MONEY MARKET

INSTRUMENTS AND TYPES

OF BONDS,FRAs & SWAPs

Subject : Financial Markets & Institutions

Presented by
Group “A”
Under the guidance of Prof. Khandekar Sir
Sr Name Roll Topic
No. No.
1) Manmath Belkunde 01 Introduction & Importance of
money market
2) Jitendra Gupta 08 Call notice money & Inter
Bank term money
3) Rahul Sawant 22 Treasury Bill & Commercial
Bill
4) Prashant Gaikwad 06 Certificate of Deposit &
Commercial Papers
5) Mohan Chavan 03 Inter bank participation,
FCNR,NRE, Stock investment

6) Sameer Dhanse 05 Types of Bonds

7) Milind Bhaye 02 FRAs & SWAPs

 What is Money Market ?

• As per RBI definitions “ A market for short terms financial

assets that are close substitute for money, facilitates the
exchange of money in primary and secondary market”

• The money market is a mechanism that deals with the

lending and borrowing of short term funds (less than one
year)

• A segment of the financial market in which financial

instruments with high liquidity and very short maturities
are traded
 Features of Money Market
• Transaction have to be conducted without the help of
brokers

• It is not a single homogeneous market, it comprises of

several submarket like call money market, acceptance &
bill market

• The component of Money Market are the commercial

banks, acceptance houses & NBFC (Non-banking financial
companies)

• In Money Market transaction can not take place formal

like stock exchange, only through oral communication,
relevant document and written communication
transaction can be done
Characteristics of Money Market

• Highly organized banking system

• Availability of proper credit instruments
• Existence of sub-market
• Ample resources
• Existence of secondary market
• Demand & supply of funds
 Objective of Money Market

To provide a reasonable access to users of short-term

funds to meet their requirement quickly, adequately at
reasonable cost

To provide a parking place to employ short term surplus

funds
 Importance of Money Market

• Development of trade & industry

• Development of capital market

• Smooth functioning of commercial banks

• Effective central bank control

• Formulation of suitable monetary policy

• Non inflationary source of finance to government

What is Interbank Term Money Market

A short-term money market, which allows for large

financial institution , such as bank , mutual fund and
corporation to borrow and lend money at interbank rates
Meaning of Call Money/Notice Market

• The call money market is an integral part of the Indian Money

Market, where the day-to-day surplus funds (mostly of banks)
are traded. The loans are of short-term duration varying from 1
to 14 days. The money that is lent for one day in this market is
known as "Call Money", and if it exceeds one day (but less
than 15 days) it is referred to as "Notice Money". Term Money
refers to Money lent for 15 days or more in the Interbank
Market.
Banks borrow in this money market
for the following purpose:

1. To fill the gaps or temporary mismatches in funds

2. To meet the CRR & SLR

3. To meet sudden demand for funds arising out of large

outflows
Call Money Market Participants

• Those who can both borrow as well as lend in the market

- RBI (through LAF) Banks, PDs
• Those who can only lend Financial institutions-LIC,
UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.
 Bill of Exchange:

Definition:
Section 5 of the Negotiable Instruments Act defines a bill of
exchange as follows:
“ An instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum
of money only to, or the order of a certain person or to the bearer of
the instrument”.
Commercial Bills Market or Discount
Market

1) A commercial bill is one which arises out of a genuine trade

transaction, i.e., credit transactions.
2) As soon as goods are sold on credit, the seller draws a bill on
the buyer for the amount due. The buyer accepts it
immediately agreeing to pay the amount mentioned therein
after a certain specified date.
3) Three parties: Drawer, Drawee and Payee
4) Period: short period ranging between 3 months and 6 months.
 Types of Bills:

1) Demand and usance bills

2) Inland and foreign bills

3) Export bills and import bills

4) Indigenous bills

5) Accommodation bills and supply bills.

