Q. 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 RBI to a corporation.
(3) ‘Call Money’ is 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?

  • 1 and 2 only
  • 4 only
  • 1 and 3 only
  • 2, 3 and 4 only

Answer: (c) 1 and 3 only

Notes:
  • Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note and held in a materialized form through any of the depositories approved by and registered with SEBI.
  • Certificates of Deposits are fixed-income financial instruments generally issued by commercial banks to individuals/ other lenders.
  • Call money is any type of short-term, interest-earning financial loan that the borrower has to pay back immediately whenever the lender demands it.
    • Call money deals with day to day cash requirement of banks.
      • Participants in the call money market are banks and related entities specified by the RBI.
    • Notice money deals with loans for 2-14 days to banks, it is also a short-term financial instrument.
  • Zero-coupon bond (Also known as Pure Discount Bond or Accrual Bond) refers to those bonds that are issued at a discount to its par value and make no periodic interest payment (noninterest-bearing), unlike a normal coupon-bearing bond. Zero Coupon Bonds are not interest-bearing instead they are issued at deep discounts and redeemable at par on a future date.
Money Market & Capital Market
  • The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders.
    • Money market deals in financial assets whose period of maturity is up to one year.
    • Short term financial instruments are –
      • Call money, Notice Money
      • Treasury Bill
      • Commercial Paper
      • Deposit Certificates
      • Trade bill
  • The capital market is the market for medium and long-term funds.
    • Capital Market deals in financial assets whose period of maturity more than one year.
    • Long term financial instruments are-
      • Security Market– Equity, Debt, IPOs, Commodity Markets etc.
      • Non-Securit Market – Mutual Funds, Fixed Deposits, Saving Deposits etc.