Medicaps Institute Of Technology & Management

Presentation Topic Instruments of money market.

Submitted to

Submitted by Manali kala Nikita patodi Neha jhanjhari Suyog dekhne Vishal chawla

Meaning of money market & its instruments

Money market is a market where short term funds or loans or financial assets are borrowed and lent .it is a place where lending and borrowing is done through instruments having an original maturity of up to one year. Large no. of instruments that are trade in money market are issued by gov.of India, state gov. & other statutory bodies.

Types of money market instruments

Treasury bills. Certificates of deposits. Commercial papers. Gilt edged securities. Repo and reverse repo transaction.

Meaning of treasury bills

Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India . Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity.

Features of t-bills
These are highly liquid and safe investment giving attractive yield. Maturity 91 days ,182 days, & 364 days. T-bill can be purchased by any one including individuals except state govt. T-bills are issued in the form of promissory note in physical form or dematerialized form. The Reserve Bank of India conducts auctions usually every issue T-bills on Wednesday. Payments for the T-bills purchased are made on the following Friday

T- bills
T-bills are issued at a discount to face value and are redeemable at par on maturity. T-bills are available for a minimum amount of rs.25000 and in multiples of it. The RBI issues a quarterly calendar of t-bill auctions. It also announces the exact dates of auction. The Reserve Bank of India announces the issue details of T-bills through a press release every week.

Advantages Highly liquid. Transparency. Simplified settlement. They are exempted from state and local taxes.

Disadvantages The down side to t-bill is that low return on investment.

Meaning of certificate of deposit

Certificate of Deposit (CD) is a negotiable money market instrument and issued in only dematerialized form . Banks can issue CDs for maturities from 7 days to one a year whereas eligible FIs can issue for maturities 1 year to 3 years. it is Introduced in 1989.

Features of CDs
Person can buy a CDs by depositing the minimum requisite amount. Higher deposited amount gives higher interest amount. It is a written certificate where the applicable interest rate ,term of deposit and date of maturity are stated. They are negotiable and transferable instruments. Issued limit, minimum 1 lack ,beyond in multiple of Rs.1 lack.

at the time of maturity, buyer are entitled to receive the principle amount and the interest earned.

Prons & cons of CDs

prons Its an effective and safe tool of investment ,and it has simplest form of interest calculation.

Cons
If the investor wants a longer maturity and higher rate of interest then this instrument can not used.

Meaning of commercial paper

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. It was introduce in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

Features of commercial paper

Its a short term money market instrument. It is issued at a discount to face value basis but it can also be issued in interest bearing form. It is directly issued by a company to investors or through banks/merchant bankers. The issuer promise to pay the buyer some fixed amount on some future period but pledges no assets. The liquidity and established earning power of buyer ,guarantee that promise.

Commercial paper
A corporate would be eligible to issue CP who s tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore. All eligible participants shall obtain the credit rating for issuance of Commercial Paper from either the Credit Rating Information Services of India Ltd. (CRISIL) or by any other institution ,permitted by RBI. CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue.

Commercial paper
CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by single investor should not be less than Rs.5 lakh (face value).

Advantages of commercial paper

Simple and easy. Flexibility. Diversity. High return. Securitization of loans Etc.

Gilt edged securities

Gilts are bonds issued by certain national government. it also call Govt.securities. The Government securities comprise dated securities issued by the Government of India and state governments as also, Reserve Bank of India manages and services these securities through its public debt offices located in various places as an agent of the Governments. its a totally secured financial instrument ensuring safety of both capital and income.

Features of G-securities
Central govt.securities are the safest amongst all security, they may be dated security or t-bills. State govt.in India also issue their securities. It is also held by RBI for purchase and sale. It is completely safe as regards payment of interest and repayment of principal. It bear lower rate of interest than any other securities. Interest on g-securities is payable half-yearly.

G-securities
It is exempted from income tax and wealth tax. The g-secu. Market is an over the counter market and each sale and purchase has to be negotiated separately. Government paper with tenor beyond one year is known as dated security. At present, there are Central Government dated securities with a tenor up to 30 years in the market. Subscriptions can be for a minimum amount of Rs.10,000 and in multiples of Rs.10,000.

G-securities
Apart from purchasing government securities in the primary issuance, i.e. through auctions/sales, all types of government paper can also be purchased from the secondary market. Participants in govt.securities are banking sector ,individuals, insurance companies ,central and state govt. trust, local authorities etc. Clearing corporation of India Ltd. Worked as a clearing & settlement in g- secs.

Types of g-securities or bonds

Zero coupon bonds. Floating rate bonds. Tap stock. Partly paid stock. Capital indexed bonds. Strips, etc.

Repo and reverse repo transactions

are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price.

Repurchase Agreements: Repurchase transactions

Repo & reverse repo transactions

agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction.

Similarly, the buyer purchases the securities with an

Example of repo & reverse repo transaction

I am the RBI manager. when I give you security (paper) & take money from you &promise you that I will buy the same paper back from you after few months this is repo. When I buy the security from you and give you money &you promise me that you will buy back that paper from me after few months this is reverse repo.

Players in repo /reverse repo rate

They can lend but can not borrow they can lend and borrow

Financial institutions like RBI. icici etc. Scheduled banks . Companies listed in Indian stock market.

RBI & repo

At present RBI carries out overnight (one day)repo auction at a fixed rate. This means RBI is ready to sell securities at fixed rate. Fixed rate that means rates of security could be changed on demand and supply basis. Changes in the fixed repo rate are usually made in the annual monetary and credit policy or in the mid term review of the monetary and credit policy.

RBI and reverse repo

RBI conducts fixed rate auctions of reverse repo at a rate higher than the repo rate. The reserve repo rate is linked to the repo rate in the sense that it is set at specific percentage point above the repo rate.

Conclusion
Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, knowledge about its instruments are necessary by which individual Can able to make more money and enjoy its benefits.

Thank You

19/01/2012

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