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Business Economics · Money Market

Instruments of the Money Market for CA Foundation Business Economics

Updated 1 October 2026 · Fact-checked

Money market instruments are short-term financial claims, with maturity up to one year, used to borrow and lend funds. The main ones are treasury bills, commercial paper, certificates of deposit, call or notice money and repos. To solve MCQs, identify the issuer, the maturity and the purpose of each instrument.

Understand Instruments of the Money Market

The money market is the market for short-term funds. Instruments here mature in up to one year. Banks, companies, mutual funds and the government use it to manage day-to-day cash needs. It is not a place for long-term investment.

Think of it as a place where cash-rich parties lend to cash-short parties for days or months. These instruments are very liquid and carry low risk, so the return is low. The Reserve Bank of India (RBI) uses this market to control liquidity in the economy.

The main instruments are:

  • Treasury bills (T-bills): issued by the Government of India (through RBI) to meet short-term borrowing needs. They are issued at a discount and redeemed at face value. They carry no interest coupon. Common maturities are 91, 182 and 364 days. They are considered virtually risk-free.
  • Commercial paper (CP): an unsecured, short-term promissory note issued by creditworthy companies to raise funds. It is issued at a discount to face value. Maturity ranges from 7 days to 1 year.
  • Certificate of deposit (CD): a negotiable term deposit certificate issued by banks and some financial institutions. It can be sold before maturity. It is issued at a discount.
  • Call money and notice money: very short-term borrowing and lending between banks. Call money is for one day. Notice money is for 2 to 14 days. The interest rate is the call rate.
  • Repo and reverse repo: a repo is a sale of securities with an agreement to buy them back later at a higher price. The difference is the interest. In a repo, RBI lends money to banks against securities. The repo rate is the rate at which RBI lends. In a reverse repo, RBI borrows money from banks, and the reverse repo rate is the rate it pays.

A simple way to remember the repo direction: view it from the RBI's side. Repo means RBI gives cash, so liquidity goes into the system. Reverse repo means RBI takes cash, so liquidity is absorbed.

Key formulas to remember

T-bill maturities
91 days, 182 days, 364 days
Standard tenors of treasury bills. They are issued at a discount and redeemed at face value.
Discount instrument return
Return = Face value − Issue price
T-bills, CP and CDs give no coupon. Your gain is the difference between redemption value and purchase price.
Call and notice money
Call money = 1 day; Notice money = 2 to 14 days
Both are interbank borrowing. Over 14 days is term money.
Repo direction
Repo: RBI lends, liquidity ↑; Reverse repo: RBI borrows, liquidity ↓
Always view the transaction from the RBI's side.
Repo cost
Repurchase price = Sale price + Interest for the period
A repo is a sale with an agreement to repurchase at a higher price.

How to solve Instruments of the Money Market questions

Most MCQs on this topic ask you to match an instrument to its feature. Use this method to reach the answer reliably.

  1. 1Read the question and underline the clue: issuer, maturity, security, or who lends to whom.
  2. 2Identify the issuer. Government points to T-bills. A company points to commercial paper. A bank points to a certificate of deposit.
  3. 3Check the maturity. One day is call money. 2 to 14 days is notice money. Up to one year suits CP, CDs and T-bills.
  4. 4Check if a repurchase agreement is mentioned. If yes, it is a repo or reverse repo. Decide the direction from the RBI's side.
  5. 5Check the pricing. Discount issue with no coupon fits T-bills, CP and CDs.
  6. 6Eliminate options that contradict any clue, then pick the one left.

Quickest way: Issuer-first elimination

When to use it: Use this for any match-the-following or 'which statement is correct' MCQ when time is short.

  1. Link each instrument to one key word: T-bill = government, CP = company, CD = bank, call = one day, repo = RBI lends.
  2. Spot that word in the question and cut options that pair it with something else.
  3. For repo questions, ask: who receives cash? If banks receive cash from RBI, it is a repo.
  4. For 'except' or 'incorrect' questions, find the statement that breaks a key link.
  5. If two options still look right, skip it and return later, since a wrong answer costs 0.25 marks.

