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Unit 12 - Financial Market 1, MONEY MARKET INSTRUMENTS, 1.COMMERCIAL BANKS…
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MONEY MARKET INSTRUMENTS
1.CALL/NOTICE MONEY
Call money is the most liquid money market and is the prime driver of daily interest rates in the market
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Call Money: Lend and borrowed by commercial banks on call, namely overnight or at short notice.
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3.COMMERCIAL PAPER
unsecured promissory note that a company issues to raise capital for a limited period time, usually 90 to 364 days
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Disadvantages
Can only be used by financially sound and highly rated companies. This strategy cannot be used by new or moderately rated businesses to raise funds.
Amount of funds generated depends on the excess liquidity available with fund sources at a given time.
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4.CERTIFICATE OF DEPOSITS (COD)
It is a negotiable term-deposit accepted by commercial banks from bulk depositors at market related rates.
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Issue to - Investors, Individuals, Business corporates, Trust, Funds and Associations.
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The difference between the issue price and the redemption price is the interest received on treasury bills.
T-91, T-182, T-364 are the most relevant bills issued. "T" represents treasure bill and the number represents the days of maturity.
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2.Ad-Hoc :Issued for state government, semi-governments and other government agencies to provide them temporary investing options. for their surplus.
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A Repo is a short-term loan where both parties agree to the sale and buy future repurchase of an asset within a specified contract period.
Used by: Hedge fund managers, Insurance companies, Money market mutual funds
sold usually on an overnight basis, and buys them back the following day at a slightly higher price.
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Discount Market
Discount Market:It is the section of financial market which deals in discounted bills of exchange.
Banks purchase the bills or invoices from the sellers at a discounted rate and, in turn, give them the amount after discount.The amount so discounted is the commission and a source of revenue for the bank.
Here sellers get their money instantly and can provide their customers a considerable amount of credit period.
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INSURANCE COMPANIES
In 1991, the Indian economic reforms opened the insurance sector to the private sector because the percentage of the insurance sector to Indian GDP was very low
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Government nationalised life insurance under Life Insurance corporation in 1956 and Non-life insurance under General Insurance corporation in 1972
Foreign players we formed joined ventures: AIG, New york life, Allianz, Standard Life, Prudential.
Some companies in India:
LIC, ICICI prudential Life insurance, Birla sun life insurance, Tata AIG
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Financial Market
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Money Market
(Max term - 1 year/364 days)
money market can be defined as a market
for short-term money and financial assets near substitutes for money
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Money Supply
High-Powered Money
This is the source of all other forms of money.
Also known as Base Money, Reserve Money, Central Bank Money
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Yield computation
The term "Yield" refers to the earning generated and realised on an investment over a particular period. Expressed as a percentage based on the invested amount, current market value or face value of
the security
Yield is an income-only return on investment calculated by taking dividends, coupons, or net income and dividing them by the value of the investment, expressed as an annual percentage.
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Most important objective of Central banks across the world is maintenance of Price Stability (Inflation control) and economic growth.
RBI is responsible for regulating the money market in India and injecting liquidity in the banking system.
They are of two types, Regular and Ad-Hoc
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financial guarantee :refers to a non-cancellable promise given by a third party to guarantee investors
that principal and interest payments will be made.