Question20 Which of the following statements about commercial bills is incorrect? Commercial bills are an important source of long-term finance for large and medium-sized firms A commercial bill is a discount security None of the options are incorrect A commercial bill pays no periodic interest The face value of a commercial bill is payable at a specified future date ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

Question: Which of the following statements about commercial bills is incorrect? 
Options:
1) Commercial bills are an important source of long-term finance for large and medium-sized firms
2) A commercial bill is a discount security
3) None of the options are incorrect
4) A commercial bill pays no periodic interest
5) The face value of a commercial bill is payable at a specified future date

Analysis:
Option 1: Commercial bills are an important source of long-term finance for large and medium-sized firms. This statement is typically false. Commercial bills (also known as bills of exchange or commercial paper in some contexts) are usually short-term instruments, used to finance working capital needs, and they mature in a short period (often up to 90 days). They are not generally a source of long-term finance for firms. Misunderstanding the time horizon is a common pitfall here.

Option 2: A commercial bill is a discount security. This is true. Commercial bills are issued at a discount to their face value and are redeemed at maturity for their face value, with the difference representing the interest earned by the holder.

Option 3: None of the options are incorrect. Since we have at least one incorrect statement (Option 1), this option cannot be true. It claims that all statements are correct, which contradicts the established nature of commercial bills as short-term instruments.

Option 4: A commercial bill pays no periodic interest. This is correct. As a discount security, it does not pay periodic interest; instead, the return to the holder comes from the difference between the discounted issue price and the face value paid at maturity.

Option 5: The face value of a commercial bill is payable at a specified future date. This is correct. The instrument specifies a maturity date on which the face value is paid to the holder.

Putting the pieces together, the statement that does not align with the standard characteristics of commercial bills is Option 1, which incorrectly claims they are an important source of long-term financing. The remaining options describe true aspects of how commercial bills function, namely that they are discount securities, do not pay periodic interest, and have a specified future payoff date.

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