Money and Banking (part – II)

'Commercial Paper (CP)' is an unsecured money market instrument issued in the form of a promissory note. Corporates, Primary Dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue (short-term). Hence, statement (1) is correct.

'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.

Commercial paper (CP) is source of credit for corporate industry. It was introduced in 1990 in India. Commercial paper is an unsecured money market instrument issued in the form of promissory note. CP can be issued for maturities between a minimum 7 days and a maximum of upto one year from the date of issue.

A Convertible Bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. A Convertible Bond offers investors a type of hybrid security that has features of a bond, such as interest payments, while also having the option to own the underlying stock. However, Convertible Bonds tend to offer a lower rate of interest (lower coupon rate) in exchange for the value of the option to convert the bond into common stock. Hence, statement 1 is correct.

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.

A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bond yield is the return an investor gets on that bond or on a particular government security. The major factors affecting the bond yield are the monetary policy of the Reserve Bank of India, especially the course of interest rates, the fiscal position of the government and its borrowing programme, global markets (which are affected by the actions of the U.S. Federal Reserve), economy, and inflation. Hence, all the given statements are correct.

Inflation-Indexed Bonds (IIBs) are financial instruments that attempt to protect the bonds' purchasing power by tying interest and principal payments to an index of price changes. IIBs include two types of compensation, a real rate of return plus a compensation for the erosion of purchasing power due to inflation. IIBs provide insurance to investors from inflation and cost savings for the Government on account of reduction in coupon payments with lowering inflation rate, elimination of uncertainty risk premium, and containing inflationary expectations. Hence, statements 1 and 2 are correct. As per RBI, extant tax provisions will be applicable on interest payment and capital gains on IIBs and there will be no special tax treatment for these bonds. Hence, statement 3 is incorrect.

A Blue Chip stock is the stock of a huge company with an excellent reputation. They are typically large, well established and financially sound companies that have operated for many years and that have dependable earnings, often paying dividends to their investors. These shares give consistently high rate of return to their investors.

Sweat Equity shares means such equity shares as are is- sued by the company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by what- ever name called. Sweat Equity shares is a reward given to the employees for their contribution towards fulfilling the objectives of the company. It encourages the employee to work more for the development of the company. For issue of sweat equity shares, the listed company shall comply with the provisions of Securities and Exchange Board of India (SEBI) Regulations on Sweat Equity and the company other than listed company shall comply with the provisions of Section 54 of the Companies Act, 2013 and Rule 8 of Companies (Share Capital and Debentures) Rules, 2014.

Gilt-edged securities are the Government securities (G-secs) traded in the stock exchange. They are called gilt-edged because it is certain that interest will be paid and they will be redeemed on the due date.

Gilt-edged securities are the Government securities (G-secs) traded in the stock exchange. They are called gilt-edged because it is certain that interest will be paid and they will be redeemed on the due date.

Sensex, B.S.E and Nifty are related to share market, while 'Structural Adjustment Programmes' (SAPs) are economic Policies for developing countries that have been promoted by the World Bank and IMF by the provision of loans conditional on the adoption of such policies.