Question

1. In a few sentences, compare and contrast investors’ and borrowers’ use of capital markets (specifically stocks and bonds) with their use of money markets.
2. Why do banks not eliminate the need for money markets?

Answer 1

a) The goal of the capital markets is to support the long-term funding needs of the companies to satisfy their capital demands. The capital markets play a significant role in the rotation of money in the economy. It bridges the need between lenders and borrowers.

The money markets are mostly set up to meet the short term investments and borrowing of the financial organizations concerned.

b) Need for money markets:

1. Banks have higher costs than the money market requiring the obligation to sustain reserve necessities.

2. The lower cost structure of the money markets allows for more high-priced interest rates.

3. The money market securities have a very dynamic and effective secondary market. The buyer can easily buy and then trade the security in the secondary market at any time.

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