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FINANCIAL MARKET
A market where financial assets are exchanged Financial Assets are created and traded in financial markets Financial assets are intangible
Represent a claim to future cash flow The entity that has agreed to make future cash payment The holder of a financial asset
Issuer
Investor
Funds Deposits/Shares
Financial Institutions
Commercial Banks
Insurance Companies Mutual Funds Provident Funds
Suppliers of Funds
Individuals Businesses Governments
Funds
Demanders of Funds
Private Placement
Financial Markets
Funds Securities
Funds Securities
Maturity Intermediation
Investors/lender are willing to invest/lend for short term Issuers/borrowers want funds for long term FI are able to offer more choices to both Allow small investors to overcome constraints imposed to buying assets imposed by large minimum denomination size Transforming more risky asset into less risky asset through diversification Information processing and contracting cost
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Denomination Intermediation
Diversification
Reduced Cost
By Nature of Claim
Debt
By Maturity of Claim
Capital
By Seasoning of Claim
Primary
By Time of Delivery
Cash
By Organizational Structure
Over-the-Counter
Market
Stock
Exchange
BY NATURE OF CLAIM
Debt Market
Deals
in fixed income securities issued by corporate and government May be short term or long term Represent borrowings of the Issuer
Equity Market
Deals
in shares issued by corporate entities Shares are perpetual in nature Ownership Securities
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BY MATURITY OF CLAIM
Money Markets
Markets that trade debt securities with maturities of one year or less
Treasury
Capital Markets
Markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year
Government
BY SEASONING OF CLAIM
Primary Markets
Markets in which users of funds (e.g. corporations, governments) raise funds by issuing financial instruments (e.g. stocks and bonds) Markets where previously issued financial instruments are traded among investors (e.g. NYSE, NASDAQ, BSE, NSE)
Secondary Markets
BY SEASONING OF CLAIM
In Primary market the issuer of the financial claim receives the funds while in secondary market the seller of the claim receives the funds Secondary Markets provide liquidity
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BY TIME OF DELIVERY
Assets are traded for immediate settlement Assets are traded for settlement in
Forward Markets
Financial
future As the financial asset derives its value from an underlying asset, also called derivative market
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BY ORGANIZATIONAL STRUCTURE
based on tailor made products designed specifically to meet individual needs where trading of standardized, homogenous financial claims takes place
Screen
Exchange
Market
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TRADING PLATFORMS
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FX markets deal in trading one currency for another (e.g. dollar for yen) The spot FX transaction involves the immediate exchange of currencies at the current exchange rate The forward FX transaction involves the exchange of currencies at a specified date in the future and at a specified exchange rate
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INSTRUMENTS
Equity Shares
Common Stock or Ordinary Shares Ownership Securities Voting Rights No fixed rate of dividend Perpetual Last preference in repayment of capital in case of liquidation
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DEPOSITARY RECEIPTS
Negotiable certificate issued by a depositary bank DR represent the beneficial interest in shares issued by a company Shares are deposited with a local custodian appointed by the depositary
Overseas
Issues DR in foreign currency
Local
Issues shares in local currency
Investors
Depositary
Local Custodian
Issuer
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DEPOSITARY RECEIPTS
Each DR represents beneficial interest in a predetermined number of underlying shares The issuer transacts with one entity Depositary
Global
Formal
American
Issued
by a US Depositary in US
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TREASURY BILLS
Short-term obligations issued by the government In India, the RBI acts as an issuer 91 days, 182 days and 364 days Credit Risk Free as guaranteed by the government Highly liquid instruments Discount security issued at a discount to the face value, redeemed at par 19
COMMERCIAL PAPERS
Short-term unsecured promissory notes issued by a company to raise short-term cash Issued by financially sound companies with good credit rating Discount security issued at a discount to the face value, redeemed at par Maturity less than 1 year Weak secondary market; Most Commercial Papers are held to maturity
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CERTIFICATE OF DEPOSITS
Issued
(Bank)
security issued at a discount to the face value, redeemed at par Maturity : 14 days to < 1 year Large denomination CDs Institutions
Discount
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Overnight
to 14 days
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Sale of a security with a commitment by the seller to repurchase the security at a specified price at a future date Often used by the Central Bank to suck or infuse liquidity in the market (Open Market Operations) Equivalent to a collateralized loan with the security as a collateral The lender earns interest at the `repo rate. Most repos are for less than three months Reverse repurchase agreement Involves the purchase of securities between parties with the promise to sell them back at a given date in the future
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BOND MARKETS
A bond is a promise to make periodic coupon payments and to repay principal at maturity Carry original maturities greater than one year so bonds are instruments of the capital markets Issuers are corporations and government units
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GOVERNMENT SECURITIES
Issued by government Serve as benchmark for the cost of funds for corporations and other borrowers Also called gilt-edged as they are credit risk free Issued with a face value with a given coupon rate Repayment of principle is guaranteed by the government
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CORPORATE BONDS
Issued by corporate borrowers Maturity greater than one year
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CREDIT RATING
Credit Rating by independent credit rating agencies like CRISIL/ ICRA/ CARE Comment upon ability to pay interest and repayment of principle Credit rating is issue specific Higher the rating, lower the rate of interest on borrowings
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RATING SYMBOLS
AAA Highest Safety AA High safety A Adequate Safety BBB Moderate Safety BB Inadequate Safety B - High Risk C - Substantial Risk D - Default
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TYPES OF BONDS
Convertible Bonds
Grants
the bondholder and/or the issuer the right to convert the bond into a predetermined number of ordinary shares
Non
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Call provision
Gives
the issuer an option to buy back a part or all prior to maturity Generally at a premium
Put provision
Grants
the bondholder a right to sell the bonds back to the issuer on designated dates at the predetermined price
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Spread
Adjustment
Interval
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JUNK BONDS
High yield bond issued by a corporation with a low credit rating (below BB) Trade-off between risk and return
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FOREIGN BOND
EURO-BONDS
Euro-Bonds Bonds issued by an issuer government or company in a currency different from country where the bond is issued A dollar bond sold in London Dollar Eurobond A sterling bond issued in Germany Sterling Eurobond Majority of the issues for under 10 years maturity (Medium Term Bonds)
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THANK YOU
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