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Money market is the market of trading for short term instruments. The instruments traded in money market have a maturity period of maximum one year.
i. T-Bills or Treasury Bills
Treasury bills are one type short term money market instrument which is used in the form of a promissory note that is used for borrowing by the government. It is one of the most commonly used money market instruments. It is auctioned by RBI on behalf of the central government. T-bills have a minimum unit of Rs 25,000 and in multiples. Three types of treasury bills are present which are of variable duration of 91, 182 and 364 days. T-bills get issued at discount and are redeemed at par. It is also known as zero coupon bonds and as it is issued by RBI, there is very negligible risk and returns are assured.
ii. Commercial Paper or CP
Commercial papers are one of the short-term instruments of money market that are unsecured. It is a type of promissory note that is transferrable and negotiable with maturity periods of maximum one year. These instruments were used by companies having creditworthiness in the market for raising short term funds. These are used as alternatives to borrowings from capital market or banks and offer interest lower than market. Commercial papers are used mainly for bridge financing.
iii. Call money
Call money instruments are the instrument of choice for interbank transactions. In this type of arrangement, the banks borrow a sum from each other in order to maintain any kind of shortfall in CRR. Call money have maturity of very short duration. Interest that is paid on call money is called as call rate. Call rates have a negative relationship with the money market instruments that means with rise in call rate the other money market instruments become cheaper which increases their demand.
iv. Certificate of Deposit (CDs)
Certificate of deposits are those money market instruments which are time deposits and are unsecured and negotiable in nature. These have a maturity period of maximum 5 years. Commercial bills are issued to individuals, companies and corporations by the commercial banks and other financial institutions. Higher deposits have higher interests. At times of tight liquidity situation these instruments are used to strengthen the credit.
v. Commercial Bill
Commercial bill is also known as bill of exchange which is used for financing the working capital requirements of the firm. Companies use commercial bills to finance credit sales.