Money Market: formula sheet

Key formulas

Money market – period of funds

Money market = short-term funds, generally up to 1 year

Use this as the dividing line from the capital market, which deals in funds for more than one year.

Core features to list

Short maturity + high liquidity + low risk + large-value deals + no fixed place + RBI regulation

Write these as separate bullets in a 'features' answer.

Main functions

Liquidity for banks and firms + short-term finance + monetary policy transmission + efficient use of surplus funds + government borrowing

Pick the points the question asks for and explain each in a line.

Money market vs capital market – key test

Tenor ≤ 1 year → money market; tenor > 1 year → capital market

Add purpose, risk, instruments and regulator to score full marks.

Money market tenor

Money market = short-term funds, up to 1 year

Capital market deals in funds longer than one year. Use this to separate the two markets.

Structure of the market

Money market = Organised segment + Unorganised segment

Organised: formal instruments, regulated mainly by the RBI, with SEBI regulating mutual funds. Unorganised: indigenous bankers, moneylenders, chit funds.

Participant role frame

Participant → Role (lender / borrower / regulator / intermediary) → Instrument

Use this one line for every participant in a written answer.

T-bill discount

Discount = Face value − Issue price

The investor's total earning, as no interest is paid.

T-bill yield (annualised)

Yield = [(Face value − Price) ÷ Price] × [365 ÷ Days to maturity] × 100

Divide by price, not face value. Use 365 days unless the question says otherwise.

Discount rate (bank discount)

Discount rate = [(Face value − Price) ÷ Face value] × [365 ÷ Days] × 100

Divides by face value, so it is lower than the yield.

Price from yield

Price = Face value ÷ [1 + Yield × Days ÷ 365]

Use the yield as a decimal.

Repo interest

Interest = Amount × Rate × Days ÷ 365

Repurchase price = Sale price + interest.

Call, notice, term money

Call = 1 day; Notice = 2 to 14 days; Term = over 14 days

Classification is by period of the loan. All are unsecured and traded by banks and primary dealers.

Discount on the instrument

Discount = Face value × d × (days ÷ 365)

d is the annual discount rate. Indian money market questions use a 365-day year unless the question says otherwise.

Issue price / proceeds

Price = Face value − Discount

For bill discounting, this is the amount the bank pays you now.

Yield for the period

Period return = (Face value − Price) ÷ Price

Divide by the price you pay, not the face value.

Annualised (simple) yield

Yield = [(F − P) ÷ P] × (365 ÷ days)

Also written as d ÷ (1 − d × days ÷ 365) when you only have the discount rate.

Effective annual yield

EAY = (1 + (F − P) ÷ P)^(365 ÷ days) − 1

Compounds the period return. It is higher than the simple yield for periods under a year.

Key RBI limits (CP and CD)

CP: 7 days to 1 year, ₹5 lakh minimum. Bank CD: 7 days to 1 year, ₹1 lakh minimum.

Confirm against the latest RBI directions before the exam.

Repo interest cost

Repurchase price = Sale price + (Sale price × Repo rate × Days ÷ 365)

Interest is the repurchase price minus the sale price. Use the day-count the question gives. Many Indian money market questions use 365 days.

Discount instrument yield (simple annualised)

Yield = [(Face value − Purchase price) ÷ Purchase price] × (365 ÷ Days to maturity) × 100

Use for treasury bills, commercial paper and certificates of deposit issued at a discount. The base is the price paid, not the face value.

Net asset value per unit

NAV = (Market value of fund assets − Liabilities) ÷ Number of units outstanding

Use this to value MMMF units. The purchase and sale of units happens at NAV, subject to any load.

Key features to recall

MMMF: maturity up to 1 year | CBLO replaced by TREPS in 2018 | Collateral: mainly government securities

These are definitions to state, not calculations.

Quick revision

• The money market deals in short-term funds, generally up to one year.
• Its main purpose is to help participants manage liquidity.
• Money market instruments are generally highly liquid and carry lower risk than long-term securities.
• Treasury bills are issued by the government to meet short-term borrowing needs.
• Treasury bills are issued at a discount and redeemed at face value.
• Call money is very short-term interbank lending, mainly overnight.
• Commercial paper is an unsecured short-term note issued by creditworthy companies.
• Certificates of deposit are issued by banks against deposits for a fixed period.
• Commercial bills arise from trade transactions and can be discounted for funds.
• Money market mutual funds pool investors' money to invest in money market instruments.
• Discount instruments: yield is measured on the price paid, not on the face value.
• Compare instruments on issuer, investor, tenor and pricing.

Common mistakes

• Saying the money market deals in long-term funds or shares. Fix: Link money market to 'short-term, up to one year' and capital market to 'long-term, more than one year'.
• Calling the money market a single physical place like a stock exchange. Fix: Write that it is a network of participants dealing over the counter and on electronic platforms.
• Calling the money market a market for long-term funds. Fix: Anchor on tenor: money market is up to one year, capital market is longer.
• Placing mutual funds or banks in the unorganised segment. Fix: Unorganised means informal lenders such as moneylenders and chit funds. Regulated institutions are organised.
• Dividing the discount by face value when asked for yield. Fix: Yield uses the price paid as the base. Discount rate uses face value.
• Saying T-bills pay periodic interest. Fix: T-bills are zero-coupon. The return is only the discount.
• Dividing the discount by face value to get the yield. Fix: Yield is always return on the amount invested. Divide (F − P) by P, the price paid.
• Using 360 days or months instead of 365 days. Fix: Use days ÷ 365 for money market instruments unless the question gives another basis.
• Saying CBLO is still the current platform. Fix: Write that CBLO was replaced by TREPS in 2018 and describe both, with CCIL as operator.
• Calling a money market mutual fund risk-free or return-guaranteed. Fix: Say the risk is low, not nil. Returns depend on interest earned and portfolio price changes, and credit or interest rate risk still exists.

Exam tips

• Learn one definition and six features by heart; they fit almost any theory question on this topic.
• For MCQs, test the tenor first: up to one year means money market.
• In 'distinguish' questions, use a two-column layout with at least six bases; examiners give marks per point.
• Link the topic to working capital: surplus cash is parked in money market instruments, so mention this to show application.
• Always mention the RBI when asked about functions or importance.
• Write the two-segment structure in the first two lines of any answer. Examiners look for it.
• For participant questions, give one line per participant with its role and instrument. Do not write long essays.
• In MCQs, watch the words 'organised', 'unorganised' and 'one year'. Options often swap them.