Q.Explain the various Money Market instruments.

The money market trades in short-term instruments maturing within a year that are close substitutes for money.

The main instruments are the treasury bill, commercial paper, call money, the certificate of deposit and the commercial bill — each explained in the full answer below.

The money market deals in short-term instruments that are close substitutes for money. The main instruments are:

1. Treasury Bill. An instrument of short-term borrowing by the Government of India, maturing in less than a year (also called a Zero Coupon Bond). It is issued by the RBI, is highly liquid, and is issued at a discount and repaid at par; the difference is the interest.
2. Commercial Paper. A short-term, unsecured, negotiable promissory note (maturity 15 days to one year) issued by large, creditworthy companies to raise funds at below market rates. It is sold at a discount and used for seasonal and working-capital needs, including bridge financing.
3. Call Money. Very short-term finance (one to fifteen days) repayable on demand, used for inter-bank transactions to help banks meet the cash reserve ratio. The rate paid is the highly volatile call rate.
4. Certificate of Deposit. An unsecured, negotiable, short-term instrument in bearer form issued by commercial banks and development financial institutions during periods of tight liquidity, to mobilise large sums for short periods.
5. Commercial Bill. A bill of exchange used to finance the credit sales and working-capital needs of firms. Drawn by the seller and accepted by the buyer, it becomes a trade bill; when accepted by a bank it becomes a commercial bill and can be discounted for early funds.