Money Market

Money market plays a key role in a larger financial market. It helps in the function.
Money market helps to mobilize funds in the economy. The money markets deal in
a lower risk as the significant factor of the money market is that it trades through
financial instruments. It also deals in short term debt instruments which are also
unsecured. The instruments that are used in money market are also known as the
close substitute for cash as they are very liquid which means that these can be
converted into a liquid form (Cash form) in a small span of time. These instruments
possess maturity period lying anywhere between one day to one year. These two
are the main characteristics of the Money market, i.e. short maturity period and
High liquidity. The deals which are fixed in the money market are not basically done
on cash; some specific instruments are used in the dealings, i.e. Promissory Notes,
Treasury Bills, and Government Papers etc. The institutes that are included in the
usage of these instruments on which these instruments depends on are Commercial
Banks, Acceptance Houses and Non-Banking Financial Companies.

Moreover, those businesses that have extra cash, tends to invest in money market
instruments. It will earn a little interest until it needs to pay its fixed operating costs.

Purposes of the Money Market

Suppose if you have a specific amount of money that you do not need in present
then you can invest this money on temporary basis until you need them to make
some longer-term investments or you want to purchase some stuff. Furthermore,
if you keep this money in cash with you and doing nothing then you have to bear
the opportunity cost that is the interest you could have received by investing the
funds. So if you invest the money that you do not need instantly you can invest it
and secure in interest in the easiest way.

Conversely, companies with a temporary cash shortfall can sell securities or

borrow funds on a short-term basis. In essence the market acts as a repository for
short-term funds.

Money Market Instruments

Money market instrument is an investment mechanism that allows banks,
business, and government to meet short-term capital needs. There different types
of Money market instruments;

 T-Bills (Treasury bills)

 An instrument of the short-term borrowed by the government of the
country having maturing period of one year or less.
 Also known as Zero coupon bonds issued by the Reserve bank of the
country on behalf of the central bank to meet it is short-term requirement
of funds.
 Issued in form promissory note.
 Highly liquid and have assured yield and negligible risk of default.
 It has maturity period of year or less.
 Issued at discount and paid at par. For example; if issued at 95,000 and
investor will get 100,000.
 Treasury bills are available for a minimum amount of Rs.25,000 and in
multiples thereof.

 Commercial Paper
 Unsecured promissory note having a maturity of 15 days to 1 year.
 Negotiable instruments transferable by endorsement and delivery.
 Sold at discount and redeemed at par.
 Alternative to bank borrowing.
 Bridge financing; suppose a company needs a long-term finance to buy
some machinery. In order to raise the long-term funds in the capital market
the company will have to occur the floatation costs (Costs associated with
floating of an issue are brokerage, commission, printing of applications, and
advertising etc.) Funds raised through commercial paper are used to meet
the floatation cost.

 Call Money
 Short term finance repayable on demand.
 Maturity period of 1 day to 15 days.
 Commercial banks maintain CRR as per directives of RBI.
 Call money; It is actually a method by which banks borrow from each other
to be able to maintain the CRR.
 Interest rate paid on call money.
 Inverse relationship between call rates and other short-term money market
instruments; Certificate of deposit and commercial paper. A rise in call
money rates makes other sources of money.

 Certificate of deposit
 Unsecured, negotiable, and short-term instrument in bearer form, issued
by commercial banks and development financial institutions.
 Issued in periods of tight liquidity, when the deposits by individuals and
households are less but demand for credit is high.

 Commercial bills
 Short-term, self-liquidating, negotiable instruments used for financing
credit sales of a firm.
 When goods are sold on credit, the buyer becomes liable to make payment
on a specific date in future. The seller could wait until the specified date or
make use of a bill of exchange.
 If the seller draws a BOE on buyer who accepts it then it becomes
marketable instrument known as trade bills.
 When the seller presents this to Bank and accepts it and gives funds against
it to seller, it becomes commercial bill.