Economics

Choose the Correct Answer

Correct Answer : Option a

Explanation
Statement-I is correct: The risk of capital loss and default is relatively low in the money market because these instruments are short-term and are usually issued by highly creditworthy entities like governments or large corporations.

Statement-II is correct: The money market is the place or mechanism where short term instruments that mature in a year or earlier are traded. The money market facilitates short-term financing and assures the liquidity of short-term financial assets.

Statement-II explains Statement-I:
The risk in the money market is low because the instruments have a short-term duration. Since they mature quickly, changes in interest rates don't significantly affect their value. Additionally, the risk of default is low because these instruments are mostly issued by the government, central banks, or commercial banks, which are considered highly reliable.