Question

using your own words describe each of the following financial instruments, including the kind of claim（debt or equity), maturity( money market or capital market), risk, and liquidity characteristics, and any other distinguishing characteristics. Identify a type of financial institution or other participant in the financial market (individuals, government, business) that are most likely to borrow using these instruments, and a type of institution or other participant that are most likely using these instruments.

(a) Non-Negotiable Certificates of Deposit

（b）3 year Treasury Bills

(c) Overnight finds

3 Using your own words describe each of the following financial instruments, including the kind of claim (debt or equity), maturity (money market or capital market), risk, and liquidity characteristics, and any other distinguishing characteristics. Identify a type of financial institution or other participant in the financial market (individuals, government, business) that are most likely to borrow using these instruments, and a type of institution or other participant are most likely to lend using these instruments. that (a) (b) (c) Non-Negotiable Certificates of Deposit 3 year Treasury Bills Overnight funds

Answer 1

Following are various kinds of Financial Instruments with their respective Characteristics

a) Non-Negotiable Certificate of Deposit : These are the Money market financial instruments used to park funds safely for short period of time. In the US, Face value of the Certificate of Deposits is minimum $10,000. Because of their large denominations, Non-Negotiable CDs are bought most often by large institutional investors, which often use them as a way to invest in a low-risk, low-interest security. These cannot be transferred, sold, bought or exchanged unlike the Negotiable Certificate of deposit, which can be traded in highly liquid secondary market. Banks issue Non-Negotiable certificate of deposits.

i) Claim : Debt

ii) Maturity : It is short term instrument with maturity ranging from 2 weeks to 1 Year.

iii) Risk : These are Low risk instruments as they are backed by full faith and credit of the institution that issues the CDs. In the US, CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor per bank.

iv) Liquidity Characteristic : Not very liquid as you cannot transfer, sell, buy or exchange them unlike the Negotiable Certificate of deposit. However, they can be redeemed before maturity with a penalty with usually ranges from 3 to 6 months of interest.

v) Interest Payment : Interest is paid either at maturity, or the instrument is purchased at a discount to its face value.

b) 3 Year Treasury Bills: These are fixed income money market instruments issued by the Department of Treasury in the US, Reserve Bank of India in India etc. These are the safest investment options as they are guaranteed by the Government. Since they have least risk, they also offer least interest rate among other fixed income products. Minimum investment amount is $100 and hence even individual investors can invest in them apart from institutional investors like Businesses and Government.

i) Claim : Debt. These are backed by Govt. guarantee.

ii) Maturity : In US, Treasury bills have maturity less than 1 Year. Treasury Notes have maturities of 2,3,5 and 10 Years. Treasury bonds are issued for term of 30 Years.

iii) Risk : Very Low risk. Safest fixed income instruments as they are backed by the Government.

iv) Liquidity Characteristic : Highly liquid as they can be traded in the secondary market.

v) Interest Payment : Interest is paid periodically (generally 6 months) and at maturity investor gets their prinicipal amount back along with interest paid over the life time of the instrument.

c) Overnight Funds: These are money market instruments involving shortest term loan i.e Overnight. Such loans are made commonly in the interbank market and are to be paid by 11 a.m. next day along with applicable interest amount. Banks are the largest participant in the overnight market, although some other large financial institutions, e.g. mutual funds, also buy and sell on the overnight market as a way to manage unanticipated cash needs or as a temporary haven for money until the institution can decide on where to invest that money.^[1]

i) Claim : Debt.

ii) Maturity : Overnight. Needs to be repaid by the beginning of next working day.

iii) Risk : Low risk since banks are participants in this instrument and also the tenure is only for 1 night.

iv) Liquidity Characteristic : Highly liquid market

v) Interest Payment : Interest needs to be paid out along with the principal amount before beginning of the next working day. Interest paid is very low because of the short tenure of investment.