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Assignment

Titled

“Money Market & Capital Market”

Master of Business Administration

Submitted To: - Submitted By:-

Dr. Giriraj kiradoo Swati Panwar

Lecturer (MBA Deptt.) MBA III Sem

 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.

Money Market Instruments:-

Some of the important money market instruments are briefly discussed below;

1. Call /Notice-Money Market: - Call/Notice money is the money borrowed or lent on

demand for a very short period. When money is borrowed or lent for a day, it is known as
Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose.
Thus money, borrowed on a day and repaid on the next working day, (irrespective of the
number of intervening holidays) is "Call Money". When money is borrowed or lent for more
than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover
these transactions.

2. Inter-Bank Term Money: - Inter-bank market for deposits of maturity beyond 14 days
is referred to as the term money market. The entry restrictions are the same as those for
Call/Notice Money except that, as per existing regulations, the specified entities are not allowed
to lend beyond 14 days.

3. Treasury Bills: - Treasury Bills are short term (up to one year) borrowing instruments of
the union government. It is an IOU of the Government. It is a promise by the Government to pay
a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less
than one year). They are issued at a discount to the face value, and on maturity the face value is
paid to the holder. The rate of discount and the corresponding issue price are determined at each
auction.
4. Certificate of Deposits:- Certificates of Deposit (CDs) is a negotiable money market
instrument and issued in dematerialized form or as a Promissory Note, for funds deposited at a
bank or other eligible financial institution for a specified time period. Guidelines for issue of
CDs are presently governed by various directives issued by the Reserve Bank of India, as
amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial
Institutions that have been permitted by RBI to raise short-term resources within the umbrella
limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI
may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with
other instruments viz., term money, term deposits, commercial papers and inter corporate
deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance
sheet.

5. Commercial Paper: - CP is a note in evidence of the debt obligation of the issuer. On

issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an
unsecured promissory note privately placed with investors at a discount rate to face value
determined by market forces. CP is freely negotiable by endorsement and delivery. A company
shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of
the company from the banking system is not less than Rs.4 crore and (c) the borrowed account of
the company is classified as a Standard Asset by the financing bank/s. The minimum maturity
period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent
rating by other agencies.

6. Short Term Tax Exempts: - These instruments are short-term notes issued by state and
municipal governments. Although they carry somewhat more risk than T-bills and tend to be less
negotiable, they feature the added benefit that the interest is not subject to federal income tax.
For this reason, corporations find that the lower yield is worthwhile on this type of short-term
investment.
7. Bankers Acceptances: - "A banker's acceptance begins life as a written demand for the
bank to pay a given sum at a future date," Brealey and Myers noted. "The bank then agrees to
this demand by writing 'accepted' on it. Once accepted, the draft becomes the bank's IOU and is a
negotiable security. This security can then be bought or sold at a discount slightly greater than
the discount on Treasury bills of the same maturity." Bankers' acceptances are generally used to
finance foreign trade, although they also arise when companies purchase goods on credit or need
to finance inventory. The maturity of acceptances ranges from one to six months.

Capital Market

The capital market is the market for the issue and trading of long-term securities. The term in
this instance is measured as the term to maturity of the security and in order to be classified as a
capital market instrument, the term to maturity should be longer than 3 years. During the trading
of these instruments, the securities traded are informally classified into short-term, medium-term
and long-term securities depending on their term to maturity. Where the term to maturity of the
instrument is up to five years, the security is classified as a short-term capital market instrument.
Where the term to maturity is five to ten years, the security is classified as medium term, and
where the term to maturity is more than 10 years, the security is known as long-term.

Capital Market Instruments:-

1. Initial Public Offering: - Companies can raise large amount of long term capital from
capital market by issuing Initial Public Offering or IPO. A company gets “floated” in the
stock market through an IPO. Whenever a company get financing through IPO, it has to lose
some control over the company, proportional to the amount of shares that is sold to the
investors. But the company interested in issuing IPO has to satisfy the entry standards to get
a full listing in the stock market. Earlier these entry standards were quite stringent, but
nowadays initiatives are taken by the stock markets to make the entry a bit easy for the new,
technology based innovative companies. New stock markets are also created with simplified
entry requirement for new innovative companies. These new stock markets have all the
 characteristics of a public stock market and these provide the new companies their much
required access to capital.

