Financial Market

A market is the means through which buyers and sellers are brought together to aid in the
transfer of goods and services.

Aspects of market:

1. A market need not have a physical location. It is only necessary that the buyers
and sellers can communicate regarding the relevant aspects of transaction.
2. The market does not necessarily own the goods or services involved.
3. A market can deal in any variety of goods and service

Characteristics of a good market:

1. Availability of timely and accurate information.
2. Liquidly - The ability to buy or sell of an asset quickly and at a known price.
3. Price continuity: It means that price do not change much from one transaction to
the next unless substantial new information become available.
4. Depth: It means that numerous potential buyers and sellers must be willing to
trade at prices above and below the current market price.
5. Transaction Cost: An efficient market is one which the cost of the transaction is
minimal which also referred to as internal efficiency. Transactions entail low
costs including the cost of reaching the market, the brokerage costs and the costs
of transferring the assets.
6. External efficiency: Pieces rapidly adjust to new information thus the prevailing
price is fair because it reflects all available information regarding the assets.
Financial market:
Financial Market is the mechanism through which buyers and seller are brought
together to facilitate the exchange of the financial assets.

Classification of Financial Market:

Financial Market

On the basis of life span of On the basis of life span of

financial assets types of securities traded

Money market Capital Market Primary market Secondary Market

Seasonal new issue market Unseasonal new issue market

On the basis of timing of Trading

On the basis of physical
location trading hours, listing
requirement.

Call Market Continuous Market

Organized Exchange OTC Market Third Market Fourth Market

Money Market:
Money markets are used to facilitate the transfer of short-term funds from individual ,
corporation or governments with excess funds to those with deficit funds. Securities with
maturities within one year are referred to as money market securities. Money market
securities are short term , highly marketable , liquid , low risk debt securities. For
example Treasury bills, Certificate of Deposit, Commercial papers, Bankers’ Acceptance,
Eurodollar, Repo and Reverse repo, Federal funds, LIBOR Market / Call money Market.

Capital Market:
The financial markets that facilitate the flow of long term funds (with maturities more
than one year) are called Capital Markets.

The Primary Market:

The primary market is where new issues of bonds , preferred stock , or common stock are
sold by government units , municipalities or companies to acquire new capital.
The Secondary Market
Secondary market is the market where the outstanding securities are bought and sold.
Difference between Primary Market & Secondary Market:
Criteria for Primary Market Secondary Market
differences
Definition New issue of shares and securities Outstanding shares are
traded
Method of sale Sale typically takes place through Sales typically takes place
investment banker through market makers like
brokers, dealer etc.
Proceeds of sale It goes to the company issuing the Do not go to the companies
security issuing the securities rather
it goes to the Investors.
Interdependence Primary market depend on having well Secondary market is
established secondary market, since depended on primary
Investors would be unlikely to market for the supply of
subscribe for new securities if there securities to be traded in it.
are no prospect of disposing of them in
the future to realize the investment.
Over the counter (OTC) markets:
The over the counter market includes trading in all stocks not listed on the stock
Exchange.

Third market:
It describes over the counter trading of shares listed on an Exchange.
Forth market:
The term fourth market describes direct trading of securities between two parties with no
broker intermediaries.

Money Market Instruments:

Money Market Instruments/ securities are debt securities that have a maturity of one year
or less. For example Treasury bills, Certificate of Deposit, Commercial papers, Bankers’
Acceptance, Eurodollar, Repo and Reverse repo, Federal funds, LIBOR Market / Call
money Market.
Characteristics of Money Market Instruments:
a) Short Term
b) Highly marketable
c) Liquid
d) Low risk