Advantages or Importance:
Commercial bill market is an important source of short-term funds
for trade and industry. It provides liquidity and activates the
money market. In India, commercial banks play a significant role
in this market due to the following advantages:

1) Liquidity
2) Self- liquidating and Negotiable Assets
3) Certainty of Payment
4) Ideal Investment
5) Simple Legal Remedy
6) High and Quick Yield
7) Easy Central Bank Control
 Drawbacks:
In spite of these merits, the bill market has not been well
developed in India. The reasons for the slow growth are the
following:

1) Absence of Bill Culture

2) Absence of Rediscounting among Banks
3) Stamp Duty
4) Absence of Secondary Market
5) Difficulty in Ascertaining Genuine Trade Bills
6) Limited Foreign Trade
7) Attitude of Banks
 Treasury Bill Market
.

Meaning and Features:

1) A treasury bill is nothing but a promissory note issued by the
Government under discount for a specified period stated
therein.
2) The period does not exceed a period of one year. It is purely a
finance bill since it does not arise out of any trade transaction.
3) It does not require any ‘grading’ or ‘endorsement’ or
‘acceptance’ since it is a claim against the Government.
4) Treasury bills are issued only by the RBI on behalf of the
Government. Treasury bills are issued for meeting temporary
Government deficits.
5) The Treasury bill rate or the rate of discount is fixed by the
RBI from time-to-time.
6) short-term maturity and high degree of liquidity and security.
Types of Treasury Bills:
On the basis of periodicity, treasury bills may be classified into three.

•91 days treasury bills

•182 days treasury bills

•364 days treasury bills

Importance or Merits:

1) Safety
2) Liquidity
3) Ideal Short-Term Investment
4) Ideal Fund Management
5) Statutory Liquidity Requirement
6) Source of Short- Term Funds
 Defects:

1) Poor Yield

2) Absence of Competitive Bids

3) Absence of Active Trading

 Certificates of Deposit

A CD is a time deposit with a bank. Like most time

deposit, funds can not withdrawn before maturity
without paying a penalty. CD’s have specific maturity
date, interest rate and it can be issued in any
denomination. The main advantage of CD is their safety.
Anyone can earn more than a saving account interest.
Certificates of Deposit

• CDs are short-term borrowings in the form of UPN

issued by all scheduled banks and are freely transferable
by endorsement and delivery.
• Introduced in 1989
• Maturity of not less than 7 days and maximum up to a
year. FIs are allowed to issue CDs for a period between 1
year and up to 3 years
• Subject to payment of stamp duty under the Indian Stamp
Act, 1899
• Issued to individuals, corporations, trusts, funds and
associations
• They are issued at a discount rate freely determined by
the market/investors
Commercial Papers

• Short-term borrowings by corporate, financial institutions,

primary dealers from the money market
• Can be issued in the physical form (Usance Promissory
Note) or demat form
• Introduced in 1990
• When issued in physical form are negotiable by
endorsement and delivery and hence, highly flexible
• Issued subject to minimum of Rs. 5 lacs and in the multiple
of Rs. 5 lacs after that
• Maturity is 7 days to 1 year
• Unsecured and backed by credit rating of the issuing
company
• Issued at discount to the face value
Types of Commercial Papers

• Direct paper-
Large finance & bank holding companies

• Dealer paper-
Security dealers & non- financial
companies
Features of Commercial Papers

• Eligibility criteria for all corporate.

• The tangible net worth of the company, as per the latest

audited balance sheet, is not less than Rs. 4 crore.

• Company has been sanctioned working capital limit by

banks or all- India financial institutions

• The borrowal account of the company is classified as a

Standard Asset by the financing bank/s/ institution/s
Credit Rating.
Inter bank Participation
This is purely an inter bank instrument. The RBI has authorized
the banks to fund their short term needs from within the system
through issuance of IBPC.
There are also bill rediscounting and refinance drawl facilities to
enable bank to tide over their liquidity shortages.

