Looking for the answer to the question below related to Financial Management ?
Which of the following is not a component of capital market?
|A. long term loan market
B. industrial securities market
C. Short term loan market
D. government securities market
The Correct Answer Is:
- C. Short term loan market
The correct answer is C. Short term loan market. The short-term loan market is not a component of the capital market. Let’s delve into the reasons why option C is the correct answer and why the other options (A. long-term loan market, B. industrial securities market, and D. government securities market) are indeed components of the capital market:
Why Option C (Short term loan market) is Not a Component of the Capital Market:
The short-term loan market primarily deals with borrowing and lending of funds for shorter durations, typically less than one year. It is often referred to as the money market. This market involves instruments like Treasury bills, commercial paper, certificates of deposit, and call money.
Money market instruments are used for short-term liquidity management, investments, and financing needs. The key distinguishing feature of the money market is its short-term nature, which contrasts with the capital market’s focus on longer-term financing and investment.
Why Option A (Long term loan market) is a Component of the Capital Market:
Option A, “long-term loan market,” is indeed a component of the capital market. This market involves the issuance and trading of long-term debt instruments, such as corporate bonds and debentures, as well as long-term loans provided by financial institutions.
Entities access the long-term loan market to secure financing for capital projects, expansion, and other long-term financial needs. Investors participate in this market to invest in long-term fixed-income securities.
Why Option B (Industrial securities market) is a Component of the Capital Market:
Option B, “industrial securities market,” is also a component of the capital market. The industrial securities market encompasses the issuance and trading of securities related to industrial and commercial enterprises.
This includes shares of companies traded on stock exchanges (equity securities) and various forms of corporate debt instruments like bonds and debentures. The industrial securities market plays a vital role in facilitating long-term capital formation and investment in business enterprises.
Why Option D (Government securities market) is a Component of the Capital Market:
Option D, “government securities market,” is another component of the capital market. This market involves government-issued debt securities, such as Treasury bonds and Treasury notes.
These securities are considered low-risk investments and serve as benchmarks for interest rates in the broader financial markets. The government securities market is essential for governments to raise funds to finance various initiatives and manage fiscal policies.
In summary, the capital market encompasses various segments related to long-term financing, investments, and capital formation. The components of the capital market include the long-term loan market, industrial securities market (equity and corporate debt), and government securities market.
In contrast, the short-term loan market, commonly referred to as the money market, deals with short-term borrowing and lending and is distinct from the capital market due to its focus on shorter timeframes. Therefore, option C, “Short term loan market,” is the correct answer as it is not a component of the capital market.