Monetary Instruments: Commercial paper,Certificate of Deposit,Debentures,Systematic Investment Plan

1. Commercial paper:

Commercial paper is a money-market security issues by large corporations to obtain funds to meet short-term obligations and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note.

Is an unsecured, short-term instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates. Advantages of Commercial Paper:

• It does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months or 270 days.
• It is a very cost-effective means of financing.
• The proceeds from this type of financing can only be used on current assets, or inventories, and are not allowed to be used on fixed assets, such as new plant, without SEC involvement.

2. Certificate of Deposit(CD):

• Certificate of Deposit (CD) refers to a money market instrument, which is negotiable and equivalent to a promissory note.
• It is either issued in demat form or in the form of a usance promissory note.
• This instrument is issue in lieu of the funds deposited at a bank for a specified time period.
• These are similar to savings accounts and virtually risk free.

Who can Issue a Certificate of Deposit?

A Certificate of Deposit in India can be issue by:

• All scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs)
• Select All India Financial Institutions permitted by RBI

What is Minimum amount for Certificate of Deposit?

• Minimum amount for Certificate of Deposit has been fixed at Rs. 1 Lakh, to be accepted from a single subscriber
• Larger amounts have to be in the multiples of Rs. 1 Lakh.

What is tenure of Certificates of Deposits?

Certificates of Deposit are money market instruments and their maturity period is between seven days to one year for commercial banks. For Financial Institutions, the maturity is not less than a year and not more than three years.

What is Return on Certificates of Deposits?

The CDs are issued at a discount on face value. Return on them is difference between the issue value and face value.

How CDs can be transferred from one person to other?

If CD has been issued in physical form (as usance promissory notes), they can be freely transferred by endorsement and delivery. If they have been released in Demat form, they can be transferred as per the procedure applicable to other demat securities.

3. Debentures are of two types Convertible and Non-Convertible.

Convertible debentures: Are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate. Non-Convertible debentures :

• Non-Convertible debentures are fixed income products that offer comparatively higher returns which are difficult to resist.
• Non-Convertible debentures (NCDs) are used as tools to raise long-term funds by companies through a public issue.
• To compensate for this drawback of non-convertibility, lenders are usually given a higher rate of return compared to convertible debentures.
• NCDs offer various other benefits to the owner such as high liquidity through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating as specified in the norms laid down by RBI for the issue of NCDs.
• In India, these have to be issued of a minimum maturity of 90 days.
• An NCD can be Secured or Unsecured. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation unlike unsecured NCDs

4. Systematic Investment Plan :

• Systematic Investment Plan(SIP) is a financial planning tool that helps you to create wealth, by investing small sums of money every month, over a period of time
• A Systematic Investment Plan(SIP) is a vehicle offered by mutual funds to help investors invest regularly in a disciplined manner.
• It is mode of investing in mutual funds in a systematic and regular manner.

The method of investing is similar to investment in a recurring deposit (RD) with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk 5. What is a ‘High Net Worth Individual – HNWI’

• High net worth individual (HNWI) is a classification used by the financial services industry to denote an individual or a family with high net worth.
• It is a term used by some segments of the financial services industry to designate persons whose investible assets (such as stocks and bonds) exceed a given amount.What Makes a HNWI?

The most commonly quoted figure for membership in the high net worth club is $1 million in liquid financial assets.

An investor with less than $1 million but more than $100,000 is considered to be “affluent” or perhaps even “sub-HNWI.” The upper end of HNWI is around $5 million, at which point the client is then referred to as “very HNWI.” More than $30 million in wealth classifies a person as “ultra HNWI.