INSTRUMENT OF MONEY MARKET :-
1. T
- Bills :- Treasury
bills are short term notes issued by Government. T - bills are issued when the Government
need money for a shorter period. Generally T - bills have a maximum maturity of
360 days. They are presently issued in 3 maturities namely 90 days, 180 days
and 360 days. Thus they are categorized as money market instruments as money
market deals with funds having maturity of less than 1 year.
T
- Bills are zero coupon securities and pay no interest. Rather, they are issued
at a discount and redeemed at the face value at maturity. This means that you
can get Rs. 100. T - Bills at a lower price and can get Rs.100 at maturity.
Thus there is no interest as such to the investor but his return is the
difference between the maturity value (i.e. Rs. 100) and the issue price. The
issue of T - Bills is through auction. T-Bills are usually held by financial
institutions including banks. They have a very important role in financial
market beyond investment instruments.
2. Commercial
Paper :- Commercial
paper refers to unsecured short term promissory notes issued by financial and
non financial corporations. It is issued by large, credit worthy corporation
with unused lines a bank credit and therefore carries low default risk.
CP's
are issued by corporate and financial institution at a discount value on face
value. They are generally issued with fixed maturity between 1 to 270 days and
for financing of account receivables, inventories and meeting short term
liabilities.
Commercial
paper yield higher returns as compared to T - Bills as they are less protected
in comparison to these bill, through chances of default are almost negligible
but are not zero risk instrument commercial paper are actively traded in the
secondary market since they are issued in the form of promissory notes and are
freely moveable in demat form.
3. Certificate
Of Deposit :-
Certificate of deposit is a short term borrowing more like a bank term deposit.
It is an instruments which in negotiable
and equivalent to a promissory note. It is either issued in demat form
or in the form of a promissory not. CD is issued by the commercial banks and
financial institutions.
A
commercial bank can issue certificate of deposit as per its own requirements. A
financial institution can issue certificate of deposit within a limit
prescribed by RBI. CD's can be issued to individuals, corporation, companies,
trusts, funds, associations etc. CD's are issued at a discount on face value.
Return on them is difference between the issue value and face value.
4. Banker's
Acceptance :-
Banker's acceptance is a short term credit investment created by a non financial
firm and guaranteed by bank to make payment. It is just like a bills of
exchange drawn by a person and accepted by bank. It is assurance by a bank to
pay to the seller a certain particular amount at a certain date. For banker's
acceptance the person drawing a bill should have a good credit rating otherwise
it will not be tradable. The common term for such instruments is 90 days,
however, it may vary from 30 days to 180 days. It is just like mutual fund
except the fact the mutual funds carter to capital market and money market
funds carter to money market.
5. Repurchase
Agreement :- Under
repurchase agreements the sellers sells particular securities with an agreement
to repurchase the same at an equally determined future date and price. On the
other hand, the buyer purchasers the securities with an agreement to resell the
same to the seller on a decided date at a
pre-determined price. The transactions when viewed from perspective of
seller of the securities this is known as repo and when such transactions are
viewed from point of view of buyer of the securities is known as reverse repo.
These rates are negotiated by counter parties separately of the coupon rates of
underlined securities and is influenced by overall market conditions.
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