Question

3. Financial instruments

Financial instruments are assets that have a monetary value or record a monetary transaction. To coordinate the exchange of capital between borrowers and lenders, financial instruments trade in the financial markets. These financial instruments can be categorized on the basis of their issuers, maturity, risk, and other factors. 

Identify the financial instruments based on the following descriptions.

Issued by nonfederal government entities, these financial instruments are debt securities that fund their capital expenditures. They are exempt from most taxes imposed in the area where the securities are issued. Issued by money-centered financial firms, these short- or medium-term insured debt instruments pay higher interest than a regular savings account. They are low-risk instruments and have low returns.

These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.

Issued by corporations, these financial instruments give their holders a class ownership in a company. They are riskier than bonds but less risky than the general class of ownership.

Which of the following are money market instruments? Check all that apply.

• Corporate bonds

• Common stocks

• Preferred stocks

• Commercial paper

Answer 1

NOTE: As the first four questions are correctly solved, the solution provided is only for the last question.

Money Market Instruments are SHORT-TERM debt instruments which are issued by entities to majorly take care of immediate financial obligations and expenses such as paying off vendors, capital for some urgent R&D, immediate construction of some critical infrastructure, availing some vital service immediately and many more. Among the options provided, only Corporate Bonds and Commercial Papers are debt instruments, with the other two being equity instruments. Between the two debt instruments, commercial papers have shorter tenures as compared to bonds, thereby being the money market instrument. Hence, the correct option is (d).