During the decade of the eighties the markets have evolved a wide array of funding instruments. The spectrum ranges from the traditional bank loans to complex borrowing packages involving bonds with a variety o£ special features coupled with derivative products such as options and swaps. The driving forces behind these innovations have diverse origins. Some, such as floating rate loans and bonds, reflect investor preference towards short-term instruments in the light of interest rate volatility. Some, such as Note Issuance Facilities, permit the borrower to raise cheaper funds directly from the investor while having a fallback facility. Some, such as swaps, have their origins in the borrowers’ desire to reshuffle the composition of their liabilities (as also investors’ desire to reshuffle their asset portfolios). Some, such as medium term notes, were designed to fill the gap between very short-term instruments such as commercial paper and long term instruments such as bonds.
Some – an example is swaps again – have their genesis in market participants’ drive to exploit capital market inefficiencies and arbitrage possibilities created by differences across countries in tax regulations.
In this section we will briefly describe some of the common short-term funding instruments such as commercial paper (CP), bankers’ acceptances (BAs) and Certificates of Deposit (CDs).
In addition, there are banking products viz. deposits and loans ranging in maturity from overnight to one year and some underwritten facilities like Note Issuance Facility (NIF) and Revolving Underwriting Facility (RUF). Medium-to-long-term debt instruments like bonds, notes, NIFs and RUFs are discussed in chapter 19. International equity investment is discussed in chapter 18. Financial swaps are the topic of chapter 16. A comprehensive reference on money market instruments, players and regulatory aspects is Stigum (1990).