Question

When would a businesd use Money or Bond markets amd what type of risk/return are related to each.What type of profucts are in Money and Bond Markets?

Answer 1

Normally the borrowing is divided into two types money market and capital market. Money market instruments are for smaller period of time, less than a year and capital market instrument are for long term period. The business uses money market to meet working capital requirement, requirements where day to day business needs have to be met, these short-term borrowing requirements are met by money market instruments where as long term capital market is used for borrowing large amount for expansion or large investment projects. These borrowing are normally greater than 5 year or 10 year. The risk associated with money market is normally less and it can be in the form of sudden increase in interest rate which can affect the borrowing. The risk associated with capital markets is more because in the long term there is interest rate risk, inflation risk, default risk and credit migration issue. Money market instruments consist of Treasury bills, Certificate of deposits, Commercial paper etc. Capital market instruments can be in the form of equity or preference share or debentures or bond also known as debt securities.