Question

Answer the following question
State the instruments in money market.

Answer 1

Financial instruments are documents in the form of a legal agreement between two parties having a monetary value. It represents a financial asset to one party and a financial liability to another party. In the money market, only those financial instruments are traded which are immediate substitutes for money.
Some of these instruments are explained as follows:
1) Call money and Notice money: Call money and Notice money market is an important segment of the money market in India. Under Call money, funds are lent or borrowed for very short periods i.e. one day. Under Notice money, funds are lent or borrowed for periods between 2 days to 14 days. Funds have to be repaid within a specified time on the receipt of the notice given by the lender. When one bank faces temporary shortage of cash, then another bank with surplus cash lends money to it. Hence Call/ Notice money market is also called as interbank Call money market.
2) Treasury Bills (T-Bills): Treasury Bills are short-term securities issued by the Reserve Bank of India on behalf of the Central Government of India to meet the government's short-term funds requirement. Treasury Bills have three maturity periods - 91 days, 182 days and 364 days. These bills are sold to banks and individuals, firms, institutions, etc. These bills are negotiable instruments and are freely transferable. The minimum value of T-bills is 25,000 or in multiples of 25000. These are issued at a discount and repaid at par and hence they are also called Zero-Coupon Bonds.
3) Trade Bills/ Commercial Bills: Bill of Exchange also called as Trade bills are negotiable instruments or bills drawn by a seller on the buyer for the value of goods sold under credit sales. These have a short-term maturity period generally of 90 days and can be easily transferred. If the seller wants immediate cash, he can discount the trade bills with Commercial banks i.e. sell it to banks for cash. When the trade bills are accepted by Commercial banks it is known as Commercial Bills. Banks can rediscount the bills any number of times till the maturity of the bill.
4) Commercial Papers (CPs): Commercial Paper is an unsecured promissory note issued by highly rated companies, All India Financial Institutions, like SIDBI, Exim Bank, etc. and Primary Dealers with a fixed maturity period which varies from 7 days to a maximum 1 year. The minimum value of CP is 5 lakhs or in multiples of 5 lakhs. It is issued at a discount to the face value and are highly liquid as it gives better returns than normal bank deposits. Individuals, Banks, Mutual funds, Companies, etc. invest in Commercial Papers.
5) Certificate of Deposits (CDs): These are unsecured negotiable promissory notes usually issued by Commercial Banks and Financial Institutions. It is a receipt of funds deposited in a bank for a fixed period at a specified rate of interest. It can be issued for a minimum value of 1 lakh or in multiples of 1 lakh. They can be issued at a discount to the face value. They have a maturity period of minimum 7 days and maximum 1 year. (Maximum maturity maybe 3 years if the CDs are issued by Financial Institutions.) CDs can be bought by individuals, companies, etc.
6) Government Securities: The marketable debts issued by the government or by semi-government bodies which represent claims on the government are known as government securities. These securities are issued by agencies such as Central Government, State Government, local self-government e.g. Municipalities, etc. These securities are safe investment as payment of interest and repayment of principal amount are guaranteed by the government.
7) Repo or Repurchase Agreement: Repo is an agreement where the seller of a security, (i.e. one who needs money) agrees to buy it back from the lender at a higher price on a future date. Usually, this agreement is made between RBI and commercial banks. Repo rate is the rate at which banks borrow from RBI and Reverse repo rate is the rate at which RBI borrows from banks. RBI uses the repurchase agreement to control the money supply in the economy. These agreements are the most liquid of all money market investments having maturity ranging from 24 hours to several months.
8) Money Market Mutual Funds (MMMFs): A Mutual Fund which invests in Money market instruments like Call Money, Repos, T-bills, CDs, etc. is called as MMMFs. This type of Mutual Fund invests in debt instruments which mature in less than 1 year and have low risk. Individuals and corporates are allowed to invest in MMMFs.