For understanding the concept of time value of money, an insight into the financial markets is quite important. A financial market is a place where money is traded. Just take any other market, there are buyers arid sellers in the segment of market too. The buyers of money or funds ,are people/entrepreneurs/industrialist who have viable projects with them and who are looking out for sources of finance. The sellers of the money are people who have surplus money/funds and who are ready to lend the same on agreed terms. The agreed terns mostly center around the interest and principal repayment schedule. Since the borrowings and repayments take place at different points of time the interest factor plays a very important role.
The financial markets can be broadly classified into two categories, i.e. the capital/ investment markets and money markets. Though a clear distinction between the two is not always clear because of overlapping, it is the length of time which distinguishes the two. Markets when funds are borrowed/loaned for a year or less are referred to as money markets. Capital markets encompass longer term obligations.
Capital Markets
Capital markets deal in the following types of securities :
- Corporate securities
- Governmental of India bonds
- State and local bonds
- Corporate equities
- Mortgages
- Mutual fund units
Money Markets
Money markets which are described as centers of short term funds include the following major segments :
- Treasury bills
- Commercial bank loans
- Commercial papers
- Certificates of deposits
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