Banking Terms — Set 9

Correct Answer: D. Date on which a debt must be paid

• **Date on which a debt must be paid** = Maturity is the final date when the issuer repays the full principal (face value) to the investor. • **Short for money market** — money market instruments mature in less than one year; capital market instruments have maturities exceeding one year. • 💡 Wrong-option analysis: [Closing a bank branch]: branch closure is an operational decision, not a financial term; [Success of a business]: business success is measured by profitability, not 'maturity'; [Being an adult]: the legal definition of maturity; financial maturity means the debt repayment date.

Correct Answer: D. Primary Dealer

• **Primary Dealer** = a specialised money market intermediary that participates in government securities auctions and provides secondary market liquidity. • **RBI link** — Primary Dealers have a direct relationship with the RBI and are obligated to support T-Bill and dated securities auctions. • 💡 Wrong-option analysis: [Insurance agent]: sells insurance products, not a money market intermediary; [Travel agent]: facilitates travel bookings, entirely unrelated to financial markets; [Retail shop]: a consumer goods seller with no role in money markets.

Correct Answer: A. Assessment of a borrower's ability to pay back debt

• **Assessment of a borrower's ability to pay back debt** = Credit Rating is an objective evaluation of the creditworthiness of an issuer or instrument. • **CRISIL and ICRA** — in India, CRISIL, ICRA, and CARE are the major credit rating agencies; ratings like 'AAA' or 'A1' indicate the lowest default risk. • 💡 Wrong-option analysis: [Ranking of a bank]: bank rankings may use credit ratings but a rating itself is not a ranking; [Total bank assets]: asset size is a balance sheet metric, not a creditworthiness assessment; [Number of customers]: customer count measures reach, not credit quality.

Correct Answer: C. Market where previously issued securities are traded

• **Market where previously issued securities are traded** = the Secondary Market allows investors to buy and sell already-issued instruments before maturity. • **Liquidity provider** — the secondary market gives investors an exit option before maturity, making primary market investments more attractive. • 💡 Wrong-option analysis: [Market for food items]: food markets are commodity markets; [A small local market]: financial secondary markets can be national or global in scale; [Market for used cars]: the used car market is an analogy sometimes used for explanation but is not the definition.

Correct Answer: B. Nominal value printed on a security

• **Nominal value printed on a security** = Face Value is the amount the issuer promises to repay the holder at maturity. • **Basis for discount** — money market instruments like T-Bills and CP are issued at a price below this face value; the difference is the investor's return. • 💡 Wrong-option analysis: [Market price of a share]: market price fluctuates; face value is fixed and printed on the instrument; [Value of a person's face]: a humorous distractor with no financial meaning; [Total tax paid]: tax paid is a fiscal concept, not related to securities valuation.

Correct Answer: A. Periodic interest payment

• **Periodic interest payment** = a Coupon is the fixed interest rate paid periodically (annually or semi-annually) by the bond issuer to the holder. • **Zero-coupon exception** — Treasury Bills are 'zero-coupon' instruments because they do not make any coupon payments; returns come only from the price discount. • 💡 Wrong-option analysis: [A discount voucher]: a retail discount has no relation to bond interest payments; [A penalty fee]: fees and penalties are charges imposed for non-compliance, not periodic returns; [A legal document]: a bond itself is a legal document; the coupon is the interest component within it.

Correct Answer: D. Converting physical securities into electronic form

• **Converting physical securities into electronic form** = Dematerialisation (Demat) converts paper-based securities into electronic records held in a depository. • **Faster and safer** — dematerialisation eliminates risks of loss, theft, and forgery of paper certificates; most money market instruments exist only in Demat form today. • 💡 Wrong-option analysis: [Selling of bank property]: asset disposal is unrelated to dematerialisation; [Printing new notes]: currency printing is the RBI's function; [Destroying physical goods]: physical destruction of goods is a logistics/operations concept.

Correct Answer: D. Extra return for holding an illiquid asset

• **Extra return for holding an illiquid asset** = Liquidity Premium is the additional yield investors demand for holding assets that are difficult to quickly convert to cash. • **Low for money market** — money market instruments are highly liquid, so their liquidity premium is negligible compared to real estate or long-term bonds. • 💡 Wrong-option analysis: [Tax on cash]: cash holdings are not taxed as liquidity premium; [Insurance fee]: an insurance premium covers risk, not illiquidity; [Bank profit]: profit is revenue minus cost, not the extra return for holding illiquid assets.

Correct Answer: C. Trading directly between two parties without an exchange

• **Trading directly between two parties without an exchange** = Over-the-Counter (OTC) trading happens bilaterally, not through a centralised stock exchange. • **Dominant in money market** — most Indian money market transactions (repos, call money) are OTC and reported to a central body for transparency. • 💡 Wrong-option analysis: [Buying medicine]: 'over the counter' in pharmacy means no prescription needed; in finance it means decentralised trading; [Trading only in physical counters]: OTC trades happen electronically; 'counter' is metaphorical; [Buying food in a bank]: completely irrelevant to OTC financial trading.

Correct Answer: B. Money Market Instruments

• **Money Market Instruments** = ideal for managing seasonal liquidity surpluses and deficits because of their short tenures and high convertibility. • **Seasonal pattern** — during harvest season, agricultural businesses need short-term funds; after sales, they park surpluses in money market instruments. • 💡 Wrong-option analysis: [Fixed Deposit]: FDs have fixed lock-in periods and are not ideal for fluctuating seasonal cash needs; [Gold]: gold is illiquid and not a standard tool for corporate liquidity management; [Real Estate]: highly illiquid and long-term, unsuitable for managing seasonal cash flows.