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| Money Market |
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A lot of big houses enter the money markets and park their funds
there when they do not find much use of their funds.
Money market securities are normally issued by financial
institutions, government and large corporate. These are highly
liquid and safe. As they are safe, normally returns on these
instruments are low compared to other securities. Normally it is
the dealers and brokers who operate in money market on their own.
In a stock transaction it is the broker acting on client
behalf and the broker earns commission which he charges from the
client but in case of money markets, it is the dealer who trades
on his own. The volume of transaction in case of money markets is
huge. The money market mutual funds also operate in money markets
and the individual investor can participate in money market
indirectly through these mutual funds.
Whenever the stock markets fall, the investors start looking at
money markets as an alternative form of investment.
The most common form of money market instruments are :
Treasury Bills ( T-Bills)
Certificate of Deposit (CD)
Commercial Paper (CP)
Repos
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| Treasury Bills |
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When we talk of treasury bills , we normally
refer to short term securities that mature in less than a year
from their issue date. These bills are generally raised by
governments and that is the reason they are safest to invest for
short term. They are also exempt from taxes. They are also called
T-Bills. They are of 3 month, 6 month and 12 month maturities.
They are sold by government at a lower price then their face
value. The buyer gets the full price at the time of maturity. The
profit or return is the difference in the buying price which one
buys from the government and the maturity value which is the face
value. For example if the government issues a one year T-Bill at 96 and face value
is 100 units of that currency then in that case one gets a return
of 4 units in a year. (The difference between bonds is that in
case of a bond, one gets a fixed interest depending on the terms
of the bond)
T-Bills are issued through the bidding process as they are
auctioned by the government and you have to bid for them to get
them. The highest bidder gets them.
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Certificate
Deposit |
Certificates of Deposit are certificates issued
by Commercial banks who wish to raise money by offering a slightly higher rate
of interest than normal rates. These generally have a period validity of between
3 months to 5 years. One is normally not expected to withdraw in between the
validity of deposit
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Commercial
Paper |
The Commercial Papers are issued by generally good corporate having good track
record and good ratings. The big corporations issue these papers as they do not
wish to go to banks for their immediate short term financing. The accounts
receivable or inventories are backed for the commercial paper. These are issued
for a period varying from one month to a year. The interest rate depends on the
interest rate of banks as well as rating of the corporate issuing the paper.
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Repos |
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Repo is short word for repurchase agreement. It
is mainly used for overnight borrowing. It involves the sale
or purchase of securities with an undertaking to reverse the transaction at an
agreed date in the future and at an agreed price.
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