Consider the following markets:
1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market
How many of the above are included in capital markets?
(a) Only one
(b) Only two
(c) Only three
(d) All four
The correct answer is (b).
The Government Bond Market and the Stock Market are both capital markets. The Call Money Market and the Treasury Bill Market are money markets.
A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.
A money market is a financial market in which short-term debt securities are bought and sold. Money markets are used by investors and borrowers to manage their cash flows. Investors can use money markets to earn a return on their cash, while borrowers can use money markets to raise short-term funds.
The Government Bond Market is a capital market where government bonds are traded. Government bonds are debt securities issued by governments to raise money. Investors who buy government bonds are lending money to the government. The government pays interest on the bonds and repays the principal when the bonds mature.
The Stock Market is a capital market where stocks are traded. Stocks are equity securities that represent ownership in a company. Investors who buy stocks are buying a piece of ownership in the company. The company pays dividends to the stockholders and the stockholders can sell their shares for a profit if the stock price goes up.
The Call Money Market is a money market where call money is traded. Call money is a type of short-term loan that is made between banks. Banks use the call money market to borrow and lend money to each other on a short-term basis.
The Treasury Bill Market is a money market where Treasury bills are traded. Treasury bills are short-term debt securities issued by the government. Investors who buy Treasury bills are lending money to the government. The government pays interest on the Treasury bills and repays the principal when the Treasury bills mature.