Question

Describe the difference between the money market and the capital market. Classify the following as capital or money market instrument:
a. 3-Month Government of Canada Bond
b. Student Loan maturing in 10 years

Answer 1

Money market

Money Market is a part of the global financial market where instruments with short term maturities are traded, usually up to one year. It is a highly liquid market. The interest rates of money market instruments is lower due to shorter maturity time and are less risky than securities issued in capital market. The market is used by business, government, financial institutions to raise short term working capital or short term credit. The instruments traded in Money market are Treasury bills, Certificated of Deposits, Commercial Papers , interbank lending etc.

Capital Market

The capital market is a type of financial market where financial products like stocks, bonds, debentures are traded for a long duration of time. They serve the purpose of long-term financing and long-term capital requirement of business. In this case, maturities of securities are more than a year. Businesses, governments, or public-sector institutions can issue equities or bonds, and the capital market functions through the stock exchange market. The goal of Capital Market is to channel the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investors through a variety of financial instruments (bonds, notes, or shares) termed as securities.

A. 3 month government of Canada bond is a Money market instrument as the maturity is less than a year.

B. Student loan maturing in 10 years is a capita market instrument as maturity of loan is more than a year.