Banking Terms — Set 3
Economics · बैंकिंग शब्दावली · Questions 21–30 of 120
Which money market instrument is also known as a 'Zero Coupon' bond?
Correct Answer: C. Treasury Bill
Treasury Bills do not pay regular interest but are issued at a discount to their face value. The return to the investor is the difference between the purchase price and the maturity value. Because they pay no periodic interest, they are called zero-coupon bonds.
What is the minimum amount for which a Commercial Paper (CP) can be issued?
Correct Answer: B. Rs. 5 Lakhs
Commercial Paper must be issued in denominations of Rs. 5 lakhs or multiples thereof. It is an unsecured promissory note used by corporate borrowers. This high minimum amount ensures that only institutional or wealthy investors participate.
Which rate is used as the base for all other interest rates in the economy?
Correct Answer: D. Repo Rate
The Repo rate is the policy rate determined by the RBI's Monetary Policy Committee. Changes in the repo rate typically lead to changes in lending and deposit rates across banks. It is the rate at which banks borrow money from the RBI.
What is 'Term Money' in the money market?
Correct Answer: A. Loan for 15 days to 1 year
Term money refers to the borrowing and lending of funds for a period exceeding 14 days and up to one year. It is a part of the inter-bank market for slightly longer durations. It helps banks manage their structural liquidity mismatches.
Which of these entities cannot issue a Certificate of Deposit?
Correct Answer: D. Regional Rural Banks
Regional Rural Banks (RRBs) and Local Area Banks are currently not allowed to issue Certificates of Deposit. Scheduled Commercial Banks and select All-India Financial Institutions are the primary issuers. This restriction helps maintain the credit quality of the instruments.
What is 'Liquidity Adjustment Facility' (LAF) used for?
Correct Answer: B. Daily liquidity management
LAF is a tool used by the RBI to manage day-to-day liquidity in the banking system through Repo and Reverse Repo. It helps in aligning the inter-bank rates with the policy repo rate. It allows banks to borrow or park funds according to their needs.
The 'Discount and Finance House of India' (DFHI) was established to help which market?
Correct Answer: D. Money Market
DFHI was set up in 1988 by the RBI to provide liquidity to the money market. It acts as a specialized intermediary to stimulate secondary market activity in money market instruments. It was later merged to form STCI Primary Dealer Limited.
What does 'Haircut' mean in a REPO transaction?
Correct Answer: A. Margin on the collateral value
A haircut is the difference between the market value of the collateral and the amount of the loan. It acts as a safety buffer for the lender in case the value of the security drops. For example, if a 5% haircut is applied, a bank can borrow Rs. 95 against Rs. 100 worth of securities.
Who can issue Commercial Paper in India?
Correct Answer: B. Corporates and Financial Institutions
Companies, Primary Dealers, and All-India Financial Institutions are eligible to issue Commercial Paper. The issuer must have a minimum net worth and a valid credit rating. This instrument provides an alternative to bank finance for highly rated entities.
In the money market, what is 'Basis Point' (bps)?
Correct Answer: A. 0.01% of interest
A basis point is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%. Therefore, a 50 bps increase in the repo rate means a 0.5% increase.