In the Indian money market, a Certificate of Deposit (CD) is a negotiable money market instrument issued by banks and certain financial institutions in the form of which type of promissory note?

Introduction / Context:
Certificates of Deposit (CDs) are important short term instruments in the Indian money market. They provide banks and certain financial institutions with a way to raise funds from the market, and they offer investors a relatively safe, interest bearing asset. To answer questions on CDs correctly, it is useful to know their basic legal form and characteristics, including whether they are demand or usance instruments.

Given Data / Assumptions:

• We are discussing Certificates of Deposit (CDs) issued in the Indian money market.
• CDs are negotiable money market instruments.
• The options describe different forms of promissory notes and a bearer cheque.
• We assume the standard regulatory framework in which CDs are issued by scheduled commercial banks and certain financial institutions.

Concept / Approach:
In India, Certificates of Deposit are issued in dematerialised form or as usance promissory notes. A usance promissory note is payable at a future date, that is, on maturity, rather than on demand. CDs have a fixed maturity period and a specified interest rate or discount. They are not payable on demand like demand promissory notes or bearer cheques. The negotiability of CDs allows them to be traded in the secondary market before maturity, but their legal form is that of usance promissory notes.

Step-by-Step Solution:
Step 1: Recall that CDs are time deposits with a fixed maturity, often ranging from a few months up to one year for banks.Step 2: Time deposits by definition are payable on a specified future date, not on demand, which means they match the concept of a usance instrument.Step 3: The Reserve Bank of India guidelines state that CDs may be issued in demat form or as usance promissory notes.Step 4: A demand promissory note or bearer cheque would imply immediate payment on demand, which is not the case for CDs.Step 5: Describing CDs as derivative usance promissory notes or allowing either demand or usance forms would not reflect the standard regulatory design.Step 6: Therefore, the correct form is usance promissory note.

Verification / Alternative check:
If you look at typical descriptions of CDs in exam oriented banking awareness material, they clearly mention that CDs are negotiable money market instruments in the form of usance promissory notes, issued at a discount to face value and redeemable at par on maturity. The time to maturity and the fact that investors must wait until that date to receive the face value (unless they sell in the secondary market) confirm that CDs are not payable on demand. This matches the definition of usance, which refers to payment at a future date.

Why Other Options Are Wrong:
Derivative usance promissory note: The term derivative here is misleading and not part of the standard description of CDs.

Demand promissory note: This would be payable on demand, while CDs are payable at the end of a fixed term.

Either demand or usance promissory note: Regulatory guidelines do not present CDs as instruments that can be either; they are structured as time instruments.

Bearer cheque payable on demand: Cheques are different instruments used for payment, not for raising fixed term deposits from the market.

Common Pitfalls:
Students sometimes assume that any easily tradable instrument must be payable on demand, and therefore select demand promissory note. It is important to distinguish between an instrument being negotiable (transferable) and being payable on demand. CDs are negotiable but have fixed maturities, which is why they are usance instruments. Keeping this difference clear helps in correctly answering money market questions.

Final Answer:
A Certificate of Deposit in India is issued in the form of a usance promissory note.