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Money vs Capital Markets

Compare money and capital markets and identify the major issuers of securities in the different markets and the difference among the various types of securities within and between each of the markets. Within your discussion of the money markets include a consideration of the role of the Federal Reserve System (Fed) and the banking system as they interact through required reserve maintenance, needs for liquidity and monetary policy actions by the Fed. Consider in your analysis the types and significance of the links between the money and capital markets via the term structure of interest rates, issuers of debt and equity and the presence of interest rate and credit risk derivatives.

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Step 1
Money market deals with transactions of short-term finance whereas capital markets deals in securities for long term finance. The capital market securities are usually of more than one year duration. The securities of the capital market are stocks, shares, debentures, bonds, and securities. The securities of money market are collateral loan, acceptances, and bills of exchange. The securities in the capital market are more varied than the securities in the money market.

Step 2
The role of Federal Reserve System and the banking system is important as they interact. The Federal Reserve System requires the banks to keep a fraction of their deposits with the Federal Reserve Bank; this is the fractional reserve requirement or the required reserve ratio. Banks are required to maintain this reserve with the Federal Reserve Banks.
There are several liquidity needs satisfied by the Federal Reserve Bank. The first is local liquidity needs, In addition, the availability of liquidity ...

Solution Summary

This solution explains monetary market and capital market. The sources used are also included in the solution.