Common mistakes in Instruments of the Money Market

  • Saying T-bills pay periodic interest.

    Students link all government securities to coupons.

    Fix: T-bills are issued at a discount and redeemed at face value. The gain is the price difference.

  • Mixing up repo and reverse repo.

    Students view the deal from the bank's side instead of the RBI's side.

    Fix: Repo means RBI lends to banks. Reverse repo means RBI borrows from banks. Always take the RBI's view.

  • Treating call money and notice money as the same.

    Both are interbank and very short-term.

    Fix: Call money is for one day. Notice money is for 2 to 14 days.

  • Thinking commercial paper is issued by banks or the government.

    The word 'paper' sounds like a general security.

    Fix: CP is issued by companies. Banks issue CDs. The government issues T-bills.

  • Believing CDs cannot be sold before maturity.

    Students confuse them with ordinary fixed deposits.

    Fix: CDs are negotiable, so they can be transferred before maturity. That is a key difference from a normal deposit.

Worked examples

Example 1

Which of the following is issued by the Government of India at a discount and has no coupon rate?
(A) Commercial paper
(B) Certificate of deposit
(C) Treasury bill
(D) Notice money

Show the solution
  1. The clue is 'Government of India'. Only T-bills are issued by the government among these.
  2. Commercial paper is issued by companies, so (A) is out.
  3. Certificates of deposit are issued by banks, so (B) is out.
  4. Notice money is interbank borrowing, not a security issued by the government, so (D) is out.

Answer: (C) Treasury bill

Example 2

When RBI lends money to commercial banks against government securities with an agreement to repurchase, the transaction is called:
(A) Repo
(B) Reverse repo
(C) Call money
(D) Certificate of deposit

Show the solution
  1. View the deal from the RBI's side. RBI gives cash to banks.
  2. RBI lending against securities with a buyback is a repo.
  3. A reverse repo would mean RBI borrows from banks, which is the opposite, so (B) is wrong.
  4. Call money is borrowing between banks, and a CD is a bank deposit certificate, so (C) and (D) are wrong.

Answer: (A) Repo

Example 3

Money borrowed and lent between banks for a period of 7 days is called:
(A) Call money
(B) Notice money
(C) Commercial paper
(D) Treasury bill

Show the solution
  1. The clue is interbank lending, so the answer is call or notice money.
  2. Call money is for one day only. 7 days is longer, so (A) is out.
  3. Notice money covers 2 to 14 days. 7 days falls in this range.
  4. CP and T-bills are securities, not interbank loans, so (C) and (D) are out.

Answer: (B) Notice money

Exam tips

  • Learn the issuer for each instrument. Many MCQs test only this link.
  • Memorise the numbers: 91, 182 and 364 days for T-bills, one day for call money, and 2 to 14 days for notice money.
  • For repo questions, always decide the direction from the RBI's side before reading the options.
  • In 'which is NOT correct' questions, check each option against the key link of issuer, maturity and pricing.
  • Do not guess when two options seem equal. Skip and return if time remains, as wrong answers lose 0.25 marks.

Practice questions from Money Market

Instruments of the Money Market: frequently asked questions

What is the difference between treasury bills, commercial paper and certificates of deposit?

T-bills are issued by the government, commercial paper by companies, and certificates of deposit by banks. All three are short-term and issued at a discount. They differ mainly in issuer and risk, with T-bills being the safest.

What is call money and notice money?

Both are short-term loans between banks to manage liquidity. Call money is for one day. Notice money is for 2 to 14 days.

What is the difference between repo rate and reverse repo rate?

The repo rate is the rate at which RBI lends to banks against securities. The reverse repo rate is the rate at which RBI borrows from banks. Repo adds liquidity and reverse repo absorbs it.

Why are money market instruments called low risk?

They are short-term, so there is less time for things to go wrong. Many are issued by the government, banks or strong companies. This also makes them liquid, so returns are lower.