32 Questions
What are the key features of the money market?
Short-term horizon, low risk, high liquidity, near-cash assets
What is the original maturity of negotiable money market instruments (MMIs)?
One year or less
What are the characteristics of money market instruments?
Highly liquid, short-term, low credit risk
Name three types of money market instruments.
Commercial paper, Banker's acceptance, Treasury bills (T-bills)
What is the primary purpose of the money market?
To buy and sell short-term financial instruments
What is the original maturity of securities in the capital market?
More than one year
Why is the money market considered a low-risk market?
It involves short-term investments with minimal credit risk
What is a key characteristic of the capital market in terms of risk?
Higher risk
How does the liquidity of capital market instruments compare to money market instruments?
Less liquid
What is the term used to describe capital market instruments that are not easily converted to cash?
Less near-cash assets
What are stocks in the context of the capital market?
Ownership shares in a corporation
What are bonds in the context of the capital market?
Debt securities issued by corporations or governments
What are mutual funds in the context of the capital market?
Investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other assets
What is the key difference between the money market and the capital market?
Time horizon and risk level
What type of market is the money market?
Short-term, low-risk market for near-cash assets
What type of market is the capital market?
Long-term, higher-risk market for securities with an original maturity of more than one year
What are the primary goals of the money market?
Facilitate borrowing and lending of money on a short-term basis
Name three types of money market instruments.
Treasury bills, commercial paper, and banker's acceptances
What is the significance of the interbank money market?
It is the part of the money market where banks lend money to each other
How does the money market rate contribute to the functioning of the money market?
It represents the interest rate at which banks lend money to each other
What distinguishes the capital market from the money market in terms of borrowing and lending?
Capital market involves long-term borrowing and lending, while money market involves short-term borrowing and lending
Explain the key difference between money market instruments and capital market instruments.
Money market instruments are short-term, while capital market instruments are long-term
What are Open Market Operations (OMO)?
Transactions conducted by the central bank to buy and sell government securities in the open market to regulate the money supply.
Define the capital market rate.
The interest rate at which banks lend money to each other in the interbank capital market.
Explain the purpose of Initial Public Offerings (IPOs).
The first sale of stock by a company to the public.
Differentiate between money market and capital market in terms of borrowing and lending.
Money market facilitates short-term borrowing and lending, while capital market caters to long-term borrowing and lending.
What are some examples of capital market instruments?
Stocks, bonds, and mutual funds.
What is the primary goal of the capital market?
To facilitate long-term borrowing and lending of money, such as bonds with a maturity of five years or more.
Explain the concept of interbank capital market.
A part of the capital market where banks lend money to each other.
What are the key differences between the money market and the capital market?
The money market facilitates short-term borrowing and lending, while the capital market caters to long-term borrowing and lending.
How do the liquidity of capital market instruments compare to money market instruments?
Capital market instruments are generally less liquid than money market instruments.
What role do money market and capital market play in the functioning of the financial system and the economy?
Both markets play a crucial role in the functioning of the financial system and the economy as a whole.
Study Notes
Money Market and Capital Market
In the financial world, there are two primary markets where investments are made: the money market and the capital market. Each of these markets serves a specific purpose and caters to different types of investors and financial instruments.
Money Market
The money market is a short-term financial market where investors can buy and sell negotiable money market instruments (MMIs) with an original maturity of one year or less. The key features of the money market are:
- Short-term: The money market deals with investments that have a short-term horizon, usually less than a year.
- Low risk: The money market is considered a low-risk market, as it involves short-term investments with minimal credit risk.
- High liquidity: Money market instruments are highly liquid, meaning they can be easily bought and sold without affecting their market price.
- Near-cash assets: Money market instruments are near-cash assets, which are highly liquid and short-term.
Money Market Instruments
There are several types of money market instruments, including:
- Commercial paper: Unsecured short-term promissory notes issued by large corporations.
- Banker's acceptance: A short-term promissory note issued by a bank.
- Treasury bills (T-bills): Short-term securities issued by the U.S. Treasury.
Capital Market
The capital market is a long-term financial market where investors can buy and sell securities with an original maturity of more than one year. The key features of the capital market are:
- Long-term: The capital market deals with investments that have a long-term horizon, usually more than a year.
- Higher risk: The capital market is considered a higher-risk market, as it involves long-term investments with credit risk.
- Lower liquidity: Capital market instruments are less liquid than money market instruments, meaning they may be more difficult to buy and sell without affecting their market price.
- Less near-cash assets: Capital market instruments are less near-cash assets, meaning they are not as easily converted to cash as money market instruments.
Capital Market Instruments
There are several types of capital market instruments, including:
- Stocks: Ownership shares in a corporation.
- Bonds: Debt securities issued by corporations or governments.
- Mutual funds: Investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other assets.
In conclusion, the money market and capital market serve different purposes in the financial world. The money market is a short-term, low-risk market for near-cash assets, while the capital market is a long-term, higher-risk market for securities with an original maturity of more than one year. Understanding the differences between these markets can help investors make informed decisions when selecting investments based on their risk tolerance and time horizon.
Learn about the differences between money market and capital market, their key features, instruments, risk levels, and liquidity. Understand how these markets cater to different types of investors and financial instruments.
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