6. Differentiate b/n mony markets and capital markets and given a commendable examples for each?

Answer 1

Money markets and capital markets are both segments of the financial market, but they serve different purposes and cater to different types of securities and investors. Here's a differentiation between the two, along with examples for each:

1. Money markets:
- Money markets are short-term markets, typically dealing with instruments that have a maturity period of less than one year.
- They provide a platform for the borrowing and lending of funds for short durations.
- Money market instruments are highly liquid and low-risk, ideal for investors seeking capital preservation and easy access to funds.
- Examples of money market instruments include Treasury bills, Certificates of Deposit (CDs), commercial paper, and repurchase agreements.

Example: A company needs to finance its working capital requirements for a short period. They issue commercial paper, a money market instrument, to borrow funds from investors for a few months.

2. Capital markets:
- Capital markets deal with long-term securities, where the maturity period is typically more than one year.
- They are a platform for raising long-term funds through the sale of equity or debt securities.
- Capital market instruments offer higher potential returns but are also associated with higher risks compared to money market instruments.
- Examples of capital market instruments include stocks, bonds (both corporate and government), preferred shares, and debentures.

Example: A large corporation plans to expand its operations and requires substantial funding. To raise long-term funds, they issue corporate bonds, which investors can purchase and hold to maturity.

In summary, money markets primarily deal with short-term, low-risk instruments for borrowing and lending funds, focusing on capital preservation. Capital markets, on the other hand, accommodate long-term securities for raising funds through equity or debt, providing a platform for investors seeking potential returns on their investments.