Manifest Money

Explained: Types Of Money Market Instruments

The term money market refers to an asset (short-term) with a maturity period of less than a year. For a similar reason, money market instruments are extremely liquid and can also be utilized as a close replacement for money. They can also assist in providing money exchange facilities implemented in the primary and secondary markets.

 

About Money Market Instruments 

Money market instruments are mainly barred debt contracts that can provide the investors or the bearer of the instruments with a predetermined return rate. Although money market instruments have risks, they also increase credit rating. This signifies that the issuer of these money market instruments does not usually default.

 

The main agenda of money market instruments is to accomplish the short-term yet significantly high capital requirements of different financial organizations, governments and banks. These are issued by the borrowers who immediately require funds and lenders provide them with the money for a short period and gain a fixed return.

Money market instruments are a form of short-term investments.

Features of the Money Market Instruments

Although multiple organizations, banks and government institutions can receive immediate funds through money market instruments, investors need to be aware of certain characteristics of these instruments. Some of them are discussed below: 

 

  • Security: The issuer of money market instruments usually has a high credit rating, indicating that the lender’s money will be safe.
  • Liquidity: The money market instruments have an extremely short maturity period (one year or less than one year) and are fixed-income securities. These specific reasons make the money market instruments highly liquid.
  • Discount pricing: Another fundamental feature of money market instruments is that as a lender, you can purchase the money market instruments at a discounted rate as per their face value.

 

What are the Different Kinds of Money Market Instruments?

Different banks, financial institutions, and government organizations can issue multiple types of money market instruments. Some of them are discussed below:

 

  1. Banker’s Acceptance or BA

Some organizations and individuals make use of a financial instrument that has been manufactured using the name of a bank. This particular financial instrument is regarded as the Banker’s Acceptance.

 

In this case, the issuer of this particular money market instrument will have to pay a specified amount to the investor between 30 and 180 days. The contrast between the sale price and the issue price is regarded as the return on investment.

 

  1. Certificate of Deposits or CDs

Many think a Certificate of Deposits is similar to Fixed deposits, but that is not the case. Certificates of Deposits are negotiable term deposits, and only banks accept these kinds of money market instruments. The minimum requirement for a Certificate of Deposits is rupees 1 lakh, which can go higher than that.

 

  1. Repurchase Agreement or Repo

Repurchase agreements, also known as repo or reverse repo, are primarily sales agreements. According to this agreement, the individual or party selling the securities will buy them back from the seller after a significant time.

 

  1. Commercial Bills

As an Indian money market instrument, commercial bills are extremely popular among investors. Commercial bills imitate exchange bills, and the seller can issue these bills to the purchaser of specific goods and services. 

 

If a bank or any other financial institution takes this exchange bill, it is regarded as a commercial bill. Whenever a seller of goods and services requires funds, they can use commercial bills.

 

  1. Commercial Papers or CPs

Commercial Papers or CPs are a form of unsecured promissory notes, and huge companies mainly issue these with enough reputations. Returns from commercial papers are higher than Treasury bills because of their unsecured nature.

 

  1. Call and Notice Money

A lot of times, banks and other financial organizations ask for funds to manage their cash flow. These funds are borrowed for a very brief period. If a borrowing or lending fund is limited to one day, it is regarded as call money, and at the same time, if the designated period (for the funds) is as long as 14 days, it is regarded as notice money. You also need to note that there is no collateral for the borrowed funds.

 

The purchasing or buyback price also includes a specific rate or interest, regarded as the repo rate. Like any other money market instrument, a repurchase agreement can be used to collect short-term funds. At the same time, the investor also receives a noteworthy amount in the form of a return on investment.

 

  1. Treasury Bills or T-Bills

The Government of India normally issues Treasury bills to satisfy its momentary requirements. Treasury bills are the most secured money market instruments available in India. Although the treasury bills are sold at discounted prices, at maturity, the government pays the face value of the T-Bills. Therefore, the investors receive capital gains.

 

  1. If you want to keep your money secured for a short period while gaining profits, then money-making instruments are the ideal option for you.
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Christophe Rude

Christophe Rude

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