ACCA Financial Management (F9) Certification Practice Exam

What is the certificate of deposit market primarily responsible for?

1. Issuing long-term bonds

2. Trading negotiable instruments acknowledging deposits

3. Facilitating foreign currency transactions

4. Providing government loans

The correct answer is: Trading negotiable instruments acknowledging deposits

The certificate of deposit market is primarily responsible for trading negotiable instruments that acknowledge deposits. Certificates of deposit (CDs) are financial instruments issued by banks and financial institutions that represent a time deposit. When a customer places money into a CD, the bank issues a certificate indicating the amount deposited, the interest rate, and the maturity date. In essence, CDs are a way for banks to secure deposits from customers while offering a fixed interest rate over a specified term. The market allows these instruments to be bought and sold, enabling liquidity and providing investors with options for fixed-income investments while maintaining a level of security, as CDs are generally insured by government entities up to a certain limit. The other options refer to different financial markets or functions, where long-term bonds relate to debt securities with maturities typically greater than ten years, foreign currency transactions involve the exchange of one currency for another, and government loans pertain to borrowing activities by governmental entities. Each of these has distinct characteristics and is not primarily linked to the functions of the certificate of deposit market.