Advanced Diploma of Financial Planning (ADFP) Practice Test

What characterizes securities in the money market?

1. Long-term maturities with high liquidity

2. Short-term maturity with low credit risk

3. High yield potential

4. High volatility and risk

The correct answer is: Short-term maturity with low credit risk

Securities in the money market are characterized by short-term maturities and low credit risk. This market is generally used by institutions, businesses, and governments to manage their short-term financing needs and cash flows. The focus on short-term maturities typically ranges from overnight to just under a year, meaning these instruments are generally less sensitive to interest rate fluctuations compared to long-term securities. Additionally, the low credit risk is a key feature because money market instruments usually involve highly rated entities, which contributes to their stability and safety. This makes money market securities an attractive option for investors looking for places to park funds temporarily with minimal risk. In contrast, other options involve characteristics that do not align with the nature of the money market. For instance, long-term maturities with high liquidity would more accurately describe bonds or other securities found in the capital markets rather than the short-term nature prevalent in money markets. High yield potential and high volatility and risk are more associated with equities or junk bonds, which do not typically represent the conservative investment approach seen in money market securities.