Compare and contrast the characteristics of the securities of the money market with those of the
Money market securities are short-term, usually less than nine months, while capital
market securities are from five to one hundred years.
The money market is largely a “primary”
market with secondary market activity.
The capital market is a secondary market with some
primary market additions.
All money market securities are unsecured debt, while equities and
debt, some collateralized, make up the capital market.
What might determine whether an individual investor buys corporate or municipal bonds?
Everything else being the same, an individual investor would select the higher after-tax
return; so the relative yields and marginal tax rate of the investor will likely determine the choice
of corporate bonds or muni’s.
For example with a 7% yield available on a corporate bond, for an
individual in the 28% marginal tax bracket would have to find an equivalent (term and rating)
5.04% municipal or state bond. For individuals’ pension money in a tax-deferred program, one
would invest in the taxable securities.
List and discuss the risks faced by bond investors.
Bond investors may face a variety of risk including default risk, inflation risk, price risk
and reinvestment risk (coupon bond), foreign exchange risk and/or political risk if an
international investment, and market risk (risk of a constant ready market).
U.S. Treasury STRIPS are of interest to individuals with IRA's or $401k pension plans.