Money Market — Set 5
Economics · मुद्रा बाजार · Questions 41–50 of 80
Which instrument helps in establishing a 'bridge' between the short-term and long-term interest rates?
Correct Answer: C. Treasury Bills
Treasury Bills, especially the 364-day tenor, provide a benchmark for pricing other debt instruments. They help in forming the yield curve which connects short-term and long-term rates. A well-developed T-bill market is essential for monetary policy transmission.
The 'Liquidity Adjustment Facility' (LAF) consists of which two tools?
Correct Answer: D. Repo and Reverse Repo
LAF operates through Repo and Reverse Repo auctions. Through Repo, RBI injects liquidity; through Reverse Repo, it absorbs liquidity. It is the most frequently used indirect instrument of monetary policy.
Commercial Paper can only be issued by companies with a minimum net worth of?
Correct Answer: D. Rs. 4 Crore
To issue CPs, a company must have a tangible net worth of at least Rs. 4 crore as per the latest audited balance sheet. Additionally, their working capital limit must be sanctioned by a bank. This ensures that only financially sound companies access the market.
Which of the following provides 'Ready Forward' facility to participants in the money market?
Correct Answer: D. Repo Transaction
A Repo is also known as a Ready Forward transaction because it involves a ready sale and a forward purchase. It provides an immediate source of cash (ready) with a pre-arranged future reversal (forward). It is widely used by banks to manage daily liquidity.
The unorganized money market is characterized by?
Correct Answer: C. Lack of formal documentation and regulation
The unorganized market operates on personal relationships and informal agreements. There is no standardization in interest rates or loan terms. This sector is largely beyond the reach of formal monetary policy interventions.
Maturity of 'Term Money' in the inter-bank market refers to funds borrowed for?
Correct Answer: A. 15 days to 1 year
Term Money is borrowing or lending for a period exceeding 14 days up to one year. It serves as a mechanism for banks to bridge gaps in their maturity profiles. Unlike call money, term money rates are generally fixed for the period.
Which of the following is NOT an instrument of the organized money market?
Correct Answer: B. Hundi
A Hundi is a traditional indigenous instrument used in the unorganized money market. Organized instruments like T-Bills and CDs have standardized formats and regulatory backing. Hundis have been used in India for centuries for trade and remittance.
What is the primary function of the 'Secondary Market' for money market instruments?
Correct Answer: A. To provide exit and liquidity to existing investors
The secondary market allows investors to sell their instruments before maturity. This trading provides liquidity and helps in efficient price discovery. Institutions like DFHI play a major role in developing this market.
Money market instruments are often called 'Near Money' because?
Correct Answer: C. They can be easily and quickly converted into cash
Near money refers to assets that are highly liquid but not currently used as a medium of exchange. Money market instruments can be turned into cash with minimal delay and cost. This property makes them ideal for temporary storage of surplus funds.
In India, the interest on Treasury Bills is paid in the form of?
Correct Answer: B. Discount from the face value
Treasury Bills do not carry a coupon or interest rate. Investors buy them at a discount (e.g., Rs. 98) and receive the full face value (Rs. 100) on maturity. This 'implicit' interest is the income earned by the investor.