Corporate Finance II

Investment of Surplus Cash

Submitted to: Submitted by:

Dr. Tarun Soni Siddharth Upadhyay
Roll no – 123/2019
 TABLE OF CONTENT

PAGE No.
Sr. PARTICULAR
No.
1. Treasury Bills
2. Commercial Papers
3. Certificate of Deposits
4. Bank Deposits
5. Inter-Corporate Deposits
6. Money Market Instruments
1) Treasury Bills –

These are short term money market instruments of the Government of India;
treasury bills are zero coupon instruments which are issued at discount and
redeemed at par. In India treasury bills are issued by RBI on behalf of the
government. Difference between the face value and issued price is the return to
the investors.
Types of Treasury bills –
Treasury Bills were first issued in India in 1917. At present, the active T-Bills
are 91-days T-Bills, 182-day T-Bills and 364-days T-Bills. The 91-day T-Bills
are issued on weekly auction basis while 182-day T-Bill auction is held on
Wednesday preceding Non-reporting Friday and 364-day T-Bill auction on
Wednesday preceding the Reporting Friday. In 1997, the Government had also
introduced the 14-day intermediate treasury bills. Auctions of T-Bills are
conducted by RBI.
Who can purchase T-Bills?

Individuals, Firms, Trusts, Institutions and banks can purchase T-Bills. The
commercial and cooperative banks use T-Bills for fulfilling their SLR
requirements.

How to Buy a Treasury Bill?

One can purchase treasury bills at a bank, through a dealer or broker, or online
from a website like TreasuryDirect. The bills are issued through an auction
bidding process, which occurs weekly. Treasury bills are now issued only in
electronic form, though they used to be paper bills.

2) Commercial Papers –

Commercial paper is an unsecured, short-term debt instrument issued by a

corporation, typically for the financing of accounts payable and inventories and
meeting short-term liabilities. Maturities on commercial paper rarely range
longer than 270 days. Commercial paper is usually issued at a discount from
face value and reflects prevailing market interest rates.

Can I buy commercial paper?

Commercial paper is usually traded among large institutions, but individual
investors can participate in two ways:
1.Individuals can buy commercial paper from a broker. However, since
commercial paper is typically traded in increments of $100,000 or more, it takes
a substantial investment.
2.Retail investors can put money in funds or money market accounts that invest
in commercial paper. This allows you to get into the market with a smaller
investment, though management fees and active investment costs are likely to
dilute the yield.

3) Certificates of Deposits –
A certificate of deposit (CD) is a product offered by banks and credit unions
that offers an interest rate premium in exchange for the customer agreeing to
leave a lump-sum deposit untouched for a predetermined period of time. Almost
all consumer financial institutions offer them, although it’s up to each bank
which CD terms it wants to offer, how much higher the rate will be compared to
the bank’s savings and money market products, and what penalties it applies for
early withdrawal.
Certificates of Deposit are issued at discount. The return on them is the difference
between the said issue price and their higher face value. They are issued only in
multiples of one lacs. They are easily transferable and highly liquid.

Minimum Size of Issue and Denominations

Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that
could be accepted from a single subscriber should not be less than Rs.1 lakh,
and in multiples of Rs. 1 lakh thereafter.
Investors
CDs can be issued to individuals, corporations, companies (including banks and
PDs), trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also
subscribe to CDs, but only on non-repatriable basis, which should be clearly
stated on the Certificate. Such CDs cannot be endorsed to another NRI in the
secondary market.
Maturity
The maturity period of CDs issued by banks should not be less than 7 days and
not more than one year, from the date of issue.
The FIs can issue CDs for a period not less than 1 year and not exceeding 3
years from the date of issue.
Settlement
All OTC trades in CDs shall necessarily be cleared and settled under DVP I
mechanism through the authorised clearing houses {National Securities
Clearing Corporation Limited (NSCCL), Indian Clearing Corporation Limited
(ICCL) and MCX Stock Exchange Clearing Corporation Limited (CCL)} of the
stock exchanges.
4) Bank Deposits –
Bank deposits consist of money placed into banking institutions for
safekeeping. These deposits are made to deposit accounts such as savings
accounts, checking accounts and money market accounts. The account holder
has the right to withdraw deposited funds, as set forth in the terms and
conditions governing the account agreement.
Types of Deposits
On the basis of purpose they serve, bank deposit accounts may be classified as
follows:
• Savings Bank Account - A savings account is an interest-bearing deposit
account held at a bank or other financial institution. Though these accounts
typically pay a modest interest rate, their safety and reliability make them a
great option for parking cash you want available for short-term needs.
• Current Deposit Account - A checking account is a deposit account held at
a financial institution that allows withdrawals and deposits. Also called
demand accounts or transactional accounts, checking accounts are very liquid
and can be accessed using checks, automated teller machines, and
electronic debits, among other methods. A checking account differs from
other bank accounts in that it often allows for numerous withdrawals and
unlimited deposits.
• Fixed Deposit Account - A fixed deposit (FD) is a financial
instrument provided by banks or NBFCs which provides investors a higher
rate of interest than a regular savings account, until the given maturity date.
It may or may not require the creation of a separate account. For a fixed
deposit is that the money cannot be withdrawn from the FD as compared to
a recurring deposit or a demand deposit before maturity.
• Recurring Deposit Account - Recurring Deposits (RD) provides customers
with the flexibility to invest an amount of their choice each month and save
money with ease. Recurring deposit accounts are offered by most of the banks
and NBFCs in India with tenures ranging from 6 months to 10 years. The
interest rate usually ranges from 5.00% - 7.85%.

5) Inter-Corporate Deposit –
An Inter-Corporate Deposit (ICD) is an unsecured borrowing by corporates and
FIs from other corporate entities registered under the Companies Act 1956. The
corporate having surplus funds would lend to another corporate in need of funds.
This lending would be an uncollateralized basis and hence a higher rate of interest
is demanded by the lender. The short term credit rating of the borrowing
corprorate would determine the rate at which it would be able to borrow funds.
Further the credit spreads demanded even for the top rated corporates would be
higher than similar rated banks and the rates on ICDs would higher than those in
the Certificate of Deposit (CD) market. The tenor of ICD may range from 1 day
to 1 year, but the most common tenor of borrowing is for 90 days.

These are of 3 types -

3 months deposits – The annual rate of interest given for 3 months deposits is
12%
6 months Deposits – The annual rate of interest given for 6 months deposits is
15%
Call deposits – These can be called back any time with one day prior notice. The
interest rate on such types of deposits is generally around 10%.

6) Money Market Instruments –

The money market is one of the two main segments of the Financial Market. It
performs the same functions of mobilizing funds in the economy. However, the
one main factor of the money market is that it exclusively trades in financial
instruments and commodities that have a term of less than one year.

So the money market deals in low risk, generally unsecured, short-

term debt instruments. These instruments are a close substitute for cash since they
are extremely liquid, i.e. can be converted to cash on short notice. The maturity
period of such instruments ranges anywhere from one day to one year.

There is no physical market as such, the money market is intangible. Most

transactions happen online or via the telephone. The main aim is to provide short-
term finance at reasonable rates to the institutes in need. Let us take a look at some
of the main instruments of the money market.

Following are the money market instruments –

1.Treasury Bills
2.Commercial paper
3.Commercial Bill
4.Call Money
5.Certificate of Deposits