Investment Banking and Financial Services

Financial System and Markets

Course Leader:
Ms. Reshma K.J.
reshma.ms.mc@msruas.ac.in

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 Session Contents

• Types of Financial Assets

• Investment Process

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 Types of Financial Assets

Certificate of Deposit
• Term Deposit with a bank with specified interest rate
• Duration is pre-specified
• Deposit cannot be withdrawn on demand

• Rated and approved by credit rating agencies

• Higher return

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 Types of Financial Assets cont..

Bills of Exchange
• Instrument in writing containing an unconditional order signed by
the maker
• Directing certain person to pay a certain sum of money to the order
of a certain person or to the bearer of the instrument

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 Features of Bills of Exchange

• A bill of exchange an instrument in writing.

• It is drawn and signed by the maker i.e. drawer of the bill.

• It is drawn on a specific person i.e. drawee, to pay the specified
amount
• Contains an unconditional order to a person i.e. drawee

• To make an instrument of value the drawee must accept it

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 Features of Bills of Exchange

• The specified amount is payable to the person whose name is

mentioned in the bill or to his order or to the bearer
• It specifies the date by which amount should be paid
• Payment of the bill must be in the legal currency of the country
• It must be properly stamped

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 Promissory Note

• Promissory note contains promise to pay

• Parties to a promissory note

 Maker: Is the debtor who promises to make the payment

 Payee: The person who receives the payment of the promissory

note

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 Types of Financial Assets cont..

Repo and Reverse Repo

• Repurchase agreement are the very popular mode of short term
borrowings and lending
• Two parties are involved in a repo transaction
• Difference between the purchase price and original price is called
repo rate
• Repo for a buyer is the reverse repo for the lender

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 Types of Financial Assets cont..

Money at Call
• Short term market for short term funds
• Called as money at call or short notice
• Period range between 1 day to 15 days

• Repayable at call or short notice

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 Types of Financial Assets

• Shares

• Bonds
• Financial derivatives

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 Investments and the Investment Process

• The goal of investing is to grow your money to achieve long-term financial goals.
– Investment: any asset into which funds can be placed with the expectation that it will
generate positive income and/or increase its value
– Portfolio: a collection of different investments

– Return: reward from investing

• Income from investment

• Increase in value of investment

• Attributes of Investments
• The Structure of the Investment Process

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 Investments and the Investment Process
• Attributes of Investments
– Securities or Property

• Securities: financial assets, such as stocks, bonds, and options, that represent
claims on the resources of the issuer
• Liquidity: the ability to buy and sell quickly

• Property: real assets that are typically less liquid than securities

– Real property: permanently affixed to the land, such as land, buildings, and
machines
– Tangible personal property: such as gold, artwork, antiques, and collectables

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 Investments and the Investment Process

– Direct or Indirect

• Direct Investment: investor directly acquires a claim/ownership

• Indirect Investment: investor indirectly acquires a claim/ownership via a

professional investment manager

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 Investments and the Investment Process
• Attributes of Investments
– Debt, Equity, or Derivative Securities

• Debt: investor lends funds in exchange for interest income and repayment of loan
in future (bonds)
• Equity: ongoing ownership in a business or property (common stocks)

• Derivative Securities: neither debt nor equity; derive value from an underlying
asset (options)
– Low- or High-Risk Investments

• Risk: uncertainty surrounding the return that a particular investment will

generate
– Low-risk: more predictable, lower average return

– High-risk: less predictable, higher average return

• Diversification: holding different types of assets in an investment portfolio 14
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 Investments and the Investment Process

• Attributes of Investments

– Short- or Long-Term Investments

• Short-Term: maturities of one year or less
• Long-Term: maturities of longer than one year

– Domestic or Foreign
• Domestic: securities issued by domestic companies
• Foreign: securities issued by foreign companies

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 Investments and the Investment Process

