A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called
A) commercial paper.
B) a negotiable certificate of deposit.
C) a municipal bond.
D) federal funds.

Question

Quizplus · Accepted Answer

A debt instrument that pays annual interest and at maturity pays back the original purchase price is a certificate of deposit (CD). When a bank issues a CD that can be traded on the secondary market, it is called a negotiable certificate of deposit (NCD). Therefore, option B, a negotiable certificate of deposit, is the correct answer. Commercial paper (option A) is a short-term debt instrument issued by corporations, not banks. Municipal bonds (option C) are issued by state and local governments to finance public projects. Federal funds (option D) refer to overnight loans between banks to meet reserve requirements.

A Debt Instrument Sold by a Bank to Its Depositors