Money Market and Capital Markets - A few answered questions!

What are financial markets? What function do they perform? How would an economy be worse off without them?

Financial markets are institutions and procedures that facilitate transactions in all types of financial securities. They serve to distribute the savings supply in the economy to the demanders of the savings. If the financial markets did not exist, the wealth of the economy would decrease and the rate of capital formation would not be as high.


Define in a technical sense what we mean by financial intermediary. Give an example of your definition.

The financial intermediary is a median between the business firm and savers. It also collects the savings of individuals and issues its own securities in exchange for these savings. Afterwards, it uses the funds to gain the business stocks, bonds, etc. An example would be company issued stock.

Distinguish between the money markets and capital markets.

The primary difference between the money and capital markets is maturity period of the securities traded in them. The money market handles transactions within the short-term credit instruments while the capital market handles transactions in long-term financial instruments. Typically, a maturity period above one year would be categorized long-term, and less than one year would be categorized short-term.


What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

Corporations and investors enjoy three main benefits from organized security exchanges. The first is a continuous market, which leads to continuous security prices. It also establishes and publishes fair security prices based on supply and demand rather than bargaining. Organized security exchanges also help business’ raise new capital because the secondary market makes it easier for firms to float new security offerings successfully.

What is an investment banker, and what major functions does he or she perform?

An investment banker is a financial specialist involved as an intermediary in the merchandising of securities. They facilitate the flow of savings from those economic units that want to invest to those units that want to raise funds. The three main functions of an investment banker are underwriting, distributing, and advising.