UPSC Prelims 2020 · Question 80 of 100
UPSC Prelims 2020 question on Commercial Paper
- ExamUPSC CSE
- Year2020
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyMedium
- TypeStatement
With reference to the Indian economy, consider the following statements:
1. 'Commercial Paper' is a short-term unsecured promissory note.
2. 'Certificate of Deposit' is a long-term instrument issued by the Reserve Bank of India to a corporation.
3. 'Call Money' is a short-term finance used for interbank transactions.
4. 'Zero-Coupon Bonds' are the interest bearing short-term bond issued by the Scheduled Commercial Banks to corporations.
Which of the statements given above is/are correct?
Show answer
Answer: C. 1 and 3 only
Verdict
Correct statements: 1 and 3 → Option (c).
Statement by statement
Statement 1 – CORRECT: Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue (short-term). Hence statement 1 is correct.
Statement 2 – INCORRECT: Certificate of Deposit (CD) is a negotiable money market instrument and is issued in dematerialised form against funds deposited at a bank or other eligible financial institution for a specified time period. It is issued by the Federal Deposit Insurance Corporation (FDIC) and regulated by the Reserve Bank of India — the CD is a promissory note, the interest on which is paid by the financial institution. It is NOT a long-term instrument, and it is NOT issued by the RBI to a corporation. Hence statement 2 is incorrect.
Statement 3 – CORRECT: Call money rate is the rate at which short term funds are borrowed and lent in the money market among banks on a day-to-day basis. Banks resort to this type of loan to fill the asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds. Hence statement 3 is correct.
Statement 4 – INCORRECT: Bonds are a type of debt instrument. Zero Coupon Bonds are issued at a discount and redeemed at par. No interest payment is made on such bonds at periodic intervals before maturity. They are NOT interest-bearing short-term bonds issued by Scheduled Commercial Banks to corporations. Hence statement 4 is incorrect.