Assertion: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions.
Reasoning: Certificate of deposit 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.
Answer & explanation
Correct answer: option 2
Assertion: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. The assertion is correct because Certificates of Deposit (CDs) are defined as unsecured, negotiable money market instruments.
Reasoning: Certificate of deposit 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. The reasoning is correct as it describes the specific economic conditions that lead to the issuance of CDs. CDs are a tool used by banks to mobilize a large amount of money for short periods, particularly when liquidity is tight. During such times, standard deposit growth might be slow, but the demand for credit from businesses remains high. CDs allow banks to attract bulk funds from individuals, corporations, and companies to bridge this gap.
However, the reasoning does not explain why CDs are unsecured, negotiable, or short-term instruments. Hence, it does not explain the assertion.
"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."