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Debt market instruments have a maturity of

Debt market instruments have a maturity of

Looking for the answer to the question below related to Financial Management ?

Debt market instruments have a maturity of

 Options:

A. Less than one year
B. Less than six months
C. More than one year
D. None of these

The Correct Answer Is:

  • C. More than one year

Debt market instruments, also known as fixed-income securities, are financial instruments that represent loans made by investors to borrowers. These instruments come with various maturities, and the correct answer to the question is option C: “More than one year.” Let’s delve into a detailed explanation of why this answer is correct, followed by an analysis of why the other options are not correct.

Correct Answer (C): More than one year

Debt market instruments can be categorized based on their maturities. When we refer to maturities, we are essentially talking about the time it takes for the borrower to repay the principal amount borrowed along with any interest accrued. Instruments with maturities of “more than one year” are typically considered long-term debt securities. Here’s why this answer is correct:

  1. Characteristics of Long-Term Debt: Debt instruments with maturities of more than one year are generally considered long-term. These include government bonds, corporate bonds, and mortgage-backed securities. Investors in long-term debt instruments are committing their capital for an extended period, often years or even decades.
  2. Interest Payments: In long-term debt instruments, borrowers make periodic interest payments to the investors (bondholders or lenders) over the life of the security, and the principal is repaid at maturity. This means that investors receive interest income over a more extended period than short-term instruments.
  3. Risk and Volatility: Long-term debt instruments are exposed to interest rate risk. As interest rates change over time, the value of these instruments can fluctuate significantly. This is because the present value of future cash flows, including interest payments, is inversely related to prevailing interest rates. Therefore, they are more sensitive to interest rate changes than shorter-term instruments.
  4. Examples: Government bonds, such as U.S. Treasury bonds, typically have maturities ranging from 10 to 30 years. Corporate bonds can have varying maturities, often exceeding one year. Mortgage-backed securities, which represent bundles of home loans, can also have maturities exceeding one year.

Now, let’s explore why the other options are not correct:

Option A: Less than one year

This option is incorrect because debt market instruments with maturities of “less than one year” typically fall into the category of short-term debt instruments. These instruments are designed for shorter investment horizons and include Treasury bills, commercial paper, and certificates of deposit (CDs).

They are known for their liquidity and are often used by investors seeking a safe place to park their funds for the short term. They have a maturity of one year or less, so they do not meet the criterion of “more than one year.”

Option B: Less than six months

This option is even more restrictive than option A. Instruments with maturities of “less than six months” are considered ultra-short-term debt instruments. Examples include very short-term commercial paper and certain types of money market instruments.

These are typically used for extremely short investment periods and provide a high degree of liquidity. They do not align with the definition of debt market instruments with maturities “more than one year.”

Option D: None of these

This option is incorrect because it suggests that there is no specific maturity associated with debt market instruments. In reality, there is a wide range of debt instruments available in financial markets, each with its own unique characteristics and maturity profiles.

Maturities can vary from less than one day (for overnight money market instruments) to several decades (for long-term government and corporate bonds). Therefore, it is not accurate to say that there is no specific maturity for debt market instruments; they span a broad spectrum of maturities.

In conclusion,

The correct answer to the question about the maturity of debt market instruments is option C: “More than one year.” These instruments, such as government and corporate bonds, typically have maturities exceeding one year, making them long-term investments with unique characteristics, risks, and rewards.

The other options (A, B, and D) are not correct because they either represent shorter-term instruments or do not acknowledge the diversity of maturity profiles in the debt market. Understanding the maturity of debt instruments is crucial for investors and financial professionals when making investment decisions and managing risk in their portfolios.

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