A commercial bill is a short-term, negotiable, self-liquidating instrument which is used to finance the:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → credit sales of firms
Option (1) inter-bank transactions of commercial banks — Incorrect. Inter-bank transactions are financed by call money.
Option (2) floatation costs of a new issue — Incorrect. Floatation costs of a new issue are met from funds raised through commercial paper. This is called bridge financing.
Option (3) short-term needs of the Central Government — Incorrect. The short-term needs of the Central Government are met by treasury bills.
Option (4) credit sales of firms — Correct. When goods are sold on credit, the buyer pays on a fixed date in future. A commercial bill finances these credit sales. It is self-liquidating, as it is settled when the buyer pays on the due date.
NCERT (Pre-rationalised Edition): “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. When goods are sold on credit, the buyer becomes liable to make payment on a specific date in future. The seller could wait till the specified date or make use of a bill of exchange. The seller (drawer) of the goods draws the bill and the buyer (drawee) accepts it. On being accepted, the bill becomes a marketable instrument and is called a trade bill. These bills can be discounted with a bank if the seller needs funds before the bill matures. When a trade bill is accepted by a commercial bank it is known as a commercial bill.” |