Given below are two statements:
Assertion (A): Certificates of deposit are issued by commercial banks and development financial institutions.
Reason (R): Certificates of deposit are unsecured, negotiable, short-term instruments in bearer form.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Certificates of deposit are issued by commercial banks and development financial institutions. — True. These two are the issuers of CDs.
Reason (R): Certificates of deposit are unsecured, negotiable, short-term instruments in bearer form. — True. A CD has no security behind it, can be transferred, and is payable to whoever holds it.
Why R does not explain A?
R describes what kind of instrument a CD is. It says nothing about who issues it, or why. The real reason lies in the banks’ need for funds. CDs are issued when deposit growth of banks is slow but the demand for credit is high, and they help to mobilise a large amount of money for short periods.
NCERT (Pre-rationalised Edition): “4. Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilise a large amount of money for short periods.” |