Read the following statements - Assertion (A) and Reason (R) : Assertion (A) : Money market instruments have a higher degree of liquidity as compared to capital market securities. Reason (R) : Money market instruments are traded on the stock exchanges. Choose the correct alternative from the alternatives given below :
Read the following statements - Assertion (A) and Reason (R) : Assertion (A) : Money market instruments have a higher degree of liquidity as compared to capital market securities. Reason (R) : Money market instruments are traded on the stock exchanges. Choose the correct alternative from the alternatives given below :
Options
Correct option: (C) Assertion (A) is true and Reason (R) is false.
Why
- Assertion (A) is TRUE: Money market instruments (treasury bills, commercial paper, call money, etc.) are short-term and highly liquid — more liquid than long-term capital market securities.
- Reason (R) is FALSE: Money market instruments are not traded on stock exchanges. The money market is largely an over-the-counter market operated through banks and financial institutions; it is capital market securities (shares, debentures) that are traded on stock exchanges.
Marking Scheme
- 11 mark for selecting (C) Assertion (A) is true and Reason (R) is false.
- 2Reasoning: money market instruments are highly liquid (A true) but are traded over-the-counter, not on stock exchanges (R false).
Hint
Where are money market instruments actually traded — on stock exchanges, or over the counter through banks?
Quick Oral Answer
Assertion is true — money market instruments are highly liquid; but the reason is false because they trade over-the-counter, not on stock exchanges.
Analysis & Explanation
A higher-order assertion-reason item that separates a true fact from a false justification.
Concept
- The money market deals in short-term (up to one year) instruments that are highly liquid and safe.
- The capital market deals in medium- and long-term securities (shares, debentures) that trade on stock exchanges.
Evaluating the statements
- Assertion (A) — TRUE: Short maturities make money market instruments highly liquid, indeed more liquid than capital market securities.
- Reason (R) — FALSE: Money market instruments trade over the counter through banks and dealers, not on stock exchanges. Stock exchanges are where capital market securities trade.
Choosing the option
- A true, R false → option (C).
Why the other options fail
- (A) / (B) require R to be true — it is not.
- (D) requires A to be false — but A is true.
Exam trap
- Students wrongly assume every tradable instrument goes through a stock exchange. Money market trading is over-the-counter, which makes R false even though A sounds related.
Common Mistakes
- 1Assuming money market instruments trade on stock exchanges — they are traded over-the-counter through banks and dealers.
- 2Marking (A) because both statements seem topically related, without testing whether the Reason is factually true.
- 3Confusing liquidity (ease of conversion to cash) with the trading venue.
Interesting Facts
Treasury Bills (T-Bills) are issued by the Reserve Bank of India on behalf of the Government and are among the safest, most liquid money market instruments.
Money market instruments are typically issued at a discount and redeemed at face value, with maturities of up to one year.
Commercial Paper was introduced in India in 1990 to let highly rated corporates raise short-term funds.
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Frequently Asked Questions
Are money market instruments traded on stock exchanges?
No. Money market instruments are traded over-the-counter through banks, dealers and financial institutions. Stock exchanges are where capital market securities such as shares and debentures are traded, which is why the Reason is false.
Why are money market instruments more liquid than capital market securities?
Because they are short-term (maturing within a year) and safe, they can be converted into cash quickly and easily, giving them a higher degree of liquidity than long-term capital market securities.