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CA Foundation · Business Economics · Money Market

Which of the following is the main reason a company with temporary surplus cash would prefer parking it in money market instruments rather than in long-term shares?

A firm with temporary surplus cash prefers money market instruments because they are highly liquid and have low risk of capital loss over short periods. They do not give ownership rights, usually yield less than equity, and are not entirely free from rate movements.

  1. AMoney market instruments carry a higher expected return than equity over long periods
  2. BMoney market instruments give ownership rights in the issuing firm
  3. CMoney market instruments offer high liquidity and low risk of capital loss for short periodsCorrect
  4. DMoney market instruments are free from any interest rate movements

Explanation

Short-term, high-quality instruments can be turned into cash quickly with little capital risk, which suits temporary surplus. Equity gives ownership but is volatile, and money market returns are usually lower, so A and B are wrong. D is wrong because their prices and yields still respond to rates, though only slightly.

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