Question

Explain any two instruments used in money market.

Answer 1

1. Treasury Bills:

Treasury bills, also known as Zero Coupon Bonds are the instrument of short term borrowing with maturity period of less than one year.

This instrument is issued by Reserve Bank of India on behalf of the Central Government for fulfilling short term requirements of funds. They are issued at discount and are paid at par.

2. Commercial Paper:

Commercial Paper (CP) is a short term unsecured promissory note with maturity period of 15 days to one year. Since it is unsecured, it is issued by the large and creditworthy companies to meet their short term fund requirements.

Commercial Paper is issued at discount and redeemed at par. It is negotiable and transferable by endorsement. The funds raised through Commercial Paper can be used for fulfilling seasonal and working capital need. For example, for meeting the floatation cost at the time of issue of shares and debentures i.e. Bridge Financing.