Explain the various Money Market Instruments.
Answers
SOLUTION :
The various money market instruments are :
(i) Treasury bills :
Treasury bills are issued by Reserve Bank of India on the behalf of the central government of India. They are generally sold to banks, public, Financial institutions, insurance companies, cooperative house for a period of 91 days to 364 days.
They are negotiable instructions and freely transferable. No interest is paid on treasury bills rather they are issued at discount. They are also known as deep discount bond.
Example : If a treasury bill with the face value of ₹ 1,000 is issued at ₹ 900 . The holder of the bill would get ₹ 1000 on the maturity. Here, the difference between issued price and face value is discount on interest.
(ii) Commercial paper :
Commercial paper is an unsecured promissory note issued by a credit worthy and financially strong company with the fixed maturity period ranging from 7 days to 1 year. The funds are raised at low rate of interest then market rates. This source of fund is an alternative to bank borrowings. Banks and mutual funds are the main investors in this instrument. Normally funds raised through this instruments are used to finance working capital requirements . These are also issued at discount and repayable at par.
(iii) Call money :
The call money as a source of finance is used between the banks in which one bank is borrower with shortage of funds and other is lender with surplus of funds. Such transactions are also known as inter bank transactions. Normally such shortage arises due to maintenance of cash reserve ratio (CRR) which is frequently changed by the RBI and create shortage of funds with some banks . The rate of interest is known as called rate. This rate is highly volatile and varies from day to day and from hour to hour . There is inverse relationship between call rate and other money market instruments.
(iv) Certificate of deposit :
Certificate of deposit is an unsecured negotiable and short term deposit issued by commercial banks or other Financial institutions at discount against the deposits kept by the companies with the banks. Minimum face value of certificate of deposit is ₹ 1,00,000 and further in the multiples of ₹ 1,00,000.
(v) Commercial bill / Trade bill :
Trade bills are bill of exchange drawn by one business firm on another due to credit sales. The seller of the bill is known as drawer and the buyer of goods is known as drawee. Such bills are drawn for the purpose of meeting working capital requirements for not more than 90 days. They are of short term duration, generally of 90 days. They are also self-liquidating and negotiable instruments which are freely transferable. 5the holder can get it discounted with the bank also before the maturity of the bill. On the date of maturity, drawee of the bill is required to honour the bill and thus finance requirements of both parties are met.
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