With reference to the Indian economy, consider the following statements:
- ‘Commercial Paper’ is a short-term unsecured promissory note.
- ‘Certificate of Deposit’ is a long-term instrument issued by the Reserve Bank of India to a corporation.
- ‘Call Money’ is a short-term finance used for interbank transactions.
- ‘Zero-Coupon Bonds’ are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 3 — 1 and 3 only
This question tests knowledge of various money market instruments in the Indian economy. Statements 1 and 3 correctly describe Commercial Paper and Call Money, while statements 2 and 4 contain factual inaccuracies regarding Certificate of Deposit and Zero-Coupon Bonds.
✅ Statement 1 – Correct: Commercial Paper (CP) is indeed a short-term unsecured promissory note issued by highly rated corporations to raise short-term funds, introduced in India in 1990.
❌ Statement 2 – Incorrect: Certificate of Deposit (CD) is a short-term (not long-term) negotiable instrument issued by Scheduled Commercial Banks and select All-India Financial Institutions, not by the Reserve Bank of India.
✅ Statement 3 – Correct: Call Money refers to overnight borrowing/lending between banks (1 day), used for interbank transactions; funds borrowed for more than 1 day up to 14 days are called Notice Money.
❌ Statement 4 – Incorrect: Zero-Coupon Bonds do not bear periodic interest; they are issued at a deep discount to face value and redeemed at par, with the difference representing the return. They are not specifically issued by Scheduled Commercial Banks to corporations.
📝 Short Notes: Money Market Instruments
| Instrument | Nature | Issuer | Key Features |
|---|---|---|---|
| Commercial Paper (CP) | Short-term unsecured promissory note | Highly rated corporations | Maturity: 7 days to 1 year; introduced in 1990 |
| Certificate of Deposit (CD) | Short-term negotiable instrument | Scheduled Commercial Banks & select FIs | Maturity: 7 days to 1 year; cannot be withdrawn before maturity |
| Call Money | Very short-term interbank loan | Banks to banks | Overnight (1 day); Notice Money: 2-14 days |
| Treasury Bills (T-Bills) | Short-term government security | Government of India | Zero-coupon; maturity: 91, 182, 364 days |
| Zero-Coupon Bonds | Long-term debt instrument | Government/Corporations | No periodic interest; issued at discount, redeemed at par |
Question 2 of 2 Money Market
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