Given below are two statements:
Assertion (A): Money market instruments are generally much safer than capital market instruments, with a minimum risk of default.
Reason (R): Money market instruments enjoy a higher degree of liquidity, as there is a formal arrangement for this.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Money market instruments are generally much safer than capital market instruments, with a minimum risk of default. — True. The money market is generally much safer, with a minimum risk of default.
Reason (R): Money market instruments enjoy a higher degree of liquidity, as there is a formal arrangement for this. — True. A formal arrangement gives money market instruments a ready market.
Why R does not explain A?
R explains why the instruments are easy to sell. Being easy to sell does not lower the chance of default. The real reason for A is the shorter duration of investing and the financial soundness of the issuers, mainly the government, banks and highly rated companies.
NCERT (Pre-rationalised Edition): “(v) Liquidity: Capital market securities are considered liquid investments because they are marketable on the stock exchanges. However, a share may not be actively traded, i.e. it may not easily find a buyer. Money market instruments on the other hand, enjoy a higher degree of liquidity as there is formal arrangement for this. The Discount Finance House of India (DFHI) has been established for the specific objective of providing a ready market for money market instruments.” “(vi) Safety: Capital market instruments are riskier both with respect to returns and principal repayment. Issuing companies may fail to perform as per projections and promoters may defraud investors. But the money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investing and also to financial soundness of the issuers, which primarily are the government, banks and highly rated companies.” |