What best defines Money Markets?

• A. Markets for debt securities with original maturities of one year or less
• B. Markets for long-term equity instruments
• C. Markets for currencies
• D. Markets for mortgage-backed securities

Answer: (A)

Money markets are about short-term borrowing and lending using debt instruments that originally mature in one year or less. This short horizon makes them ideal for liquidity management—firms, banks, and governments park cash, cover day-to-day needs, and finance working capital with instruments that can be issued and traded quickly. Typical money-market instruments include Treasury bills, commercial paper, certificates of deposit, and repurchase agreements, all designed for high liquidity and relatively low risk.

This differentiates money markets from other markets. Long-term equity instruments are traded in the capital markets, not the money markets. Markets for currencies are the foreign exchange market, which deals with exchanging one currency for another rather than short-term debt. Mortgage-backed securities are longer-term, securitized debt and don't fit the short-maturity focus of money markets. So the description involving debt securities with original maturities of one year or less best defines money markets.