Post Session Quiz - Introduction To Money Market

Money market transactions typically involve short-term borrowing and lending of funds, usually for a period of one year or less. This includes instruments such as Treasury bills, commercial paper, and certificates of deposit, which have maturities ranging from a few days to one year. Transactions with a time-span of one to 10 years would fall under the category of capital market transactions, while transactions with a time-span of 10 years or more would typically be associated with long-term investments in the bond or equity markets.

Money markets are used for short-term borrowing because they provide a platform for borrowing and lending funds for a short period of time, usually less than one year. Money market instruments such as treasury bills, commercial paper, and certificates of deposit are commonly used for short-term borrowing purposes. These instruments offer low-risk and highly liquid options for borrowers who need funds for a short duration. Therefore, the correct answer is short-term borrowing.

Central banks are actually permitted to participate in the money market. They often engage in activities such as buying and selling government securities, conducting open market operations, and providing liquidity to commercial banks. These actions help regulate the money supply, manage interest rates, and stabilize the financial system. Therefore, the statement that central banks are not allowed to participate in the money market is false.

A certificate of deposit is a financial instrument issued by a bank to a depositor. It serves as a receipt to acknowledge the money deposited, and the bank guarantees to repay the principal amount plus interest at maturity. The certificate of deposit can also be sold in the market at a price. This aligns with the definition given in the question.

Bills of exchange are commonly used in trade finance to facilitate the payment process for goods. They are a written order issued by a seller to a buyer, requiring the buyer to pay a specified amount of money at a future date. This instrument helps to ensure that the payment is made efficiently by providing a legally binding document that can be easily transferred between parties. By using bills of exchange, the seller can receive payment without the need for immediate cash, while the buyer can defer payment until a later date, making the overall trade process more efficient.

The correct answer is "Buying or selling government bonds, Buying or selling stocks." These transactions are not carried out in the money market because the money market deals with short-term debt instruments and liquid assets, such as treasury bills, commercial papers, and certificates of deposit. Buying or selling government bonds and stocks are typically done in the capital market, where long-term securities are traded.