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Money market instruments

Money Market Instruments

Treasury Bills (T-bills):

  • Short-term government securities with a maturity of less than a year.
  • Issued by the Central Government through the Reserve Bank of India (RBI).
  • Highly liquid and low-risk instruments.
  • Sold at a discount to face value and redeemed at face value upon maturity.
  • The difference between the purchase price and face value represents the interest earned.

Commercial Paper:

  • Short-term unsecured promissory notes issued by creditworthy corporations.
  • Typically matures between 15 days and one year.
  • Provides a cost-effective way for corporations to raise short-term funds.
  • Sold at a discount and redeemed at face value.
  • Often used for working capital needs and bridge financing.

Call Money:

  • Short-term finance with a maturity ranging from one day to fifteen days.
  • Used for inter-bank transactions.
  • Helps banks maintain the cash reserve ratio (CRR) set by the RBI.
  • Call rates are highly volatile and have an inverse relationship with other short-term money market rates.

Certificate of Deposit (CD):

  • Unsecured, negotiable, short-term instruments issued by commercial banks and financial institutions.
  • Mobilizes large sums of money for short periods.
  • Provides an avenue for individuals, corporations, and businesses to invest in short-term instruments.

Commercial Bill:

  • A bill of exchange used to finance working capital needs of companies.
  • Used to fund credit sales by firms.
  • Buyer becomes obligated to make payment on a future date when goods are sold on credit.
  • Seller can wait until the specified date or use a bill of exchange.
  • Bills can be discounted with a bank if funds are needed before maturity.
  • When accepted by a commercial bank, it becomes a marketable instrument known as a trade bill.

These money market instruments play essential roles in facilitating short-term financing, managing liquidity, and providing investment options to various participants in the financial market. They contribute to the overall efficiency and stability of the financial system by offering a range of choices to meet different financial needs and risk appetites.

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