CHAPTER

15.

Money Market

(A) Money Market and Money Market instruments Money Market is the center for dealings mainly of short term character , in money assets, meeting the requirements of borrowers and lenders .By convention the term “Money Market” refers to the market for short term requirement and deployment of funds. Money market instruments are those instruments ,which have maturity period of less than one year . They can be quickly converted in to money with minimum transaction cost .The most active year .they can be quickly converted into money with minimum transaction cost .The most active part of the money market is the market for over night call and term money between banks and institutions and repo transactions. Call money /Repo are very short term Money Market products . (B) Feature of Money Market (1) It is collection of market for following instruments –Call money ,notice money repos, term money .treasury bills ,commercial bills, certificate of deposits, commercial papers inter-bank participation ,certificates ,inter-corporate deposits, swaps etc. (2) The sub market have close inter-relationship & free movement of funds from one sub market to another. (3) A network to large number of participants exists which will add greater depth to the market. (4) Activities in the market tend to concentrate in some centre ,which serves a region or an area. The width of such area may vary depending upon the size and needs of the market itself. (5) The relationship that characterizes a money market is impersonal in character so that competition is relatively. (6) Price differentials for assets of similar type will tend to be eliminated by the interplay of demand and supply. (7) A certain degree of flexibility in the regulatory framework exists and there are constant endeavors for introducing a new instruments /innovative dealing techniques. (8) It is wholesale market & the volume of funds or financial assets traded are very large i.e. 1 crore rupees. (C) Call Money Call /Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and up to 14 days ,it is called ‘Notice money ‘ Otherwise the amount known is Call money .Intervening holidays and /or Sunday are excluded for the purpose .No collateral security is required to cover these transactions Reserve Bank of India has now farmed Call Money market as exclusive market for Banks/& PD/s . (D) Treasury Bills (T-Bills) Treasury bills are actually a class of Central Government Securities. Treasury bills commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. The T-Bills .All these are issued at a discount to-face value .T-Bills are issued through Auction .Auction is a process of bids with an objective of arriving at the market price. It is basically a price discovery mechanism .There are several variants of auction. Auction can be price based or yield based .In securities market we comes across bellow mentioned auction methods.

Money Market

*JAI MATA DI*

H. L. GUPTA

French auction: After receiving bids at various levels of yield expectations, a particular yield level is decided as the coupon rate . Auction participants who bid at yield levels lower than the yield determined as cut-off get full allotment at a premium. The premium amount is equivalent to price equated differential to the bid yield and the cut-off yield .Applications of bidders who bid at levels higher than the cut-off levels are out right rejected .This is primarily a yield based auction. Dutch auction : This is identical to the French to the French auction system as defined above. The only difference being that the concept of premium does not exist. The means that all successful bidders get a cut-off price of Rs. 100.00 and do to pay any premium irrespective of the yield level bid for. Calculation of Yield a T Bill Remember T Bills are issued at discount .The discount to the face value is the interest earned on investment. (F  P) 365 Y  100 P M Where Y is the yield ,F is the face value of T-Bill , P is the issue price (applicable when Directly issued during auction /purchase price (applicable when purchased in the secondary market ). M is Maturity period . T Bills are used to manage liquidity ,safe return for SLR and for heading and monetary management . (E) Certificates of Deposit (CDS) Certificates of Deposit (CDS) – introduced since June 1989 –are negotiable term deposit certificates issued by a commercial banks/Financial Institution at discount to face value at market rates with maturity ranging from 15 days to one year . Being securities in the form of promissory notes transfer of title is easy , by endorsement and delivery .Further governed by the Negotiable instruments Act .As these certificates are the liabilities of commercial banks /financial institutions, they make sound investments. CDs are issued by Banks, when the deposit growth is sluggish and credit demand is high and a tightening trend in call rate is evident .CDs are generally considered high cost liabilities and banks have recourse to them only under tight liquidity conditions. Certificates of Deposit (CD) are also issued at discount and the discount amount is paid front end (i.e. at the time of issue ) .They yield to the investor (who buys CD) or cost to the borrower is given by r n  1  D   Y    M  1 100, where D  100  100 12  100  M   Y is the yield M- Maturity in months /days i.e. either 12/n months or 365 days D is the Discount paid front end , r is the rate of discounting , n no of months/days. CD’s issued by banks are negotiable ,require stamp duty ; generally for the period of less than 12 months are issued at discount ; has high face value .Time deposits accepted by the bank from ordinary investing public are not negotiable ;does not require stamp duty; may be any period are not issued at discount and does not have a high value. (F) Commercial Paper Commercial Paper (CP) is a Rupee Denominated Short Term; Unsecured Negotiable Usance Promissory Note issued by Indian Public sector Companies. The maturity varies between 15 days and one year with the 91 days variety being the most commonly issued one .CP is issued at a discount to the face value .Unlike CD the issuer can buy commonly issued on CP. CP is in the form of physical security transferable by Endorsement and Delivery or in a dematerialized from approved and registered by SEBI .Eligible investors in CP are Individuals , Corporate , Unincorporated Bodies ,Insurance Companies and Banks .CP should be rated and it attracts stamp duty. The purpose of introduction of CP was to release the pressure on bank funds for small and medium sized borrowers and at the same time allowing highly rated companies to borrow directly fro the market. [15.2]

