Question

Which among the following is/are an instrument of money market?

i. Commercial Paper

ii. Preference Share

iii. Certificate of Deposit

iv. Treasury Bill

• A. ii, iii, iv
• B. i, ii, iii
• C. i, iii, iv
• D. i, ii, iv

Answer 1

Answer:

C. i, iii, iv

Overview of Money Market Instruments

The money market is a segment of the financial market where short-term debt instruments with maturities of one year or less are traded. These instruments are characterized by high liquidity, low risk, and are primarily used by governments, banks, and corporations to manage short-term liquidity needs.

Key Money Market Instruments

• Treasury Bills (T-Bills): These are short-term debt obligations issued by the Government of India to meet temporary funding requirements. They are considered one of the safest investments as they are backed by the sovereign. They are issued at a discount to their face value and do not carry coupon payments.
• Commercial Paper (CP): An unsecured, short-term promissory note issued by highly-rated corporates and financial institutions to raise funds for working capital. The maturity period typically ranges from 7 days to one year.
• Certificate of Deposit (CD): A negotiable money market instrument issued by banks and financial institutions in dematerialized form against funds deposited for a specified period. These function similarly to a 'tradable fixed deposit'.

Why Preference Shares are Excluded

• Capital Market Instrument: Preference shares are categorized as capital market instruments, not money market instruments.
• Hybrid Nature: While they possess some features of debt (fixed dividend), they represent a form of ownership (equity) in a company.
• Long-term Horizon: Unlike money market instruments which have a maturity of up to one year, shares generally do not have a short-term maturity in the same sense, and their trading is associated with the capital market where long-term funds are raised.