UPSC Prelims 2020 Question:

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?

Explanations:

• Commercial paper is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year. It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India for the first time in 1990. So, statement 1 is correct.
  
  
• Certificates of Deposit (CD) is a short term debt instrument issued by scheduled commercial banks, with a maturity of 3 months to 1 year. Interest on it is paid by the bank. It is issued by the Federal Deposit Insurance Corporation (FDIC) and regulated by the Reserve Bank of India. So, statement 2 is not correct.
  
  
• Call money is a segment of the money market where scheduled commercial banks lend or borrow on an overnight basis or at short notice i.e., for periods up to 14 days to manage the day-to-day surpluses and deficits in their cash-flows. So, statement 3 is correct.
  
  
• A zero-coupon bond is a debt instrument wherein the issuer does not make any coupon payment but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full-face value. These bonds have been traditionally issued by government, but banks are also allowed to issue them since last few years. So, statement 4 is not correct.
  
  

Therefore, option (3) is the correct answer.

Subject: Economics | Money and Banking