Professional Documents
Culture Documents
Introduction HUL463
Introduction HUL463
2019
(2nd Semester)
Batch: 2016
Example, (a) Bond (debt security) that promises to make payments periodically
for a specified period of time. (b) Stock refers to a security that entitles the owner
to a share of the company’s profits and assets.
6
Adverse Selection
asymmetric information problem that occurs
prior to a transaction
8
Lemons Problem
The Market for "Lemons": Quality Uncertainty and the Market
Mechanism (George Akerlof, 1970)
9
Lemons Problem in Stock and Bond Market
10
Solutions to Financing Puzzles
lemons or adverse selection problem tells why
marketable securities are not the primary
source of financing
11
More Solutions to Financial Structure Puzzles
12
Structure of Financial Markets
Financial Market
Call money
Market for 24 hours Short notice
Repayable on demand) Market(<14 days)
Reqd for maintaining CRR
Structure of capital Market
Money market: India
• Characteristics of Money Market instruments
• Money Market→ It deals with short-term financial instruments, generally with
original maturity of less than one year.
It does not deal with money or cash but close substitutes of money viz. CP, T-
bill, promissory notes that can be quickly converted to cash with low
transactions cost and quickly.
These are more widely traded than longer term securities and so tend to be
more liquid. Moreover, short-term securities are subject to smaller
fluctuations in prices than long-term securities.
It constitutes of central bank, commercial banks, NBFC.
Transactions in these markets take place via oral communication without the
help of brokers.
Objectives of Money Markets:
To make available a parking place in order to make use of short term surplus.
To offer room to overcome short term deficits.
To allow the central bank to influence and control liquidity in the economy by
means of intervention in this market.
To provide access to users of short-term funds so that they can meet their
requirements quickly, adequately, and at reasonable costs.
Short-term Financial Instruments
• Commercial Paper :
It is an unsecured short-term debt instrument issued by a corporation typically for
financing liabilities, inventories, accounts receivables etc.
Maturity period of CP is less than one year.
It is not backed by any collateral.
Commercial Bill :
It is a bill of exchange that a merchant Investment bank or a company issues in
order to borrow money.
It is unsecured, short-term debt instrument.
It is risky and has comparatively higher yield than TBs.
Reputation of the issuing firm acts a collateral.
Maturity period of CBs varies between 30 days to 90 days.
Example, Trade Bills, Demand Bill (payable on demand) , Issuance Bill (payable at a
specified later date.
Inland Bill (Hundi), drawn on and payable on India only (for example).
Foreign Bill, Export Bill, Import Bill.
• Treasury bills - Short-term debt obligations of a
national government that are issued to mature in
three to twelve months.
• Certificate of deposit - Time deposit, commonly
offered to consumers by banks, thrift institutions,
and credit unions.
• Call money market
• The call money market deals in short term
finance repayable on demand, with a maturity
period varying from one day to 14 days
Capital Market → Deals with longer-term debts
(generally with original maturity of one year or more)
and equity instruments. For example, stocks and
long-term bonds are held by insurance companies,
pension funds.
Example: (i) Government Securities market
(ii) Industrial Securities market
(iii) DFIs
(iv) Financial Intermediaries
Capital Market: Regulatory Framework
• The fund manager trades (buys and sells) the fund's investments in
accordance with the fund's investment objective. A fund manager must be
a registered investment advisor.
• Examples: The four main categories of funds are money market funds,
bond or fixed income funds, stock or equity funds and hybrid funds.
• Mutual funds have advantages compared to direct investing in individual
securities. These include:
• Increased diversification: A fund must hold many securities. Diversifying reduces
risks compared to holding a single stock, bond, other available instruments.
• Daily liquidity: Shareholders may trade their holdings with the fund manager at
the close of a trading day based on the closing net asset value of the fund's
holdings. However, there may be fees and restrictions as stated in the fund
prospectus. For holders of individual stocks, bonds, closed-end funds, ETFs, and
other available instruments, there may not be a buyer/seller for that instrument
every day, making such investments less liquid.
• Ease of comparison: Since mutual funds are available from many providers, it is
generally easy to find similar funds and compare features such as expenses.
• Mutual funds have disadvantages as well,
which include:
• Fees
• Less control over timing of recognition of
gains.
• Less predictable income.
• No opportunity to customize.
Future Markets
• Buyers of the contract are called long and sellers are called short referring to
a kind of expectations formed by the agents. The buyer hopes or expects that
the asset price is going to increase, while the seller hopes or expects that it
will decrease in near future.
• Put Options, give the beneficiary the right to require the grantor to buy or
receive the property at the agreed price.
Contd..
Money markets vs Capital markets
Money market Capital Market
Transactios Transactions take place over It takes place in formal markets
phone, fax, internet e.g. stock market
Broker Meets working capital Supplies Capital for Fixed Capital
Reqirements
requirements
the economy
Relation with central bank Closely and directly linked with Capital mkt. feels central bank’s
central bank of the country intervention, but mainly
indirectly through money
market.
Market Regulation COMMERCIAL BANKS ARE SEBI
CLOSELY REGULATED BY
THE CENTRAL BANK