Question

List TWO money market instruments and briefly explain these two instrument

Answer 1

Treasury Bills or T- Bills

They are zero-coupon bonds issued by the government with a maturity period of less than one year normally. The validity varies from weeks to 1 month, 3 month etc. As the T bills are of zero risk, the return also is observed to be lower. The risk is zero because the repayment is guaranteed. It is issued at a discount and redeemed at a value where the difference between these two is the interest earned.

Commercial Paper

​​​​​​​​​​​It is a money market instrument issued by large corporates having higher credit rating to meet their short term fund needs. The interest rate also is lower where it may increase with increase in term. The major characteristic is that it is not backed by collaterals.