Banking Terms — Set 10

Correct Answer: C. A loan where interest and principal are paid on time

A standard asset is a performing loan that does not carry more than normal risk. It is the opposite of a Non-Performing Asset (NPA). Only companies with 'standard' accounts are allowed to issue Commercial Paper.

Correct Answer: C. Backing by the national government

A sovereign guarantee means that the government will pay the debt if the issuer defaults. Treasury Bills carry this guarantee, making them extremely safe. It is considered the highest level of credit protection.

Correct Answer: D. Interest rate used to find the present value of future cash

The discount rate is the rate used to calculate the current value of a future payment. In the money market, it is the rate at which T-bills are sold below their face value. It determines the effective yield for the investor.

Correct Answer: A. Central Banks

Central banks, like the RBI in India or the Fed in the USA, are the primary regulators of money markets. They use these markets to implement monetary policy. They monitor participants and ensure the smooth functioning of the financial system.

Correct Answer: A. Market where banks lend and borrow from each other

The inter-bank market is the segment of the financial market where banks trade with one another. It includes the call money market and the inter-bank repo market. It is used to manage daily liquidity and statutory requirements.

Correct Answer: B. Process of collecting and managing cash flows

Cash management involves managing cash inflows and outflows to ensure an entity has enough liquidity to meet its obligations. Both corporations and governments engage in cash management. Money market instruments are key tools for this process.

Correct Answer: D. Capital used in day-to-day operations of a business

Working capital is the difference between current assets and current liabilities. It is used to fund daily operations like buying raw materials and paying wages. Commercial Paper is a popular way for companies to finance their working capital.

Correct Answer: D. Total assets minus total liabilities

Net worth is the value of all the non-financial and financial assets owned by an entity minus its outstanding liabilities. It represents the actual equity of a company. A high net worth is often a prerequisite for borrowing in the money market.

Correct Answer: A. Legal document with a written promise to pay a specific sum

A promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money. It can be payable on demand or at a specified future date. It is the legal basis for Commercial Paper and Treasury Bills.

Correct Answer: D. Cash

Cash is the most liquid asset because it can be used immediately for transactions without any conversion. In the financial market, money market instruments are considered next to cash in terms of liquidity. Real estate is usually the least liquid.