This lesson examines the fundamental distinction between money markets and capital markets. It explains the differences in instruments, maturities, participants, and functions, providing a clear framework for understanding market segmentation.

Detailed Notes:

• Money Markets: Money markets facilitate the borrowing and lending of short-term funds, typically with maturities of one year or less. Their primary role is to provide liquidity to the financial system and to enable participants to manage short-term cash needs .

• Money Market Instruments: Key instruments include Treasury bills (short-term government debt), commercial paper (unsecured corporate debt), certificates of deposit (time deposits issued by banks), repurchase agreements, and federal funds (interbank borrowing). These instruments are considered low-risk and highly liquid .

• Capital Markets: Capital markets facilitate the trading of longer-term financial instruments, with maturities exceeding one year. Their primary role is to provide long-term financing for productive investment through equity and debt securities .

• Capital Market Instruments: Key instruments include corporate bonds, government bonds (notes and bonds), common and preferred stock, and mortgage-backed securities. These instruments have higher risk and return potential compared to money market instruments .

• Distinction Based on Term to Maturity: The critical distinction between money and capital markets is the term to maturity of the instruments traded. Instruments with a maturity of one year or less are money market instruments; instruments with longer maturities or no maturity (stocks) are capital market instruments .