Question

Negotiable claim issued by a bank in return for a term deposit is called

• A. Share certificate
• B. Certificate of incorporation
• C. Certificate of deposit
• D. Term deposit

Hint:

Distinguish between a regular Fixed Deposit Receipt (FDR) and a Certificate of Deposit (CD). While both are based on term deposits, the key difference is that a CD is a negotiable instrument (transferable by endorsement and delivery), whereas an FDR is not.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
This question asks for the name of a specific type of financial instrument issued by banks. It is related to a deposit made for a fixed term and has the quality of being negotiable.
Step 2: Detailed Explanation:
- Term Deposit: This is the underlying deposit itself, also known as a Fixed Deposit (FD). It is an account where money is deposited for a fixed period. The receipt for this deposit (FDR) is generally not negotiable.
- Certificate of Deposit (CD): This is a specific money-market instrument issued by banks and financial institutions against funds deposited for a fixed period of time. Unlike a standard Fixed Deposit Receipt, a Certificate of Deposit is a negotiable instrument and can be traded in the secondary market. It is issued in dematerialized form or as a usance promissory note. The Reserve Bank of India regulates the issuance of CDs.
- Share certificate: This is evidence of ownership of shares in a company.
- Certificate of incorporation: This is a legal document relating to the formation of a company.
The instrument that is a negotiable claim issued against a term deposit is a Certificate of Deposit.