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Topic Overview
 Definition of financial markets
 Classification of financial market
instruments
 The Money market instruments
 The bonds market
 Equities securities
 Derivative Market

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 Definition
 Financial Markets are markets where
financial instruments are traded.
 Financial markets are traditionally
segmented into :
a) Money markets; and
b) Capital markets

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 Money Instruments

 This a subsector of the fixed income

market.
 Consists of very short-term debt
securities that usually are highly
marketable
 Trade in large denominations
 Not easily accessible by individuals
 Small investors can make investments
through money market mutual funds

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 Typical Money Market
Instruments
 Treasury Bills
 Certificate of Deposits
 Commercial Paper
 Bankers Acceptances
 Eurodollars Deposits
 Short term Repos and reverses
 Inter-bank money market
 Brokers calls

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 Treasury Bills

 Issued the treasury of the government.

 In Zambia the Central bank handles
treasury auctions on behalf of the
government
 T-bills are the most marketable of all
money market instruments
 Typical maturities are 91,182,273 and
364 days
 These are discount instruments.

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 Certificate of Deposit
 This a time deposit with a bank
 In developed countries like the USA
and UK, CDs issued in
denominations greater than $100,000
are usually negotiable
 They are highly marketable
 Amounts up to $100,000 qualify
federal deposit insurance

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 Commercial Paper

 Issued by large well know companies

 Usually unsecured
 Are an alternative to bank borrowing
 Usually backed by standby lines of
credit

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 Bankers Acceptance
 Widely used in foreign trade where the
credit worthiness of one trader is
unknown to the trading partner.
 Starts trade draft(i.e. An order to a bank
by a bank’s customer to pay a sum of
money at a future date)
 Once accepted by the bank:
a) it(the bank) assumes responsibility for
ultimate payment to the holder of he
acceptance.
b) Draft becomes negotiable

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 Eurodollars

 These are dollar denominated

deposits in banks outside the USA
 Mostly deposits of large sums
 Time deposits of less than 6 months
maturities
 A variant of this is the Eurodollar CD

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 Repos and reverses
 Repos-this refers to the use of
government securities for overnight
or short term borrowing
 Interest on such deals in calculate as
the difference between the sell and
the repurchase price
Reverses-this is mirror image of repo

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The Interbank Money
Market
 Banks with excess reverses with the
central bank lend to those with
deficits
 Activities on the interbank is often
used as measure of liquidity in the
economy
 The interbank lending rate is thus a
key measure of short tem interest
rates

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 The bonds Market
 Composed of longer term borrowings
 Typically includes:

a) Treasury notes and bonds

b) Corporate bonds
c) Municipal bonds; and
d) Mortgage backed securities

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 Stock Securities Market
 Market for common and preferred stock
 Equity shares- mostly have confer
ownership interest on the holders
 The have residual claim and limited
liability features
 Preferred stock-are hybrid financial
instrument

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 Derivatives Market

 Market where derivative instruments

are traded.
 Typical derivative instruments are:

a) Forward
b) Futures
c) Swaps
d) options

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“ If you know these things
happy are you.....” 16