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Investments & Portfolio Management HW#1 Senthil N. Velu #1403024

Money Market Instruments

Treasury BillsTreasury Bills (T-Bills) are short term debt securities issued by the Government. T-bills are issued in lengths of 91 days, 182 days and 364 days. They are borrowing instruments of the Government which enable investors to park their short term funds while reducing their market risk. T-bills are purchased for a price less than their face value and when they mature the government pays the holder the full face value. The effective interest is the difference between the purchase price and what you get on maturity. Individuals, Trusts, Firms, Institutions and banks can purchase T-Bills. They are issued by the government and have zero risk assigned to them. T-bills have high liquidity and it has an active secondary market. In India T-Bills are issued only by the central government. Interest rates are determined by the market forces. T-bills are available for a minimum amount of Rs. 25,000/- and in multiples of Rs. 25,000/-.

Certificate of Deposit *CDA CD is a time deposit with a bank. It is a money market instrument, equivalent to a promissory note. CD’s offer a slightly higher yield that T-Bills because of the higher default risk for a bank. CD’s bear a specific maturity date and a specified interest rate.The amount of interest we can earn on a CD depends on factors such as the current interest rate environment, amount of invested capital, the length of time and the choice of bank.

Commercial PaperCommercial papers are an unsecured, short term loan issued by a corporation, typically for financing accounts receivables and inventories. It is issued at a discount with maturities no longer than 9 months. Only companies with a high credit rating and credit worthiness issue commercial papers. In India, to be eligible to issue commercial papers, the corporation need to have a net worth of at least Rs. 4 Crore. Individuals, banking companies, FIIs, corporate bodies and unincorporated bodies can invest in commercial papers. They are issued at a discount to face value as determined by the issuer. The different between issue price and face value is the return.

Banker’s AcceptanceThe Banker’s acceptance is a short term credit investment created by a non-financial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market. BA’s can be sold off in the secondary markets.

EurodollarsEuro dollars are US dollar denominated deposits at banks outside of US. Euro dollars have a higher yield when compared to CDs because they have less liquidity. This market requires high investments hence used by large institutions. However individuals do invest in this market through money market funds.


Repos & Reverse RepoThe repurchase rate is the rate at which RBI lends to banks for short periods. Repo is used to inject liquidity in the system. If the RBI wants to increase liquidity in the market by making it easier / cheaper for banks to borrow money, it reduces repo rate and vice versa. The reverse repo rate: Banks park their excess funds with the RBI in return for an earned interest component. The RBI sells government bonds and securities to banks with the commitment to buy them back. The RRR is the rate at which the RBI borrow funds from other banks. The RBI can reduce the liquidity in the banking system by increasing the rate at which it borrows.

Broker Call RateThe broker call rate is the interest rate relative to which margin loans are quoted. Individuals may take margin loans from brokers, who invariably borrow money from a bank. The interest rate charged by banks on loans to brokers is called broker call rate. The rate paid is based on benchmarks such as LIBOR.

LIBORLibor is the benchmark rate that the world banks charge each other for short terms loans. The interbank lending rates are fixed on a daily basis from an average of the world’s credit worthy banks. In the recent past investigations revealed widespread manipulation of the interest rates by traders and brokers which has tarnished the image of LIBOR.

GNMAThe government national mortgage association (GNMA). GNMA guarantees the payment of principal and interest on residential mortgage backed securities (MBS) to investors worldwide.The pool of mortgage loans are used as collateral for the issuance of securities. It serves as a guarantor for the repayment of principal and interest from approved issuers.

FNMAFederal National Mortgage association – Fannie Mae is a publicly traded company founded to increase the flow of mortgage money. They purchase and guarantee mortgages to form MBS. In India, the National Housing Bank (NHB) played a key role in starting MBS and the development of a secondary mortgage market. Their current MBS portfolio is in the range of Rs. 664 crore.

FHLBFederal Home loan banking system. The banking system was set up to increase the amount of loanable funds available for affordable housing and development projects.


FCSThe farm credit is a network of cooperative banks that provide credit to farmers and agriculture related businesses. The loan provided by FCS can be used to cover all the value chain activities involved in the farming industry. In India the government has set agriculture credit targets at Rs. 8.5 Lakh crore.

SARFAESI ActThe securitization and reconstruction of financial assets and enforcement of security act, 2002, enables banks and financial institutions to recover their loan dues from delinquent borrowers. It allows the banks to issue notices, recall entire loans and auction pledged assets. The SARFEASI act has gone a long way in aiding the banking and debt trading institutes in India to recover underperforming assets.

Reference: Investopedia, wikiinvest, finweb, fidelity

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