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Differences Between Money Market And Capital Market

  6 Downloads   |   5 Pages 1,117 Words   |   Published Date: 24/10/2016

Questions:

1. What is the difference between the money market and the capital market?

2. What is the main similarity and the main difference between bank bills and bank certificates of deposit?

3. What is the main similarity and the main difference between bank bills and commercial paper?

4. On 21 January 2015, China Telecom issued RMB 3 billion (face value) of commercial paper for 90 days at an annual interest rate of 4.40% and a further RMB 3 billion of commercial paper for 180 days at an annual interest rate of 4.38%. The purpose of the issues was to enhance China Telecom’s working capital.

How much money, in total, did China Telecom raise through these issues?
 
 

Answers:

Difference between the money market and the capital market:

The differences between the capital market and the money market are as follows:

1. Period of maturity: the money market is engaged in the activity of borrowing and lending of money so as to cater to the needs of the short term whereas on the other side, the capital market is engaged in the lending as well as in the borrowing of money of the finances so as to meet to the long term financing needs of the companies.

2. Credit instruments: the following are the credit instruments in the money market:

a. Call money

b. Acceptance bills of exchange

c. Collateral loans

Where the following are the credit instruments in respect of the capital market:

 
a. Shares

b. Debentures

c. Bonds

d. Government securities

3. Nature of the credit instruments: the credit instruments deals with the capital market and the same are heterogeneous than the one sin the money market. The operations of the financial markets is required for the credit instruments.

4. Institutions: the following are the credit instruments in the money market:

a. Acceptance houses

b. Commercial banks

c. Central banks

d. Nonbanking financial institutions

 
Where the following are the credit instruments in respect of the capital market:

a. Mortgage banks

b. Building societies

c. Stock exchanges

5. Risks: the money market deals with e smaller amount of risk whereas the capital market deals with a bigger amount of risk.

6. Role: the money market is indulged in the liquidity adjustment. The main role of the capital market is the putting capital to work, but mainly long term, secure and the productive employment.

7. Relationship with the central bank: the money market is associated with the central bank whereas the capital market is associated with the money market and is under the influence of the central banks

8. Market regulations: in the money market, the commercial banks are closely regulated but in the capital market, the institutions are not much regulated.

9. The maturity period of the money market is 1 hour to 90 days whereas the capital market deals with the 5 to 20 years. In the cases, the shares are issued by the company, then the amount of the same will be repaid when the company is wound up. The investors do have the right to sell in case the company needs the money.

10. The rate of interest in the money market is regulated and is controlled by the RBI or the central bank of the country. But the dividend and the interests rate is determined by the demand and the supply of the securities of the Sensex of the stock markets. The stock market is regulated by the SEBI.

 

11. In the country of USA, the money market deals with the money fund and the banker’s acceptance instruments. But the capital market in the USA is the New York stock exchange and stock regulator is Security exchange commission (SEC).

(Preservearticles, 2015)


(SV Tuition, 2009)

Similarity and the main difference between bank bills and bank certificates of deposit:

The certificate of deposit is the kind of the time deposits. It has 0 risk and security and is provided by the banks.

The bank bill or the bank draft as it is sometimes called, that can be bought from the bank and can be given to the person who is not willing to accept a personal cheque in order to make the payment. The bank bill can be purchased from the bank and then the same can be used to make the payment or transfer the bank bill certificate to the other people. The other people can withdraw the money from the bank through the bank bill.

The main difference between a bank bill and the certificate of deposit is its relationship in the sense that the certificate of deposit is the relationship between the person and the bank but the bank bill is the relationship between the bank and the receiver.

The second difference is that of the function. The certificate of deposit is very simple but the bank bills on the other hand are far more complex and rich.  The amount can be transferred to the bank bill to other people. Therefore, the amount can be paid with the bank bill or the transfer money.

(Ally, 2015)

 

Main similarity and the main difference between bank bills and commercial paper:

A commercial paper is the instrument of borrowing through which the banks and the other financial companies make the investment that extend to a shorter term. The main purpose of the commercial papers is to raise the capital for the company. The commercial papers are issued for a shorter period of time and usually lasts for a year. It is issued at a discount and has a maturity and the face value. The commercial paper is always bought at the discounted rate and is equal to the rate of maturity less the interest of the commercial paper. The commercial papers have the rating that indicates their safety and security and also, reflects the confidence of the investors in the instruments.

The bank bill or the bank draft as it is sometimes called, that can be bought from the bank and can be given to the person who is not willing to accept a personal cheque in order to make the payment. The bank bill can be purchased from the bank and then the same can be used to make the payment or transfer the bank bill certificate to the other people. The other people can withdraw the money from the bank through the bank bill.

Amount raised:

The amount raised is RMB 6 million, assuming that the commercial paper was issued at the stated amounts.

 

References:

Ally.com, (2015). CDs or Bonds: What's the Difference? | Ally Bank. [Online] Available at: http://www.ally.com/cds/cds-or-bonds-whats-the-difference/ [Accessed 21 Mar. 2015].

Kumar, V. (2009). Five Differences between money market and capital market. [Online] Svtuition.org. Available at: http://www.svtuition.org/2009/06/five-differences-between-money-market.html [Accessed 21 Mar. 2015].

Sinha, A. (2015). What is the difference between Money Market and Capital Market? [Online] Preservearticles.com. Available at: http://www.preservearticles.com/201012281814/difference-between-money-market-and-capital-market.html [Accessed 21 Mar. 2015].

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