Prelims 2020

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 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?
a) 1 and 2 only
b) 4 only
c) 1 and 3 only
d) 2, 3 and 4 only
Correct Answer : c) 1 and 3 only

Question from UPSC Prelims 2020 GS Paper

Explanation:

1. Commercial Paper

‘Commercial Paper’ is a short-term unsecured promissory note. – This statement is correct. Commercial Paper (CP) is indeed a short-term, unsecured promissory note issued by high-rated corporations to meet their short-term liabilities, such as payroll, accounts payable, and inventories. It is a very common form of short-term borrowing and typically has a maturity period of less than one year.

2. Certificate of Deposit

‘Certificate of Deposit’ is a long-term instrument issued by the Reserve Bank of India to a corporation. – This statement is incorrect. A Certificate of Deposit (CD) is a short-term to medium-term financial instrument issued by banks and financial institutions to individuals, corporations, and other entities. They are not issued by the Reserve Bank of India (RBI) and are not specifically long-term; their maturity can range from a few weeks to a few years.

3. Call Money

‘Call Money’ is a short-term finance used for interbank transactions. – This statement is correct. Call Money is a very short-term loan, typically overnight, used by banks to meet their immediate liquidity needs. It is part of the money market and involves borrowing and lending between banks (interbank transactions).

4. Zero-Coupon Bonds

‘Zero-Coupon Bonds’ are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations. – This statement is incorrect. Zero-Coupon Bonds do not pay periodic interest (coupon) payments. Instead, they are issued at a discount to their face value, and the return to the investor is the difference between the purchase price and the face value at maturity. They can be issued by various entities, including governments and corporations, and their maturity can range from short to long-term. They are not specifically issued by Scheduled Commercial Banks to corporations.

Given the analysis, the correct statements are 1 and 3, making the correct answer:

c) 1 and 3 only

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