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Financial Management and Strategic Management · Treasury and Cash Management

Investment of Surplus Cash and Money Market Instruments

Updated 4 October 2026 · Fact-checked

Investment of surplus cash means parking idle funds for a short time in safe, liquid instruments such as treasury bills, commercial paper, certificates of deposit and money market mutual funds. You choose by comparing safety, liquidity, maturity and yield, and by matching maturity to when the cash is needed.

Understand Investment of Surplus Cash and Money Market Instruments

A firm often holds cash that it does not need for a few days or months. Idle cash earns nothing and loses value to inflation. The treasury therefore invests it for a short period and earns a return until the cash is needed again.

The money market is the market for short-term debt, generally with maturity up to one year. Instruments are usually traded in large amounts, carry low risk and can be sold quickly. Most are issued at a discount and redeemed at face value, so your return is the gap between the two.

The main avenues are:
- Treasury bills (T-bills): issued by the Government of India. They are zero-coupon, issued at a discount and repaid at face value. Credit risk is practically nil. Common tenors are 91, 182 and 364 days.
- Commercial paper (CP): unsecured, short-term promissory note issued by creditworthy companies at a discount. Yield is higher than T-bills because the credit risk is higher.
- Certificate of deposit (CD): negotiable deposit receipt issued by banks (and certain financial institutions) for a fixed period. It can be traded before maturity.
- Money market mutual funds / liquid funds: pool money from investors and invest in money market instruments. They suit small surpluses and give diversification and professional management.
- Other options include bank fixed deposits, call money and inter-corporate deposits, where the firm lends to another company.

The treasurer does not simply chase the highest yield. The usual criteria are safety (default risk), liquidity (how fast and cheaply you can convert to cash), maturity (match to the date the cash is needed), yield (return) and sometimes tax treatment and ease of transaction. Higher yield generally comes with lower safety or lower liquidity. Treasury policy should set limits on issuers, ratings and amounts.

Key rules to remember

Discount instrument yield (simple, annualised)
Yield = [(Face value − Purchase price) ÷ Purchase price] × (365 ÷ Days to maturity) × 100
Use for T-bills, CP and CDs sold at a discount. Divide by purchase price, not face value. Use 365 days unless the question says 360.
Purchase price of a discount instrument
Price = Face value ÷ [1 + (Yield × Days ÷ 365)]
Yield is in decimal form. Use when the question gives the required yield and asks for the price.
Holding period return
Holding period return = (Maturity or sale value − Cost + Income received) ÷ Cost × 100
Not annualised. Convert to an annual figure only if the question asks.
Selection criteria
Safety, Liquidity, Maturity, Yield
Remember these four. Add tax and diversification if the question is descriptive.

How to solve Investment of Surplus Cash and Money Market Instruments questions

Questions on this topic are either descriptive (explain or differentiate instruments, state selection criteria) or numerical (compute yield or choose between options). Use this method for both.

  1. 1Identify the nature of the cash surplus: how much, and for how long you can spare it.
  2. 2List the candidate instruments and note each one's issuer, maturity, risk and tradability.
  3. 3For descriptive questions, answer instrument by instrument, with a one-line definition and one or two features, then compare on safety, liquidity and yield.
  4. 4For numerical questions, find the purchase price, the face or maturity value and the number of days.
  5. 5Compute the return for the period: (Face value − Price) ÷ Price, then annualise by multiplying by 365 ÷ days.
  6. 6Compare the annualised yields, and check that each maturity fits the date the cash is needed.
  7. 7Conclude with a recommendation that balances yield against safety and liquidity, and state it clearly.

Quickest way: Compare on four criteria, then annualise

When to use it: Use when time is short, in both MCQs and written answers on choosing or comparing instruments.

  1. For MCQs, remember the order of safety: T-bills are safest, then bank CDs, then CP, then inter-corporate deposits. Yield usually rises in the reverse order.
  2. Eliminate any option that is long-term, such as a 5-year bond, or an equity share, when the question is about short-term idle cash.
  3. For yield MCQs, compute (Gain ÷ Price) × (365 ÷ days) and match to the option. Do not divide by face value.
  4. In written answers, use a small table-like list: instrument, issuer, risk, liquidity, yield. Then add a one-line conclusion.
  5. Show the formula and each step of the calculation, since step marks are given even if the final answer is off.