• The Structure of the Investment Process

– Suppliers and Demanders of Funds
• Households
– Some need for loans (house, auto)
– Typically net suppliers of funds
• Government
– Federal, state and local projects & operations
– Typically net demanders of funds
• Businesses:
– Investments in production of goods and services
– Typically net demanders of funds

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 Structure of the Investment Process

• Bringing Together Suppliers and Demanders of Funds

• Financial Markets: markets in which suppliers and demanders of funds trade
financial assets, typically with the assistance of intermediaries such as securities
brokers and dealers
• Financial Institutions: organizations, such as banks and insurance companies,
that pool the resources of suppliers of funds and use those funds to make loans
to and invest in securities issued by demanders of funds

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 The Investment Process

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 Structure of the Investment Process

• The Structure of the Investment Process

– Types of Investors

• Individual Investors: individuals that manage their own funds to achieve their
financial goals
– Usually concentrate on earning a return on idle funds, building a source of
retirement income, and providing security for their families
• Institutional Investors: investment professionals who earn their living by
managing other people’s money
– Professionals that trade large volumes of securities for individuals, as well as
for businesses and governments
– Includes banks, life insurance companies, mutual funds, pension funds, and
hedge funds
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 Types of Investments

• Investors have a large variety of investments to choose from to

achieve their investment goals.
– Short-Term Investments
– Common Stock
– Fixed-Income Securities
– Mutual Funds
– Exchange-Traded Funds
– Hedge Funds
– Derivatives Securities
– Other Popular Investments
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 Types of Investments

• Short-term Investments
– Investments with lives of 1 year or less and little risk
• US Treasury Bills
– Provide high liquidity
• Common Stock
– Represents an ownership share of a corporation
– Return comes through dividends and capital gains

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 Types of Investments

• Fixed-income Securities
– Bonds are long-term fixed-income securities issued corporations
and governments
– Convertible securities are special debt securities that can be
converted into stock
– Preferred Stock represents an ownership claim, but has no
maturity and pays a fixed dividend

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 Types of Investments

• Mutual funds
– Actively or passively managed portfolio of securities created by pooling the funds of
many different investors
– Allow investors to construct diversified portfolios without investing a lot of money

– Money market mutual funds, or money funds, are mutual funds that invest solely in
short-term investments.
• Exchange-traded funds (ETFs)
– Like mutual funds, except ETF shares trade on exchanges, so investors can buy and sell
them at any time that exchanges are open for trading

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 Types of Investments

• Hedge Funds
– Funds that pool resources from different investors, but usually have higher minimum
investments and are less regulated than mutual funds

• Derivatives
– Securities that derive their value from some underlying asset (e.g.,
a share of stock or a commodity)
– Include options and futures contracts

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 Types of Investments

• Options: securities that give the investor an opportunity to sell

or buy another security at a specified price over a given period
of time.
• Futures: legally binding obligations stipulating that the seller of
the futures contract will make delivery and the buyer of the
contract will take delivery of an asset at a specific date and at a
price agreed on at the time the contract is sold.

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 Types of Investments

• Other Popular Investments

– Tax-advantaged investments: investments that provide higher after-tax
returns by reducing the amount of taxes that investors must pay.
• Municipal bonds
– Real estate: assets such as residential homes, raw land, and income property
(warehouses, office and apartment buildings, and condominiums).
• Potential returns in the form of rental income, tax write-offs, and capital
gains.

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 Types of Investments

– Tangibles: investment assets, other than real estate, that can be seen or
touched. Purchased in anticipation of price increases.
• Gold or other precious metals
• Collectibles

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 Summary

• A financial market is a market in which people trade financial

securities
• Financial market includes money market, Capital market, debt
market and forex market
• Capital market is concerned with long term finance and money
market with short term finance
• Capital market can be classified in to primary market and secondary
market
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 Summary (Contd..)

• The OTC Exchange Of India (OTCEI), also known as the Over-the-

Counter Exchange of India, is based in Mumbai
• The Securities and Exchange Board of India (SEBI) is the regulator
for the securities market in India

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