Money markets are where financial instruments are exchanged for money which have less than a year to maturity (maturity means when it will expire) inclusive of the repayment of principal (Wright & Quadrini, 2009, p. 25, para. 2). Examples include the markets for instruments such as: 1. T-bills – Treasury bills or short-term government bonds 2. Commercial paper – short-term corporate bonds and 3. Banker’s acceptances – guaranteed bank funds, like a cashier ’s check (p. 25, para. 2)
30 ECON3005 Monetary Theory & Policy - UNIT 1 What are Capital Markets? With capital markets, securities with a year or more to maturity are traded (p. 25, para. 3). Some capital market instruments, called perpetuities as the never mature or fall due (i.e. never expires). As such, you will continue to receive interest payments indefinitely. Equities (ownership claims on the assets and income of corporations) and perpetual interest-only loans are prime examples of capital market instruments. Most capital market instruments, have fixed maturities ranging from a year to several years, though most capital market instruments issued today have maturities of thirty years or less. Examples of these are: 1. Mortgages :- which are loans on real estate collateral with the property pledged as security for the repayment of a loan 2. Corporate bonds 3. Government bonds 4. Commercial and consumer loans . The Debt and Equity Markets An individual or company can obtain funds in a financial market in two ways; the debt market or the equity market. A debt instrument represents a promise to pay document. Funds are lent in exchange for interest income and the promised repayment of the loan at a given future date. These include bonds and mortgages which are a contractual agreement by the borrower to pay the holder of the instrument, fixed monetary amounts at regular intervals. The equity market, on the other hand, provides a mechanism for companies to raise funds by issuing equities. Equity is a claim on the net income and assets of a business. The most popular type of equity security is common stock (typically just called a stock). The Foreign Exchange Market In this market, currencies are converted. For example, this is where EC dollars will be converted into US dollars or even EC dollars for TT dollars.
31 ECON3005 Monetary Theory & Policy - UNIT 1 Session 1.2 Summary In this session, we looked at the importance of financial markets and intermediaries in improving efficiency in the economy. Moreover, we looked at the various financial institutions and instruments that exist for both savers and borrowers to lend and obtain funds respectively. Moreover, we reviewed the financial markets in which all these instruments, institutions and individuals operate in. These markets, instruments and institutions mentioned will reoccur later in this course as they are used to affect the money supply in an economy.
32 ECON3005 Monetary Theory & Policy - UNIT 1 LEARNING ACTIVITY 1.7• Reflecting on Terms that Have One Thing in Common Introducing Monetary Theory and Policy Introduction
- Spring '20