Description
types of financial markets, different instruments, equity share, depository receipts, money market instruments, commercial papers, certificate of deposits, repusrchase agreements, CBLO, STRIPS
Financial Markets
Shailendra Kumar Rai
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 Non Banking Financial Companies
Funds Loans agreement
Suppliers of Funds
Individuals
Funds
Demanders of Funds
Businesses
Governments
Private Placement
Individuals Securities
Businesses
Governments
Financial Markets
Funds Securities Money Market/ Capital Markets Funds Securities
Role of Financial Institutions
?
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
?
Denomination Intermediation
?
?
Diversification
?
Role of Financial Institutions
?
Reduced Cost
?
Information processing and contracting cost
Type of Financial Markets
?
By Nature of Claim
Debt Market ? Equity Market
?
?
By Maturity of Claim
Capital Market ? Money Market
?
?
By Seasoning of Claim
Primary Market ? Secondary Market
?
Type of Financial Markets
?
By Time of Delivery
Cash or Spot Market ? Forward Market
?
?
By Organizational Structure
Over-the-Counter Market ? Stock Exchange
?
31st December 2010
Particulars
USA
UK
Japan
Germany
Singapore HongKong
China
India
Listed Companies
7240
3278
4844
748
592
1229
2130
5787
Market Cap (USD bn)
21849
5759
5553
3146
453
1463
9426
2819
Market Cap ratio
149.0
157.1
90.2
69.4
374.4
583.9
237.5
200.1
Turnover (USD bn)
52613 15324
8997
4863
484
1017
8992
2108
Market Participants in Securities Market
31st March Market Participants
Securities Appellate Tribunal Depositories Stock Exchanges Equity Debt Market 22 2 19 2
2008
1 2
2010
1 2
Derivatives
Brokers Corporate Brokers Sub Brokers FIIs Portfolio Managers Custodians
2
9,443 4,076 27,894 996 158 15
2
9,544 4,190 44,074 1,319 205 15
Registrars & Transfer Agents
Primary Dealers Merchant Bankers Bankers to the Issue Debenture Trustess Underwriters Venture Capital Funds Mutual Funds
82
17 152 47 30 45 90 40
76
16 155 47 28 35 106 40
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
?
By Maturity of Claim
?
Money Markets
?
Markets that trade debt securities with maturities of one year or less
? ? ?
Treasury Bills Negotiable Certificates of Deposits Commercial Papers
?
Capital Markets
?
Markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year
? ?
Government Securities (Debt) Corporate Securities (Debt and Equity)
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)
?
Secondary Markets
?
Markets where previously issued financial instruments are traded among investors (e.g. NYSE, NASDAQ, BSE, NSE) ? 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
By Time of Delivery
?
Cash Market or Spot Market
?
Financial Assets are traded for immediate settlement
?
Forward Markets
Financial Assets are traded for settlement in future ? As the financial asset derives its value from an `underlying asset’, also called derivative market
?
By Organizational Structure
?
Over-The-Counter (OTC Market)
?
Market based on tailor made products designed specifically to meet individual needs
Market where trading of standardized, homogenous financial claims takes place
Screen Based Trading ? Floor Based Trading
?
?
Exchange
?
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
?
Depository Receipts
?
?
?
Negotiable certificate issued by a depository bank DR represent the beneficial interest in shares issued by a company Shares are deposited with a `local’ custodian appointed by the depository
Overseas
Issues DR in foreign currency
Local
Issues shares in local currency
Investors
Depository
Local Custodian
Issuer
Depository Receipts
Each DR represents beneficial interest in a predetermined number of underlying shares ? The issuer transacts with one entity – Depository
?
?
Global Depository Receipt (GDR)
?
Formal listing on non-use exchanges e.g. London Issued by a US Depository in US
?
American Depository Receipt (ADR)
?
Money Market Instruments
Issuance and trading of short-term debt obligations of large corporations, Financial Institutions and government ? Short duration (< 1 yr) ? Only High-Quality Entities ? Transaction size is large ? Investors include corporations and Financial Institutions with idle cash and a short-term investment horizon
?
Money Market Instruments
?
Treasury Bills
?
? ? ? ?
?
Short-term obligations issued by the government 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
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
Certificate of Deposits
? Issued
?
by a deposit accepting institution (Bank)
Negotiable with specific interest rate/maturity
?
Discount security – issued at a discount to the face value, redeemed at par
? Maturity
: 14 days to < 1 year ? Large denomination CDs – Institutions
Inter-Bank Market (Call Market)
Market where banks and financial institutions can lend and borrow money ? Short teem market
?
