FACULTY OF BUSINESS AND COMMERCE
School of Business
MBA Programme
FIRST SEMESTER
Financial Markets & Institutions
Course Code-25COT-603
Unit No. 2
Unit Name: Financial Instruments and Securities
Topic: Money market instruments
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Lecture Money market instruments
CO3:To Analyze financial services and emerging technologies.
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Table of Contents
1. Learning Outcomes
2. Meaning of Money market instruments
3. Certificate of deposit, treasury bills
4. Commercial papers, repurchase agreement
5. Features of money market instruments
6. Conclusion
7. References/Videos/E-Learning Sources
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Learning Outcome
The students will be to:
1. Understand the various money market instruments with its features.
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Introduction
Money market instruments are short-term, highly liquid financial
contracts traded in the money market, typically with maturities of
one year or less. These low-risk securities, issued by
governments, banks, and corporations, facilitate short-term
financing and liquidity management. It includes treasury bills,
commercial papers, certificates of deposit, repurchase
agreements, and banker’s acceptances.
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Money Market Instruments
Certificate of Deposit (CD)
• These certificates are issued directly by a commercial bank at a discounted rate, and
their tenure usually ranges from seven days to one year. CDs function similarly to a
bank fixed deposit, except for the higher negotiating factor and higher liquidity.
• Introduced by the Reserve Bank of India (RBI) in 1989, CDs have become a popular
investment option for investors looking for short-term assets since they carry no risk
while offering interest rates greater than those offered by fixed deposits.
Treasury Bills
• These are issued by the Government of India when it requires funds to meet its short-
term requirements. The treasury banknotes are issued at a discounted value and are
traded on primary and secondary markets.
• Since treasury bills are backed by the sovereign, the associated risk is negligible.
However, these securities do not generate any interest. The only profit is the difference
between the maturity value of the bill and its discounted purchase price.
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Commercial Papers
• This is an unsecured money market instrument issued by well-established
corporations as promissory notes. The maturity period of these instruments
is less than a year; hence, the interest rate is quite low if you compare it
with other debt securities.
• This money market instrument enables corporate borrowers to avail of
short-term borrowing by raising capital directly from the market.
Repurchase Agreements
Also known as buybacks, these are formal agreements between two parties
where the issuer offers a guarantee to repurchase the security in the future.
These transactions can only be made between two parties that are approved
by RBI, as repurchase agreements usually involve trading of government
securities. The date of purchase and interest rate is predetermined.
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Key Features of Money Market Instruments
Some of the features of money market instruments include:
• As they are low-risk instruments with short maturity periods, they are highly liquid.
• Money market instruments are usually issued by the government, banks and
corporations having high credit ratings; hence, they are considered to be quite
secure.
• Money market instruments are issued at a discount on their face value. This
makes them a lucrative option for investors with a low-risk appetite.
• The RBI regulates the money market. Hence, it contributes to the liquidity and
security of the financial markets.
• Money market instruments are a major source of funding for the government. As
a result, it provides an opportunity for banks/retail investors to deposit their
excess funds.
• For borrowers, money market instruments are convenient financing options that
allow them to meet their immediate cash flow needs.
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Conclusion
For economic development, a country needs capital and
investments and with the help of the financial market, funds flow
from surplus units to units facing a shortage. In this way, it helps
in the capital formation and effective allocation of funds in the
economy.
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References/Videos/E-Learning Sources
E Learning:
1. Money market instruments
[Link]
Reference Books:
• Mishkin, F. S., & Eakins, S. G. (2021). Financial markets and institutions (9th ed.). Pearson.
• Fabozzi, F. J., Modigliani, F., & Jones, F. J. (2013). Foundations of financial markets and
institutions (4th ed.). Pearson.
• Bhole, L. M., & Mahakud, J. (2011). Financial institutions and markets: Structure, growth and
innovations (5th ed.). Tata McGraw-Hill Education.
• Rose, P. S., & Hudgins, S. C. (2012). Financial institutions (10th ed.). McGraw-Hill.
• Pathak, B. V. (2014). The Indian financial system: Markets, institutions and services (4th ed.).
Pearson Education India.
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THANK YOU
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