Looking for the answer to the question below related to Financial Management ?
Inter bank participation certificate is a
|A. money market instrument
B. very popular instrument
C. Instrument used by companies
D. None of these
The Correct Answer Is:
- A. money market instrument
Interbank participation certificates (IPCs) are indeed money market instruments. To understand why this is the correct answer, let’s delve into the concept of money market instruments and examine why the other options are not applicable.
Money market instruments are short-term debt securities with high liquidity and low risk. They serve as a means for financial institutions, including banks, to manage their short-term funding needs and provide an avenue for investors to park their excess funds temporarily. IPCs fall under this category as they are a type of short-term borrowing and lending instrument between banks.
Interbank participation certificates are essentially issued by one bank to another bank as a form of borrowing. The issuing bank needs short-term funds to meet its liquidity requirements, and it seeks these funds from other banks through IPCs. These certificates represent a transferable and negotiable claim on the issuing bank, and they specify the amount, tenure, and interest rate of the borrowing.
Banks that purchase IPCs become lenders, providing funds to the issuing bank for a specified period. In return, they receive a predetermined interest rate on the principal amount invested. The maturity period of IPCs is generally short, ranging from a few days to a few months, making them suitable for short-term investment and financing needs.
The interest rate on IPCs is typically competitive and tied to prevailing market rates, ensuring that both parties benefit from the transaction.
Now let’s explore why the other options are not correct:
B. Very popular instrument:
While IPCs are widely used in interbank transactions, it would be inaccurate to categorize them as a “very popular instrument” in a general sense. The popularity of financial instruments can vary across different markets and regions.
IPCs are predominantly used within the banking industry as a means of short-term funding and liquidity management. They may not be as widely recognized or utilized outside of this specific context.
C. Instrument used by companies:
IPC is not typically used by companies. It primarily serves as a mechanism for interbank lending and borrowing. Companies typically utilize other financial instruments, such as commercial paper or corporate bonds, to raise short-term or long-term capital from investors.
While companies may interact with banks for various financial services, IPCs are not a commonly used instrument in their financial operations.
D. None of these:
This option is incorrect because, as explained earlier, IPCs are indeed money market instruments. They are short-term debt securities that facilitate interbank lending and borrowing, allowing banks to manage their liquidity needs efficiently.
In conclusion, Interbank participation certificates (IPCs) are classified as money market instruments. They provide banks with a means to borrow funds from other banks on a short-term basis. IPCs are used to meet short-term liquidity requirements and offer competitive interest rates.
They are not widely recognized outside of the banking industry and are not commonly used by companies. Therefore, the correct option is A: money market instrument.