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Questions and Answers
Which of the following statements best describes money markets?
Which of the following statements best describes money markets?
Commercial paper is a type of security found in the capital markets.
Commercial paper is a type of security found in the capital markets.
False
What is the primary purpose of money markets?
What is the primary purpose of money markets?
To provide liquidity for short-term financing needs.
Money markets primarily deal with financial instruments that have a maturity of less than _____ days.
Money markets primarily deal with financial instruments that have a maturity of less than _____ days.
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Match the following terms with their correct descriptions:
Match the following terms with their correct descriptions:
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Study Notes
Capital Markets vs Money Markets
- Money Market focuses on short-term instruments (maturity ≤ 1 year).
- Commercial Paper is a type of short-term debt used by corporations for liquidity or working capital.
- Capital Market focuses on long-term securities (maturity > 1 year) like stocks and bonds, used for long-term capital raising.
Sources of Funding
- Companies raise funds through various methods, including debt and equity instruments.
- Debt Instruments include bank loans (short or long-term), commercial paper (short-term), and bonds (long-term).
- Equity Instruments include preferred stock (fixed dividends, less risk) and common stock (representing company ownership).
Primary vs Secondary Markets
- Primary Market involves the initial issuance of new securities (e.g., IPOs, bond offerings) directly to investors, facilitating capital raising for corporations and governments.
- Secondary Market involves trading of already-issued securities, providing liquidity to investors and establishing market pricing. Examples include stock exchanges (NYSE) and over-the-counter (OTC) markets.
Auction Market Example
- Auction markets match buyers' bids with sellers' offers.
- The transaction price is determined by the highest bid that matches the lowest offer.
Buy-Side vs Sell-Side
- Buy-Side investors (e.g., hedge funds, pension funds) invest in securities for long-term value.
- Sell-Side includes market makers, dealers, investment banks, and brokerage firms facilitating trades and underwriting.
Top Investment Banks
- Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Barclays are among the largest investment banks.
Underwriting Methods
- Negotiated Underwriting involves the underwriter (usually an investment bank) purchasing the entire issue from the issuer, taking full financial responsibility for unsold shares. Common in IPOs and large bond offerings.
- Best Efforts Underwriting involves the underwriter acting as a broker, selling as much of the issue as possible but without assuming financial responsibility for unsold shares.
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