Which of the following is an unsecured money market instrument issued in the form of a promissory note?

Commercial Paper

The correct answer is option 1- Commercial Paper.

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990 for enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue in denominations of Rs.5 lakh or multiples thereof. However, the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.

OTHER OPTIONS-

• Public Deposits- A company can raise funds by inviting the public to deposit their savings with their company. Pubic deposits may take care of both long and short-term financial requirements of business. Rate of interest on deposits is usually higher than that offered by banks and other financial institutions.

• Retained earnings- Retained earnings is the portion of the net earnings of the company that is not distributed as dividends is known as retained earnings. The amount of retained earnings available depends on the dividend policy of the company. It is generally used for growth and expansion of the company.

• Preference shares- Preference shares provide a preferential right to the shareholders with respect to payment of earnings and the repayment of capital. Investors who prefer steady income without undertaking higher risks prefer these shares. A company can issue different types of preference shares.