Money Market — Set 5

Correct Answer: A. Indigenous Bill of Exchange

Hundis are traditional indigenous financial instruments used in India for centuries. They are written in vernacular languages and serve as a medium of trade credit. They are still used in certain unorganized trade sectors across the country.

Correct Answer: C. Liquidity and safety of principal

MMMFs invest in short-term debt securities like T-Bills and CDs to provide high liquidity to investors. Their main goal is to preserve the principal while offering slightly higher returns than a savings account. They are ideal for parking surplus cash for a very short duration.

Correct Answer: D. Inverse relation

The Repo rate and market liquidity have an inverse relationship. When the Repo rate increases, the cost of borrowing for banks goes up, which reduces the money supply and liquidity. Conversely, a lower Repo rate makes borrowing cheaper and increases liquidity.

Correct Answer: A. Individual with low income

Only large corporates, primary dealers, and All-India Financial Institutions with high credit ratings can issue CP. While individuals can 'invest' in CP, the high minimum denomination of Rs. 5 lakhs prevents low-income individuals from participating. It is essentially a wholesale market instrument.

Correct Answer: C. Unconditional written order

A Bill of Exchange is a written instrument containing an unconditional order to pay a certain sum to a specific person. It is used primarily in international and domestic trade. It becomes a 'Commercial Bill' once it is accepted by a buyer or a bank.

Correct Answer: A. Triparty

TREPS stands for Triparty Repo, where a third party (CCIL) acts as an intermediary between the borrower and the lender. This intermediary handles the collateral management and settlement of the trade. It has largely replaced the earlier Collateralized Borrowing and Lending Obligation (CBLO).

Correct Answer: A. T+0 or T+1

Most money market transactions are settled on the same day (T+0) or the next working day (T+1). This reflects the high-speed and short-term nature of these instruments. Fast settlement is essential for banks to manage their daily liquidity requirements effectively.

Correct Answer: A. Annual rate of return

Yield is the actual rate of return an investor earns on a financial instrument. It is expressed as an annual percentage. In the money market, yield is often calculated on a discount basis for instruments like T-Bills.

Correct Answer: C. Reverse Repo

Reverse Repo is the rate at which the RBI borrows funds from banks. It is always kept lower than the Repo rate to encourage banks to lend to the public rather than just parking money with the RBI. It helps in absorbing excess liquidity from the system.

Correct Answer: C. Less than 91 days

CMBs are very short-term government debt instruments introduced in 2010. They are issued for tenures specifically less than 91 days to manage temporary cash flow issues. They are similar to T-Bills but are used for more urgent, shorter durations.