Common mistakes in Investment of Surplus Cash and Money Market Instruments

  • Dividing the discount by face value instead of purchase price when finding yield.

    Students confuse bank discount rate with investor yield.

    Fix: Yield on investment is always gain ÷ amount invested, which is the purchase price.

  • Forgetting to annualise the return for a 91-day or 182-day instrument.

    The period return looks like a rate, so students stop early.

    Fix: Multiply by 365 ÷ days before comparing instruments with different maturities.

  • Saying commercial paper is secured or government-backed.

    It is mixed up with treasury bills.

    Fix: CP is unsecured and depends on the issuer's creditworthiness. Only T-bills carry the government's sovereign backing.

  • Recommending the highest-yield instrument without checking maturity and liquidity.

    Students treat the question as a pure return comparison.

    Fix: Always match maturity to the date the cash is needed and mention safety and liquidity in the conclusion.

  • Treating T-bills as interest-bearing with periodic coupons.

    Confusion with government bonds.

    Fix: T-bills are zero-coupon. Return comes only from the gap between issue price and face value.

Worked examples

Example 1

A company buys a 91-day treasury bill of face value ₹1,00,000 at ₹98,500. Compute the annualised yield (use 365 days, round to two decimals).

Show the solution
  1. Gain = 1,00,000 − 98,500 = ₹1,500.
  2. Return for 91 days = 1,500 ÷ 98,500 = 0.015228 or 1.5228%.
  3. Annualise: 1.5228% × (365 ÷ 91) = 1.5228% × 4.01099 = 6.108%.

Answer: Annualised yield is about 6.11%.

Example 2

A firm has ₹50,00,000 idle for 182 days. It can buy commercial paper of face value ₹50,00,000 at ₹48,00,000, or a 182-day certificate of deposit of face value ₹50,00,000 at ₹48,40,000. Which gives the higher annualised yield, and what else should the treasurer consider? (365 days)

Show the solution
  1. CP gain = 50,00,000 − 48,00,000 = ₹2,00,000. Period return = 2,00,000 ÷ 48,00,000 = 4.1667%.
  2. CP annualised = 4.1667% × (365 ÷ 182) = 4.1667% × 2.00549 = 8.356%.
  3. CD gain = 50,00,000 − 48,40,000 = ₹1,60,000. Period return = 1,60,000 ÷ 48,40,000 = 3.3058%.
  4. CD annualised = 3.3058% × 2.00549 = 6.630%.
  5. CP yields more. But CP is unsecured and carries issuer credit risk, whereas a bank CD is safer and tradable before maturity.

Answer: CP gives about 8.36% against about 6.63% for the CD. The treasurer should accept the extra risk only if the issuer's rating is strong and the company's policy allows it; otherwise the CD is the safer choice.

Exam tips

  • Learn a one-line definition and two features for each of T-bills, CP, CDs and mutual funds. Differentiation questions reward precise contrasts such as issuer, risk and tradability.
  • In numericals, always divide by the purchase price and annualise. State the day-count basis you use.
  • Close every recommendation with the four criteria: safety, liquidity, maturity, yield.
  • Expect MCQs asking which instrument is risk-free, which is issued by banks, or which is unsecured. Recall these facts quickly.
  • Link this topic to cash budgeting: surplus shown in the cash budget is what you invest, and its timing decides the maturity.

Practice questions from Treasury and Cash Management

Investment of Surplus Cash and Money Market Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investment of Surplus Cash and Money Market Instruments: frequently asked questions

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

Treasury bills are issued by the Government of India and are the safest. Commercial paper is an unsecured note issued by companies and carries credit risk. Certificates of deposit are issued by banks and can be traded before maturity.

Which money market instrument is the safest for surplus cash?

Treasury bills are the safest because they are backed by the government and have practically no default risk. Their yield is usually the lowest as a result.

How do I choose where to invest surplus cash?

Compare the options on safety, liquidity, maturity and yield. Match the maturity to the date you need the cash, and set limits on risk through a treasury policy.

Do I need to memorise exact interest rates or tenors for the exam?

Exact market rates change and are given in questions when needed. Know the concepts and the common tenors of T-bills, and focus on the yield calculation and the selection criteria.