Assertion (A): Treasury bills are traded in the money market.
Reason (R): Treasury bills are issued at a price lower than their face value and repaid at par.
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): Treasury bills are traded in the money market.
Reason (R): Treasury bills are issued at a price lower than their face value and repaid at par.
(A) — True. A treasury bill is a short-term borrowing of the Government of India maturing in less than one year. Instruments maturing in less than one year are traded in the money market.
(R) — True. Treasury bills are issued at a discount, below face value, and repaid at par. The gap is the interest earned.
Why R does not explain A?
R tells how a treasury bill is priced. A tells in which market it is traded. The market is decided by the maturity of an instrument, not by its price. Treasury bills are traded in the money market because they mature in less than one year.
NCERT (Pre-rationalised Edition): “Financial markets are classified on the basis of the maturity of financial instruments traded in them. Instruments with a maturity of less than one year are traded in the money market. Instruments with longer maturity are traded in the capital market.” “1. Treasury Bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds. Treasury bills are issued in the form of a promissory note. They are highly liquid and have assured yield and negligible risk of default. They are issued at a price which is lower than their face value and repaid at par. The difference between the price at which the treasury bills are issued and their redemption value is the interest receivable on them and is called discount. …” |