Money Market Instruments

Money market instruments are short-term financing instruments aiming to increase the financial liquidity of businesses.  These are the securities that provide businesses, banks, and the government with large amounts of low-cost capital for a short time.

Money market basically refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded.

The participants in this financial market are usually banks, large institutional investors, and individual investors.

FEATURES OF MONEY MARKET INSTRUMENTS

Following are the main features of these instruments :-

  • These instruments can be converted into cash easily, thereby preserving the cash requirements of an investor.
  • Money market gives lesser return to investors who invest in it but provides a variety of products.
  • The maturity period of these instruments is 1 year or less than a year.
  • The volume of traded assets is generally very high.

TYPES OF MONEY MARKET INSTRUMENTS

The various types of money market instruments traded in India are listed as-

  1. TREASURY BILLS – Treasury bills are money market instruments issued by the Government of India as a promissory note with guaranteed repayment at a later date. Funds collected through such tools are typically used to meet short term requirements of the government, hence, to reduce the overall fiscal deficit of a country.

These instruments are issued at a discount and repaid at par at the time of maturity & are issued in lots of Rs. 25,000 for 14 days & 91 days and Rs. 1,00,000 for 364 days.

  1. COMMERCIAL BILLS – A commercial bill is also referred to as a bill of exchange or bill discounting. It is a short term, negotiable, and self-liquidating money market instrument & is used to finance the movement and storage of agricultural and industrial goods in domestic and foreign trade.
  2. COMMERCIAL PAPER – This type of money market instrument serves as a promissory note generated by a company to raise short term funds. It is unsecured, and thereby can only be used by large-cap companies with renowned market reputation.

The maturity period of these instruments lies  between 15 days to one year & are issued in denomination of Rs 25 lakhs.

  1. CERTIFICATE OF DEPOSIT – Banks issue certificates of deposit to raise short-term cash.  Their duration is from one to six months. The CDs pay the holder higher interest rates the longer the cash is held.
  2. REPURCHASE AGREEMENT – A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.
  3. CALL MONEY – Call money is any type of short-term, interest-earning financial loan that the borrower has to pay back immediately whenever the lender demands it.

If money is borrowed or lend for period between 2 days and 14 days it is known as Notice Money, whereas if money is lent for more than 15 days it is referred as Term money.

 

Thus, in simple words Money Market Instruments are the instruments or tools which can help one operate in the money market & allow the borrowers to meet their short term requirements of funds as well as provide easy liquidity to lenders.

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