Which of the following is a capital market security? (select all that apply) a. Common Stock b. Commercial Paper c. U.S. Treasury Bills d. Federal Funds
The correct answer and explanation is:
The correct answers are:
- a. Common Stock
- c. U.S. Treasury Bills
Explanation:
Capital markets are markets where long-term debt or equity-backed securities are traded. These markets are crucial for companies to raise long-term funds, as they enable the buying and selling of securities with maturities greater than one year.
- Common Stock: Common stock represents ownership in a company. It is classified as an equity security, and its main characteristic is that it provides shareholders with a claim to a portion of the company’s profits through dividends and capital gains. Since common stock typically involves ownership in a corporation and is traded in the capital markets, it is considered a capital market security.
- U.S. Treasury Bills (T-Bills): U.S. Treasury Bills are short-term debt securities issued by the U.S. government. They have maturities of one year or less, which might initially make them seem like money market instruments. However, they are also considered part of the capital markets because they are issued by the government and can be traded in secondary markets.
- Commercial Paper: Commercial paper is a short-term, unsecured debt instrument issued by corporations to finance their short-term operational needs. With maturities typically ranging from a few days to 270 days, it is a money market instrument, not a capital market security. Money market instruments are those that have maturities of one year or less, whereas capital market securities have longer maturities.
- Federal Funds: Federal funds are the reserves that depository institutions lend to each other overnight. This is a short-term borrowing arrangement that typically occurs in the interbank market. Federal funds are not classified as a capital market security, as they deal with short-term liquidity rather than long-term financing.
In conclusion, common stock and U.S. Treasury Bills are capital market securities, while commercial paper and federal funds are not.