Answer to Question #197190 in Finance for Kajal

Question

Explain different types of money market instruments. In each of the below cases,which money market instruments would you recommend and why?   

a) A mutual fund manager has INR 450 million of cash, which he needs to park for a period of less than 180 days, where he will move this to equity

b) An oil refining company wishes to borrow INR 1500million for a period of 90 days to fund its settlement of invoices

Answer 1

 i) A promissory note; is a financial instrument with a written promise by one party to pay another party a definite sum of money by demand or at a specified future date. However, it falls in due for payment after 90 days within three days of grace.

ii) The Central Government issues the treasury bills, and they come with different maturity periods like one year, six months, or three months.

iii) Banker’s Acceptance; is used in money market funds and will specify the details of repayment like the date of repayment, amount to be paid, and details of the individual to which the repayment is due. It features maturity periods that range between 30 days up to 180 days.

iv) Commercial papers; usually have a fixed maturity period which can range anywhere from 1 day up to 270 days.

a) Recommend bankers acceptance; because it features maturity periods ranging between 30days up to 180 days.

b)recommend promissory note because it is a financial instrument with a written promise by one party to pay another party a definite sum of money by demand or at a specified future date, although it falls in due for payment after 90 days within three days of grace