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16. The main difference between primary market and secondary market is that the former is introduced for the first time in the market and the latter has been introduced earlier. 17. Money markets are short term while capital market are long term. 18. The difference between direct finance and indirect finance lies in their name of applying for the finance. 19. Interest rate is the cost of borrowing money while YTM is the total expected return. 20. Adaptive expectations relies on forecast while rational deals with the past data.
16. Difference between Primary market and Secondary Market:
- Primary markets are where securities are offered for the first time while secondary markets are where existing securities are traded. Companies issue primary market securities to the public to raise funds. The secondary market, on the other hand, allows investors to sell and buy previously held securities.
- Primary markets are where new shares of stock are sold in public offerings or initial public offerings (IPOs), and companies issue debt in the form of bonds. In contrast, secondary markets trade in previously issued securities that are now being resold.
- Most of the stock markets in the world, such as the New York Stock Exchange and Nasdaq, are secondary markets where investors can purchase and sell shares of a company's stock. The purpose of a secondary market is to provide liquidity to the owners of those securities.
17. Difference Between Money Market and the Capital Market:
- The capital market and money market are two parts of the financial market, with capital markets trading in long-term securities and money markets trading in short-term securities.
- Money market: The money market is a type of market where financial instruments are traded for short-term investments or assets. These securities have a maturity period of less than one year, and they are usually issued by governments, financial institutions, and big corporations. Examples of money market instruments are commercial papers, treasury bills, and certificates of deposit.
- Capital Market: Capital markets are financial markets where long-term securities are traded. The purpose of the capital market is to help raise long-term funds for firms and institutions. This market comprises stocks, bonds, and other long-term financial instruments.
- Capital market trading enables businesses and organizations to obtain funds for future expansion and growth.
18: Difference Between Direct and Indirect Finance:
- Direct finance refers to the raising of funds from investors directly through a public offering of stock, bonds, or other securities by the issuing company. It does not involve a financial intermediary.
- Indirect finance, on the other hand, involves a financial intermediary, such as a bank or other lending institution, in raising funds from investors. Banks use the funds they acquire from depositors to provide loans and mortgages to individuals and businesses.
19: Difference between Interest rate and yield to maturity:
- Interest rate is the cost of borrowing money or the return on savings or investment expressed as a percentage of the total amount borrowed or saved. It is a fixed amount charged by lenders for borrowing money or the rate at which investors earn interest on their investment.
- Yield to maturity (YTM) is the total return expected on a bond or other fixed-rate securities held until maturity. The yield to maturity calculation considers a bond's interest rate, face value, and remaining term to maturity. It reflects the actual rate of return earned by an investor who holds a bond until its maturity date.
20: Difference Between Adaptive Expectations and Rational Expectations:
- Adaptive expectations: It is an economic theory that describes how people form expectations about a future event. People base their expectations on past experiences, and the accuracy of the past is used to anticipate what will happen in the future. It assumes that the future will resemble the past.
- Rational expectations: Rational expectations theory assumes that people will always make use of all the available information to make the most rational decisions possible. In the case of economics, this means that investors and consumers will use all the available information about the economy to make their decisions.
- Rational expectations predict that if the current economic conditions change, then the economic participants will adjust their behavior accordingly.
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