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Question

Difficulty: MediumMoney Market: Institutions and Instruments

Match each money market institution or instrument on the left with its correct operational description on the right.

  • Call MoneyUltra-short-term interbank funds borrowed or lent on an overnight basis to balance temporary reserve deficiencies.
  • Discount HousesSpecialized non-bank financial intermediaries that trade, discount, and rediscount short-term debt securities.
  • Bankers' AcceptancesFinancial draft drawn by a commercial business and unconditionally guaranteed by a commercial bank to facilitate trade.
  • Treasury CertificatesGovernment debt instruments issued to cover budget deficits with maturity periods ranging between one and two years.

Answer

Call Money matches ultra-short-term interbank overnight funds; Discount Houses match specialized non-bank intermediaries trading and discounting short-term bills; Bankers' Acceptances match business drafts guaranteed by commercial banks; Treasury Certificates match government debt securities with 1 to 2 year maturities.
Each instrument and institution is correctly paired according to its operational role in the money market: Call Money serves overnight interbank liquidity needs; Discount Houses trade and discount short-term paper; Bankers' Acceptances represent bank-guaranteed commercial bills; and Treasury Certificates represent medium-short government debt maturing within 1 to 2 years.

Step-by-Step Solution

1
Identify the defining features of Call Money.
Call money is used by commercial banks to meet immediate, overnight liquidity requirements, matching ultra-short-term interbank funds.
It enables banks with surplus cash to lend to deficit banks on a daily demand basis.
2
Identify the institutional role of Discount Houses.
Discount houses specialize in purchasing and discounting bills of exchange and government securities, acting as intermediaries in the money market.
They foster market liquidity by trading short-term debt instruments before maturity.
3
Distinguish Bankers' Acceptances from other commercial paper.
A banker's acceptance originates from a commercial transaction and carries a bank's unconditional guarantee of payment.
The bank's endorsement enhances creditworthiness and marketability in international and domestic trade.
4
Differentiate Treasury Certificates from Treasury Bills.
Treasury certificates are issued by the government for short-to-medium-term financing, carrying maturities of 1 to 2 years.
Treasury bills mature within 91 to 364 days, whereas treasury certificates bridge the gap between money market bills and long-term capital bonds.

Key Concept

Money Market Instruments and Institutional Functions
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Topics

Money Market: Institutions and Instruments

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