Consider the following financial instruments:

Solution

• Financial markets are generally of two types. The short term financial market is known as the money market, while the long-term financial market is known as the capital market. • Money Market is a segment of the financial market in which financial instruments with high liquidity and very short maturities (less than one year) are traded. Money market instruments are basically debt instruments. These markets are less risky. Following are some of the instruments of the money market: • Cash Management Bills: In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. • Collateralized Borrowing and Lending Obligation: It is an RBI-approved Money Market instrument that represents an obligation between a borrower and a lender. The instrument works like a bond where the lender buys the CBLO and a borrower sells the money market instrument with interest. CBLO was conceived and developed by Clearing Corporation of India Ltd.(CCIL). • Certificate of Deposit (CD): Introduced in 1989, the CD was used by banks and issued to the depositors for a specified period ranging less than one year—they are negotiable and tradable in the money market. Since 1993 the RBI allowed the financial institutions to operate in it— IFCI, IDBI, IRBI (IIBI since 1997) and the Exim Bank—they can issue CDs for the maturity periods above one year and upto three years. • Commercial Paper (CP): It was introduced in 1990. It is used by the corporate houses in India (which should be a listed company with a working capital of not less than Rs. 5 crore). The CP issuing companies need to obtain a specified credit rating from an agency approved by the RBI (such as CRISIL, ICRA, etc).