MONEY MARKET

It is a market in which we can buy and sell those securities whose maturity life is less than one year.

Elements Of Money Market Securities:

Following are some elements of money market securities like:
• Treasury bills
• Negotiable certificate of deposit
• Commercial papers
• Repurchase agreement
• Federal fund
• Banker acceptance

 Importance Of Money Market Securities:

Money Market securities provide provide short term funds to private and public institution who need
finance for their working capital requirements. They also provide opportunity to the banks and
financial institutes to use their surplus funds profitably for small period of time. Money markets have
no need to borrow money from commercial and central bank and money market is helpful for
Government in borrowing short term funds on base of treasury bill at low interest rate.

1. Treasury Bills:
Treasury bills are short term note issued by the U.S Government. Basically when U.S Government
need borrow fund then they issued the T-Bills. Normally the Treasury bills are issued for 4 weeks, 13
weeks and 26 weeks maturity on weakly basis. T-Bills are also called cash management bill that help
short term maturity. When T-Bills were firstly issued they are in paper form but now they issued in
electronic form. The face value of T-Bill is Approx 10000. Treasury bills are normally issued at a
discount from their face value. At time of maturity the investor obtains the nominal value. This
difference between the initial value and the nominal value is the return obtained by the investor. These
are the safest short term fixed income investments because they are backed by the Government. So, T-
bill price is determined at present value of all future cash flows.

2. Negotiable Certificate Of Deposit:

Certificate Of Deposit are financial assets issued by banks and financial institutions. They offer a
fixed interest rate on the amount invested. Certificate of deposit have higher return then bank from
deposit and the return on certificate of deposit is higher than treasury bill because it assumes a higher
level of risk. Certificate Of Deposit are freely transferable. They are highly liquid and marketable and
can be issued at discount to face value . In this the pre mature cancellation is not allowed and the
minimum size of issue of single depositor is Rs 1 lac and additional amount can be in multiple of Rs 1
lakh. The maturity period for certificates of deposit varies from 7 days to 1 year but if issued by
banks.on other hand Other financial institutions can issue a Certificate of deposit with a duration
ranging from 1 year to 3 years.

3. Commercial Papers:
It was introduced in India in 1990. Large companies and businesses issue promissory notes to raise
capital to meet short term business needs is called Commercial Papers. Corporate, primary dealers and
financial institutions are eligible to issue commercial papers. They have a fixed maturity time period
from 7 days to 270 days. But the investors can trade this instrument on the secondary market. They
offer higher returns than the treasury bills.
It is a short-term money market tool comprising a promissory note and a fixed maturity. It acts as
proof of certificate of unsecured debt. It is issued at a discounted rate and can be issued in an interest-
bearing application. The issuer guarantees the buyer to pay a fixed amount in the future in terms of
cash and not assets.

4. Repurchase Agreement:
Repurchase agreements are agreement between two parties in which one party sells a security to
another with a promise to buy it back at a later date from the buyer at higher price. In this agreement
being a buy or sell type of loan the seller act as borrower and buyer act as lender.
The seller buys the security at a predetermined time and amount that also includes the interest rate at
which the buyer agreed to buy the security. The interest rate charged by the buyer for agreeing to
purchase the security is called the repo rate. They are useful when the seller needs short-term funds all
he can do is sell the securities and transfer the funds. The buyer has the opportunity to get a return on
the money invested.

5. Federal Fund:
Federal funds are excess reserves that commercial banks and other financial institutions deposit with
regional Federal Reserve banks; These funds can then be loaned to other market participants whose
liquidity is insufficient to meet their loan and reserve needs. They are lent on an overnight basis and
the interest rate charged on overnight loans of reserves among commercial banks.

6. Banker Acceptance:
A banker's acceptance is a timely draft drawn by one party at a bank and accepted by the bank as a
commitment by the bank to pay a third party at specified amount future date. With bank acceptances
banks can provide credit to their customers without using the bank's own funds.
It is compulsory for issuer to pay specific amount on a predetermined date between 30 and 180 days
from the date of issue of the instrument. It is a secure financial instrument since the payment is
guaranteed by a commercial bank. Banker's Acceptance is issued at a reduced price and the actual
price is paid to the cardholder at maturity.