The original purpose of commercial paper was to provide short-term funds for:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → seasonal and working capital needs
Option (1) seasonal and working capital needs — Correct. Commercial paper was first meant to give short-term funds for seasonal and working capital needs. Today companies also use it for purposes such as bridge financing.
Option (2) seasonal needs and inter-bank transactions — Incorrect. Seasonal needs are right. But inter-bank transactions are financed by call money.
Option (3) credit sales and working capital needs — Incorrect. Working capital needs are right. But financing credit sales is the work of a commercial bill.
Option (4) inter-bank transactions and credit sales — Incorrect. Both are wrong. Inter-bank transactions use call money, and credit sales are financed by a commercial bill.
NCERT (Pre-rationalised Edition): “2. Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong. It is sold at a discount and redeemed at par. The original purpose of commercial paper was to provide short-terms funds for seasonal and working capital needs. For example companies use this instrument for purposes such as bridge financing.” “3. Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash reserve ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. …” “5. Commercial Bill: A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms. …” |