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Money market instruments have a maturity of

Money market instruments have a maturity of

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

Money 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:

  • A. Less than one year

Money market instruments are financial instruments that are characterized by their short-term nature and high liquidity. They are typically used by governments, corporations, and financial institutions to meet short-term funding needs or to manage their cash flow efficiently. The correct answer to the question is:

A. Less than one year

This answer is correct because money market instruments are generally designed to have maturities of less than one year. This short-term nature is a defining feature of money market instruments, and it serves several important purposes in the financial markets.

Money market instruments include various types of debt securities, such as Treasury bills, commercial paper, certificates of deposit (CDs), and repurchase agreements (repos), among others. Let’s delve into why the other options are not correct:

B. Less than six months

Money market instruments can have maturities of less than six months, but they can also have maturities that extend up to one year. The key characteristic is their short-term nature, which encompasses both options.

For instance, Treasury bills, which are a common money market instrument, can have maturities ranging from a few days to one year. So, while some money market instruments may have maturities of less than six months, others can have maturities closer to the one-year mark, making option B incomplete as a description.

C. More than one year

This option is incorrect because money market instruments, by definition, do not have maturities exceeding one year. Instruments with maturities over one year are typically classified as capital market instruments.

Capital market instruments, such as bonds and stocks, serve different purposes in the financial markets and have longer investment horizons than money market instruments. Money market instruments are meant to provide short-term financing and liquidity management solutions, making option C inconsistent with their fundamental characteristics.

D. None of these

Option D is incorrect because, as explained earlier, money market instruments indeed have a characteristic maturity of less than one year. It is important to emphasize that this characteristic is a fundamental aspect of money market instruments, distinguishing them from longer-term financial instruments found in the capital market. Therefore, the correct answer is not “none of these” but rather option A, “Less than one year.”

In summary,

Money market instruments play a crucial role in the global financial system, providing short-term funding and liquidity management solutions. Their defining feature is a maturity of less than one year, making them distinct from capital market instruments with longer investment horizons. While some money market instruments may have maturities of less than six months, they can also extend up to one year, solidifying the correctness of option A.

Option B is not entirely accurate as it oversimplifies the range of maturities in money market instruments. Option C is incorrect because money market instruments are specifically designed to have maturities of less than one year. Lastly, option D is also incorrect because the correct answer is indeed option A, “Less than one year,” which aligns with the primary characteristic of money market instruments.

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