Question

Describe Money and Bond Markets, their uses and potential impacts on business.

Answer 1

Money market is a market which deals in short term loans for a period of less than or equal to 365 days. Uses of money market are as follows:-

i) plays an important role in financing domestic and international trade.

ii) Helps commercial banks to become self sufficient.

iii) The money market smooths the functioning and increases the efficiency of the central bank.

iv) Money market uses the excess funds of commercial banks to make profitable investment.

Impact of money market on business

i) Money market helps businesses by providing them short term loans to meet their working capital needs.

ii) Businesses generally need long term loans, which are provided by capital market. But the rates of the long term loan depends on the rates in the money matket, whose efficient functioning in turn helps the capital market and the businesses.

Bond market is market where debts securities are bought by investors. These bonds are generally issued by government entities or publicly traded corporations.Uses of bond matket are as follows:-

i) It helps government entities to raise capital to finance large projects.

ii) Companies issue bonds to raise the capital needed to maintain operations, or grow their capital lines.

iii) Government bonds are used to compare their bonds with the corporate bond to measure credit spread.

Impact of bond market on business :- Bond market helps in determining the interest rate in an economy, which affects the liquidity in the market. This will determine how easy or difficult it is to get loan or borrow money and how easily a business could expand.