Which of the following best distinguishes the money market from the capital market?

• A. The money market deals with short-term debt instruments, while the capital market deals with long-term securities.
• B. The money market is used exclusively for equity trading, while the capital market is used for debt instruments.
• C. The money market is regulated by the central bank, while the capital market is unregulated.
• D. The money market operates only within a single country, while the capital market is international.

Answer: (A)

Verified step by step guidance

1. Understand the definitions of the money market and the capital market. The money market is a segment of the financial market where short-term debt instruments (typically maturing in less than one year) are traded. Examples include Treasury bills, commercial paper, and certificates of deposit. The capital market, on the other hand, is where long-term securities such as stocks and bonds are traded.
2. Analyze the key distinguishing factor between the two markets. The primary difference lies in the maturity period of the instruments traded: short-term for the money market and long-term for the capital market.
3. Evaluate the options provided in the problem. Option 1 states that the money market deals with short-term debt instruments, while the capital market deals with long-term securities. This aligns with the definitions and is likely the correct answer.
4. Review the other options critically. Option 2 incorrectly states that the money market is used exclusively for equity trading, which is not true as it primarily deals with debt instruments. Option 3 claims the money market is regulated by the central bank while the capital market is unregulated, which is misleading as both markets are subject to regulatory oversight. Option 4 suggests the money market operates only within a single country, while the capital market is international, which is not universally accurate.
5. Conclude that the correct distinguishing factor is the maturity period of the instruments traded, as stated in Option 1. This understanding helps clarify the fundamental difference between the money market and the capital market.