Questions Business and Entrepreneurship

What are the different types of money market instruments?

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Wahid Bhai

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The instruments that provide low-cost capital for a shorter period for businesses, financial institutions and even the government are referred to as money market instruments. While it is a part of the financial market that offers long term cash flow, it constitutes several smaller instruments like acceptance, bill, and call money markets. In this article, we will take you through a different type of money market instruments available.

  • T-Bills (Treasury bills)
    These carry absolutely no risk at all and hence are referred often as zero risk instruments. Of course, the returns are not as good either in comparison. Issued by the central government and is offered at a price less than the actual face value. The profit is calculated as the difference in the maturity value of the T-bills versus the purchase price.
  • Banker’s acceptance (BA)
    A commercial bank issues this document which is a promise on a future payment. With maturity periods that can be anywhere from 30 – 180 days, the BA invests in money market funds and has details like repayment amount, date of repayment, the person to whom the amount has to be paid, etc. mentioned on it.
  • Commercial Papers (CPs)
    These are again short term promissory notes issued by large companies with higher credibility and these are unsecured by nature but promise higher returns than the government issued T bills. This is among the most popular of the money market instruments currently in the world. There is a fixed maturity period which can be anything from 1 day to 270 days.   These are majorly traded in the secondary market.
  • Certificate of Deposits
    It is again a promissory note which is issued by a bank which entitles the bearer to get an interest for the mentioned period. It comes with a fixed interest rate, date of maturity and maturity value similar to that of a term deposit. You can get these certificates from a tenor of 3 months to a tenor of 5 years. Since the risk is higher than that of the T Bills, these also offer better returns.
  • Repurchase agreements
    Also referred to as the Repo, these are short term loans that are agreed upon by the buyers or sellers for the transaction. This can be carried out only by RBI approved parties on securities approved by RBI only. These agreements are sold with the promise to buy them at a fixed price on a fixed date in the future.

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