Classi cation Of Financial Markets

Financial markets can be classi ed into t wo

categories based on the maturity of nancial
instruments traded, namely
Money market - refers to the market for
short-term instruments with maturity of
less than one year
Capital market - refers to the market for
the instrument with longer maturity
period.

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 Money Market - Features
The instruments traded in money market are of high liquidity,
lower risk and are unsecured in nature.
The short-term debt instruments that are highly liquid are
issued and actively traded every day.
Money market dealings are conducted over the telephone and
online as there is no physical location of the money market.
The money market on one hand helps to raise short-term funds
for meeting the temporary shortage of cash and obligations
and on the other hand it provides lucrative avenues for
temporary investment of excess funds.
The major participants in the market are Reser ve Bank of India
( RBI ) , Commercial banks, Non-banking nance companies,
State government, Large corporate houses and Mutual funds.

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 Money Market Instruments

1. Treasury Bill
These are issued by Reserve Bank of India on behalf of Central
government. They represent the following by government of
India.
These are issued in the form of promissory notes which are
highly liquid and offer assured higher returns and are safe
instruments with negligible risk of default.
These are issued at a price which is lower than face value and 3 types of Treasury bills
repaid at par. 91 days, 182 days, 364 days
The difference between the price which the treasury bills are Minimum amount of treasury bills issued
issued and the redemption value is the interest receivable is by the government are for Rs 25,000 and
so on in multiples of Rs 25,000
called discount.
They are also known as zero coupon discount bonds.

 Money Market Instruments

2. Commercial Paper

It is a short term money market instrument issued by large and credit worthy companies as an alternative
to bank borrowings.
The rate of interest is lower than the market rates.
It is a form of an unsecured promissory note, negotiable and transferable by endorsement and delivery with
a xed maturity period.
The maturity period may range from 15 days to 365 days.
It is sold at discount and redeemed at par.
Besides providing short-term loans songs for seasonal and working capital needs it is also used for the
purpose of bridge nance ( i.e) the process of raising funds required to meet the otation cost.
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 Money Market Instruments
3. Call Money
It is a short-term loan, raised by one bank from another and it is repayable on demand.
The interbank transactions enable one bank to borrow money from another bank to maintain its cash reserve ratio.
The percentage of cash required to be kept in reserves as against the bank's total deposits, is called the Cash
Reserve Ratio.
As per the guidelines of reserve bank of India the commercial banks have to maintain a minimum cash balance
known as cash reserve ratio.
The reserve bank of India changes the cash reserve ratio from time to time which in turn affects the amount of
funds available to be given as loan by commercial banks.
The maturity period ranges from 1 day to 15 days.
The rate at which the interest is paid on call money loans is call rate. Now it is 4%.
Call rate is a highly volatile in nature and keeps varying from day to day and sometimes even from hour to hour.
Whenever there is an increase in call money rates banks use other sources of finance like commercial papers and
certificate of deposit etc. ( Inverse Relationship )

 Money Market Instruments

4. Certificate of Deposit
A short-term money market instrument issued by commercial banks and
development nancial institutions during the period of tight liquidity when the
deposit growth of banks is low but the demand for credit is high.
It is an unsecured and negotiable instrument in bearer form.
It may be issued to individuals, corporations and companies when bank needs cash to
meet the credit needs.
This facilitate mobilisation of large amount of money for short duration.

The maturity period of CDs issued by

Banks - should not be less than 7 days and not more than one year, from the date of issue.
Financial Institutions - not less than 1 year and not exceeding 3 years from the date of issue.
CDs may be issued to all persons resident in India.
https://www.rbi.org.in/Scripts/Noti cationUser.aspx?Id=12108&Mode=0
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 Money Market Instruments

5. Commercial Bill
It is a bill of exchange used as a short-term money market instrument for nancing the working capital
requirement of a business rm.
It's a negotiable and self liquidating instrument. In case of credit sales buyers becomes liable to make
payment on a speci c day in future.
In credit sales the seller (Drawer) of the goods draws the bill and the buyer (drawee) accepts it. When the
drawer accepts the bill, the bill of exchange becomes a marketable instrument and is known as trade bill.
If the seller needs funds before that bill matures, the bill of exchange can be discounted with a bank. The
trade bill is accepted by a commercial bank is referred to as commercial bill.
The maturity period of the bill is 90 days. These bills can be re-sold a number of times during the usable
period of the bill.
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