http://www.fimmda.org/modules/content/?p=1015#o http://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?

Id=711

MONEY MARKET In the financial marketplace, a distinction is made between the capital markets and the money markets. The capital market is a source of intermediate-term to long-term financing in the form of equity or debt securities with maturities of more than one year. The money market provides very short-term funds to corporations, municipalities and the United States government. Money market securities are debt issues with maturities of one year or less. For more information, review our Money Market tutorial.

Purposes of the Money Market Individuals will invest in the money market for much the same reason that a business or government will lend or borrow funds in the money market: sometimes the need for funds does not coincide with having them. For example, if you find you have a certain sum of money that you do not immediately need (to pay down debt, for example), then you may choose to invest those funds temporarily, until you need them to make some other, longer-term investment, or a purchase. If you decide to hold these funds in cash, the opportunity cost that you incur is the interest that you could have received by investing your funds. If you do invest your funds in the money market, you can quickly and easily secure this interest.

The major attributes that will draw an investor to short-term money market instruments are superior safety and liquidity. Money market instruments have maturities that range from one day to one year, but they are most often three months or less. Because these investments are associated with massive and actively-traded secondary markets, you can almost always sell them prior to maturity, albeit at the price of forgoing the interest you would have gained by holding them until maturity.

Conclusion(http://www.investopedia.com/articles/04/071304.asp) When an individual investor builds a portfolio of financial instruments and securities, he or she typically allocates a certain percentage of funds towards the safest and most liquid vehicle available: cash. This cash component may sit in his or her investment account in purely liquid funds, just as it would if deposited into a bank savings or checking account. However, investors are much better off placing the cash component of their portfolios into the money market, which offers interest income while still retaining the safety and liquidity of cash. Many money market instruments are available to investors, most simply through well-diversified money market mutual funds. Should investors be willing to go it

alone, there are other money market investment opportunities, most notably in purchasing T-bills through Treasury Direct.

CONCEPTS

What is a forward contract? (http://www.fimmda.org/modules/content/?p=1015#o) A forward contract is a contract to trade in a particular asset (which may be another security) at a particular price on a pre-specified date.

What is a futures contract? (http://www.fimmda.org/modules/content/?p=1015#o) Futures are standardized forward contract that are traded on an exchange and where the counter-party (the party with which the contract has been signed) is the exchange itself.

What are callable securities? (http://www.fimmda.org/modules/content/?p=1015#o) Callable securities are those which can be called by the issuer at a predetermined time/times, by repaying the holder of the security a certain amount which is fixed under the terms of the security.

What are coupon payments?(http://www.fimmda.org/modules/content/?p=1015#o) Coupon payments are the cash flows that are offered by a particular security at fixed intervals. THE COUPON EXPRESSED AS A PERCENTAGE OF THE FACE VALUE OF THE SECURITY GIVES THE COUPON RATE

What is the yield on a security?(http://www.fimmda.org/modules/content/?p=1015#o) Yield on a security is the implied interest offered by a security over its life, given its current market price.

NOTE : Coupon Rate: Interest rate Related to Face Value(Value of security after maturity) of security. (It is calculated for various coupons provided in intertim) Yield : Interest rate Related to current Market Price of security. (It is calculated for overall life of security : CAlled YTM, there is also 'current yield' this is calculated over coupon rate)

HOW IS 'CURRENT YIELD' CALCULATED?? (http://www.fimmda.org/modules/content/?p=1015#o) This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by DIVIDING the COUPON RATE by the PURCHASE PRICE of the debenture. For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as: Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.

What is auction of Securities? (http://www.fimmda.org/modules/content/?p=1015#o)

Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism. There are several variants of auction. Auction can be price based or yield based. In securities market we come across below mentioned auction methods.

