1 . What are Money Market Instruments?
By convention the term Money Market refers to the marketplace for short-term condition and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products.
2 . Which are the instruments used in Money market?
The below mentioned instruments are normally termed as money market instruments :
- Certificate of Deposit (CD)
- Commercial Paper (C P)
- Call/ Notice/ Term Money
- Repurchase Agreements
- Banker’s Acceptance
- Treasury Bills (T - Bills)
- Inter Bank Participation Certificates
- Inter Bank term Money
- Bill Rediscounting
3 . What is Call Money Market?
The call money market is an essential part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as 'Call Money', and if it exceeds one day (but less than 15 days) it is referred to as 'Notice Money'. Term Money refers to Money lent for 15 days or more in the Interbank Market.
Banks borrow in this money market for the following purpose :
- To fill the gaps or temporary mismatches in funds
- To meet the CRR & SLR mandatory requirements as stipulated by the Reserve Bank of India
- To meet sudden demand for funds arising out of large outflows.
4 . Who are Primary Dealers?
Primary Dealers can be referred to as mercantile Bankers to Government of India, comprise the first tier of the government securities market. These were created during the year 1994-96 to strengthen the market infrastructure and put in place an improvised and an efficient secondary government securities market trading system and encourage retailing of Government Securities on large scale.
- The role of Primary Dealers is to;
- Commit participation as Principals in Government of India issues through bidding in Auctions
- Provide underwriting services
- Offer firm buy - sell / bid ask quotes for T-Bills & dated securities
- Development of Secondary Debt Market
5 . What are G-Secs?
G-Secs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program accepted by the parliament in the ‘union budget’. G- Secs are normally issued in dematerialized form (SGL) and are also issued in the physical form (in the form of Stock Certificate) and are transferable. When issued in the physical form they are issued in the multiples of Rs. 10,000/-. Normally the dated Government Securities, have a period of 1 year to 20 years. These are sovereign instruments bearing a fixed interest rate (or otherwise) with interests payable semi-annually or otherwise and principal as per schedule, normally on due date on redemption
6 . What is the issuance process of G-secs?
G-secs are issued by RBI in either a yield-based (participants bid for the coupon payable) or price-based (participants bid a price for a bond with a fixed coupon) auction basis. The Auction can be either a Multiple price (participants get allotments at their quoted prices/yields) Auction or a Uniform price (all participants get allotments at the same price).
RBI has recently announced a non-competitive bidding facility for retail investors in G-Secs through which non-competitive bids will be allowed up to 5 percent of the notified amount in the specified auctions of dated securities.
7 . What are SDL’s?
State Development Loans (SDLs) are issued by the respective state governments but the RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. The planning commission in discussion with the respective state governments determines this limit. Generally, the coupon rates on state loans are marginally higher than those of GOI-Secs issued at the same time.
The process for selling of state loans, the auction procedure and allotment procedure is similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and other modalities are similar to GOI-Secs. They are also issued in dematerialized form. State Government Securities are also issued in the physical form (in the form of Stock Certificate) and are moveable. No stamp duty is payable on transfer for State Loans as in the case of GOI-Secs. In general, State loans are much less liquid than GOI-Secs.
8 . What are T-bills?
Treasury bills are actually a class of Central Government Securities. Treasury bills, normally referred to as T-Bills are issued by Government of India against their short term borrowing necessities with maturities ranging between 14 to 364 days. The T-Bill of the following periods are currently issued by Government/Reserve Bank of India in Primary Market: 91-day, 182-day and 364-day T-Bills. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.
9 . What is auction of Securities?
Auction is a procedure of calling of bids with an objective of arriving at the market price. It is essentially a price discovery mechanism. There are several variant of auction. Auction can be price based or yield based. In securities market we come across below mentioned auction methods.
Multiple Price Auction (French Auction)
In French auction, buyers typically submit bids that specify an amount and a price (or a yield) at which they wish to buy the desired amount. Once submit, these bids are ranked from the highest to the lowest price (or from the lowest to the highest yield) and the amount for sale is awarded to the best bids (i.e. highest prices or lowest yields) upto the cut-off price (partial share being resorted to in case the quantum of securities left over are less than the amount bid at cut-off price). Under the multiple price auctions, each successful bidder will pay the actual price at which he has bid which would thus be a price higher than or equal to the cut-off price arrived at in the auction.
Uniform Price Auction (Dutch auction)
The process is similar to the Multiple Price Auction except that the each successful bidder (who has bid above the cut-off price) pays the lowest price (cut-off price) accepted by the debt manager. All the successful bidders will pay the same price, irrespective of their actual bid price.
