Treasury Bills, Certificate of Deposit & Commercial Paper: You all Need to Know

Treasury Bills, Certificate of Deposit & Commercial Paper: You all Need to Know

Certificates of deposit (CDs), commercial paper (CP) and Treasury bills (T-bills) are all securities issued to borrow money short-term (typically no longer than a year). In most markets, investors are usually professional – companies, fund managers, banks, etc. – although in some markets these instruments are sometimes issued in denominations small enough to allow for individuals to invest in them. All three instruments are usually ‘negotiable’, meaning that they can be bought and sold, subsequent to their original issue, in the ‘secondary market’.

Following of the 03 main instruments of Money Market in India are: 

1. Treasury Bills.
2. Certificate of Deposit. 
3. Commercial Paper.

Treasury Bills (TBs)

Treasury bills, also known as Zero Coupon Bonds are the instrument of short term borrowing with maturity period of less than one year.

This instrument is issued by Reserve Bank of India on behalf of the Central Government for fulfilling short term requirements of funds. They are issued at discount and are paid at par.

This difference between the issue and the redemption price is the interest payable. They are highly liquid and no risk of default of payment is there. They are issued of Rs.25, 000 or in multiples thereof.

For example, suppose an investor purchases a 108 days Treasury bill for Rs. 138,000 having face value of Rs. 1, 50, 000. On maturity, he receives Rs. 1, 50,000. The difference of Rs. 12, 000 in the issue and redemption price is the interest received by him.

T-Bills are the most important and used mean for the government to acquire money from the market, to maintain its money requirements.

Here is some of the important points about Treasury Bills you all need to Know

• Introduced in 1987
• Issued By → RBI ( On behalf of the government ).
• Type of debenture.
• Doesn’t require any collateral as security
• Five types of the TBs in due course of time:
• (a) 14-day (Intermediate TBs) –discontinued in 2001.
• (b) 14-day (Auctionable TBs) – discontinued in 2001.
• (c) 91-day TBs
• (d) 182-day TBs
• (e) 364-day TBs
• Issued on discount basis and can be redeemed at par.
• Doesn’t bear any interest.

Certificate of Deposit (CD)

Certificates of deposit are short term instruments issued by commercial banks and financial institutions to the individuals, corporations and companies. They are unsecured and negotiable. Such instruments are usually issued by banks when they have a tight liquidity position because of slow growth of bank deposits but the demand for credit is high.

CDs are certificates issued by banks or other financial institutions to the general public, to raise short-term resources

• Is a negotiable money market instrument.
• Issued in dematerialised form 
• Issuer – Scheduled Commercial Banks (excluding RRBs), permit-granted Financial Institutions (FIs)
• Issued to – individuals, corporations, companies (including banks), trusts, etc.
• Bank CDs (7 days – 1 year) and FI CDs (1 – 3 years) 
• Minimum amount – Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh 
• Issued at a discount on face value. 
• Are freely transferable .

Commercial Paper (CP)

Commercial Paper (CP) is a short term unsecured promissory note with maturity period of 15 days to one year. Since it is unsecured, it is issued by the large and creditworthy companies to meet their short term fund requirements.

Commercial Paper is issued at discount and redeemed at par. It is negotiable and transferable by endorsement. The funds raised through Commercial Paper can be used for fulfilling seasonal and working capital need. For example, for meeting the floatation cost at the time of issue of shares and debentures i.e. Bridge Financing.

Commercial Paper is a ‘money market instrument’ under Section 45W of the Reserve Bank of India Act. Commercial Paper’ (CP) is an unsecured money market instrument issued in the form of a promissory note.

Eligible Issuers:

1. Companies, including Non-Banking Finance Companies (NBFCs) and All India Financial Institutions (AIFIs), are eligible to issue CPs
2. Other entities like co-operative societies/unions, government entities, trusts, limited liability partnerships and any other body corporate having presence in India with a net worth of ₹ 100 crore or higher
3. Any other entity specifically permitted by the Reserve Bank of India (RBI).

Eligible Investors:

1. All residents, and non-residents permitted to invest in CPs under Foreign Exchange Management Act (FEMA), 1999 are eligible to invest in CPs; however, no person can invest in CPs issued by related parties either in the primary or secondary market.
2. Investment by regulated financial sector entities will be subject to such conditions as the concerned regulator may impose.

• CP shall be issued in the form of a promissory note 
• Held in a dematerialized form
• Maturity – 7 days to 1 year
• Minimum size – Minimum amount of CP is Rs. 5 lakh and multiple thereof
• CP shall be issued at a discount to face value.

There is 02 more Main Instruments of Money Market in India given below

Call Money:

Call Money is short term finance used for interbank transactions. It has a maturity period of one day to fifteen days. All the commercial banks are required to maintain cash balance which is known as Cash Reserve Ratio (CRR).

The Reserve Bank of India keeps on changing this ratio from time to time thus affecting the availability of funds, for providing loans, with the banks. Call money is a facility under which banks borrow money from each other to maintain CRR at rate of interest known as Call Rate.

This rate keeps on changing from day to day and sometimes from hour to hour. The relationship between call rates and other short term instruments such as commercial papers, certificates of deposit etc. is an inverse relationship. An increase in call money rates increases the demand for other short term instruments.

Commercial Bills:

Commercial bill is a bill of exchange used to finance the credit sales of firms. It is a short term, negotiable and self liquidity instrument. In case of goods sold on credit, the buyer is liable to make the payment on a specific date in future.

The seller could either wait till the maturity date or can draw a bill of exchange. When this bill is accepted by the buyer it becomes a marketable instrument and is called a trade bill. If the seller wants the funds before the maturity date, he can get the bill discounted from the bank. When a commercial bank accepts a trade bill it becomes a commercial bill.