Which of the following statements about the money market is correct?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → It is a market where low risk, unsecured and short-term debt instruments that are highly liquid are issued and traded every day.

Option (1) It is a market where low risk, secured and short-term debt instruments that are highly liquid are issued and traded every day. — Incorrect. The instruments are unsecured, not secured.

Option (2) It is a market where high risk, unsecured and short-term debt instruments that are highly liquid are issued and traded every day. — Incorrect. The instruments carry low risk, not high risk.

Option (3) It is a market where low risk, unsecured and short-term debt instruments that are highly liquid are issued and traded every day. — Correct. Money market instruments are short-term debt that is low risk, unsecured and highly liquid.

Option (4) It is a market where high risk, secured and short-term debt instruments that are highly liquid are issued and traded every day. — Incorrect. Both features are reversed. The instruments are low risk and unsecured.

NCERT (Pre-rationalised Edition): “MONEY MARKET The money market is a market for short term funds which deals in monetary assets whose period of maturity is upto one year. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded everyday. It has no physical location, but is an activity conducted over the telephone and through the internet. It enables the raising of short-term funds for meeting the temporary shortages of cash and obligations and the temporary deployment of excess funds for earning returns. …”