After having discovered the coupon through the auction mechanism, if on account of some circumstances the Government / Reserve Bank of India decides to further issue the same security to expand the outstanding quantum, the government usually privately places the security with RBI. The RBI in turn may sell these securities at a later date through their open market window though at a different yield.
Under this scheme of arrangements after the initial primary placement of a security, the issue remains open to yet further subscriptions. The period for which the issue remains open may be sometimes time specific or volume specific.
10 . How the price is determined in the debt markets?
The price of a bond in the markets is strong-minded by the forces of demand and supply as is the case in any market. The price of a bond in the marketplace also depends on a number of other factors and will fluctuate according to changes in;
- Economic conditions
- General money market conditions including the state of money supply in the economy
- Interest rates prevalent in the market and the rates of new issues
- Future Interest Rate Expectations
- Credit quality of the issuer
- There is however, a theoretical underpinning to the determination of the price of the bond in the market based on the measure of the yield of the security.
11 . What is the yield on a security?
Yield on a security is the implied interest offered by a security over its life, given its current market price.
12 . What are coupon payments?
Coupon payments are the cash flows that are offered by a particular security at fixed intervals. The coupon expressed as a percentage of the face value of the security gives the coupon rate.
13 . Why is there a difference between coupon rate and yield?
The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.
14 . What is meant by Current yield?
This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by dividing the coupon rate by the purchase price of the debenture.
For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as:
Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.
15 . What are the Clean Price and the Dirty Price in reference to trading in G-Secs?
G-Secs are traded on a clean price (Trade price) but settled on the dirty price (Trade price + Accrued Interest). This happens as the coupon payments are not discounted in the price as is the case in the other non-govt. debt instruments
16 . What are the conventions followed for the calculation of Accrued Interest?
The Day Count gathering to be followed for the calculation of Accrued Intetest in case of dealings in G-Secs is 30/360. I.e. each month is to be taken as having 30 days and each year is to be taken as having 360 days irrespective of the actual number of days in the month. So months like January, February, March, May, July, August, October and December are to be considered as having 30 days.
17 . Who Regulates Indian G-Secs and Debt Market?
RBI : The Reserve Bank of India is the main controller for the Money Market. Reserve Bank of India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has to concurrently fulfill several other important objectives viz. running the borrowing program of the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensure a stable currency environment. SEBI: Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India (SEBI). SEBI controls bond market and corporate debt market in cases where entities raise money from public during public issues. It regulates the method in which such moneys are raised and tries to guarantee a fair play for the retail investor. It forces the issuer to make the retail investor aware of the risks inherent in the investment by way and its disclosure norms. SEBI is also a regulator for the Mutual Funds.
18 . What is FIMMDA?
FIMMDA stands for The Fixed Income Money Market and Derivatives Association of India (FIMMDA). It is an Association of Commercial Banks, Financial Institutions and Primary Dealers. FIMMDA is a voluntary market body for the bond, Money And Derivatives Markets.
19 . What are the objectives of FIMMDA?
- To function as the major boundary with the regulators on various issues that impact the performance of these markets.
- To take on developmental activities such as introduction of benchmark rates and new derivatives instruments etc.
- To provide training and development support to dealers and support personnel at member institutions.
- To adopt/develop worldwide standard practices and a code of conduct in the above fields of activity.
- To invent standardized best market practices.
- To purpose as an arbitrator for disputes, if any, between member institutions.
- To develop standardized sets of certification.
- To assume any other relevant role facilitating smooth and orderly functioning of the said markets.
20 . Who are the members of FIMMDA?
FIMMDA has member representing all major institutional segments of the market. The membership include Nationalized Banks such as State Bank of India, its associate banks, Bank of India, Bank of Baroda; Private sector Banks such as ICICI Bank, HDFC Bank, IDBI Bank; Foreign Banks such as Bank of America, ABN Amro, Citibank, Financial institutions such as ICICI, IDBI, UTI, EXIM Bank; and Primary Dealers.
21 . What is maturity?
Maturity indicates the life of the security i.e. the time over which interest flows will occur.
22 . What is Commercial Paper?
Commercial Papers are short term borrowings by Corporates, FIs, PDs, from Money Market.
23 . What are the features of Commercial Paper?
- Commercial Papers when issued in Physical Form are negotiable by endorsement and delivery and hence highly flexible instruments
- Issued subject to minimum of Rs 5 lakh and in the multiples of Rs. 5 Lac thereafter,
- Maturity is 15 days to 1 year
- Unsecured and backed by credit of the issuing company
- Can be issued with or without Backstop facility of Bank / FI.
24 . What is the Eligibility Criteria to issue Commercial Papers?
