Financial Management · The nature and role of money markets

Money Market Instruments for ACCA Financial Management

Updated 11 October 2026 · Fact-checked

Money market instruments are short-term, tradable or negotiable debt and lending tools, usually up to one year. They include treasury bills, commercial paper, certificates of deposit, bills of exchange and interbank loans. Match each to who issues it, how it is priced (discount or interest) and its risk.

Understand Money Market Instruments

The money market is where borrowers and lenders trade short-term funds, usually for up to one year. Companies use it to park spare cash or to cover short-term gaps. Banks use it to balance their own liquidity. Governments use it to fund short-term needs.

The main instruments differ by issuer. Treasury bills are issued by governments. Commercial paper is issued by large, creditworthy companies. Certificates of deposit are issued by banks. Bills of exchange arise from trade between businesses. Interbank lending is banks lending to each other.

A treasury bill is a government promise to pay a fixed sum on a set date, normally within a year. It pays no coupon. It is sold at a discount to face value, and your return is the gap between the price paid and the face value. Default risk is very low for a stable government, so yields are low.

Commercial paper is short-term unsecured debt issued by a company, also sold at a discount. It is usually issued in large denominations and often for less than 270 days or so, depending on the market. It is cheaper than a bank loan for strong borrowers, but only well-rated companies can issue it. It carries more risk than treasury bills, so it yields more.

A certificate of deposit (CD) is a bank's receipt for money deposited for a fixed term at a stated rate. It is negotiable, so the holder can sell it before maturity instead of waiting. A bill of exchange is a written order for one party to pay a sum to another on a set date. If a bank accepts it, it becomes a bankers' acceptance, which is safer and easier to sell. Bills can be sold at a discount before maturity to raise cash. Interbank lending is unsecured lending between banks, priced at an interbank rate. Wholesale deposits are large and are normally not tradable.

Key rules to remember

Discount instrument return (not annualised): Return = (Face value − Price paid) ÷ Price paid; Use for treasury bills, commercial paper and discounted bills. The return is for the holding period, not a year.
Annualised simple return: Annual return = Return for the period × (365 ÷ days to maturity); Simple scaling. Use 360 only if the question says so.
Effective annual rate (compounded): EAR = (1 + period return)^(365 ÷ days) − 1; Use when the question asks for the effective or compound annual rate.
Instrument comparison: Higher risk and lower liquidity → higher yield; Rule of thumb for ranking: treasury bills lowest yield, then bank CDs, then commercial paper.

How to solve Money Market Instruments questions

Most questions ask you to identify an instrument, compare instruments, or compute a return. Use this order.

1Read who is borrowing and who is lending: government, company, bank or trade partner.
2Name the instrument that fits: treasury bill, commercial paper, CD, bill of exchange or interbank loan.
3Note the term. Money market means up to about one year.
4Decide how it is priced: discount to face value, or interest on a deposit.
5If a return is needed, compute (face value − price) ÷ price first.
6Annualise by multiplying by 365 ÷ days, or compound if the EAR is asked for.
7Comment on risk, liquidity and who can use it, then link to the question's context.

Quickest way: Issuer-first identification

When to use it: Use in Section A and Section B objective questions when you must pick the right instrument or statement.

Find the issuer in the wording: government, company, bank or trade debtor.
Map it: government = treasury bill; company = commercial paper; bank = CD; trade = bill of exchange.
Check negotiability: CDs and bills can be sold before maturity.
Rank risk: government lowest, then bank, then company.
For a return, compute the gain on the price paid, then scale to a year, and eliminate options that use face value as the base.

Common mistakes in Money Market Instruments

Dividing the discount by face value instead of the price paid.
Discount is quoted against face value, so it feels natural to use it as the base.
Fix: Your investment is the price paid. Divide the gain by that amount.
Forgetting to annualise the return.
The period return looks like a finished answer.
Fix: Check the days to maturity. Multiply by 365 ÷ days, or compound if EAR is asked.
Saying commercial paper can be issued by any company.
It is described as a simple alternative to a loan.
Fix: State that only large, highly rated companies can issue it, because it is unsecured.
Treating certificates of deposit as non-tradable deposits.
They look like ordinary bank deposits.
Fix: CDs are negotiable, so they can be sold before maturity. Ordinary term deposits are not.
Confusing a bill of exchange with a bankers' acceptance.
Both involve a written payment order.
Fix: A bill becomes a bankers' acceptance once a bank accepts liability to pay it, which makes it safer and easier to sell.
Calling treasury bills risk-free in every case.
They are usually the safest instrument.
Fix: Say they have very low default risk for a stable government, not zero risk.

Worked examples

Example 1

A company buys a 90-day treasury bill with a face value of $1,000,000 for $990,000. Calculate the return for the period and the simple annualised return (365 days).

Show the solution

Gain = 1,000,000 − 990,000 = $10,000.
Period return = 10,000 ÷ 990,000 = 0.010101, or 1.0101%.
Annualise: 0.010101 × (365 ÷ 90) = 0.010101 × 4.0556 = 0.04096.

Answer: Period return is about 1.01%. Simple annualised return is about 4.10%.

Example 2

A company needs short-term funds. It has a strong credit rating. Explain why commercial paper might suit it better than a bank overdraft, and state one limit on its use.

Show the solution

Commercial paper is short-term unsecured debt sold at a discount to investors.
A strongly rated company can often borrow this way at a lower cost than a bank loan or overdraft.
It is issued in large amounts, so it suits a sizeable funding need and cuts reliance on one bank.
The limit: only large, well-rated companies can issue it, and it is not flexible. The company must repay on the maturity date.

Answer: Commercial paper is usually cheaper than bank borrowing for a strongly rated company and diversifies funding. It is limited to highly rated issuers and must be repaid on maturity, so it is less flexible than an overdraft.

Exam tips

In objective questions, find the issuer first. It identifies the instrument almost every time.
In calculations, always use the price paid as the base for the return.
Check whether the question wants a period return, a simple annual rate or an EAR before you finish.
For written answers, link each instrument to risk, return and liquidity, and then to the company's situation.
Use the phrases negotiable, discount and unsecured correctly. They signal that you understand the instrument.

Practice questions from The nature and role of money markets

Money Market Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Money Market Instruments: frequently asked questions

What is commercial paper in ACCA FM?

Commercial paper is short-term unsecured debt issued by large, creditworthy companies. It is sold at a discount and repaid at face value on maturity. It is often cheaper than a bank loan for strong borrowers.

How do treasury bills work?

A government sells a treasury bill below its face value and repays the face value on maturity. There is no coupon. Your return is the gap between the price paid and the face value.

What is the difference between treasury bills, commercial paper and CDs?

Treasury bills are issued by governments, commercial paper by companies and certificates of deposit by banks. Risk and yield generally rise from government to bank to company. CDs are interest-bearing and negotiable, while the other two are sold at a discount.

What is a bankers' acceptance?

It is a bill of exchange that a bank has accepted, meaning the bank promises to pay it on the due date. This makes it safer and easier to sell before maturity. It is common in international trade.