PH: 9312606737

Money Market

*JAI MATA DI*

H. L. GUPTA

As in the case of CDs, the secondary market in CP has not developed to a large extent Effective Yield of commercial paper is given by: (F  P) 365 Y  100 P M Please note that F-P denotes discount . As far as CP is concerned , the yield to an investor and the cost to the company are not the same . A company incurs additional costs apart from interest payable to investor .They include rating charges , Issuing and paying Agent (IPA) charges and stamp duty .Thus these three charges add to the cost of the issuer. (G) Derivate Usance Promissory Notes (DUPN) It is an innovative instrument issued by the RBI to eliminate movement of papers and facilitating easy rediscounting .Once the clients discounted the genuine commercial bills with the banks, banks in turn were re-discounting the bills with RBI and the process involved tremendous paper work and was not a simplified one. RBI introduced this instrument that facilitated the banks to issue these instruments against the discounted bills. The eligibility criteria prescribed by the Reserve Bank of India for rediscounting commercial bills inter alia are that the bill should arise out of genuine commercial transaction evidencing sale of goods and the maturity date of the bill should not be more than 90 days from the date of rediscounting .Government has exempted stamp duty on DUPN to simplify and steam –line the instrument and to make in an active instrument in the secondary market .The minimum rediscounting period is 15 days. DUPN being a negotiable instrument issued by a bank , is a good security for investment .It is transferable by endorsement and delivery and hence is liquid Thanks to the existence of a secondary market the rediscounting institution can further discount the bills anytime it wishes prior to the date of maturity .In the bill rediscounting market , it is possible to acquire bills having balance maturity period of different days up to 90 days (H) Repos and Reserve Repos Ready and forward or Repos or Buyback deal is a transaction in which two parties agree to sell and repurchase the same security .Under such an arrangement , the seller sells specified securities with an agreement to repurchase the same at a maturity decided future date and a price Similarly, the buyer purchases the securities with an agreement to result the same to the seller on an agreed date in future at a prefixed price. RBI has prescribed that following factors have to be considered while perfuming repo First Leg : RBI Received Funds and sells Securities REVERSE REPO

SBI Lending Funds

From RBI

[15.3]

PH: 9312606737

Money Market

*JAI MATA DI*

H. L. GUPTA

1. 2.

Q. 1.

Q. 2.

Q. 3. Q. 4.

Q. 5.

Q. 6.

Q. 7.

Purchase and sale price should be in alignment with the ongoing market rates. No sale of securities should be effected unless the securities are actually held by the seller in his own investment portfolio. 3. Immediately on sale, the corresponding amount should be reduced from the investment account of seller. 4. The securities under repo should be market on the Balance Sheet date . The relaxation over the years made by RBI with regard to repo transactions are : 1. In addition to Treasury Bills , Central and State Government Securities are eligible for repo. 2. Besides banks ,PDs are allowed to undertake both repo reverse repo transaction. 3. RBI has further widened the scope of participation in the repo market to all the entities having SGL and current with RBI, Mumbai. 4. In the terms of instruments ,repos have also been permitted in PSU bonds and private corporate debt securities provided they are held in dematerialized from a depository and the transaction are dine in a recognized stock exchange. (CA Final May 1998) X . Ltd. issued commercial paper as per following detail : Date of issue = 17th January 1998 Date of maturity = 17th April 1998 No of Days = 90 Interest rate = 11.25% p.a. What was the net amount received by the company on issue of commercial paper ? (CA Final Nov 1998) P .Co has a make payment of Rs. 2 million (Rs. 20 lakhs ) on 16th April 1998 .It has surplus money today i.e. 15th January 1998 and the company has decided to invest in certificate of deposit (CD’s ) of a leading nationalized bank at 8.00 % p.a. .What money is required to invested now ? Take year as 365 days. (CA Final May 2005) RBI sold a 91 day T-bill of face value of Rs. 100 at a yield of 6%. what was the issue price ? (CA Final May 2006) From the following particulars, calculate the effective interest p.a. as well as the total cost of funds to ABC Ltd. which the planning a CP use: Issue price of CP = Rs.97,350 Face value = Rs.1,00,000 Maturity Paid = 3 months Issue Expenses Brokerage = 0.125% for 3 months Rating Charges = 0.5% p.a. Stamp duty = 0.125% for 3 months SBI placed Rs. 52 Crores in overnight call with foreign bank for a day in overnight call .The call rate ruled at 5.65% p.a. what is the amount it would receive from the bank the next day? If 182 day T-Bill are issued at a discounted price of Rs.96.52 .then the yield is (a) 6.98 (b) 7.13% (c ) 7.23 % (d) 7.58% (e) 8.05% If 364 –day T-bills of face value Rs. 100 are issued at a yield of 11.50% , then the issue price is (a) Rs. 88.50 (b) Rs. 89.69 (c) Rs. 89.71 (d) Rs. 89.78 (e) Rs. 89.88

[15.4]

PH: 9312606737

Money Market

*JAI MATA DI*

H. L. GUPTA

If the face value of a 364-day T-Bill is Rs. 100 and if the purchase price is Rs. 91.35 for a treasury bill, what is the yield on such a bill? Q. 9. The RBI offers 91 days T-Bill to arise Rs. 15,000 Crores .The following bids have been received Bidder Bid rate Amount (Rs. Crores ) A 98.75 18,000 B 98.63 7,000 C 98.62 10,000 (a) What is the yield for each of the price at which the bid has been made ? (b) What are the wining bidders if it was a yield based auction and has much of the security will be allotted to each wining bidder? Q.10. ABC Inc. is able to sell out Rs. 1 Crore commercial paper every 4 months at a rate of 12.5%. The company has a tax rate 30% .The cost of placement is Rs. 5,000 per issue . The dealer requires bank to maintain lines of credit Rs. 30,000 in bank balance What do the fund from commercial paper cost of ABC INC after taxes? Q.11. A company is planning a CP use of Rs. 25 lakh .Give the following details .You are required to calculate the issue price of commercial paper. Face value = Rs. 25 lakhs Maturity period = 3 months Effective interest p.a. = 10.5% Q. 8.

[15.5]

PH: 9312606737