Money market instruments are short-term debt instruments that are highly liquid and have maturities of one year or less. They are used by governments, financial institutions, and corporations to manage short-term funding needs.
Key Characteristics:
- Short maturity (usually less than 12 months)
- Low risk
- High liquidity
- Generally issued at a discount and redeemed at face value
Common Money Market Instruments:
- Treasury Bills (T-Bills):
- Issued by the government to raise short-term funds.
- Sold at a discount and redeemed at face value.
- Commercial Paper (CP):
- Unsecured, short-term promissory note issued by large corporations.
- Used to finance short-term liabilities like inventory or payroll.
- Certificates of Deposit (CD):
- Issued by banks to raise fixed deposits for a specific period.
- Offers fixed interest and can be negotiable in secondary markets.
- Repurchase Agreements (Repo):
- Short-term borrowing for dealers in government securities.
- The seller agrees to buy back the securities at a future date and price.
- Banker’s Acceptance (BA):
- A time draft guaranteed by a bank, often used in international trade.
- Traded in secondary markets before maturity.
Capital Market Instruments:
Capital market instruments are used to raise long-term funds, typically with maturities of more than one year. They support long-term investment and capital formation.
Key Characteristics:
- Long-term investment horizon
- Higher risk and potentially higher returns
- Supports economic growth through capital formation
- Includes both equity and debt instruments
Common Capital Market Instruments:
- Equity Shares (Common Stock):
- Represent ownership in a company.
- Shareholders earn returns through dividends and capital gains.
- Preference Shares:
- Carry fixed dividends and have preference over equity shares in profit distribution and asset liquidation.
- Usually non-voting shares.
- Debentures and Bonds:
- Long-term debt instruments issued by companies or governments.
- Investors receive fixed interest payments and principal at maturity.
- Corporate Bonds:
- Issued by companies to raise capital for expansion and operations.
- Can be secured or unsecured.
- Government Securities (G-Secs):
- Long-term bonds issued by the government.
- Considered safe and used for infrastructure or developmental spending.
