Explain the different Money Market Instruments.
Ans. The various money market instruments are treasury bill, commercial paper, call money, certificate of deposit and commercial bil
1. Treasury Bill:
A Treasury Bill, or zero-coupon bond, is a promissory note issued by RBI, on behalf of central government, for a discount to meet the requirement of short-term funds. Treasury bills were first issued by the Government of India in 1917.
It is one of the safe money market instruments and the returns are not that attractive. But they are zero risk instruments having assured earnings. The purchase price of the Treasury Bill will be determined on auction basis.
Treasury bills are issued at a lower price than their face value and repaid at par. The difference between the purchase price and the amount paid on maturity is the interest earned and called as "discount".
Treasury bill is circulated by both markets i.e., primary and secondary markets. At present the Government of India issues three types of treasury bills through auctions namely 91 days, 182 days and 364 days. Treasury bills are available for a minimum amount of Rs. 10,000 and in multiples thereof. Banks, individuals, HUF, financial in- institutions and corporations normally participate in the treasury bill market.
2) Commercial Paper:
Commercial paper is a short-term unsecured promissory note issued by credit wor thy companies and are negotiable by endorsement at a discount value.
A commercial paper tenure ranges from 1 day to 270 days. Commerical papers are issued for the purpose of financing of accounts receivable, inventory and meeting short. term liabilities.
The returns on commercial paper are high when compared to Treasury Bills but less secured. These securities are actively traded in secondary market also. A non. resident can also invest in commercial paper on non-repatriation basis.
Read Notes :- What is Money Market? Explain it's function
3) Call Money:
Call money is an inter-bank transaction for short-term funds repayable with inter est called as call rate to meet their cash reserve requirements on demand with a matu rity of 1 day to 14 days on notice and more than 14 days on term.
Commercial banks require to maintain minimum cash balance known as Cash Re serve Ratio. With the effect of changes in Cash Reserve Ratio by RBI, the banks with cash reserve below the statutory requirement borrow from such banks having surplus cash reserves. For the services rendered by the lending bank, interest is paid which is known as call rate.
The call rate varies from day to day and even hour to hour. Rise in call rate makes other sources of finance, such as commercial paper and certificate of deposit cheaper when compared with other sources of finance.
4) Certificate of Deposit:
Certificate of Deposit is an unsecured promissory note, negotiable short-term instrument issued by the commercial banks in the form of a certificate authorising the bearer to receive interest along with the face value.
Certificate of Deposits can be issued to individuals, NRIs, corporations and compa nies. They are issued during the period of high liquidity when the percentage of depos- its are low compared to demand for loans. These certificates are available for the term of 3 months to 5 years. The returns on certificate of deposit are higher than the T-Bill as the rate of risk is high.
5) Commercial Bill:
Commercial Bill is a negotiable instrument drawn by the drawer (seller) on the drawee (buyer) for acceptance to pay the amount of credit sales indebted to him at a future date
Once it is accepted by the drawer it becomes a legal document and it can be dis- counted with a bank when the drawer is in need of cash. The bank will deduct discount amount while paying the cash on bill. The bank receives the face value from drawee on the due date. These trade bills can be rediscounted by the banks with RBI and can be considered as liquid assets