Banking Terms — Set 12

Correct Answer: C. 7 days to 1 year

Certificates of Deposit issued by banks must have a maturity of at least 7 days and at most one year. They are used by banks to raise large amounts of funds from the market. For some financial institutions, the tenure can be up to three years.

Correct Answer: A. RBI

While companies issue CP, the RBI is the primary regulator that sets the rules and guidelines for its issuance in India. SEBI also has some oversight since these are traded in the market. The RBI ensures that CP issuance does not disrupt the credit market.

Correct Answer: A. Total return on an investment expressed as a percentage

Yield is the annual rate of return on an investment. It takes into account the interest earned and any gain or loss in the value of the instrument. In the money market, yield is a key metric for comparing different instruments.

Correct Answer: D. Regulating the money supply and interest rates

Open Market Operations involve the buying and selling of government securities by the central bank. By selling securities, the RBI takes money out of the system; by buying them, it puts money in. This is a core tool for long-term liquidity management.

Correct Answer: D. Standard rate used as a reference for other rates

A benchmark rate is a reference point used to price various financial products like loans and derivatives. MIBOR and the Repo rate are common benchmarks in India. Using a benchmark ensures transparency and consistency in pricing.

Correct Answer: A. An asset pledged by a borrower to secure a loan

Collateral is an asset that a borrower offers to a lender to secure a loan. If the borrower fails to pay, the lender can seize the collateral. Repo transactions are 'secured' because they use government securities as collateral.

Correct Answer: D. Lack of uniformity in interest rates

The unorganized money market consists of money lenders and indigenous bankers who don't follow standardized rules. This leads to widely varying interest rates across different regions and lenders. They are not directly regulated by the central bank.

Correct Answer: A. No periodic interest payments

Zero coupon instruments do not pay regular interest. Instead, they are sold at a price below their face value and redeemed at the full face value at maturity. The entire return is the difference between the purchase and sale price.

Correct Answer: C. Balancing short-term surplus and deficit of funds

The money market allows entities with temporary excess cash to lend it to those with a temporary shortage. This ensures that funds are used efficiently across the financial system. It provides a mechanism for short-term liquidity management for all participants.

Correct Answer: A. Know Your Customer

KYC stands for Know Your Customer. It is a mandatory process for banks to verify the identity and address of customers. RBI has made KYC compliance compulsory for all financial institutions to prevent money laundering and fraud.