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?

1 and 2 only

2 and 4 only

1 and 3 only

1, 3 and 4 only

APEDIA

UPSC Prelims

2020 • 04 Oct, 2020 • Paper-1

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?

Correct Answer

1 and 3 only

Commercial Paper Definition: Introduced in 1990, a Commercial Paper (CP) is fundamentally a short-term, unsecured money market instrument issued in the form of ......

💡 Analysis & Explanation

Commercial Paper Definition ▼

Introduced in 1990, a Commercial Paper (CP) is fundamentally a short-term, unsecured money market instrument issued in the form of a promissory note by highly rated corporate borrowers. Statement 1 is correct.

Certificate of Deposit Errors ▼

A Certificate of Deposit (CD) is issued by commercial banks and select financial institutions (not the RBI) to individuals or corporations. Furthermore, it is a short-term money market instrument, not long-term. Statement 2 is entirely incorrect.

Call Money Market ▼

The call money market handles extremely short-term funds, usually overnight. It is primarily utilized by commercial banks to maintain their liquidity mismatch and CRR requirements through interbank lending. Statement 3 is correct.

Zero-Coupon Bond Mechanics ▼

Zero-coupon bonds, by definition, do not pay regular interest (coupon). They are issued at a deep discount to face value and redeemed at par upon maturity. They are typically issued by the government or large corporations, not specifically by banks as 'interest-bearing' short-term debt. Statement 4 is fundamentally flawed.

Conclusion ▼

Thus, only statements 1 and 3 carry accurate financial definitions.

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