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Liam Rice

3. Why do banks not eliminate the need for money markets?

The money market is the trading of short-term liquid securities. The money market securities
have very active secondary markets. The buyer can easily buy and sell the security in the
secondary market at any time. The large banks require the borrowing and the lending for short-
term. The money market securities are the appropriate way to raise substantial funds for short-
term through CDS. Even business and individuals invest their surplus for a short term in money
market securities. Hence banks, business, and individuals consider money market securities as
an ideal investment opportunity.

7. Why do businesses use the money markets?

The money market is the trading of short-term liquid securities. The money market securities
have very active secondary markets. The businesses us the money market to buy and sell the
security as a cash management. When a company has excess cash for short-term, it invests in
the money market. When money is required, it can quickly be realized by selling money market
securities. The investment companies regularly deal with the money market. Finance companies
use the money market securities to invest surplus cash for short term. The insurance companies
use the money market to manage their liquid assets. The pension fund companies use the
money market to the stock and bond market. Therefore, the primary purpose of the use of
money market is to invest the surplus cash for short-term. It is considered as the most liquid
asset in the business. The business earns the short-term income through investing in the money
market.

1. Contrast investors use of capital markets with their use of money markets.

The money market securities have short maturity period. Investors motive differ with the
different horizon investment period of securities. Investor buys the capital market securities
with a different purpose than the money market securities. The money market securities can be
used by investors to warehouse the short-term fund period, Money market securities have a
short maturity and are more liquid. It can be used in need. However, the capital market
securities are used by an investor to invest funds for long-term period. The money market
securities are mainly used for short-term investment, and the capital market securities are used
for long-term investment.

1. What basic principle of finance can be applied to the valuation of any investment asset?
The fundamental principle of finance is present value. The present value is the current value of
future income at different time interval. In the valuation of an investment asset, the present
amount of future income is used. The price or value of a bond is equal to the present values of
all future cash inflows. In case of stock, the amount of stock is the present value depends on the
required rate of return and investment horizon. The present value of the same security may
vary due to a different required rate of returns.

5. What distinguishes stocks from bonds?

The corporations can raise the capital through the issue of stock or bonds or both. Stocks are
the part of the capital giving right of ownership to investors. Bonds are the part of capital
borrowed with a fixed charge. Stocks don’t necessarily have fixed payment returns or dividends,
while bonds pay a fixed rate coupon payment at a fixed frequency. Stocks do offer ownership
rights to the investor of a company, compared to bonds which do not offer any ownership rights
to a company. Lastly, stocks upon bankruptcy give the least preference of repayment at
bankruptcy while bonds give first preference of repayment at bankruptcy.

1. What distinguishes the mortgage markets from the other capital markets?

The capital market is the market in which various types of debts, equities, and money market
securities are traded. The mortgage is the long-term loan secured by real estate.In the mortgage
market, an individual or businesses can borrow long-term funds. The mortgage market is the
subcategory of the capital market. However, the mortgage marketed has specific characteristics
which distinguish it from the capital market. The capital market securities are used by the
government and businesses. Individuals use the mortgage market. The mortgage loan is more
personalized; it means the loan is available with required amount and maturity as per the need
of an individual. However, this feature may not be available for the capital market security.