Based on following case study, answer the question.

Financial Market are classified on the basis of the maturity of financial Instruments traded in them. Instruments with a maturity of less than one year are traded in money market while instruments with longer maturity are traded in Capital market. Instruments with a maturity of short term/ period upto one year are close substitutes for money. While long term funds market, direct savings of the community into their most productive use leading to growth and development of the economy.

Select the instrument that is used for Inter-bank transactions.

Call Money

The correct answer is option (3)- Call Money.

Call Money is the instrument that is used for Inter-bank transactions.

Call money market- 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. The interest rate paid on call money loans is known as the call rate.

OTHER OPTIONS

* 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.

* 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.

* 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.