Looking for the answer to the question below related to Financial Management ?
Money market instruments are
|A. Treasury bills
B. Certificate of deposit
C. Commercial paper
D. all of these
The Correct Answer Is:
- D. all of these
The correct answer is D. all of these. Money market instruments encompass a variety of short-term, low-risk financial assets that are highly liquid and serve as a means for institutions to manage their liquidity and short-term financing needs. Let’s examine why this is the correct answer and why each of the other options is also considered a money market instrument:
D. All of these:
All the options listed in the question, including Treasury bills (T-bills), Certificate of Deposit (CD), and Commercial paper, are indeed examples of money market instruments. Each of these instruments plays a vital role in the money market, and they share common characteristics such as short-term maturity, high liquidity, and low credit risk.
Now, let’s explore each of the options individually to understand why they are considered money market instruments:
A. Treasury Bills (T-bills):
Treasury bills are among the most well-known money market instruments. These are short-term debt securities issued by governments (such as the U.S. Department of the Treasury) to raise funds. T-bills typically have maturities ranging from a few days to one year.
Investors purchase T-bills at a discount to their face value, and when the bills mature, the investors receive the face value, effectively earning interest on their investment. T-bills are highly liquid and considered one of the safest investments due to the backing of the government.
B. Certificate of Deposit (CD):
Certificate of Deposit (CD) is another prominent money market instrument. It is a time deposit offered by banks and financial institutions. CDs have fixed terms that can range from a few days to several years, but the shorter-term CDs (e.g., 1 month, 3 months) are classified as money market instruments due to their short-term nature.
When individuals purchase a CD, they agree not to withdraw the funds until the maturity date, and, in return, they receive a fixed interest rate. Like Treasury bills, money market CDs are known for their safety and liquidity.
C. Commercial Paper:
Commercial paper is yet another significant money market instrument. It represents short-term, unsecured promissory notes issued by corporations, financial institutions, and other large borrowers. Commercial paper is issued to raise funds for short-term operational needs, such as financing accounts receivable or managing inventory.
These notes typically have maturities ranging from a few days to one year. Commercial paper is considered a low-risk investment because it is usually issued by creditworthy entities and offers higher yields than traditional bank deposits. It is actively traded in the money market.
In summary, the correct answer, D. all of these, is appropriate because Treasury bills, Certificate of Deposit (CD), and Commercial paper are all essential examples of money market instruments.
These instruments are valued for their short-term nature, high liquidity, and low credit risk, making them suitable for investors and institutions seeking to manage their short-term cash flows, invest idle funds, or optimize their liquidity positions. They collectively form the core of the money market, serving as vital tools for various financial participants.