Sunday, April 19, 2009

maturity: money and capital markets(2)

The three primary differences for investors in money market and capital market instruments relate to risk, liquidity, and information. first, short-term instruments have relatively small increases or decreases in price, so they are less risky as investment than long-term instruments are. AS a result,financial institutions and corporations typically invest short-term surplus funds in money markets. some financial institutions, such us pension funds and insurance companies, are willing to hold assets for long time and risk price fluctuations in capital markets. Second, money market instruments are generally more liquid than capital market instruments because their trading volume is greater. thus households and businesses can invest their funds for a short period of time relatively cheaply.Finally, information costs are lower for money market instruments because the borrowers are well known and the length of time for which funds are loaned is relatively short.

No comments: