Money and Banking (part – II)

'Certificate of Deposit (CD)' is a negotiable money market instrument and issued in dematerialized form out as a Usance Promissory Note, against funds deposited in a bank or other eligible financial institutions for a specified time period. Guidelines for issue of CDs are governed by the Reserve Bank of India. CDs can be issued by (i) Scheduled Commercial Banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) Select all-India Financial Institutions that have been permitted by RBI to raise short- term resources within the umbrella limit fixed by RBI. Hence, statement (2) is incorrect.

'Call Money' is the borrowing or lending of funds for 1 day (overnight). Participants in call money market includes banks (excluding RRBs) and Primary Dealers (PDs), both as borrowers and lenders. Participants are force to decide on interest rate in call money market. It is short period borrowing and lending to meet the short term mismatches in fund position. Hence, statement (3) is correct.

'Zero-coupon Bond' is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. Hence, statement (4) is incorrect.

Features of Commercial Papers

• These can be issued in denominations of Rs.5 lakh or multiples thereof.
• It is a popular instrument for financing working capital requirements of companies.
• It is an unsecured money market instrument (as it is not backed by the government) in the form of a promissory note.
• Commercial Papers normally give a higher return than fixed deposits & Certificate of Deposits.
• Only corporates, who get an investment grade rating (Blue Chip companies) can issue Commercial Papers, as per RBI rules. It is issued at a discount to face value.
• Bank and Financial Institutions are prohibited from issuance and underwriting of Commercial Papers.

The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices as equity prices can differ widely from the given interest and the difference in that can be used as hedge for the inflation. Hence, statement 2 is also correct.

Key Characteristics of Blue Chip Stocks:

• Blue chip companies have substantial market capitalization, indicating their significant size and influence in the market.
• They consistently demonstrate solid financial health, with a history of profitability and positive cash flow.
• Blue chip stocks often provide regular dividend payments to shareholders, making them attractive to income-seeking investors.
• They have a strong reputation and well-established brand names, which contribute to their stability and investor confidence.
• Compared to smaller, less established companies, blue chip stocks are generally considered lower-risk investments due to their financial stability and consistent performance.

Examples of Blue Chip Companies: Reliance Industries, HDFC Bank, Infosys, Tata Consultancy Services etc.

• A G-Sec is a tradable instrument issued by the Central Government or the State Governments.
• A G-Sec is a type of debt instrument issued by the government to borrow money from the public to finance its Fiscal Deficit.
• A debt instrument is a financial instrument that represents a contractual obligation by the issuer to pay the holder a fixed amount of money, known as principal or face value, on a specified date.
• It acknowledges the Government's debt obligation.
• Such securities are short-term (usually called treasury bills, with original maturities of less than one year- presently issued in three tenors, namely, 91-day, 182 days and 364 days) or long-term (usually called Government bonds or dated securities with original maturity of one year or more).
• In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
• Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds.

• A G-Sec is a tradable instrument issued by the Central Government or the State Governments.
• A G-Sec is a type of debt instrument issued by the government to borrow money from the public to finance its Fiscal Deficit.
• A debt instrument is a financial instrument that represents a contractual obligation by the issuer to pay the holder a fixed amount of money, known as principal or face value, on a specified date.
• It acknowledges the Government's debt obligation.
• Such securities are short-term (usually called treasury bills, with original maturities of less than one year- presently issued in three tenors, namely, 91-day, 182 days and 364 days) or long-term (usually called Government bonds or dated securities with original maturity of one year or more).
• In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
• Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds.

These programs aim to reform the recipient countries' economies, typically by promoting liberalization, reducing government intervention, and encouraging exports. SAPs often involve measures like reducing government spending, privatizing state-owned enterprises, and deregulating markets.