Banker’s Acceptance

It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyer’s promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The person drawing the bill must have a good credit rating otherwise the Banker’s Acceptance will not be tradable. The most common term for these instruments is 90 days. However, they can very from 30 days to180 days. For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown. The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables. An individual player cannot invest in majority of the Money Market Instruments, hence for retail market, money market instruments are repackaged into Money Market Funds. 

A money market fund is an investment fund that invests in low risk and low return bucket of securities viz money market instruments. It is like a mutual fund, except the fact mutual funds cater to capital market and money market funds cater to money market. Money Market funds can be categorized as taxable funds or non taxable funds. Having understood, two modes of investment in money market viz Direct Investment in Money Market Instruments & Investment in Money Market Funds, lets move forward to understand functioning of money market account. Investment in Money Market Direct Investment in Money Market Instruments Investment in Money Market Funds Parking money in Money Market Account Money Market Account: It can be opened at any bank in the similar fashion as a savings account. However, it is less liquid as compared to regular savings account. It is a low risk account where the money parked by the investor is used by the bank for investing in money market instruments and interest is earned by the account holder for allowing bank to make such investment. Interest is usually compounded daily and paid monthly. There are two types of money market accounts:

Money Market Transactional Account: By opening such type of account, the account holder can enter into transactions also besides investments, although the numbers of transactions are limited.

Money Market Investor Account: By opening such type of account, the account

holder can only do the investments with no transactions.

Money Market Index: To decide how much and where to invest in money market an investor will refer to the Money Market Index. It provides information about the prevailing market rates. There are various methods of identifying Money Market Index like:

· Smart Money Market Index- It is a composite index based on intra day price pattern

of the money market instruments.

· Salomon Smith Barney’s World Money Market Index- Money market instruments are evaluated in various world currencies and a weighted average is calculated. This helps in determining the index.

· Banker’s Acceptance Rate- As discussed above, Banker’s Acceptance is a money market instrument. The prevailing market rate of this instrument i.e. the rate at which the banker’s acceptance is traded in secondary market, is also used as a money market index.

· LIBOR/MIBOR- LondonInter Bank Offered Rate/ Mumbai Inter Bank Offered Rate

also serves as good money market index. This is the interest rate at which banks

borrow funds from other banks.