DEPARTMENT OF MANAGEMENT SCIENCES(BBA)

Topic Money and Capital Market Instruments

SUBMITTED TO: Madam Irum Khan

SUBMITTED BY: TAHSEEN ULLAH

ROLL NO: 01(one)

DATE OF SUBMITION: .2. 2015

Comments: ……………………………………………………

Money Market Instrument Money: a current medium of exchange in the form of coins and banknotes, coins and banknotes collectively.

Money Market:

The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period up to one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.

“Investment and Risk Characteristics”

Term: Mostly Short Term i.e. less than a yearIncome: LowSecurity: Depends upon the issuerMarketability: GoodVolatility: Low since the term is shortInflation: Low impact of inflation as term is shortExpected Return: Negotiable/Equivalent to bank depositCurrency: Available in different currencies.

“The Need of Money Market Instruments”

•Need for short term funds by Banks.

•Outlet for deploying funds on short term basis.

•Optimize the yield on temporary surplus funds.

•Regulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market.

“Money Market Instruments”

1) T-bill and other government Securities.2) Commercial Papers.3) Certificates of deposits.4) The Interbank market loans.5) Repurchase agreements.6) International money market securities.

T-bills:

T-Bills are short term money market instruments issued by Govt. & backed by it. Treasury bills were first authorized by Congress (U.S.A) in 1929. T-bill are secure and little or no risk. Maturity life is from 12 weeks to 12months. No interest or interest free. Sell at discounted rate.

Commercial Papers:

Commercial paper is an unsecured, short term loan issued by a corporation, typically for financing Accounts Receivables and Inventories.

Maturities on Commercial Papers are no longer than nine months, with maturities of between one and two months being the average.

Commercial Paper is a very safe investment because the financial situation of a company can easily be predicted over a few months.

Certificates of deposits:

Commercial paper is a short-term unsecured promissory note issued by large, well known, credit worthy corporations.

To pay short-term debt e.g. payroll. The maturity of commercial paper must be less than 270 days (9 months). Average maturity life are 45 & 30-35 days. High rate of interest/Discounted rate.

The Interbank market loans:

Interbank market refers to the subset of bank-to-bank transactions that take. Maturity is one are less than one week &mostly 14 days. Commercial banks are required to keep reserves on deposits on central bank. Interest rate charge.

Repurchase agreements:

 Repurchase agreement are called REPO. Repurchase agreement, is the sale of securities together with an agreement for the seller

to buy back the securities at a later date. Buyer purchase securities from seller. open REPO:- No set of maturity date but renewed each day upon agreement of both

counterparties. Term REPO:-Repo maturity date is more than one day. The participants of REPO are banks money market funds, non-financial institutions.

Maturity from 1 to 15 days & for1, 3, 6 months. There is no Secondary market for REPOs.

International money market securities:

These markets in which the borrowing &lending denominated in a currency of some other country take place.

In general, Eurocurrency market instruments are the same as other money market instruments.

Eurocurrency instruments is any instrument denominated in a currency which differs from that of the country in which it traded.

Euro banks are banks which specialize in Eurocurrency business.

“The capital market Instruments” .

The capital market is the market for securities where companies and the government can rise long term fund.

Meaning of Capital Market , Capital Market is the part of financial system which is concerned with raising capital funds by dealing in Shares, Bonds, and other long-term investments.

The market where Investment instruments like bonds, equities and mortgages are traded is known as the capital market..

“Types of Capital Market” .

There are two types of capital market:

Primary market,

Secondary market.

Primary Market:

It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital.

This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET.

Features of Primary Market:

It Is Related With New Issues.

It Has No Particular Place .

It Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary market.

i) Public Issue .

ii) Offer For Sale.

iii) Private Placement.

iv) Right Issue .

v) Electronic-Initial Public Offer .

Secondary Market:

The secondary market is that market in which the buying and selling of the previously issued securities is done.

The transactions of the secondary market are generally done through the medium of stock exchange.

The chief purpose of the secondary market is to create liquidity in securities.

It Creates Liquidity .

It Comes After Primary Market .

It Has A Particular Place .

It Encourages New Investments .

“BASIC CAPITAL MARKET INSTRUMENTS” .

“Types of capital market instrument”

Equity share

Preference share

Debenture

Bonds

Difference between equity- debt securities

Equity shares:

According to the Companies Act 1956, equity shares are that part of the share capital of the company,

Easy liquidity and marketability.

No fixed rate of dividend . A permanent source of finance to the company. No guarantee on returns to shareholders Loss of managerial control.

Preference share:

Preference shares are known as preferred stock.

Preference share capital has two priorities,

i.e. in the repayment of capital and payment of dividend.

Preferred stocks usually carry no voting rights.

DEBENTURES:

When a corporation is in need of fund in addition to share capital it borrows money by issuing debentures.

The debenture holder gets interest which is fixed at the time of issue.

Reduces burden of tax of the company .

Fixed rate on interest.

Bonds:

Bonds are issued by public authorities, credit institutions, companies and super national institutions in the primary market.

A bond is a negotiable certificate which entitles the holder of repayment of the principal sum plus interest.

The most common process of issuing bonds is through underwriting.

“Types of Bonds”

Bearer bonds

Registered bonds

Callable bonds

Convertible bonds

Zero coupon bonds

Fixed rate bonds.