Money Market — Set 8

Correct Answer: D. Call Money Market

The call money market is highly organized and regulated by the central bank. It operates through standardized procedures and electronic platforms. Money lenders and indigenous bankers are part of the unregulated unorganized sector.

Correct Answer: D. Reduction from face value

Discount refers to issuing an instrument at a price lower than its eventual maturity value. This is the primary way investors earn a return on non-interest-bearing instruments like T-Bills. The deeper the discount, the higher the effective interest rate for the buyer.

Correct Answer: D. Profiting from price differences in different markets

Arbitrage involves the simultaneous purchase and sale of an asset to profit from a difference in the price. It ensures that prices of the same instrument in different markets stay aligned. In the money market, traders use this to exploit tiny interest rate differences.

Correct Answer: C. Statutory

SLR stands for Statutory Liquidity Ratio. The term 'Statutory' means it is a legal requirement under the Banking Regulation Act. All banks must maintain this ratio to ensure they have enough liquid assets.

Correct Answer: A. Tenure of the loan

In this context, 'Term' refers to the specific time duration or tenure of the loan. While call money is for one day, term money is for a longer fixed duration. This duration can range from 15 days up to one year.

Correct Answer: A. Treasury Bills

Treasury Bills are issued by the government and are considered 'risk-free'. They are backed by the sovereign power to tax and print money. Other instruments like Commercial Paper carry the risk of default by the private issuer.

Correct Answer: A. Date of repayment

Maturity is the final date on which the principal amount of a debt instrument becomes due and is paid back to the investor. For money market instruments, this date is always within 365 days of issuance. After this date, the instrument ceases to exist.

Correct Answer: B. Short term liquidity management

The money market allows entities with temporary excess cash to lend it to those with a temporary shortage. It ensures that funds are used efficiently within the financial system. It provides a vital platform for the central bank to implement monetary policy.

Correct Answer: D. Asset easily converted to cash

A liquid asset can be sold or exchanged for cash quickly without significant loss in value. Cash itself is the most liquid asset. Government bonds and high-quality T-bills are also considered highly liquid assets.

Correct Answer: C. Security provided for a loan

Collateral is an asset provided by a borrower to a lender as a security for the loan. If the borrower defaults, the lender can sell the collateral to recover the money. In Repo transactions, government securities serve as the collateral.