2. Debentures: - A debenture is a document which either creates a debt or acknowledges it.

Debenture issued by a company is in the form of a certificate acknowledging indebtedness.
The debentures are issued under the Company's Common Seal. Debentures are one of a
series issued to a number of lenders. The date of repayment is specified in the debentures.
Debentures are issued against a charge on the assets of the Company. Debentures holders
have no right to vote at the meetings of the companies.

3. Income Bonds: - Here interest is paid only when cash flows are adequate. Income Bonds
are like cumulative preference shares on which the fixed dividend is not paid if there is no
profit in a year, but is carried forward and paid in the following year. On Income Bonds,
there is no default if interest is not paid. Unlike dividend on cumulative preference shares,
interest on income bond is tax deductible. Income Bonds are issued abroad by companies in
reorganization or by firms whose financial situation does not make it feasible to issue bonds
with a fixed interest payment

4. Asset-Backed Securities: - Assets-backed securities are a category of marketable

securities that are collateralized by financial assets such as installment loan contracts. Asset-
backed financing involves a process called securitization. Securitization is a
disintermediation process in which credit from financial intermediaries is replaced by
marketable debentures that can be issued at lower cost. Financial assets are pooled so that
debentures can be sold to third parties to finance the pool. Repos are the oldest asset-backed
security in our country. In USA, securitization has been undertaken for insured mortgages
(Ginnie Mae, 1970), mortgage backed loans, student loans (Sallie Mae 1973), trade credit
receivable backed bonds (1982), equipment leasing backed bonds (1984), certificates of
automobile receivable securities (1985) and small business administration loans. More
recently, credit card receivables have been securitized. The decade of the eighties witnessed
large expansion of asset backed security financing.

5. Junk Bonds:- Junk Bond is a high risk, high yield bond to finance either a leveraged
buyout (LBO), a merger of a company in financial distress. Coupon rates range from 16 to 25
 per cent. Old line established companies which were inefficient and. financed conservatively
were objects of take over and restructuring. To finance such take-over, high yield bonds were
sold. Attractive deals were put together establishing their feasibility in terms of adequacy of
cash flows to meet interest payments. Michael Milken (the JUNK BOND KING) of Drexel
Buraham Lambert was the real developer of the market. The junk bond market was tarnished
by the fines ($ 650 million) levied in 1989 on the investment banking firm Drexel Burnham
Lambert for various Securities Law violations and thus was forced into bankruptcy in 1990
and the indictment of Milken in 1990 on charges of fraud $ 600 million fines and penalties.

6. Equity Shares:- An equity share, commonly referred to as ordinary share also represents
the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the
maximum entrepreneurial risk associated with a business venture. The holders of such shares
are members of the company and have voting rights. A company may issue such shares with
differential rights as to voting, payment of dividend, etc.

7. Rights Issue/ Rights Shares: - The issue of new securities to existing shareholders at a
ratio to those already held.

8. Bonus Shares: - Shares issued by the companies to their shareholders free of cost by
capitalization of accumulated reserves from the profits earned in the earlier years.

9. Preferred Stock/ Preference shares: - Owners of these kinds of shares are entitled to
a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend
can be paid in respect of equity share. They also enjoy priority over the equity shareholders
in payment of surplus. But in the event of liquidation, their claims rank below the claims of
the company’s creditors, bondholders / debenture holders.

10. Cumulative Preference Shares: - A type of preference shares on which dividend

accumulates if remains unpaid. All arrears of preference dividend have to be paid out before
paying dividend on equity shares.

11. Security Receipts: - Security receipt means a receipt or other security, issued by a
securitization company or reconstruction company to any qualified institutional buyer
 pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an
undivided right, title or interest in the financial asset involved in securitization.

12. Government securities (G-Secs):- These are sovereign (credit risk-free) coupon
bearing instruments which are issued by the Reserve Bank of India on behalf of Government
of India, in lieu of the Central Government's market borrowing programme. These securities
have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are
available in wide range of maturity dates, from short dated (less than one year) to long date
(up to twenty years).

13. Zero Coupon Bond: - Bond issued at a discount and repaid at a face value. No
periodic interest is paid. The difference between the issue price and redemption price
represents the return to the holder. The buyer of these bonds receives only one pay
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Assignment

Titled

“Money Market & Capital Market”

Master of Business Administration

Submitted To: - Submitted By:-

Dr. Giriraj kiradoo Ankita Dhunna

Lecturer (MBA Deptt.) MBA III Sem