Future Business Leaders of America (FBLA) Securities and Investments Practice Test

Which of the following is an example of a money market instrument?

1. Corporate bonds

2. Commercial paper

3. Municipal bonds

4. Common stocks

The correct answer is: Commercial paper

The correct choice is commercial paper, which is indeed an example of a money market instrument. Money market instruments are short-term debt securities that are typically issued with maturities of one year or less, designed to provide a safe and liquid investment option for corporations and governments. Commercial paper specifically fits this category as it refers to unsecured, short-term promissory notes issued by companies to finance their immediate operational needs, such as inventory purchases or payroll. Because of its short maturity and the high credit quality of the issuers, commercial paper usually offers lower yields compared to longer-term debt instruments. In contrast, corporate bonds, municipal bonds, and common stocks do not belong to the money market. Corporate bonds are long-term debt securities with maturities that can extend for several years or even decades. Municipal bonds are also long-term debt instruments issued by states or local governments, typically used to fund public projects. Common stocks represent equity in a company and, therefore, do not classify as debt instruments. They lack the fixed return structure associated with money market instruments, as stocks can fluctuate widely in value and do not have predetermined maturity dates.