Which sequence ranks money market securities from lowest to highest risk and return?

The correct answer ranks money market securities from lowest to highest risk and return effectively by considering the characteristics of each security type. Treasury bills (T-Bills) are considered the lowest risk as they are backed by the government, making them virtually risk-free. Consequently, T-Bills typically offer the lowest return compared to other securities.

Moving up the risk and return scale, municipal short-term papers, which are issued by local governments and may carry some degree of credit risk, follow. Although they are still quite safe, they are less secure than T-Bills and offer slightly higher returns to compensate for that risk.

Bankers' acceptances are next in line; these are short-term debt instruments issued by banks and carry additional risks related to the banking institutions' creditworthiness. They generally yield higher returns than municipal short-term papers, balancing their added risk.

Finally, commercial papers are unsecured promissory notes issued by corporations. They carry the highest risk among the listed securities because they depend on the issuing company's financial stability. Consequently, they tend to offer the highest returns to compensate investors for the greater risk they take compared to the other securities.

This ranking reflects the fundamental principle in investing that higher risk is associated with the potential for higher returns. Understanding this hierarchy is