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Q5. What do you mean by Money Market and Money Market instruments?

Answer:
Introduction
The money market is the market where liquid and short-term borrowing and lending
take place. The lending of funds in this market constitutes short-term investments.
In a certain sense all bank notes, current accounts, cheque accounts, etc. belong to
the money market.
In financial market terms, the money market exists for the purpose of issuing and
trading of short-term instruments, that is, instruments where the term remaining
from the date when trading takes place to the date of redemption of the loan
represented by die instrument (commonly referred to as the "term to maturity"), is
of a short-term nature. In theory, this term for classification as a money market
instrument is given as one year.
Institutions in the market
There are quite a few active institutions in the market, and it probably has the most
active participants of all the financial markets. Individuals form an important and
integral part of the market through cash income and spending, investments and
borrowings at banks and funds (e.g. unit trusts, pension funds, etc.) and other shortterm funds, which they invest and borrow.
The government is involved in the market through the Treasury and the Reserve
Bank. They interact with other players in the market such as the commercial banks,
the merchant banks, the funds and corporate companies. Other financial
institutions such as insurers, money market trusts, micro-lenders, etc. all play a part
to keep the money market vibrant and liquid.
Money market instruments give businesses, financial institutions and governments
a means to finance their short-term cash requirements. Three important
characteristics are:
Liquidity - Since they are fixed-income securities with short-term maturities of
a year or less, money market instruments are extremely liquid.
Safety - They also provide a relatively high degree of safety because their
issuers have the highest credit ratings.
Discount Pricing- A third characteristic they have in common is that they are
issued at a discount to their face value.
Some of the important money market instruments are briefly discussed below;
i.)

ii.)

Call /Notice-Money Market: Call/Notice money is the money borrowed or lent


on demand for a very short period. When money is borrowed or lent for a
day, it is known as Call (Overnight) Money. Intervening holidays and/or
Sunday are excluded for this purpose. Thus money, borrowed on a day and
repaid on the next working day, (irrespective of the number of intervening
holidays) is "Call Money". When money is borrowed or lent for more than a
day and up to 14 days, it is "Notice Money". No collateral security is required
to cover these transactions.
Treasury Bills: The Treasury bills are short-term money market instrument
that mature in a year or less than that. The purchase price is less than the
face value. At maturity the government pays the Treasury bill holder the full

iii.)

iv.)

v.)

vi.)

vii.)

face value. The Treasury Bills are marketable, affordable and risk free. The
security attached to the treasury bills comes at the cost of very low returns.
Certificate of Deposit: The certificates of deposit are basically time deposits
that are issued by the commercial banks with maturity periods ranging from
3 months to five years. The return on the certificate of deposit is higher than
the Treasury Bills because it assumes a higher level of risk.
Commercial Paper: Commercial Paper is short-term loan that is issued by a
corporation use for financing accounts receivable and inventories.
Commercial Papers have higher denominations as compared to the Treasury
Bills and the Certificate of Deposit. The maturity periods of Commercial
Papers are a maximum of 9 months. They are very safe since the financial
situation of the corporation can be anticipated over a few months.
Banker's Acceptance: It is a short-term credit investment. It is guaranteed by
a bank to make payments. The Banker's Acceptance is traded in the
Secondary market. The banker's acceptance is mostly used to finance
exports, imports and other transactions in goods. The banker's acceptance
need not be held till the maturity date but the holder has the option to sell it
off in the secondary market whenever he finds it suitable.
A Repo or repurchase agreement is a form of borrowing. A dealer, or holder of
a government security, sells it under the terms and conditions of repurchase
at an agreed price and date.
In Reverse Repos the process is reversed to that of a repo the dealer buys
securities from an investor and then sells them back at a higher price on a
later date.
Inter-Bank Term Money: Inter-bank market for deposits of maturity beyond 14
days is referred to as the term money market. The entry restrictions are the
same as those for Call/Notice Money except that, as per existing regulations,
the specified entities are not allowed to lend beyond 14 days.

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