Capital market instruments are riskier than money market instruments, both with respect to returns and principal repayment. Which of the following is a reason given for this?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Its issuing companies may fail to perform as per projections.
Option (1) Its instruments are issued during periods of tight liquidity, when deposit growth is slow. — Incorrect. Issue during periods of tight liquidity, when deposit growth is slow, describes certificates of deposit, a money market instrument.
Option (2) Its issuing companies may fail to perform as per projections. — Correct. Capital market returns depend on how the issuing company performs. Issuing companies may fail to perform as per projections, and promoters may defraud investors. So both returns and principal repayment carry risk.
Option (3) Its call rate is highly volatile and varies from day to day. — Incorrect. A highly volatile rate that changes from day to day is the call rate on call money.
Option (4) Its instruments are unsecured promissory notes issued by companies. — Incorrect. A short-term unsecured promissory note issued by companies is commercial paper, a money market instrument.
NCERT (Pre-rationalised Edition): “(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.” |