Money market refers to the market for short-term debt securities that mature in one year or less, such as Treasury bills, commercial paper, certificates of deposit (CDs), and repurchase agreements. Money market instruments are typically highly liquid, low-risk, and have a high degree of marketability. Money market instruments are used to meet short-term financing needs, such as to fund working capital or to cover cash flow shortfalls.
On the other hand, the capital market refers to the market for long-term debt and equity securities that have a maturity of more than one year, such as stocks, bonds, and other long-term financial instruments. Capital market instruments are used to raise long-term financing for capital expenditures, expansion projects, and other long-term investments. Unlike money market instruments, capital market instruments have higher risk and volatility, but also offer the potential for higher returns over the long-term.
Money Markets
Suppose a corporation needs to raise funds to cover its short-term working capital needs, such as to finance its day-to-day operations, pay its bills, or manage its inventory. The corporation can raise these funds through various money market instruments, such as Treasury bills, commercial paper, or certificates of deposit (CDs).
For instance, let's consider Treasury bills as an example of a money market instrument. Treasury bills (T-bills) are short-term debt securities issued by the US government with a maturity of one year or less. T-bills are sold through weekly auctions, and their yields are determined by the market demand and supply. T-bills are considered to be one of the safest investments, as they are backed by the full faith and credit of the US government.
Suppose the corporation wants to invest $1 million in T-bills that mature in three months. It can participate in the weekly T-bill auction and bid on the desired amount of T-bills at the prevailing market price. If the corporation wins the bid, it will purchase the T-bills and hold them until maturity, at which point it will receive the face value of the T-bills plus interest.
Alternatively, the corporation can invest in commercial paper, which is an unsecured short-term debt instrument issued by corporations and financial institutions to fund their short-term financing needs. Commercial paper usually has a maturity of less than 270 days and can be sold at a discount to face value. The corporation can buy commercial paper issued by a reputable corporation or financial institution and earn a return on its investment.
Capital Markets
Suppose a corporation wants to raise funds to finance its long-term investment projects, such as building a new factory, expanding its business, or launching a new product. The corporation can raise these funds through various capital market instruments, such as stocks, bonds, or other long-term financial instruments.
For instance, let's consider bonds as an example of a capital market instrument. Bonds are long-term debt securities issued by corporations, governments, or other organizations to finance their long-term investments. Bonds usually have a maturity of more than one year and pay a fixed or variable interest rate to the bondholders.
Suppose the corporation wants to raise $10 million to finance its expansion project. It can issue bonds with a face value of $1,000 each and a maturity of ten years, paying a fixed interest rate of 5% per year. The corporation can sell the bonds to institutional investors or individuals who are willing to invest in the bonds and earn a return on their investment.
Alternatively, the corporation can issue stocks, which represent ownership in the corporation and entitle the stockholders to a share of the corporation's profits and assets. Stocks are traded on stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, and their prices are determined by the market demand and supply.
Suppose the corporation wants to raise $20 million by issuing stocks. It can offer new shares of its stock to the public through an initial public offering (IPO) and list its stock on a stock exchange. Investors can buy the corporation's stock on the stock exchange and become shareholders in the corporation, sharing in its profits and growth potential.
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