?
Overnight to 14 days
?
To overcome short term liquidity mismatches
Repurchase Agreements (Repo)
?
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
CBLO
?
Collaterised Borrowing and Lending Obligations (CBLO)
? ?
?
Obligation by the borrower to return the money borrowed at a specified future date Authority by the lender to receive the money lent at a specified future date with an option to transfer the authority to another person An underlying charge on securities in custody with CCIL
? ? ?
Product offered by Clearing Corporation of India Limited (CCIL) Participants – Banks, FIs, MFS, Insurance Companies, Corporate etc. Duration – one day to one year
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
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
STRIPS
?
Separate Trading of Registered Interest and Principal Securities ? The cash flow associated with a treasury bond is broken into a number of cash flows
?
?
For each coupon payment For the principal repayment
?
Each cash flow is traded separately as a zero coupon bond ? Generally STRIPS are not issued directly ? Financial Institutions create the strip components after purchasing the original treasury bonds
Corporate Bonds
Issued by corporate borrowers ? Maturity greater than one year
?
Upto 10 years – Medium Term ? More than 10 years – Long Term
?
?
Often secured by a specific pledge against company assets
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
?
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
?
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 Convertible ? Partially Convertible ? Fully Convertible
?
Bonds with warrants
The warrant grants the holder the right to purchase a specified amount of a security (generally ordinary shares) at a predetermined price ? Warrants can be detached and traded separately
?
Callable/ Putable Bonds
?
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
Floating Rate Bonds
?
Coupon rate is reset periodically in line with some predetermined benchmark
Benchmark ? Spread ? Adjustment Interval
?
Junk Bonds
High yield bond issued by a corporation with a low credit rating (below BBB) ? Trade-off between risk and return
?
Zero-Coupon Bond/ Deep Discount Bond
No coupon rate of interest ? Issued at a discount to the face value ? Redeemable at Par ? Interest is built-in the difference between issue price and redemption price
?
Foreign Bond
?
Bond issued in the domestic currency of the country by a foreign entity
Yankee Bond – Issue of a dollar bond by a British Company in US ? Samurai Bonds for Yen ? Bulldogs for Sterling
?
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)
doc_550370953.pptx
types of financial markets, different instruments, equity share, depository receipts, money market instruments, commercial papers, certificate of deposits, repusrchase agreements, CBLO, STRIPS
Financial Markets
Shailendra Kumar Rai
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 Non Banking Financial Companies
Funds Loans agreement
Suppliers of Funds
Individuals
Funds
Demanders of Funds
Businesses
Governments
Private Placement
Individuals Securities
Businesses
Governments
Financial Markets
Funds Securities Money Market/ Capital Markets Funds Securities
Role of Financial Institutions
?
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
?
Denomination Intermediation
?
?
Diversification
?
Role of Financial Institutions
?
Reduced Cost
?
Information processing and contracting cost
Type of Financial Markets
?
By Nature of Claim
Debt Market ? Equity Market
?
?
By Maturity of Claim
Capital Market ? Money Market
?
?
By Seasoning of Claim
Primary Market ? Secondary Market
?
Type of Financial Markets
?
By Time of Delivery
Cash or Spot Market ? Forward Market
?
?
By Organizational Structure
Over-the-Counter Market ? Stock Exchange
?
31st December 2010
Particulars
USA
UK
Japan
Germany
Singapore HongKong
China
India
Listed Companies
7240
3278
4844
748
592
1229
2130
5787
Market Cap (USD bn)
21849
5759
5553
3146
453
1463
9426
2819
Market Cap ratio
149.0
157.1
90.2
69.4
374.4
583.9
237.5
200.1
Turnover (USD bn)
52613 15324
8997
4863
484
1017
8992
2108
Market Participants in Securities Market
31st March Market Participants
Securities Appellate Tribunal Depositories Stock Exchanges Equity Debt Market 22 2 19 2
2008
1 2
2010
1 2
Derivatives
Brokers Corporate Brokers Sub Brokers FIIs Portfolio Managers Custodians
2
9,443 4,076 27,894 996 158 15
2
9,544 4,190 44,074 1,319 205 15
Registrars & Transfer Agents
Primary Dealers Merchant Bankers Bankers to the Issue Debenture Trustess Underwriters Venture Capital Funds Mutual Funds
82
17 152 47 30 45 90 40
76
16 155 47 28 35 106 40
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
?
By Maturity of Claim
?
Money Markets
?