Money Market Instruments:

i) Treasury Bills:
Treasury Bills represents the simplest form of borrowing. The government raises money
by selling bills to public. Investors buy the bills at a discount from the stated maturity
value. At the bills maturity, the holder receives from the government a payment equal to
the face value of the bill. The different between the purchase price and ultimate maturity
value constitute the investors earning. Different maturities T-bills are available like 28
day, 91 day, 182 day, 364 day etc.
ii) Certificate of Deposit (CD):
Certificate of Deposit is issued by the commercial banks and other depository institutions
as a short term source of funds. Non-financial corporations often purchase CDs.
Certificate of Deposit is time deposit with a bank. The time deposit may not be
withdrawn on demand. The bank pays interest and principal to the depositor only at the
end of the fixed term of the CD.

iii) Commercial papers:

Commercial Papers is often issued by the large well known companies as short term
unsecured debt notes. It is normally issued to provide liquidity or finance a firm’s
investment.

iv) Bankers’ Acceptance:

It means that a bank accepting responsibility for a future payment. It is commonly used
for international trade transactions. Exporters often prefer that banks act as guarantor
before sending goods to importer whose credit rating is not known. The bank therefore
facilitates international trade by stamping ACCEPTED on a draft, which obligates
payment at specified point in time . In turn , the importer will pay the bank what is owed
to the exporter along with a fee to the bank for guaranteeing the payment. Exporter may
discount that accepted bill before maturity and raise short term fund which will
subsequently be paid on realization of bill.

v) Eurodollars:
A currency deposited in a bank outside the country of origin. For example , dollar
denominated deposits at foreign banks or foreign branches of American banks are
Eurodollars. Most Eurodollar deposits are for large sums, and most are time deposite of
less than six months maturity.
vi) Repo and Reverse Repo:
Repo means repurchase agreements. Dealers sell government securities to an investors on
an overnight basis , with an agreement , to buy back those securities the next day at a
slightly higher price. The increase in the price is the overnight interest. The reverse repo
is the mirror image of the repo.

vii) Federal Funds:

Funds in the banks reserve account are called federal funds. The federal funds market
allows depository institutions to effectively lend or borrow short term funds from each
other at the federal fund rate. In Bangladesh commercial banks are supposed to keep 6%
of their time and demand deposit to the Bangladesh bank which is called cash reserve
ratio (CRR) .

viii) LIBOR Market:

The London Inter Bank Offered Rate (LIBOR) is the grate at which large banks in
London are willing to lend money themselves. It serves as a reference Rate for a wide
range of transaction. For example, a corporation might borrow at a floating rate to
LIBOR + 2%.

ix) Call money Market:

Commercial Banks may lend or borrow money from the call money market for a very
short term period. The short term surplus fund of banks is invested and short term deficit
of fund of the banks is mitigated through the market. There is no fixed interest rate in the
market which is determined by the negotiation of the banks.
Capital Market:

Capital market Intermediaries:

1. Stock Exchanges: Apart from Dhaka Stock Exchange, there is another stock
exchange in Bangladesh that is Chittagong Stock Exchange established in 1995.
2. Central Depository: The only depository system for the transaction and
settlement of financial securities, Central Depository Bangladesh Ltd (CDBL)
was formed in 2000 which conducts its operations under Depositories Act 1999,
Depositories Regulations 2000, Depository (User) Regulations 2003, and the
CDBL by-laws.
3. Stock Dealer/Sock Broker: Under SEC (Stock Dealer, Stock Broker &
Authorized Representative) Rules 2000, these entities are licensed and they are
bound to be a member of any of the two stock exchanges. At present, DSE and
CSE have 238 and 136 members respectively.
4. Merchant Banker & Portfolio Manager: These institutions are licensed to
operate under SEC (Merchant Banker & Portfolio Manager Rules) 1996 and 45
institutions have been licensed by SEC under this rules so far.
5. Asset Management Companies (AMCs): AMCs are authorized to act as issue
and portfolio manager of the mutual funds which are issued under SEC (Mutual
Fund) Rules 2001. There are 15 AMCs in Bangladesh at present.
6. Credit Rating Companies (CRCs): CRCs in Bangladesh are licensed under
Credit Rating Companies Rules, 1996 and now, 5 CRCs have been accredited by
SEC.
7.  Trustees/Custodians: According to rules, all asset backed securitizations and
mutual funds must have an accredited trusty and security custodian. For that
purpose, SEC has licensed 9 institutions as Trustees and 9 institutions as
custodians.
8. Investment Corporation of Bangladesh (ICB): ICB is a specialized capital
market intermediary which was established in 1976 through the ordainment of
The Investment Corporation of Bangladesh Ordinance 1976. This ordinance has
empowered ICB to perform all types of capital market intermediation that fall
under jurisdiction of SEC. ICB has three subsidiaries:

