Cash Market

• The cash market, or money market, is the market for short-term securities. These are debt-based assets such as government bonds and certificates of deposit with two key qualities: they have fixed repayment dates and they carry a low rate of default risk. Investors can sell or buy such assets to or from other investors before they come due for repayment by the issuer. Generally, the rate of return on money market assets is lower than with riskier assets, and is much closer to the base rate set by a central bank such as the US Federal Reserve.
  
  

Liquidity

• Liquidity is a measure of how readily an investor will find a buyer or seller for an asset at the market price. Generally, liquidity is determined by the volume of trading. In normal circumstances, the money market is very liquid. This is because a buyer of a money market asset will know that even if the market price falls, he will usually be able to get at least the face value back relatively soon by waiting for the repayment date.
  
  

Bond Market

• The wider bond market differs in two significant ways from the cash market. Firstly, bonds usually run for a longer period, meaning that an investor buying a bond on the open market will on average have longer to wait before the repayment date; if the bond price falls, this means waiting longer to get her money back
  
  Secondly, bonds on the general market are more likely to carry a risk of default by the issuer -- for example, if a corporation goes into liquidation.
  
  

Effects

• Because the money market is so liquid, it is always a viable option for investing on a low-risk, low-return basis, regardless of the overall states of other financial markets. This has the effect of exacerbating the volatility of bond markets: whether bonds as a whole appear attractive or unattractive at any time is reinforced by the comparison with the alternative offered by the money market.
  
  

Interest Rates

• Although the liquidity of the money market does contribute to the volatility of bonds, it is arguably not the biggest factor. Instead, the major factor may be interest rates. As interest rates overall increase, the amount corporations are willing to pay to borrow will also increase, thus increasing the interest rate paid on newly issued bonds. This rise in turn makes bonds already in existence less attractive, lowering their price.