Consider the following statements:
(A) A treasury bill has a negligible risk of default.
(B) A commercial paper is also known as a Zero Coupon Bond.
(C) A treasury bill is issued by the Reserve Bank of India on behalf of the Central Government.
(D) A commercial paper is issued at lower rates of interest than market rates.
(E) A treasury bill is used by companies for bridge financing.
How many of the above statements are correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Three
(A) A treasury bill has a negligible risk of default. — Correct. Treasury bills are borrowing by the Government, so they have assured yield and negligible risk of default.
(B) A commercial paper is also known as a Zero Coupon Bond. — Incorrect. It is the treasury bill that is known as a Zero Coupon Bond.
(C) A treasury bill is issued by the Reserve Bank of India on behalf of the Central Government. — Correct. The Government borrows for the short term, and the Reserve Bank of India issues the bills for it.
(D) A commercial paper is issued at lower rates of interest than market rates. — Correct. Large and creditworthy companies issue it, so they can borrow below market rates.
(E) A treasury bill is used by companies for bridge financing. — Incorrect. Companies use commercial paper for bridge financing, to meet the floatation costs of a long-term issue.
NCERT (Pre-rationalised Edition): “1. Treasury Bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds. Treasury bills are issued in the form of a promissory note. They are highly liquid and have assured yield and negligible risk of default. …” “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.” |