8.1. ICB Capital Management Ltd.,

8.2. ICB Asset Management Company Ltd
8.3. ICB Securities Trading Company Ltd
Capital market Instruments:

The capital market includes longer-term securities. Securities in the capital market
are much more diverse than those found within the money market. This includes :

i) Bond Market :

The bond Market is composed of longer term borrowing instruments than those
trade in the money market. Bond Market includes:

a) Treasury Notes and Bonds :

Government borrows fund in large part by selling treasury notes and bond.
T-note maturites range up to 10 years, whereas bonds issued with
maturities ranging from 10 to 30 years.

b) Federal Agency Debt :

Some government agencies issue their own securities to finance their

activities. This agencies usually are formed to channel credit to a
particular sector of the economy. Some of the agencies are federal home
loan bank (FHLB), National Mortgage Association, (FNMA) etc.

c) Municipal Bonds:

It is issued by the State and Local government usually to finance

infrastructure development.

d) Corporate bonds:

Corporate bonds are the means by which private firms borrow money
directly from the public. They are variety in nature . Some of the
classification is as udder:

i) Secured Debt:

Secured Debt securities are classified according to the collateral and

mortgage used to protect the bond holder. Collateral is a general term that
frequently means securities that are pledged as security for payment of
debt. Mortgage securities are secured by a mortgage on the real property
of the borrower. For example land, building.
 ii) Unsecured (Debenture ) bond:

Unsecured (Debenture ) bond frequently represents unsecured obligations

of the company. A debenture is an unsecured bond, for which no specific
pledge of property is made . Debenture holder only have a claim on
property not otherwise pledge. In other words, the property that remains
after mortgage and collateral trust are taken in to account.

iii) Senior Bond:

In general , seniority indicates preference in position over other lenders

and debts are sometimes labeled as senior or junior to indicate seniority.
Some debt is subordinate. In the event of default, holders of subordinate
debt must give preference to other specified creditors.

iv) Callable:

A call provision allows the company to repurchase or “Call” part or all of

the bond issue at stated prices over a specified period. Corporate bonds are
usually callable. A bond that during a certain period , cannot be redeemed
by the issuer is called call protected bond. During this period of
prohibition, the bond is said to be Non callable bond.

v) Convertible:

A convertible bond can be swapped for a fixed number of shares of stock

anytime before maturity at the holder’s option. Convertibles are relatively
common, but number has been decreasing in recent year.

ii) Equity Securities:

Equity securities describes several equity instruments which differ from fixed
income securities because their returns are not contractual . As a result we can
receive returns that are much better or much worse than what we would receive
on a bond. Equity holder is the owner of the company. Types of equity securities
–

i) Common Stock :

Common stock represents ownership shares in a corporation. Feature of

common stock are voting right , proxy voting, classes of stock, share
 proportionally in declared dividends , share proportionally in remaining assets
during liquidations.

ii) Preferred stock :

A class stock in which the stock holder is entitled to dividends but unlike
dividends on common stock, dividends are a specified percentage of par or
face value. It also has priority over common stocks in dividends and
distributions in the event of liquidation. Preferred stock does not carry voting
right .

iii) Derivative Securities:

The value of a security depends on other securities is called derivative securities.

Different forms of derivative securities are :

a) Forward
b) Future
c) Option
d) SWAP