Basics of Capital Market and Money Market:4

Treasury Bill Market:

Treasury bills are a kind of finance bill or promissory note issued by the Govt, to raise short term funds.  The important features of Treasury bills are high liquidity, absence of risk of default, ready availability, assured yield, low transaction cost, eligibility for inclusion in SLR requirements and negligible capital depreciation. Presently there are two  types of treasury bills:

a.    91 day Treasury bill – maturity is 91 days. Its auction also takes place on all Wednesdays.  The notified amount for this auction is also Rs.250 crores
b.    364 days Treasury bill – Its auction also takes place on alternate Wednesdays. The notified amount for this auction is Rs. 750 crores.
   
Based on the bids received at the auctions, RBI decides the cut off yield and accepts all the bids below that  yield.  Banks, Insurance Companies and FIs are the main investors.  Banks invest in  these bills as they not only serve as investment but also meets part of their SLR requirements.

The treasury bills are issued at a discount to face value and can be traded in the market.  Most of the time, unless the investor requests specifically, they are routed through the Subsidiary General Ledger (SGL ) account which is maintained by the RBI.  Normally trading is high in each bill immediately after its issue and before redemption.

3.    Inter Bank Term Money Market:  The lendings/borrowings in these markets are for periods ranging from 15 days to 3 months.  Only banks are the players in the market.

4.    Certificates of Deposit Market:   Next to  Treasury bills, the lowest risk category investment option is  the  Certificate of Deposit (CD) issued by banks and FIs .  A CD is a negotiable promissory note, secure and issued for periods less than a year. A CD is issued at a discount to the face value, the discount rate being negotiable between the issuer and the investor.   Interest rate on one-year deposit act as a base rate in the market.

5.    Commercial Paper:   CPs are a unsecured promissory notes issued by highly rated Corporates, Primary dealers and All India Financial Institutions, which have been permitted to raise resources through money market instruments under the umbrella limit fixed by RBI.

A company can issue CP – provided (1) its tangible net worth as per the latest audited balance sheet is not less than 4 crores (2) the company has been sanctioned working capital limit by bank/s or all India financial Institutions and (3) the borrowal account of the company is classified as Standard Asset by the financing bank.  Credit rating is compulsory for all CPs.

CPs can be issued for a minimum period of 15 days and a maximum of 1 year., CPs can be issued in denominations of Rs. 5 lakhs or multiples thereof.  CPs can be issued and held only in demat form through any of the depositories approved by and registered with SEBI.  CPs are issued at a discount to the face value.

CPs can now be issued as ‘stand alone’ product and the aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the credit rating agency for the specified rating whichever is lower.

6.    Other Instruments:  Inter corporate Deposits (ICD), Inter Bank Participation Certificate (IBPC) Commercial bills  which form a negligible portion  of deals in the money market.

COMMONLY USED TERMS IN FINANCIAL MARKETS:

Amortization:

The paying off of debt according to a schedule over a period of time.

Arbitrage:

1.    The act of buying something at a low price in one market and simultaneously selling it for a higher price in another market.
2.    Doing a spread trade – i.e., selling one thing and using the proceeds to buy a second thing.
3.    Yield Curve Arbitrage: Doing a spread trade that exploits anomalies in the yield curve.
4.    Statistical Arbitrage: Taking a calculated gamble that the two sides of a spread trade will move in your favour, back to a more normal relationship.
Basis point (BP, BIP):
A measure of a bond’s yield, equal to 1/100th of 1% of yield.  A bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points.  When applied to a price rather than a rate, the term is often expressed as annualized basis points.

Convertible bond:

A bond which the holder can convert into a specified number of shares issued by the company.
Coupon:
This term is often used interchangeably with interest, but coupon actually has two distinct meanings:
1.    In the case of Bearer Bonds, the coupon is the warrant attached to the certificate, i.e. a physically detachable coupon, which you are required to present to a paying agent in order to receive the interest payment due. The coupon will state the amount of interest due at each payment date.
2.    As a result of the definition above, coupon has also come to be accepted as a name for the nominal interest a bond pays. Remember not to confuse the nominal interest being offered with the yield. The latter is the actual rate of return you are getting and it relates to the market price you paid for the investment.
Derivative:
A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards, and various combinations thereof.

Fungibility:

A term which can be likened to liquidity and transferability.  The characteristic by which the instrument can be transferred or converted and the mechanism by which the investor can exit his investment.

Greenshoe Option: 

In case of over subscription, the option to retain upto a specified amount above the issue amount. The lead manager exercises this option on behalf of the issuer.

Hedge:

An investment made in order to reduce the risk of adverse price movements in a security. Normally, a hedge consists of a protecting position in a related security.
Mark to market:
The process in a futures market in which the daily price changes are paid by the parties incurring losses to the parties making profits

Securitisation:

Securitisation is a technical term describing the process of bundling a group of mortgages together such that they may be treated, for funding purposes, as a single entity and made available to prospective investors in mortgage debt.
Developed in the USA, the idea came to the UK market in the 1980s. Mortgage debt is seen as a relatively attractive safe investment by many institutions, pension funds etc. Securitisation allows lenders to raise money in the money markets, lend it to domestic property purchasers and then sell the resulting group of mortgages on to other institutions.
This is also known as “off balance sheet lending” since the debt does not form part of the lenders assets. All one really need to know as a mortgage borrower is that this process does not affect the terms and conditions of his mortgage in any way.

Red Herring Prospectus:

A draft prospectus.  This contains all the details regarding the issuer, the project.  But it does not contain exact quantum of funds to be raised and the price of the instrument.

Insurance reform:

Insurance reform sounds good, but what it has been and the word was nice and as the word reform meant from evil to good, giving self respect and protecting sovereignty. While performing the job of reform one should understand that in no way, country’s sovereignty and security would be compromised. One should also see that indigenous companies must grow nearer to reform oriented companies that would be reached at your doorstep after proper reforms had been conducted.
Why insurance reform, as many a times indigenous companies did require resource for expansion, but due to dearth of resources, they could not be expanding thus minimizing their growth, and for this, with the advent of foreign insurance companies and in partnership with local insurance companies, the concerned companies would be getting more and more resources for expansion , but the important parameters was that the stake of stake holders and how they were going to perform , and how could their equity would be preserved? Now these local companies would be extracting money by selling their shares to foreign companies and thus in this manner they could raise their resources and in a way they would be expanding their bases.If at all these foreign companies , would not fulfill the promise as they had been at the beginning then in the long run there would be serious crisis of savings and in the long run that would be threatening country’s financial base and basis of the existence of economy.

Insurance reform

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