Markets that trade debt securities with maturities of one year or less
? ? ?
Treasury Bills Negotiable Certificates of Deposits Commercial Papers
?
Capital Markets
?
Markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year
? ?
Government Securities (Debt) Corporate Securities (Debt and Equity)
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)
?
Secondary Markets
?
Markets where previously issued financial instruments are traded among investors (e.g. NYSE, NASDAQ, BSE, NSE) ? 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
By Time of Delivery
?
Cash Market or Spot Market
?
Financial Assets are traded for immediate settlement
?
Forward Markets
Financial Assets are traded for settlement in future ? As the financial asset derives its value from an `underlying asset’, also called derivative market
?
By Organizational Structure
?
Over-The-Counter (OTC Market)
?
Market based on tailor made products designed specifically to meet individual needs
Market where trading of standardized, homogenous financial claims takes place
Screen Based Trading ? Floor Based Trading
?
?
Exchange
?
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
?
Depository Receipts
?
?
?
Negotiable certificate issued by a depository bank DR represent the beneficial interest in shares issued by a company Shares are deposited with a `local’ custodian appointed by the depository
Overseas
Issues DR in foreign currency
Local
Issues shares in local currency
Investors
Depository
Local Custodian
Issuer
Depository Receipts
Each DR represents beneficial interest in a predetermined number of underlying shares ? The issuer transacts with one entity – Depository
?
?
Global Depository Receipt (GDR)
?
Formal listing on non-use exchanges e.g. London Issued by a US Depository in US
?
American Depository Receipt (ADR)
?
Money Market Instruments
Issuance and trading of short-term debt obligations of large corporations, Financial Institutions and government ? Short duration (< 1 yr) ? Only High-Quality Entities ? Transaction size is large ? Investors include corporations and Financial Institutions with idle cash and a short-term investment horizon
?
Money Market Instruments
?
Treasury Bills
?
? ? ? ?
?
Short-term obligations issued by the government 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
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
Certificate of Deposits
? Issued
?
by a deposit accepting institution (Bank)
Negotiable with specific interest rate/maturity
?
Discount security – issued at a discount to the face value, redeemed at par
? Maturity
: 14 days to < 1 year ? Large denomination CDs – Institutions
Inter-Bank Market (Call Market)
Market where banks and financial institutions can lend and borrow money ? Short teem market
?
?
Overnight to 14 days
?
To overcome short term liquidity mismatches
Repurchase Agreements (Repo)
?
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
CBLO
?
Collaterised Borrowing and Lending Obligations (CBLO)
? ?
?
Obligation by the borrower to return the money borrowed at a specified future date Authority by the lender to receive the money lent at a specified future date with an option to transfer the authority to another person An underlying charge on securities in custody with CCIL
? ? ?
Product offered by Clearing Corporation of India Limited (CCIL) Participants – Banks, FIs, MFS, Insurance Companies, Corporate etc. Duration – one day to one year
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
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
STRIPS
?
Separate Trading of Registered Interest and Principal Securities ? The cash flow associated with a treasury bond is broken into a number of cash flows
?
?
For each coupon payment For the principal repayment
?
Each cash flow is traded separately as a zero coupon bond ? Generally STRIPS are not issued directly ? Financial Institutions create the strip components after purchasing the original treasury bonds
Corporate Bonds
Issued by corporate borrowers ? Maturity greater than one year
?
Upto 10 years – Medium Term ? More than 10 years – Long Term
?
?
Often secured by a specific pledge against company assets
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
?
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
?
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 Convertible ? Partially Convertible ? Fully Convertible
?
Bonds with warrants
The warrant grants the holder the right to purchase a specified amount of a security (generally ordinary shares) at a predetermined price ? Warrants can be detached and traded separately
?
Callable/ Putable Bonds
?
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
Floating Rate Bonds
?
Coupon rate is reset periodically in line with some predetermined benchmark
Benchmark ? Spread ? Adjustment Interval
?
Junk Bonds
High yield bond issued by a corporation with a low credit rating (below BBB) ? Trade-off between risk and return
?
Zero-Coupon Bond/ Deep Discount Bond
No coupon rate of interest ? Issued at a discount to the face value ? Redeemable at Par ? Interest is built-in the difference between issue price and redemption price
?
Foreign Bond
?
Bond issued in the domestic currency of the country by a foreign entity
Yankee Bond – Issue of a dollar bond by a British Company in US ? Samurai Bonds for Yen ? Bulldogs for Sterling
?
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)
doc_550370953.pptx