Looking for the answer to the question below related to Financial Management ?
Which of the following is not a money market security?
|A. Treasury bills
B. National savings certificate
C. Certificate of deposit
D. Commercial paper
The Correct Answer Is:
- B. National savings certificate
The correct answer is B. National savings certificate. To understand why this option is not a money market security and why the other options are, let’s delve into the characteristics and distinctions of each of these financial instruments in detail.
A. Treasury Bills (T-Bills):
Treasury bills are indeed a money market security. They are short-term debt instruments issued by the government to raise funds for various activities.
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 receive the face value upon maturity, making the difference between the purchase price and face value their interest or profit. T-Bills are highly liquid and considered one of the safest investments due to the government’s backing.
C. Certificate of Deposit (CD):
Certificate of deposits are also money market securities. CDs are time deposits offered by banks and other financial institutions with fixed maturities, typically ranging from a few months to several years.
They offer higher interest rates compared to regular savings accounts due to the commitment to keep the funds deposited for a specific term. CDs can be traded in secondary markets but are considered less liquid than T-Bills.
D. Commercial Paper:
Commercial paper is another money market security. It represents short-term unsecured debt issued by corporations and financial institutions to meet their short-term funding needs.
Commercial paper typically has maturities ranging from a few days to 270 days. Investors purchase commercial paper at a discount to face value and receive the face value at maturity, earning the difference as interest. It’s a critical source of short-term financing for many businesses and is considered relatively safe, depending on the issuer’s creditworthiness.
Now, let’s discuss why B. National Savings Certificate is not a money market security:
B. National Savings Certificate:
National Savings Certificates are not considered money market securities. They are government-sponsored savings instruments aimed at encouraging small-scale savings by individuals. NSCs are typically issued by postal departments or authorized banks in various countries. These certificates have fixed tenures, often ranging from 5 to 10 years, and are not traded in secondary markets.
Unlike money market securities, NSCs do not have short-term maturities, making them more suitable for long-term savings goals rather than short-term liquidity management. Furthermore, the interest on NSCs is generally higher than traditional savings accounts but lower than money market instruments like T-Bills or commercial paper.
In summary, the key distinction between money market securities and National Savings Certificates lies in their purpose, maturity, and liquidity. Money market securities are designed for short-term liquidity management and are highly liquid, whereas National Savings Certificates are meant for long-term savings and lack the short-term maturity and liquidity characteristic of money market instruments.
It’s important for investors to understand these differences to make informed decisions about where to allocate their funds based on their financial goals and risk tolerance.