Various Domestic Money Market

instrument
Money Market Instrument
 Investment in money market is done through
money market instruments
 Money market instrument meets short term
requirements of the borrowers and provides
liquidity to the lenders
 The most active part of the money market is the
market for overnight call and term money
between bank and institutions and repo
transaction.
 Domestic Money Market Instruments

 Treasury bills
 Commercial paper
 Commercial Bills
 Federal funds
 Banker’s Acceptance
 Certificates of Deposit (CDs)
 R
 Municipal notes
Treasury Bill
 The Treasury sells bills at regularly scheduled auctions to refinance
maturing issues and to help finance current federal deficits. It also sells
bills on an irregular basis to smooth out the uneven flow of revenues from
corporate and individual tax receipts.

 Treasury bills are one of the safest money market instruments as they are
issued by Central Government. They are zero-risk instrument ,and hence
returns are not that attractive .t-bills are circulated by both primary as well
as the secondary market .They come with the maturity value of 3-months
,6-months and 1-year .
Commercial Paper
 Commercial paper is an unsecured, short-term debt
instrument issued by a corporation, typically for the
financing of accounts receivable, inventories and
meeting short-term liabilities. Maturities on commercial
paper rarely range any longer than 270 days.

 Commercial paper is usually issued at a discount from

face value and reflects prevailing market interest rates.
Commercial Bills
 The commercial bills are issued by the seller
(drawer) on the buyer (drawee) for the value of
goods delivered by him. These bills are of 30 days,
60 days or 90 days maturity.
 Commercial bill is a short term, negotiable, and
self-liquidating instrument with low risk written
instrument containing unconditional order.
Federal Funds
 Federal funds, often referred to as fed funds, are excess reserves that
commercial banks and other financial institutions deposit at regional
Federal Reserve banks; these funds can be lent, then, to other
market participants with insufficient cash on hand to meet their
lending and reserve needs.

Characteristic of Federal Funds

 First, they are short-term borrowings of immediately available
money funds which can be transferred between depository
institutions within a single business day.
Cont….
 Second, federal funds can be borrowed by only those depository
institutions that are required by the Monetary Control Act of 1980 to
hold reserves with Federal Reserve Banks. They are commercial
banks, savings banks, savings and loan associations, and credit
unions.
 Third, federal funds borrowed have historically been distinguished
from other liabilities of depository institutions because they have
been exempt from both reserve requirements and interest rate
ceilings.
Banker’s acceptance
 Bankers acceptance is like a short term investment plan
created by non-financial firm, backed by a guarantee from the
bank. Its like a bill of exchange stating a buyers promise to
pay to the seller a certain specified amount at a certain date
and the bank guarantees that the buyer will pay the seller at a
future date. These securities come with the maturities
between 30 and 180 days and the most common term for
these instrument is 90 days
 A banker's acceptance starts as a time draft drawn on a bank
deposit by a bank's customer to pay money at a future date,
typically within six months, analogous to a post-dated check.
Certificates of Deposit (CDs)
 Certificate of deposit is like a promissory note issued by
a bank in form of a certificate entitling the bearer to
receive interest. It is similar to bank term deposit
account. The certificate bears the maturity date, fixed
rate of interest and the value. These certificate are
available in the tenure of 3 months to 5 years. The return
on certificate of deposits are higher than t-bills because
they carry higher level of risk.
Repurchase and Reverse Agreement
 Repurchase agreements which are also called as repo or reverse repo are
short term loans that buyers and sellers agree upon for selling and
repurchasing .repo or reverse repo transaction can be done only between
the parties approved by RBI and allowed only between RBI–approved
securities such as state and central government securities.
 A reverse repurchase agreement is the purchase of securities with the
agreement to sell them at a higher price at a specific future date. For the
party selling the security (and agreeing to repurchase it in the future) it is a
repurchase agreement (RP) or repo; for the party on the other end of the
transaction (buying the security and agreeing to sell in the future) it is a
reverse repurchase agreement (RRP) or reverse repo.
Municipal Notes
 Municipal notes are short term debt issued by
municipalities, normally to cover spending until money
is received from a specified source.
 Municipal notes are debt securities issued by state and
municipal governments and the special districts and
statutory authorities they establish. States and
municipalities borrow to finance their own expenditures,
to provide funds to some tax-exempt entities such as
colleges and nonprofit hospitals, and, to a limited
degree, to provide funds to private firms and individuals.
3 types of Municipal Notes
 Tax anticipation notes (TAN) – Short term debt issued to
cover spending until tax revenue comes in.
 Revenue anticipation notes (RAN) – Short term debt issued
to cover spending until revenue comes in from one of the
municipalities projects such as a sewage or electric plant.
 Bond anticipation notes (BAN) – Short term debt issued to
cover spending until a bond issue is completed.
Advantages of Money Market Instruments
 Safe to park fund- the stock markets are generally in a continuous flux
and when the investor are not sure of where to park their money ,money
market instrument can be a safe place to do so.
 Higher return on investments- money market funds typically pay slightly
higher interest rates than traditional savings and current accounts,
sometimes the money market generates single digit returns which in down
market can be quite attractive.
 Tax-free –the tax free money market funds can also offer an additional
boost for those in the higher tax brackets and avoid generating further
taxable income.
 Liquidity- money market investments are the closest to cash in hand and
hence can be regarded as the most liquid form of investment. The investors
can buy into them and sell them with comparative case
 Less or no fee-there’s little or no fee or sales charges associated with these
funds, also since these can be sold or bought at any time quite like how
money can be deposited and withdrawn from the bank.
Disadvantages of Money Market Instruments
 Purchasing power can get impacted- if the return is decent but the
inflation is just a percent higher, the investor will be losing on the
purchasing power each year .gradually the money they earn may not help
them to cope with the rising cost of living ,hence making them poorer.
 Opportunity cost – by investing in money market funds that yields only 2-
3%,the investors might be missing out on the opportunity for better rate of
return ,which can impact the wealth building ability tremendously.
 Some returns can vary and can be riskier- while money market funds are
generally safe and invest only in governing securities ,however ,sometimes
to yields better returns they might take some risk, so to earn a greater return
percentage ,they might invest the money in bonds or commercial papers
that carry additional risks, which might not be a smarter idea.
References
 http://www.investopedia.com/terms/c/commercialpaper.asp#ixzz4SqOjgyEB
 http://www.investopedia.com/terms/e/eurodollar.asp#ixzz4SqQyALLF
 http://www.investopedia.com/terms/m/moneymarket.asp#ixzz4Slkhifkf
 https://www.richmondfed.org/~/media/richmondfedorg/publications/research/special
_reports/instruments_of_the_money_market/pdf/full_publication.pdf
 http://www.investopedia.com/terms/n/ncd.asp#ixzz4SqcuG4fP
 https://en.wikipedia.org/wiki/Bankers'_acceptance
 http://www.businessdictionary.com/definition/trade-bill.html
 http://www.slideshare.net/vidhyamalu/money-market-instruments-16999724