The theory of capital market deals with the following issues:
- Importance of venture capital in the capital market
- Initial public offerings
- Role of capital market
- Major capital markets worldwide
- Markets and financial innovations in derivative instruments
- Role of Federal Reserve System
- Role of securities
- Capital market regulatory requirements
- Role of the government treasury
Mortgages, equities, bonds, and other investments are traded in the capital market. The financial instruments in this market have long maturity periods.
Capital market theory states that federal funds, federal agency securities, treasury bills, commercial papers, negotiable certificates of deposits, repurchase agreements, Eurocurrency loans and deposits, options and futures are merchandised in the capital market.
When one has to put a price on a security, one has to determine the risk and return of the security both for single assets, as well as a portfolio of assets. The uncertainty and variability of returns on assets and the possibilities of losses can be defined as risks.
The theory of capital market defines returns in the following manner:
K = Pt + Ct - Pt-1 / Pt-1
where the time of purchase of the asset of price Pt-1 is t-1. If this be the case, then the return (K) from the time period t-1 to t is the above mentioned formula. Ct is the cash gotten from assets between t-1 and t. Pt is the price of the asset at time t.
For practitioners of the capital market theory, it has not lost its significance. It is still as important for retirement, financial, and investment plans.
