Types of Capital markets

Capital markets refer to financial markets where buyers and sellers trade financial securities

such as stocks, shares and bonds. They provide equity finance and long term debt for the

corporate sector and the government. Capital markets are either primary or secondary. In the

primary markets, new securities are traded while existing securities are traded in secondary

markets (Fabozzi & Drake, 2009). Capital markets are important in the economy because they

provide long-term finance to investors as well as encourage an investment culture. This

discussion explores different types of capital markets such as bond markets, mortgage markets,

commodities markets and options markets, as well as their importance in the financial sector.

II. Bond Market

A bond market is a financial market in which bonds are the primary debt instruments that are

sold and bought. Transactions in a bond market are between issuers, purchasers and

underwriters. Issuers are organizations such as banks which sell bonds in order to raise funds for

financing their operations. Purchasers buy the bonds and they include corporations, governments

and individual investors. Underwriters assist issuers in selling bonds and they include leaders in

the investment business (Fabozzi & Drake, 2009). Bond markets are important to the financial

sector because they provide liquid cash for use by the economy to develop, governments to

invest and companies to grow (Bolton & Freixas, 2000).

i. Corporate Bonds

Corporate bonds refer to debt obligations which are issued by corporations. Corporate

bonds’ issuers are companies intending to raise capital for expansion and other corporate projects

(Lyuu, 2002). Purchasers of corporate bonds lend money to corporations. This money is paid

back in regular intervals at a particular interest. When the specified maturity date comes, the

principal amount is returned to the purchaser. Corporate bonds are important to the economy

because they reduce the dependence of the citizens on the public sector and stimulate private

investment.

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