Question

Statement-I: Capital market instruments are safer than money market instruments both with respect to returns and principal repayment.
Statement - II: The capital market deals in medium and long-term securities such as equity shares and debentures etc.
Choose the correct option from the following:

• A. Statement I is true and Statement II is false.
• B. Statement I is false and Statement II is true.
• C. Both Statement I and Statement II are true.
• D. Both Statement I and Statement II are false.

Hint:

Remember: Money market = Short-term, Low risk, Low return. Capital market = Long-term, High risk, High return.

Answer 1

The Correct Option is B

Step 1: Evaluate Statement I about safety.
Statement I claims that capital market instruments are safer than money market instruments with respect to both returns and principal repayment.
Step 2: Analyse the safety of money market instruments.
Money market instruments are short-term (less than one year), issued by financially sound institutions like the Reserve Bank of India, commercial banks, and large corporations. Because of their short duration and high-quality issuers, they carry very low risk. Returns are relatively stable and principal repayment is highly predictable.
Step 3: Analyse the safety of capital market instruments.
Capital market instruments (like equity shares and debentures) are long-term instruments. Equity shares carry no guaranteed return and their principal value can fluctuate significantly. Even debentures carry credit risk over long periods. Therefore, capital market instruments are generally riskier, not safer.
Step 4: Conclusion on Statement I.
Statement I is false because it reverses the reality: money market instruments are safer, not capital market instruments.
Step 5: Evaluate Statement II about the capital market's scope.
Statement II says the capital market deals in medium and long-term securities such as equity shares and debentures. This is the standard textbook definition of the capital market, which is entirely correct.
Step 6: Choose the correct option and confirm.
Statement I is false and Statement II is true, pointing to Option (B).
\[ \boxed{ \text{(B) Statement I is false and Statement II is true.} } \]