Banking Terms — Set 9

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

Maturity refers to the final date on which the principal amount of a loan or bond becomes due. On this date, the issuer must pay the face value to the investor. Money market instruments have short maturities of less than a year.

Correct Answer: D. Primary Dealer

Primary dealers are specialized intermediaries who deal in government securities and money market instruments. They help the RBI in the primary auction process. They also provide liquidity in the secondary market.

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

A credit rating is an objective evaluation of the creditworthiness of a borrower or an instrument. Agencies like CRISIL and ICRA provide these ratings in India. High ratings like 'AAA' or 'A1' indicate a very low risk of default.

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

The secondary market is where investors buy and sell instruments that have already been issued. It provides liquidity to investors who want to exit their positions before maturity. The stock exchange is a well-known example of a secondary market.

Correct Answer: B. Nominal value printed on a security

Face value is the amount that the issuer of a security promises to pay the holder at maturity. It is also the amount used to calculate interest if it's a coupon-bearing bond. Most money market instruments are issued at a discount to this face value.

Correct Answer: A. Periodic interest payment

A coupon is the interest rate stated on a bond when it is issued. It is typically paid annually or semi-annually. Treasury Bills are 'zero-coupon' because they don't make these periodic payments.

Correct Answer: D. Converting physical securities into electronic form

Demat is the process of holding securities in an electronic format instead of physical paper. It makes trading faster, safer, and more efficient. Most money market instruments today exist only in dematerialized form.

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

Investors usually demand a higher return for assets that are hard to sell quickly. This extra yield is the liquidity premium. Since money market instruments are highly liquid, their liquidity premium is very low.

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

OTC trading is decentralized, where participants trade directly with each other over the phone or electronic platforms. Many money market transactions in India are OTC. They are often later reported to an exchange or a central body for transparency.

Correct Answer: B. Money Market Instruments

Money market instruments are ideal for handling seasonal spikes or dips in liquidity. For example, during the harvest season or festivals, the demand for cash increases. Banks use instruments like Call Money to manage these short-term shifts.