MONEY MARKET: Money Market Instruments

Tue, 05 Nov 2019 08:43:35 +0000

Money Market Instruments
Main instruments of money market in India are:

1. Treasury Bills
2. Commercial Paper
3. Certificate of Deposit
4. Commercial Bills

TREASURY BILLS:
Treasury bills, also known as Zero Coupon Bonds are the instrument of short term borrowing with maturity period of less than one year.
This instrument is issued by Reserve Bank of India on behalf of the Central Government for fulfilling short term requirements of funds. They are issued at discount and are paid at par.
This difference between the issue and the redemption price is the interest payable. They are highly liquid and no risk of default of payment is there. They are issued of Rs.25, 000 or in multiples thereof.
For example, suppose an investor purchases a 108 days Treasury bill for Rs. 138,000 having face value of Rs. 1, 50, 000. On maturity, he receives Rs. 1, 50,000. The difference of Rs. 12, 000 in the issue and redemption price is the interest received by him.

SALIENT FEATURES OF TREASURY BILLS

 Form: T-bills are issued either in physical form as a promissory note or dematerialized form by crediting to Subsidiary General Ledger (SGL) Account.
 Eligibility: Individuals, firms, companies, trust, banks, insurance companies, provident funds, state government and financial institutions are eligible to invest in treasury bills.
TYPES OF TREASURY BILLS
At present there are four types of auctioned T-bills, which are:
14 days T-bills: These treasury bills get matured 14 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 CR
Minimum Bid: The minimum amount of bid is Rs. 25000 and in multiples thereof.
91 days T-bills: These treasury bills get matured 91 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 CR.

182 days T-bills: These treasury bills get matured in 182 days, from the day of issue, and the auction is on Wednesday of non-reporting week.
Moreover, these are repaid on following Friday, when the term expires. The notified amount for this auction is Rs. 100 CR
364 days T-bills: The maturity period of these bills is 364 days. The auction is on every alternate Wednesday of reporting week and repaid on the following Friday after the term gets over. The notified amount for this auction Rs. 500 CR.
 Issue price: T-bills are issued at a discount, but redeemed at par.
 Repayment: The repayment of the bill is made at par on the maturity of the term.
 Availability: Treasury bills are highly liquid negotiable instruments that are available in both financial markets, i.e. primary and secondary

 Method of the auction: Uniform price auction method for 91 days T-bills, whereas multiple price auction method for 364 days T-bill.
 Day count: The day count is 364 days, in a year, for treasury bills.

COMMERCIAL PAPER:
Commercial Paper (CP) is a short term unsecured promissory note with maturity period of 15 days to one year. Since it is unsecured, it is issued by the large and creditworthy companies to meet their short term fund requirements.

Commercial Paper is issued at discount and redeemed at par. It is negotiable and transferable by endorsement. The funds raised through Commercial Paper can be used for fulfilling seasonal and working capital need. For example, for meeting the flotation cost at the time of issue of shares and debentures i.e. Bridge Financing.

CERTIFICATE OF DEPOSIT:
Certificates of deposit are short term instruments issued by commercial banks and financial institutions to the individuals, corporations and companies. They are unsecured and negotiable. Such instruments are usually issued by banks when they have a tight liquidity position because of slow growth of bank deposits but the demand for credit is high.

COMMERCIAL BILLS:
Commercial bill is a bill of exchange used to finance the credit sales of firms. It is a short term, negotiable and self-liquidity instrument. In case of goods sold on credit, the buyer is liable to make the payment on a specific date in future.

The seller could either wait till the maturity date or can draw a bill of exchange. When this bill is accepted by the buyer it becomes a marketable instrument and is called a trade bill.

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