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