Briefly discuss the various money market instruments with their purpose.

The money market possesses many prominent assets as:

1 Treasury Bill (T-bills),

2 Commercial Papers (CPs),

3 Banker Acceptances (BAS),

4 Certificates of Deposits (CDs) and

5 Repurchase agreements (Repos)

6 Treasury bills are issued for raising short-term cash deficiencies for spending programme.

These T-bills have maturity period from the date of issue. However, the profits obtained from T-bills are lower than any other security in the mon, market due to their risk free nature. Also, since their denominations range on a higher side, they are not suitable for small investors.

Treasury bills are very practical instruments to set-up short-term surpluses depending upon the accessibility and requirement. Even funds, which are kept in current accounts, can be deployed in treasury bills to maximize returns. Banks do not pay any interest on fixed deposits of less than 15 days, or balances maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements.

This helps in deployment of idle funds for very short periods as well. At times when the liquidity in the economy is unyielding, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and accessibility for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements.

The T-bill yield is calculated as “Discount yield”. This is annualized yield and is calculated in the following way:

= Face Value – Purchase Value/Face Value * 360

Days till maturity * 100%

2 Commercial papers are short-term unsecured promissory notes issued in the open market as a commitment to the issuing entity immediate financing needs. Commercial paper permits a corporation to issue for the short run until longer-term financing is foreseen.

Since stocks and bonds are subjected to limited SEC requirements and registration, this takes time and money, and hence commercial paper helps sidestep. Each CP is issued as series of notes and each note promises to pay the bearer a stated sum of money at the maturity date.

Also, following things are always indicated on each note: The name of the issuing company, the amount of the note, the issue date, the maturity date, a certificate of authentication signed by authorized signatory of the company. Also, each note is requ 2, to indicate that the note is negotiable, its bearer is entitled to payment and that the payment will be made by the issuer.

A Certificate of Deposit (CD) is a time deposit instrument or a financial product generally offered to consumers by banks, thrift institutions, and credit unions. CDs typically require a minimum deposit, and may offer higher rates for larger deposits. A CD consists of a simple book entry and an item shown in the consumer’s periodic bank statements. Hence, there is no “certificate” as such.

There are number of variations in the terms and conditions for CDs. A CD has a specific, fixed term (often three months, six months, or one to five years), and are generally available at a fixed interest rate.  However, CD can be liquidated at any given time at the prevailing rate in the secondary market.

Hence, they are an ideal funds short-term while retaining the flexibility to convert into cash at short notice if a need arises at any time. Repurchase Agreements (RPs or Repos) are known as financial instruments used in money markets and capital markets.

Typical repurchase agreements has a borrower (seller/cash receiver) to sell securities for cash to a lender (buyer/cash provider) and who agrees to repurchase those securities at a later date for more cash. 

This repo rate is the difference between borrowed and paid back cash expressed as a percentage. A repo is economically similar to a secured loan, with the buyer receiving securities as collateral to protect against default.

There is little that prevents any security from being employed in a repo; so, Treasury or Government bills, corporate and Treasury / Government bonds, and stocks / shares, may all be used as securities involved in a repo.

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