The money market is generally much safer than the capital market, with a minimum risk of default. Which of the following is a reason given for this?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Its issuers, mainly the government and banks, are financially sound.
Option (1) There is a formal arrangement for the liquidity of its instruments. — Incorrect. A formal arrangement for liquidity explains why money market instruments are easy to sell.
Option (2) Its issuers, mainly the government and banks, are financially sound. — Correct. Money market issuers, mainly the government, banks and highly rated companies, are financially sound. Together with the shorter duration of investing, this keeps the risk of default low.
Option (3) Its deals are made mainly by institutions such as the RBI and banks. — Incorrect. Dealing mainly by the RBI and banks describes the participants of the money market. Who trades in the market does not decide whether the issuer can repay.
Option (4) Its transactions entail huge sums of money, as instruments are costly. — Incorrect. Huge sums per transaction describe the investment outlay in the money market. A costly instrument is no safer for that reason.
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.” |