Q.Explain any four instruments of the money market.

Each money-market instrument exists to serve a specific, narrow borrowing need — an interbank cash gap, a government shortfall, a company's working capital, or a genuine credit sale — and recognising which instrument fits which need is the point of this question.

Each differs mainly in WHO issues it and WHAT need it meets, not merely in name.

Four (of the five) principal money-market instruments are as follows.

Call Money is money borrowed or lent for a very short period, typically overnight, sometimes up to fourteen days (notice money), mainly between banks, to meet their day-to-day statutory reserve and liquidity requirements. The rate charged is the call rate, highly sensitive to daily liquidity conditions in the banking system.

Treasury Bills (T-Bills) are short-term government securities issued by the RBI on behalf of the Government of India, at a discount to face value, repaid at face value on maturity with no separate interest paid. They are issued with maturities of 91, 182, and 364 days, and, carrying a sovereign guarantee, are regarded as virtually risk-free.

Commercial Paper (CP) is an unsecured, short-term promissory note issued at a discount by large, creditworthy companies to raise working-capital funds directly from the market rather than through a bank loan. Being unsecured, it is available only to issuers with a good credit rating, with maturities from 7 days to 1 year.

Certificate of Deposit (CD) is a negotiable, unsecured money-market instrument issued by banks and certain financial institutions against funds deposited for a fixed period, issued in dematerialised form and transferable to another investor before maturity — unlike an ordinary fixed deposit. Maturities range from 7 days to 1 year for banks, up to 3 years for financial institutions.

A fifth instrument, Commercial Bills, arises from a genuine credit sale of goods: the seller draws a bill on the buyer, who accepts it, and if the seller needs funds before the due date, the accepted bill can be discounted with a bank for immediate cash.

Students often describe a Certificate of Deposit as identical to an ordinary bank fixed deposit, missing its two defining features — it is negotiable/transferable before maturity, and issued in dematerialised form. Confusing Commercial Paper (issued by companies) with Commercial Bills (arising from a specific credit sale) is another frequent mix-up, since both contain the word 'commercial'.