Question 1) Working Capital & Liquidity

Working capital of a business refers to the excess of current assets such as cash in hand debtors stock etc. over current liabilities. (Working Capital = Current Assets - Current Liabilities)

A company that has positive working capital indicates that the company has enough liquidity or cash to pay its bills in the coming months.

For a company, liquidity essentially measures its ability to pay off its bills when they are due, or how easily and effectively a company can access the money it needs to cover its debts. Working capital reflects the liquid assets a company utilizes to make such debt payments.

Drivers of Working Capital

A) Current assets Can include Cash, Accounts receivables, Inventory, Marketable Securities

B) Current Liabilities can include Accounts Payable, Wages, Short term debt, Taxes, Other payments

Working capital is the measure of how well a company can sell its current assets to pay its current liabilities. For example, if a company has an accounts payable coming due in 30 days, the company could sell some of its merchandise inventory or withdraw cash from its marketable securities to satisfy the payable that's coming due.

For example, a company can improve its working capital by collecting their accounts receivables from their customers sooner or asking suppliers for a short-term extension on the due dates for their accounts payables. A number of factors affect working capital needs, including asset purchases, past-due accounts receivable being written off, and differences in payment policies. However, it's important to remember that the working capital needed to operate a business varies between industries.

Question 2) Four money market instruments

Financial instruments with short term maturity up to 1 year, used as tools for raising capital by the issuer are known as money market instruments.

These are debt securities that offer a fixed interest rate and are generally unsecured. There is no collateral backing up the security, and the risk of non-repayment is theoretically high. However, money market instruments have a high credit rating ensuring that issuers don’t default, which makes them a go-to avenue for investors looking for options to park their money for the short term and earn fixed returns on the same.

The types are

1) Treasury Bills

Treasury bills or T- Bills are issued by the Central Bank on behalf of the Central Government for raising money. They have short term maturities with highest upto one year.

T-Bills are issued at a discount to the face value. At maturity, the investor gets the face value amount. This difference between the initial value and face value is the return earned by the investor. They are the safest short term fixed income investments as they are backed by the Government

2) Commercial Paper

Large companies and businesses issue promissory notes to raise capital to meet short term business needs, known as Commercial Papers (CPs). These firms have a high credit rating, owing to which commercial papers are unsecured, with company’s credibility acting as security for the financial instruments

CPs have a fixed maturity period ranging from 7 days to 270 days

3) Certificates of Deposits (CD)

CDs are financial assets that are issued by banks and financial institutions. They offer fixed interest rate on the invested amount. The primary difference between a CD and a Fixed Deposit is that of the value of principal amount that can be invested. The former is issued for large sums of money

4) Repurchase Agreements

Also known as repos or buybacks, Repurchase Agreements are a formal agreement between two parties, where one party sells a security to another, with the promise of buying it back at a later date from the buyer. It is also called a Sell-Buy transaction.

The seller buys the security at a predetermined time and amount which also includes the interest rate at which the buyer agreed to buy the security. The interest rate charged by the buyer for agreeing to buy the security is called Repo rate. Repos come-in handy when the seller needs funds for short-term, s/he can just sell the securities and get the funds to dispose. The buyer gets an opportunity to earn decent returns on the invested money.