Banking Terms — Set 11

Correct Answer: A. Up to 364 days

Treasury Bills are short-term instruments with maturities of 91, 182, or 364 days. They are issued by the central government through the RBI. Longer-term government debt is called 'Government Bonds' or 'Dated Securities'.

Correct Answer: B. Commercial Banks

The Repo rate is the rate at which commercial banks borrow money from the RBI by selling their securities with an agreement to buy them back. It is a key tool for controlling the money supply. When the repo rate is high, borrowing becomes expensive for banks.

Correct Answer: D. Equity Share

Equity shares represent long-term ownership in a company and are traded in the capital market. Money market instruments are short-term debt instruments. Capital markets are for long-term investments, while money markets are for short-term liquidity.

Correct Answer: C. Loan for 1 day

Overnight borrowing refers to funds borrowed today and repaid on the next working day. It is the most common tenure in the call money market. It helps banks maintain their mandatory reserve ratios on a daily basis.

Correct Answer: C. It does not require collateral

Unsecured means that the instrument is not backed by any physical assets or collateral. It is issued based on the credit reputation of the company. Because there is no security, only highly rated companies can issue it.

Correct Answer: D. Face Value

Par value is another name for the face value of a bond or security. It is the amount that will be repaid at maturity. If a security trades above this value, it's at a 'premium'; if below, it's at a 'discount'.

Correct Answer: A. Scheduled Commercial Banks

Only scheduled commercial banks and certain other financial entities can park their surplus funds with the RBI. This process allows banks to earn a safe interest on their idle cash. It helps the RBI manage excess liquidity in the system.

Correct Answer: B. Ensuring an entity can meet its short-term obligations

Liquidity management is the practice of ensuring that a bank or company has enough cash and liquid assets to pay its bills. Poor liquidity management can lead to a financial crisis even if an entity is profitable. Central banks use money market tools to help the entire system manage liquidity.

Correct Answer: A. 2 to 14 days

Notice money is a loan for a period of more than one day and up to 14 days. If the money is for only one day, it is call money. This segment allows banks to manage liquidity for slightly longer than overnight.

Correct Answer: C. Treasury Bill

Treasury Bills are issued by the Government of India and are considered risk-free. They are backed by the sovereign power of the state. Other instruments like Commercial Paper are issued by private companies and carry a risk of default.