Money Market Instruments

Debt instruments, which have a maturity of less than one year at the time of issue, are called money market instruments i.e. basically concerned with the issue and trading of securities with short term maturities. These instruments are highly liquid and have negligible risk. The money market instruments are dominated by the government, financial institutions, banks and corporate.

The Following is the list of money market instruments:

• Treasury bills: It is a central government security, which is commonly referred to as T-bill .T-bills are issued by central government against their short term borrowing requirements with maturity ranging between 14 to 364 days. They are currently issued in primary market in the following periods: 91-days, 182- days and 364-days T-bills. They do not carry any coupon rates. Instead, they are sold at a discount and redeemed at par.

            Though the yield on treasury bills is somewhat low, they have appeal for the following reasons:

1. They can be transacted readily and very active in secondary market.
2. They have nil credit risk and negligible price credit risk.

 

• Commercial paper: It is a short term unsecured money market instrument issued in the form of promissory note. CPs can be issued by corporate, primary dealers (PDs), and all India financial institutions under the umbrella limit specified by the Reserve bank of India. CPs can be issued for maturities between 7 days and one year from the date of issue. Hence the implicit rate of interest is a function of the size of discount and the period of maturity.

 

• Certificates of Deposit: It is a negotiable money market instrument issued by a bank or an eligible financial institution for a specified time period issued in demat form or as promissory Notes. CDs issued by banks should not have the maturity less than seven days and not than one year. Financial institutions are allowed to issue CDs for a period between 1 year and upto 3 years. CDs are issued at discount on face value or on a floating rate basis.CDs are a popular form of short-term investment for mutual funds and companies for the following reasons:

1. Banks are normally willing to tailor the denominations and maturities to suit the needs of the investors.
2. CDs are generally risk free.
3. CDs generally offer a higher rate of interest than treasury bills or term deposits.
4. CDs are transferable.

 

Advantages of Money market instruments:

• It is a platform to make highly liquid investments.
• Can gain greater benefits from cash surplus in a very short term ( High profitability).
• Assistance to central bank operation
• Can be sold or purchased anytime
• Less or no fee  associated with the funds.

 

Disadvantages of Money market instruments:

• They require high minimum deposit to open.
• Subject to change in market rates hence some returns can vary and can be risker.
• Opportunity cost
• Purchasing power can be impacted

 

Conclusion: The money market instrument is the market where liquid and short term borrowing and lending takes place. As the short term market for money, players in the market have to be alert to changes, up to date with news and innovative with strategies and product.