Money Market Instruments

Money Markets generally comprise of short duration instruments, which are traded by Banks, Mutual Funds, Insurance Companies and Corporate. Money Market Instruments meets short term requirements of the borrowers and provides liquidity to lenders. The commonly used money market instruments are Treasury Bills, Commercial Papers, Certificate of Deposits, Banker's Acceptances and Repurchase Agreements.

Treasury Bills: Treasury bills are issued by the Central Government, which is one of the safest money market instruments, carrying no risk. T-bills are issued for maturities of 91 days, 182 days and 364 days. T-bills carry a face value, which is the maturity value, and buy price is the market value. The difference between buy price and maturity price is the interest earned by the buyer of the instrument. T-bills are traded in the secondary markets as well as auctioned in the primary markets.

Commercial Paper: Commercial Paper is an unsecured instrument issued at a discount to Face value that carries higher interest than the T-bills, which is issued by the Corporate and Financial Institutions. CPs are issued for meeting short term liabilities, account receivables and inventories. The maturity period could be up to 270 days. These instruments are rated by a credit rating agency, Ones with higher credit rating, issued by reputed Corporate, are actively traded in the secondary markets.

Certificate of Deposit: CDs are issued by a Bank entitling the bearer to receive the interest. The certificate carries a maturity value, fixed interest rate and maturity date. The CDs are to be stamped according to the laws of the State Government. The maturity of CDs range from 3 months to 5 years. These CDs are transferable by delivery at a consideration unlike Fixed Deposits.

Repurchase Agreements (Repo): Repo or Reverse Repo are the short term loans that buyers and sellers agree upon for selling and repurchasing. These transactions could be carried out by the parties approved by RBI, and are allowed for approved securities such as Central and State Government Securities, T-bills, PSU Bonds and Corporate Bonds. Repurchase Agreements are sold by the seller with a promise to repurchase at a given price and on a given date in future and vice-versa for buyer as well.

Banker's Acceptance: A Bill of Exchange issued by a non-financial firm, stating buyer's promise to pay to the seller a certain amount on a specified date. The Bill of Exchange is guaranteed by a Bank. These are negotiable instruments with maturities between 30 days and 180 days. Companies use these negotiable instruments to finance import, exports and other trade.

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