Money And Capital Market Instruments

MONEY AND CAPITAL MARKET INSTRUMENTS

Following are the important money and capital market instruments:-

Treasury Bills

• Treasury Bills are also known as T-Bills.
• This is one of safest instrument to invest.
• T-bills are issued by RBI backed by government security.
• RBI issue treasury bills on the behalf of central government to meet the short term liquidity needs of central government.
• Currently, the Government of India issue three types of treasury bills through auctions for 91 days, 182 days and 364 days.
• Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs.25,000.

Commercial Papers (CP)

• Commercial papers are issue by private organizations or financial institutions having strong credit rating to meet short term liquidity requirements.
• These are unsecured instruments as these are not backed by any security. The return on commercial papers is usually higher than T-bills.
• Different rating agencies, rate the commercial paper before issue by any organization.
• If commercial paper carrying good rating means it is safe to invest and carrying lower risk of default.
• All corporate are not eligible to issue Commercial papers, only who met certain defined criteria by RBI are eligible to issue Commercial papers.
• Commercial papers can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue and can be issued not less than 5 lakhs and multiples thereafter.

Certificate Of Deposit

• Certificate of Deposit (CD) is a money market instrument.
• CDs can be issued by scheduled commercial banks and selected All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources.
• Minimum amount of a Certificate of Deposit should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter.
• The maturity period of Certificate of Deposit issued by banks should not be less than 7 days and not more than one year, from the date of issue.
• Certificate of Deposit may be issued at a discount on face value.

Bankers Acceptance

• Bankers Acceptance is also a money market instrument to meet short term liquidity requirement .
• In this company provides bank guarantee to seller to pay amount of goods purchased at agreed future date.
• In case buyer failed to pay on agreed date , seller can invoke bank guarantee . It is usually used to finance export and import.

Repurchase Agreement

• It is money market instrument .In this, one party sell its asset usually government securities to other party and agreed to buy this asset on future agreed date .
• The seller pays an interest rate, called the repo rate,when buying back the securities.

Bond or Debt

• Bond market is also known as Debt market.
• A debt instrument is used by government or organization to generate funds for longer duration.
• This gives no owner ship right .A person receives fixed rate of interest on debt instrument.
• If any company or organization want to raise money for long term purpose without diluting his ownership that it is known as Debentures.