FIN4060 Week 1 Project

Money Markets

One way that the �nancial market is represented is by the money market and the capital market. The

money market deals with securities with maturities of up to one year, which are referred to as being

short-term. Typically, activity in the money market represents the availability of excess funds, which

are used to pursue a modest return instead of being idle. Money market activity is represented by the purchase and/or sale of short-term marketable securities.

Examples of these short-term securities include:

Negotiable certi�cates of deposit

U.S. Treasury Bills

Commercial paper (unsecured promissory note with �xed maturity)

The opportunity of short-term securities to be traded is provided by large banks and through government securities dealers. The Federal Reserve provides funds to support loans between member

banks. This is a special case of marketable securities in banking, and these funds are called federal

funds, or fed funds.

The capital market deals with long-term securities with maturities of more than a year. With regards to

accessing excess funds, the activity in the capital market is similar to that of the money market.

However, investors in the capital market may also invest in the money market in order to meet liquidity

needs.

The primary forum for capital market activity is through securities exchanges. The securities involved

are stocks and bonds. Derivatives of stocks and bonds may also be the target of investments.

The capital markets in the U.S. are considered the largest. However, there are other robust capital

markets, such as the Eurobond and foreign bond markets, and the international equity market. Market

securities are issued and purchased by entities in need and those with excess funds, respectively.

These entities may be based anywhere in the world.

Financial markets can also be categorized as primary markets and secondary markets.

Primary markets are those where securities are introduced for the �rst time. In this regard, the

issuer of the securities actually receives the net proceeds of the sale of the securities. This is a

unique distinction of the primary markets.

Secondary markets are those where securities are traded after an initial introduction. In this

case, the issuer of the securities in not involved in receiving proceeds. It is in secondary markets that company valuation becomes signi�cant by way of the volatility of the price of a company's

security or a share.