Which of the following pairs of a money market instrument and its feature is correctly matched?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Commercial paper – An alternative to bank borrowing for large companies that are financially strong
Option (1) Commercial paper – An alternative to bank borrowing for large companies that are financially strong — Correct. Large companies that are financially strong can borrow directly through commercial paper. So it is an alternative to bank borrowing for them.
Option (2) Call money – Issued to meet the short-term requirement of funds of the Central Government — Incorrect. This is the feature of a treasury bill, which the Reserve Bank of India issues for the Central Government. Call money is short-term finance used for inter-bank transactions.
Option (3) Certificate of deposit – A self-liquidating instrument used to finance the credit sales of firms — Incorrect. A self-liquidating instrument that finances credit sales is a commercial bill. A certificate of deposit is an unsecured, negotiable instrument in bearer form, issued by commercial banks and development financial institutions.
Option (4) Treasury bill – Used by banks to borrow from each other to maintain the cash reserve ratio — Incorrect. Banks borrow from each other through call money to maintain the cash reserve ratio. A treasury bill is short-term borrowing by the Government of India.
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. …” “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. …” |