential, Growth Funds go for these kinds of stocks. 

Value Funds-These funds go for long term investment and aims at increase of value over the years.  International Equity Funds-These funds invest in the stocks of foreign companies. 

Global Equity Funds-These funds invest in stocks of both the domestic market and the foreign markets. 

Sector Funds or Specialty Funds-These funds invest in specific sectors like Health care and in specific commodities like Gold. 

Index Funds-These funds reflect the performance of stock market indexes. 

Bond Funds These funds invest in government bonds and corporate bonds. These Bond Funds offer a steady source of income and in many times these incomes get the advantage of Tax Exemption. 

Money Market Funds These funds invest in the money market. These funds involve low level of risk and promises comparatively low rate of return. 

Balanced Fund These funds invest both in Stocks and Bonds and thus offer a well diversified investment portfolio. 

Nassau Time deposits:

A savings account or CD held for a fixed-term with the understanding that the depositor can only withdraw by giving written notice.

Tbills:

A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).

T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder. Investopedia explains Treasury Bill - T-Bill. For example, let's say you buy a 13-week T-bill priced at $9,800. Essentially, the U.S. government (and its nearly bulletproof credit rating) writes you an IOU for $10,000 that it agrees to pay back in three months. You will not receive regular payments as you would with a coupon bond, for example. I

Instead, the appreciation - and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back ($10,000). In this case, the T-bill pays a 2.04% interest rate ($200/$9,800 = 2.04%) over a three-month period. The reason that commercial bills have higher yields than T-bills is due to the varying credit quality of each bill type. The credit rating of the entity issuing the bill gives investors an idea of the likelihood that they will be paid back in full. The federal government's debt (T-bills) is considered to have the highest credit rating in the market because of its size and ability to raise funds through taxes. On the other hand, a company that issues commercial bills does not have the same ability to generate cash inflow because it does not have the same power over consumers that a government has over its electorate. In other words, commercial bills and T-bills differ in the credit quality of the bodies that issue them. A higher yield acts as compensation for investors who choose the higher-risk commercial bills.

For example, imagine that you have a choice between two three-month bills, both of which yield

5%. The first bill is offered by a small biotech company and the other is a U.S. government T-bill. 

Which bill is the wisest choice? 

In this case, any rational investor will probably choose the T-bill over that offered by the biotech company because it is far more likely that the U.S. government will pay back its debt when compared to a far less stable, much smaller entity like the biotech firm. If, on the other hand, the biotech bills are yielding 15%, the decision becomes more complex. In order to make a decision, an investor would need to factor in the likelihood that the small company could pay its debt as well as the amount of risk he or she is willing to take on. 

In general, when there are two bills with the same maturity, the bill that has the lower credit quality or rating will offer a higher yield to investors because there is a greater chance that the creditor will be unable to meet its debt obligation.

Repurchase Agreements:

A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. 

For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement Repo is short for repurchase agreement. Those who deal in government securities use repos as a form of overnight borrowing. A dealer or other holder of government securities (usually T-bills) sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. They are usually very short-term, from overnight to 30 days or more. This short-term maturity and government backing means repos provide lenders with extremely low risk.  Repos are popular because they can virtually eliminate credit problems. Unfortunately, a number of significant losses over the years from fraudulent dealers suggest that lenders in this market have not always checked their collateralization closely enough. 

There are also variations on standard repos: 

Reverse Repo - The reverse repo is the complete opposite of a repo. In this case, a dealer buys government securities from an investor and then sells them back at a later date for a higher price 

Term Repo - exactly the same as a repo except the term of the loan is greater than 30 days. 

Certificates of Deposit:

1) A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years. Investopedia explains Certificate Of Deposit - CD

2) A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty.  For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end, the CD will have grown to $10,500 ($10,000 * 1.05).

CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable. 

3) A certificate of deposit (CD) is a time deposit with a bank. CDs are generally issued by commercial banks but they can be bought through brokerages. They bear a specific maturity date (from three months to five years), a specified interest rate, and can be issued in any denomination, much like bonds. Like all time deposits, the funds may not be withdrawn on demand like those in a checking account. 

CDs offer a slightly higher yield than T-Bills because of the slightly higher default risk for a bank but, overall, the likelihood that a large bank will go broke is pretty slim. Of course, the amount of interest you earn depends on a number of other factors such as the current interest rate environment, how much money you invest, the length of time and the particular bank you choose. While nearly every bank offers CDs, the rates are rarely competitive, so it's important to shop around. 

A fundamental concept to understand when buying a CD is the difference between annual percentage yield (APY) and annual percentage rate (APR). APY is the total amount of interest you earn in one year, taking compound interest into account. APR is simply the stated interest you earn in one year, without taking compounding into account. (To learn more, read APR vs. APY: How The Distinction Affects You.)

The difference results from when interest is paid. The more frequently interest is calculated, the greater the yield will be. When an investment pays interest annually, its rate and yield are the same. But when interest is paid more frequently, the yield gets higher. For example, say you purchase a one-year, $1,000 CD that pays 5% semi-annually. After six months, you'll receive an interest payment of $25 ($1,000 x 5 % x .5 years). Here's where the magic of compounding starts. The $25 payment starts earning interest of its own, which over the next six months amounts to $ 0.625  ($25 x 5% x .5 years). As a result, the rate on the CD is 5%, but its yield is 5.06. It may not sound like a lot, but compounding adds up over time. 

The main advantage of CDs is their relative safety and the ability to know your return ahead of time. You'll generally earn more than in a savings account, and you won't be at the mercy of the stock market. Plus, in the U.S. the Federal Deposit Insurance Corporation guarantees your investment up to $100,000. 

Despite the benefits, there are two main disadvantages to CDs. First of all, the returns are paltry compared to many other investments. Furthermore, your money is tied up for the length of the CD and you won't be able to get it out without paying a harsh penalty. 

MMMF:

Money market mutual fund invests only in money market instruments and issues redeemable units to investors. Money market funds are very low risk but the returns are still not guaranteed. Their stability is based on the investments that make up their portfolios and any losses are rare. The funds are invested into some of the safest market instruments. These instruments provide a fixed return with short maturity. Money market funds carry a low risk while still offering high returns if debt securities issued by banks are purchased. This is in comparison to similar low-risk products. The initial investment is low as money market funds have lower requirements than other funds. These leave investment opportunities available to a wider range of investors. Money market funds offer investors a same day settlement similar to money market instruments. 

Money market funds are either taxable or tax-free. Returns from a taxable fund are subject to taxation. They mainly invest in a wide range of funds. Tax-free funds are not taxable and are invested in a smaller range of funds. These funds invest in short-term debt obligations issued by federally tax-exempt entities. They usually have lower returns.

What Does Money Market Fund Mean?

An investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments.

Investopedia explains Money Market Fund

A money market fund's purpose is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterized as a low-risk, low-return investment. Because of their relatively low returns, investors, such as those participating in employer-sponsored retirement plans, might not want to use money market funds as a long-term investment option.

What Does Money Market Account Mean?

A savings account that offers the competitive rate of interest (real rate) in exchange for larger-than-normal deposits. 

Also known by the acronym "MMDA", which stands for "money market demand account" or "money market deposit account". Investopedia explains Money Market Account. Many money market accounts place restrictions on the amount of transactions you can make in a month (such as five or less). Furthermore, you usually have to maintain a certain balance in the account to receive the higher rate of interest. Some banks require at least $500; others require a much higher balance.

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