Any private/public sector co. wishing to raise money through the CP market has to meet the following requirements :
- Tangible net-worth not less than Rs 4 crores - as per last audited statement
- Should have Working Capital limit sanctioned by a bank / FI
- Credit Rating not lowers than P2 or its equivalent - by Credit Rating Agency approved by Reserve Bank of India.
- Board resolution authorizing company to issue CPs.
25 . What are Certificates of deposit (CD)?
CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a most of one year. CD is subject to payment of Stamp Duty below Indian Stamp Act, 1899 (Central Act). They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits
26 . What are the Features of CD?
- All scheduled banks (except RRBs and Co-operative banks) are qualified to issue CDs
- Issued to individuals, corporations, trusts, funds and associations
- They are issued at a discount rate freely determined by the issuer and the market/investors.
- Freely transferable by endorsement and delivery. At present CDs are issued in physical form (UPN)
27 . What is Debt Market?
There is no single location or exchange where debt market participants interact for common business. Participants talk to each other over telephone conclude deals and send confirmations by Fax, Mail etc. with back office doing the settlement of trades. In the sense the wholesale debt market is a virtual market. The daily transaction volume of all the debt instruments traded would be about Rs.4000 - 5000 crores per day. In India, NSE has its separate segment which allows online trades in the listed debt securities through its member brokers. Recently BSE as well as OTCI have introduced Debt Market Segment. Reserve Bank of India has proposed Negotiated Dealing System (NDS) for trades in the G-Secs and Repos. NDS is likely to be operational by October 2001.
28 . What is Debt Instrument?
A tradable form of loan is usually termed as a Debt tool. They are usually obligations of issuer of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Debt Instruments are of various types. The distinguishing factors of the Debt Instruments are as follows :
- Issuer class
- Coupon bearing / Discounted
- Interest Terms
- Repayment Terms (Including Call / put etc.)
- Security / Collateral / Guarantee
29 . Who are institutional investors in the Indian Debt Market?
Institutional investors operating in the Indian Debt Market are :
- Insurance companies
- Provident funds
- Mutual funds
- Corporate treasuries
- Foreign investors (FII’s)
30 . What factors determine interest rates?
When we talk of interest rates there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the bond/G-Sec, market rates offered to small investors in small savings schemes like NSC rates at which companies issue fixed deposits etc.
The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic. Some of these factors are :
- Demand for money
- Government borrowings
- Supply of money
- Inflation rate
- The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.
31 . What is meant by Current yield?
This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by dividing the coupon rate by the purchase price of the debenture. For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as :
Current Yield = (10%*100)/90 X 100, that is 11.11% p.a.
32 . What is Yield to maturity (YTM)?
The yield or the return on the instrument is held till its maturity is known as the Yield-to-maturity (YTM). It basically measures the total income earned by the investor over the entire life of the Security.
33 . What are a Repo and a Reverse Repo?
A Repo deal is one where eligible parties enter into a agreement with another to borrow money against at a prearranged rate against the collateral of qualified security for a specified period of time. The legal title of the security does change. The motive of the deal is to fund a position. Though the mechanics fundamentally remain the same and the contract almost remains the same in case of a reverse Repo deal the underlying motive of the deal is to meet the security / instrument specific needs or to lend the money. Indian Repo Market is governed by Reserve Bank of India. At present Repo is permitted between permitted 64 players against Central & State Government Securities (including T-Bills) only at Mumbai.
34 . Zero Coupon Yield Cure?
The Zero Coupon Yield Curve (also called the Spot Curve) is a association between maturity and interest rates. It differs from a normal yield curve by the fact that it is not the YTM of coupon bearing securities, which gets plotted. Represented against time are the yields on zero coupon instruments across maturities. The benefit of having zero coupon yields (or spot yields) is that the deficiency of the YTM approach (See Yield to Maturity) is removed. However zero coupon bonds are generally not available across the entire spectrum of time and hence statistical opinion processes are used. The zero coupon yield curve is useful in valuation of even coupon bearing securities and can be extended to other risk classes as well after adjusting for the spreads. It is also an important input for robust measures of Value at Risk (VaR).
35 . What happens to investors when a money market fund closes and liquidates?
In some cases, a fund will close to new investors and distribute its assets to investors, in accordance with the distribution terms in its prospectus. A fund might do this to provide equitable treatment to all investors in the face of significant redemption pressure that might lead to a forced sale of the fund's assets.
36 . What are the recent trends in money market fund assets?
Assets of money market mutual funds have doubled since 2004, rising to a level of $3.9 trillion by January 2009. This increase primarily reflected very significant inflows to institutional money market funds, and to a lesser extent, inflows to retail money market funds in 2007 and 2008.
37 . What are retail money market funds?
Retail funds are offered primarily to individuals with moderate-sized accounts. As of January 2009, retail money market funds hold around 35 percent of all money market fund assets.