(a) French Auction System / YIELD BASED AUCTION : After receiving bids at various levels of yield expectations, a particular yield level is decided as the coupon rate. Auction participants who bid at yield levels lower than the yield determined as cut-off get full allotment at a premium. The PREMIUM amount is equivalent to price equated differential of the bid yield and the cut-off yield. Applications of bidders who bid at levels higher than the cut-off levels are out-right rejected. This is primarily a YIELD BASED AUCTION.

(b) Dutch Auction Price : This is identical to the French auction system as defined above. The only difference being that the concept of premium does not exist. This means that all successful bidders get a cut-off price of Rs. 100.00 and do not need to pay any premium irrespective of the yield level bid for.

(c) Private Placement : After having discovered the coupon through the auction mechanism, if on account of some circumstances the Government / Reserve Bank of India decides to further issue the same security to expand the outstanding quantum, the government usually privately places the security with Reserve Bank of India. The Reserve Bank of India in turn may sell these securities at a later date through their open market windiow albeit at a different yield...

(d) On-tap issue : Under this scheme of arrangements after the initial primary placement of a security, the issue remains open to yet further subscriptions. The period for which the issue remains open may be sometimes time specific or volume specific..

What is Yield to maturity (YTM)?(http://www.fimmda.org/modules/content/?p=1015#o) The yield or the return on the instrument is held till its maturity is known as the Yield-to-maturity (YTM). It basically measures the total income earned by the investor over the entire life of the Security. This total income consists of the following: Coupon income: The fixed rate of return that accrues from the instrument Interest-on-interest at the coupon rate: Compound interest earned on the coupon income Capital gains/losses: The profit or loss arising on account of the difference between the price paid for the security and the proceeds received on redemption/maturity

What is the relationship between price and Yield?(http://www.fimmda.org/modules/content/?p=1015#o) Prices and interest rates are inversely related.

Why is there a difference between coupon rate and yield?(http://www.fimmda.org/modules/content/?p=1015#o)

The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.

What are options?(http://www.fimmda.org/modules/content/?p=1015#o) Options are one-way contract where one party has the right but not the obligation to trade in a particular asset at a particular price on a pre-determined date/dates or in a particular time interval.

What are Money Market Instruments?(http://www.fimmda.org/modules/content/?p=1015#o)

By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year.The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. The below mentioned instruments are normally termed as money market instruments:

Certificate of Deposit (CD)

Commercial Paper (C.P)

Inter Bank Participation Certificates

Inter Bank term Money

Treasury Bills

Bill Rediscounting

Call/ Notice/ Term Money

What factors determine interest rates?(http://www.fimmda.org/modules/content/?p=1015#o)

When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the bond/G-Sec,market, rates offered to small investors in small savings schemes like NSC rates at which companies issue fixed deposits etc.

The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic. Some of these factors are:

Demand for money

Government borrowings

Supply of money Inflation rate The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.

CPS === http://www.differencebetween.com/difference-between-certificate-of-deposit-cd-and-vs-commercialpaper/#ixzz2vm1Kdm6z

What is a Commercial Paper?

Commercial paper is a short term money market instrument that matures within a period of 270 days. Commercial papers are used as a means of raising funds, sometimes used instead of a bank loan, and are usually preferred over a bank loan since large amounts of funds can be raised within a short period of time. Commercial papers are not backed by collateral and, therefore, only creditworthy institutions with high debt ratings can issue them to obtain funds at a lower cost of interest. If the organization does not have a very attractive debt rating they may have to offer a high interest rate that covers investment risk, to attract investors to invest. An advantage to the issuer of a commercial paper is that since the instrument has a very short maturity it does not require a registration with the Securities and Exchange Commission (SEC), which makes it much less complicated and a cheaper form of obtaining finance.

