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 bonds issued by the Scheduled Commercial Banks to corporations. Which of the statements given above is/are correct?

QUESTION

Medium

Economy

Prelims 2020

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?

Select an option to attempt

Explanation

The correct statements are 1 and 3:

Statement 1 is correct: Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990 to enable highly rated corporate borrowers to diversify their sources of short-term borrowings.
Statement 3 is correct: Call Money is a short-term finance used for interbank transactions. It refers to the borrowing or lending of funds for 1 day (overnight). If the money is borrowed for more than 1 day but up to 14 days, it is known as 'Notice Money'.

Why the other statements are incorrect:

Statement 2 is incorrect: A Certificate of Deposit (CD) is a short-term (money market) negotiable instrument. It is issued by Scheduled Commercial Banks and select All-India Financial Institutions (like SIDBI or EXIM Bank), not by the Reserve Bank of India.
Statement 4 is incorrect: Zero-Coupon Bonds are not interest-bearing in the traditional sense (they do not pay periodic coupons). Instead, they are issued at a deep discount to their face value and redeemed at par. The difference between the purchase price and the maturity value represents the return. While the Government issues them (e.g., Treasury Bills), they are not specifically defined as bonds issued by Scheduled Commercial Banks to corporations.

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