Lecture

Money Markets
Financial Market: An Overview

What is a Financial Market?

▪ A financial market is a market for the creation A
financial market is a place where people can buy
and sell financial assets.

▪ Wherever there is a financial transaction, there

are financial markets.
Structure of Financial Market in India
The Indian Financial Market is divided into the following:

1. Money Market 3. Commodity market 5. Banking System 7. Insurance Market

4. Foreign
2. Capital Market 6. Pension Market
Exchange Market
Types of Financial Markets

Markets

Money
Markets Capital Markets

Primary Secondary

Debt Equity Debt Equity

Difference Money Market Capital Market

Financial institutions, banks, corporate

RBI, banks, financial institutions and entities, foreign investors and ordinary
Participants
finance companies. retail investors from members of the
public.

T-bills, trade bills reports, commercial Equity shares, debentures, bonds,

Instruments
paper and certificates of deposit. preference shares

Transactions entail huge sums of

money as the instruments are quite
Value of units of securities is generally
Investment Outlay expensive.
low (E.g. Rs 10, Rs 100, and so on)

Maximum tenure of one year, and may

Trading of medium and long term
even be issued for a single day.
Duration securities such as equity shares and
debentures.

Liquidity Higher Degree of Liquidity Relatively Lower Degree of Liquidity

Money Market

▪ Money markets are a place where people and

businesses can temporarily invest their extra
cash or borrow funds for short periods, typically
less than a year.

▪ In money markets, you can buy short-term

financial products like Treasury bills or
certificates of deposit. These are safe ways to
earn a bit of profit on your money.

▪ Money markets also allow businesses and banks

to borrow money quickly to meet their short-
term needs. They pay interest to the lenders.

▪ Money market investments are considered safe

because they usually involve lending to stable
governments or well-established institutions.
 Let’s Look at Different Money Market Instruments

All Financial Market Instruments are purchased and sold in Money or Capital
Markets
Treasury Bills

▪ Treasury Bills are short terms bonds with maturities of

less than one year. These are issued by the government
to meet the mismatch between receipt and expenditure
Why does the Government issue Treasury Bills

▪ A short term Treasury Bill helps the Government to raise funds to

meet its current obligations which is in excess of its annual
revenue generation

▪ Reserve bank of India also issues Treasury Bills in the Open

Market Operations strategy (OMO) to regulate inflation and
spending/borrowing habits of individuals

▪ At times when there is an Economic boom with high inflation, the

RBI will issue high value Treasury Bills to the Public which reduces
the money flow in the market and thereby curb inflation

▪ On the reverse side at times of economic depression, RBI will

reduce the inflow of Treasury Bills and also reduce the discounted
value of the T Bills thereby disincentivizing individuals to
channelize funds into this sector and thereby increasing cash
flows into stock market
Types of Treasury Bills

▪ 14 days Treasury Bill

▪ 91 days Treasury Bill
▪ 182 days Treasury Bill
▪ 364 days Treasury Bill
Features of Treasury Bill

Minimum Investment-
As per RBI regulations a
minimum of Rs 25000/-
is required and
subsequently in
multiples of 25000/-

RBI auctions such

securities every
Wednesday on major
They are zero coupon – stock exchanges.
they do not provide Individuals can buy
interest. Instead they them through their DP,
are issued at a Commercial Banks.
discounted price and on Many Mutual Funds also
maturity they get the include Treasury Bills in
entire face value their Debt portfolios
resulting in capital gain
Yield Rate of Treasury Bills… How to arrive at it

▪ Y= ( 100-P)/Px365/Dx100

▪ Where Y is return %

▪ P= Discounted price at which it is purchased

▪ D= Tenure of Bills
 Activity

Let us consider a question

RBI issues a 91 days Treasury Bill of a face

value of Rs 100 at a discounted price of 98
Rs, calculate the yield of T-bill
Try to solve another question:

“ Q: Suppose you could buy a 91-day T-bill at an asked price of $98 per
$100 face value and you could sell to the dealer at a bid price of
$97.95 per $100 face value. What are the quotation conventions on
this bill and how is the yield calculated? What is the best measure of
the yield on a T-bill?

”
Advantages & Disadvantages of Treasury Bills

They are risk free being issued by the Government of India

▪ Liquidity- They are only issued for 364 days. In case

anyone needs money before that, it is also traded in the
secondary market

However there are some shortcomings as well. Lower

returns compared to other forms of investment tools such
as stocks

▪ Taxation- They are subject to short term capital gains

and the earnings get added to the income of the
individuals to be taxed at the slab in which the investor
falls