Regional Rural Banks (RRBs) allowed to issue Inter-Bank

Participation Certificates (IBPCs)

August 3, 2009: Reserve Bank of India has been decided that

henceforth, Regional Rural Banks (RRBs) can also issue Inter-
Bank Participation Certificates (IBPCs) of a tenor of 180 days on
risk sharing basis to scheduled commercial banks against their
priority sector advances in excess of 60% of their outstanding
advances.
Stock investment

Risk appetite and Return

Foreign Currency Non-Resident
(Banks)Accounts - "FCNR"
•Non-Resident Indians can open accounts under this scheme.

•The account should be opened by the non-resident account holder himself and
not by the holder of power of attorney in India.

•These deposits can be maintained in 5 designated currencies i.e. U.S. Dollar

(USD), Pound Sterling (GBP) and Euro, Australian Dollar (AUD) & Canadian
Dollar (CAD).

•These accounts can only be maintained in the form of terms deposits for
maturities of minimum 1 year to maximum 5 years.

•Interest rates are reviewed periodically and determined by directives from the
Reserve Bank (Department of Banking Operations and Development).

•Payment of Interest
Interest on FCNR (B) deposits is being paid on the basis of 360 days to a year.
However, depositor is eligible to earn interest applicable for a period of one year
if the deposit has completed a period of 365 days.
Non-Resident (External) Account - NRE Account
•Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs) can open and
maintain NRE accounts with authorized dealers and with banks (including co-
operative banks) authorized by the Reserve Bank of India (RBI) to maintain
such accounts.

The account has to be opened by the Non Resident account holder himself and
not by the holder of the power of attorney in India.

•Opening NRE accounts in the names of individuals/entities of

Bangladesh/Pakistan nationality/ownership requires approval of RBI

•Types of Accounts - Savings, Current, Recurring or Fixed Deposit accounts.

•In 2010, Advertised interest rates on NRI accounts range between 6%

and 8%.

•Can be opened jointly with another Non-Resident Indian

FEATURES OF BONDS

1. Par value
2. Maturity
3. Call feature
4. Indenture
5. Pledge of security
6. Fixed income
7. Coupon rate
8. Acceleration clause
REASONS FOR ISSUING BONDS

1. To reduce the cost of capital

2. To get the benefit of leverage

3. To effect tax saving

4. To preserve control
TYPES OF BONDS

1. Serial
2. Sinking fund
3. Registered
4. Mortgage
5. Collateral trust
6. Equipment trust
7. Guaranteed
8. Joint
9. Assumed
10. Convertible
11. Income
12.Foreign
Forward Rate Agreement
• Meaning
• Example
On Jan 1,2010,Mr.A agrees to buy a certain asset on May 1,2010
for Rs.1 lakh from Mr.B. This is a forward contract where Mr.A has to pay
Rs.1 lakh to Mr. B on May 1 and Mr. B has to supply the asset.
Features
1.Over the counter Trading
2.No Down Payment
3.Linearity
4.No Secondary Market
5.Settlement at maturity
6.Need for a intermediary
• Advantages
1.Protection against price fluctuation
2.Proper portfolio management
3.No burden on carrying cost
4.Flexibility
5.Cash management
6.Facilitates planning
7.Development of financial market
• Financial FRA
Forward rate currency contract
Forward rate Interest rate contract
• Meaning
• For example,
SWAPs
In the case of a swap involving two bonds, the
Specifically, the two counterparties agree to
exchange one stream of cash flows against another
stream. The swap agreement defines the dates when
the cash flows are to be paid and the way they are
calculated. Usually at the time when the contract is
initiated at least one of these series of cash flows is
determined by a random or uncertain variable such
as an interest rate, foreign exchange rate, equity
price or commodity price. The cash flows are
calculated over a notional principal amount, which is
usually not exchanged between counterparties.
• Use
• Types of swaps
• Interest rate swap
• Currency swaps
• Commodity swaps
• Equity Swap
• Credit default swaps