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.
🎶