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Financial Market — Business Studies STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceBusiness StudiesFinancial Market6 Marks
Question
Explain the various money market instruments.
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Answer

Following is the brief description of money market instruments:
  1. Treasury Bill: Treasury Bill means that short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short-term financial needs. Usually their maturity period is 14 days, 91 days, 182 days and 364 days. Treasury bills are of highly liquid nature because the RBI is ever-ready to buy them on discount. They are issued at less than the face value while the payment is made at the face value.
  2. Commercial Paper (CP): Commercial Papers are those unsecured Promissory Notes which are issued by well-reputed companies. The minimum face value of a commercial paper is five lakh rupees. It is used to meet the demand of a shortterm seasonal need and the requirement of working capital. They are issued for a period of 15 days to 12 months.
  3. Call Money or Call Loans: Call loan means that loan document for which the payment can be made at a short notice either by the borrower or the lender. Under this, the maturity period of the loan is between 1 and 15 days. The lowest amount of this instrument is rupees 10 crore. They are generally used by the banks for the following reasons:
  • To control the Statutory Liquidity Ratio (SLR).
  • To invest cash, more than what is needed, for short term.
  1. Certificate of Deposit (CD): Certificate of deposit is a negotiable instrument which can be transferred after a certain period by an endorsement. It is issued by the Scheduled Commercial Banks and the Indian Financial Institutions like IDBI, IFCI, ICICI, SIDBI and EXIM Bank. They are issued for a period ranging between 91 days and one year. They are issued on discount. An investor can transfer the certificates of deposits after a lapse of 45 days by an endorsement to any person.
  2. Commercial Bill: It is a negotiable instrument which can be easily transferred. It is used to finance the credit sales. The seller (drawer) draws the bill and the buyer (drawee) accepts it. The buyer honours the bill on the due date. If the seller needs money before the due date, he can get the bill discounted from the bank. It is a short-term instrument, generally, issued for a period of 90 days.

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