NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to the Indian Financial Markets

Money Market Instruments in India: NISM X-A Notes

Updated 11 October 2026 · Fact-checked

Money market instruments are short-term debt and borrowing tools with original maturity up to one year. They include treasury bills, commercial paper, certificates of deposit, call money, notice money, term money and repos. Learn who issues each one, who buys it, how it is priced, and what makes it different.

Understand Money Market Instruments

The money market is where banks, governments, companies and institutions borrow and lend for short periods, up to one year. Its purpose is liquidity. A bank with surplus cash lends it; a bank with a shortfall borrows it. The Reserve Bank of India (RBI) uses this market to manage liquidity and transmit its policy rate.

Start with the safest instrument. A treasury bill (T-bill) is issued by the Government of India. It is a zero-coupon instrument sold at a discount to face value and redeemed at par. The standard maturities are 91 days, 182 days and 364 days. Because the issuer is the government, credit risk is negligible. State governments do not issue T-bills; they borrow through State Development Loans. Cash management bills are issued by the Government of India, as short-term instruments for temporary cash needs. Do not mix these up.

Commercial paper (CP) is an unsecured, short-term promissory note issued at a discount by companies, primary dealers and financial institutions with good credit standing. A certificate of deposit (CD) is an unsecured, negotiable deposit instrument issued by banks (and select all-India financial institutions) against funds deposited. The easy memory hook: CP is issued by corporates, CD is issued by banks. Both are issued at a discount and carry credit risk. The level of risk depends on the issuer, and CP is generally seen as riskier than CD.

Call money is overnight borrowing and lending between banks and certain other participants. Notice money is for 2 to 14 days. Term money is for more than 14 days. The rate in call money moves daily with liquidity.

A repo (repurchase agreement) is a secured short-term loan. One party sells securities and agrees to buy them back later at a higher price. The price difference is the interest. For the lender of cash it is a reverse repo. Repo is a collateralised borrowing, while call money is an unsecured borrowing. This difference is a favourite exam point.

Key formulas to remember

T-bill price (discount basis): Price = Face value ÷ (1 + yield × days ÷ 365); T-bills are zero-coupon. Price is below face value. Yield is quoted per year on a 365-day basis.
Discount instrument return: Yield = (Face value − Price) ÷ Price × 365 ÷ days; Use the price paid in the denominator, not face value. This applies to T-bills, CP and CDs.
Standard T-bill tenors: 91 days | 182 days | 364 days; Issued at a discount, redeemed at face value.
Call, notice and term money: Call = overnight (1 day) | Notice = 2 to 14 days | Term = over 14 days; All three are unsecured borrowing and lending, mainly among banks and primary dealers.
Repo cost: Repurchase price = Sale price × (1 + repo rate × days ÷ 365); The seller of securities is the borrower of cash. Interest accrues at the repo rate for the days of the loan, on a 365-day basis.

How to solve Money Market Instruments questions

Most questions ask you to identify an instrument, state a feature, or compute a simple discount yield. Use this order.

1Read the key clue: issuer (government, company, bank), tenor (overnight, 91 days, up to a year) or security (secured or unsecured).
2Match the issuer: government means T-bill; company means CP; bank means CD.
3Match the tenor: overnight means call money; 2 to 14 days means notice money; over 14 days means term money.
4Check for collateral: a sale with a buyback of securities means repo; no collateral means call or similar interbank borrowing.
5For a numerical question, identify face value, price paid and days held.
6Apply the discount formula with the price paid in the denominator and 365 days in the year.
7Eliminate trap options that swap issuer, secured and unsecured, or repo and reverse repo.

Quickest way: Issuer and tenor shortcut

When to use it: Use for definition and identification MCQs where you have about a minute per question.

Say the pairing in your head: Government - T-bill, Company - CP, Bank - CD.
Say the tenor ladder: overnight - call, 2 to 14 days - notice, over 14 days - term.
Ask if there is collateral. Yes means repo. No means unsecured.
If the question asks about the cash lender in a repo, the answer is reverse repo.
For yield, compute (gain ÷ price paid) × (365 ÷ days) exactly and select the matching option.

Common mistakes in Money Market Instruments

Saying CP is issued by banks and CD by companies.
Both are discount instruments with similar names and features.
Fix: Remember C-P is Corporate Paper and C-D is a bank Deposit.
Calling a repo an unsecured loan.
Students confuse repo with call money since both are short-term.
Fix: A repo is backed by securities that are sold and repurchased. Call money has no collateral.
Mixing up repo and reverse repo.
The names depend on whose side you view.
Fix: The borrower of cash does a repo. The lender of cash does a reverse repo.
Using face value as the denominator in a yield calculation.
Discount rate and yield get treated as the same thing.
Fix: Return on investment is gain divided by the amount you invested, which is the price paid.
Thinking T-bills pay periodic interest.
Students link all government securities with coupons.
Fix: T-bills are zero-coupon. Your return is the gap between purchase price and face value.
Treating notice money and term money as the same.
Both are longer than overnight.
Fix: Notice is 2 to 14 days. Term is more than 14 days.

Worked examples

Example 1

An investor buys a 91-day treasury bill with a face value of ₹1,00,000 at a price of ₹98,500. What is the annualised yield, to the nearest 0.01%, on a 365-day basis?

Show the solution

Gain = ₹1,00,000 − ₹98,500 = ₹1,500.
Return for 91 days = 1,500 ÷ 98,500 = 0.015228, or 1.5228%.
Annualise: 0.015228 × 365 ÷ 91 = 0.015228 × 4.01099 = 0.06108.
Convert to percentage: 6.11%.

Answer: About 6.11% per year.

Example 2

Which statement correctly describes the difference between commercial paper and a certificate of deposit?

Show the solution

Check the issuer. CP is issued by companies, primary dealers and financial institutions. CD is issued by banks.
Check security. Both are unsecured.
Check form. Both are issued at a discount and are short-term money market instruments.
So the clear distinguishing point is the issuer: corporates for CP, banks for CD.

Answer: CP is an unsecured discount instrument issued by corporates and similar entities. A CD is an unsecured negotiable deposit instrument issued by banks.

Exam tips

Expect direct identification questions. Learn the issuer-instrument pairs until automatic.
Watch the word secured. It points to repo; unsecured points to call money, CP or CD.
In yield sums, check the day count and use 365 unless the question says otherwise.
In a repo question, find whose view is being asked: borrower of cash or lender of cash.
On a 2-mark question a wrong answer costs more, so skip only if you cannot narrow to two options.

Practice questions from Introduction to the Indian Financial Markets

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.

Money Market Instruments: frequently asked questions

What is the difference between commercial paper and a certificate of deposit?

Commercial paper is issued by companies and similar entities with good credit standing. A certificate of deposit is issued by banks against deposits. Both are unsecured and issued at a discount, but CP generally carries higher credit risk.

How is a treasury bill different from a repo?

A treasury bill is a government zero-coupon security issued at a discount. A repo is a secured loan where securities are sold and bought back later at a higher price. One is an instrument; the other is a borrowing transaction.

What maturities do treasury bills have?

Treasury bills are issued for 91 days, 182 days and 364 days. All are issued at a discount and redeemed at face value.

What is call money?

Call money is overnight borrowing and lending in the money market, mainly among banks and certain other participants. It has no collateral. Rates change daily with liquidity.