What is a Certificate of Deposit (CD)? A certificate of deposit (CD) is a document issued by the bank to an investor who chooses to deposit his funds in the bank for a specific amount of time. A certificate of deposit can also be referred to as a promissory note issued by a bank. One feature of the CD is that once the money has been deposited for a period of time the depositor cannot withdraw the funds without incurring a penalty for early withdrawal. Since funds cannot be withdrawn as pleased, the interest paid to the depositor of a CD is higher than for a savings account. Once the CD matures, at the end of the specified term of holding the funds are repaid to the depositor alongside the interest calculated for the period. CDs issued by banks can be negotiable or non-negotiable. A negotiable CD allows the holder to sell it on the money market before maturity. A non-negotiable CD mandates the depositor hold the funds till maturity or incur a penalty for early withdrawal.

Difference between certificate of deposit and commercial papers =============================================================== http://www.slideshare.net/puneetarora171/cps-vs-cds

CPs 1)Definition: Its is an money market instrument, issued to enable highly rated corporate borrowers to diversify their sources of short-term borrowing

2) Issuers: Corporates, PDs and all india Financial institution.

3) Rating Requirements: Min A2 (CRAs : ICRA, CRISIL, FITCH, CARE)

4) Maturity: min 7 days to max 1 year

5) denominations: 5 lakhs or multiple of that

CDs 1) Definition: It is intrument where promisary note is issued against funds deposited at bank 2) Issuers: commercial banks and all india Financial institutions (FIs). 3) Rating Requirements: NO RATING REQUIRED 4) Maturity: min 7 days to max 1 year 5) denominations: Min is 1 lakhs

COMPARISON BETWEEN CERTIFICATE OF DEPOSIT (CD) AND COMMERCIAL PAPER CDs and commercial papers are both forms of money market instruments and are issued in the money markets by organizations that wish to raise funds, and are traded by investors who wish to profit from the interest rate fluctuations. However, there are many differences between these two forms of instruments, since CDs are issued as a proof of an investment of funds in the bank by a depositor while commercial papers are issued to an investor as a proof of purchase of the issuers debt (purchasing debt means providing funds like a bank gives out a loan). The main difference between the two forms of instruments is the time period of maturity of the two. While a CD is usually for a longer term, a promissory note is for a shorter period. The issuance of a CD, owing to this difference in maturity, entails higher responsibility on the issuers part than for a promissory note; the CD is insured by the Federal Deposit Insurance Corporation (FDIC) so that the depositor will be reimbursed in the incident that the bank fails to repay the deposit.

http://www.differencebetween.com/difference-between-certificate-of-deposit-cd-and-vs-commercialpaper/#ixzz2vnuUHvgd

T Bills ------Treasury bills are actually a class of Central Government Securities. Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. The T-Bill of below mentioned periods are currently issued by Government/Reserve Bank of India in Primary Market 91-day and 364-day T-Bills. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00. 91 days T-Bills are auctioned under uniform price auction method where as 364 days T-Bills are auctioned on the basis of multiple price auction method.

What is Call Money 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.

1 Day: Call Money 1- 15 Days : Notice Money > 15 Days: Term Money

Banks borrow in this money market for the following purpose:

To fill the gaps or temporary mismatches in funds

To meet the CRR & SLR mandatory requirements as stipulated by the Central bank

To meet sudden demand for funds arising out of large outflows. Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

Call Money Market Participants :

1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs

2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.

Reserve Bank of India has framed a time schedule to phase out the second category out of Call Money Market and make Call Money market as exclusive market for Bank/s & PD/s.

REPOs (Repo implies injection of liquidity and reverse repo absorption of liquidity) ------------------------------------------------------------------------------------------http://www.fimmda.org/modules/content/?p=1015#o http://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=711

With introduction of liquidity adjustment facility from June 2000, Reserve bank has been injecting liquidity into the system through repos on a daily basis. The repo auctions are conducted.

Auctions: Auctions for government securities are either multiple- price auctions or uniform price auction either yield based or price based.

Yield Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted

Price Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing Government Securities. Bids at price lower then the cut off price are rejected and bids higher then the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction.