Compare money and capital markets and identify the major issuers of securities i

Question

Compare money and capital markets and identify the major issuers of securities in the different markets and the difference among the various types of securities within and between each of the markets. Within your discussion of the money markets include a consideration of the role of the Federal Reserve System (Fed) and the banking system as they interact through required reserve maintenance, needs for liquidity and monetary policy actions by the Fed. Consider in your analysis the types and significance of the links between the money and capital markets via the term structure of interest rates, issuers of debt and equity and the presence of interest rate and credit risk derivatives.

Explanation / Answer

Money market is related to financial assets upto one year. The money market is used for short term basis. Capital markets are used for long term basis and is related to financial assets more than a year.

The major issuers of securities in the money market are governments, financial institutions and large corporations. The securities issued by them are very liquid and usually trade in high denominations. The major issuers of securities in the capital market are businesses, government and individuals as well.

In terms of difference among the various types of securities, the money market is a sub set of fixed income market. The securities in the money market consists of very short term debt securities. Examples are t-bills, certificate of deposit, commercial papers etc. Capital markets consists of both equity as well as debt instruments.

The Fed and the banking system interact with each other to keep the money market healthy. All depositary financial institutions like banks have to keep a percentage of their deposits in the form of reserves with the Reserve Bank. The reserve requirements is set by Fed for all banks. Secondly, Fed uses discount rate to manage the money market. Discount rate is the rate at which financial institutions can borrow from the Reserve bank, on a short term basis. Fed uses monetary policy action tools like OMO (open market operations) where it buys and sells US government securities in the open market. The purpose is to align the federal funds rate with the target.

The money market and the capital market are closely interrelated. The term structure of interest rates and the yields in the money market are related to those in the capital market. For instance a fall in the short term interest rate in the money market signals the availability of easy credit and this results in a fall in the long term interest rates in the capital market.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.