Sunil sold goods on credit to Ajay and drew a draft on him for the amount, which Ajay accepted. Sunil needs funds before the due date. Which money market instrument can he use to raise them?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Commercial bill
Option (1) Commercial bill — Correct. Sunil drew a bill of exchange on Ajay, and Ajay accepted it. A commercial bill is a bill of exchange used to finance the credit sales of firms. Such a bill can be discounted with a bank if the seller needs funds before it matures.
Option (2) Commercial paper — Incorrect. Commercial paper is issued by large and creditworthy companies. It is not raised against a credit sale.
Option (3) Call money — Incorrect. Call money is finance between banks, used to keep the cash reserve ratio. A trader cannot use it.
Option (4) Certificate of deposit — Incorrect. Certificates of deposit are issued by commercial banks and development financial institutions.
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.” |