FMI ppt

MONEY MARKET INSTRUMENTS AND TYPES OF BONDS,FRAs & SWAPs

Subject : Financial Markets & Institutions Presented by Group “A”

Under the guidance of Prof. Khandekar Sir

SrNo.

Name RollNo.

Topic

1) Manmath Belkunde 01 Introduction & Importance of money market

2) Jitendra Gupta 08 Call notice money & Inter Bank term money

3) Rahul Sawant 22 Treasury Bill & Commercial Bill

4) Prashant Gaikwad 06 Certificate of Deposit & Commercial Papers

5) Mohan Chavan 03 Inter bank participation, FCNR,NRE, Stock investment

6) Sameer Dhanse 05 Types of Bonds

7) Milind Bhaye 02 FRAs & SWAPs

What is Money Market ?

• As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”

• The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year)

• A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded

Features of Money Market• Transaction have to be conducted without the help of

brokers

• It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market

• The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies)

• In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done

Characteristics of Money Market

• Highly organized banking system• Availability of proper credit instruments• Existence of sub-market• Ample resources• Existence of secondary market• Demand & supply of funds

Objective of Money Market

To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost

To provide a parking place to employ short term surplus funds

Importance of Money Market

• Development of trade & industry

• Development of capital market

• Smooth functioning of commercial banks

• Effective central bank control

• Formulation of suitable monetary policy

• Non inflationary source of finance to government

What is Interbank Term Money Market

A short-term money market, which allows for large financial institution , such as bank , mutual fund and corporation to borrow and lend money at interbank rates

Meaning of Call Money/Notice Market

• The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the Interbank Market.

Banks borrow in this money market for the following purpose:

1. To fill the gaps or temporary mismatches in funds

2. To meet the CRR & SLR

3. To meet sudden demand for funds arising out of large outflows

Call Money Market Participants

• Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs

• Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.

Definition:Section 5 of the Negotiable Instruments Act defines a bill of exchange as follows:“ An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or the order of a certain person or to the bearer of the instrument”.

Bill of Exchange:

Commercial Bills Market or Discount Market

1) A commercial bill is one which arises out of a genuine trade transaction, i.e., credit transactions.

2) As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay the amount mentioned therein after a certain specified date.

3) Three parties: Drawer, Drawee and Payee4) Period: short period ranging between 3 months and 6 months.

Types of Bills:

1) Demand and usance bills

2) Inland and foreign bills

3) Export bills and import bills

4) Indigenous bills

5) Accommodation bills and supply bills.

Advantages or Importance:Commercial bill market is an important source of short-term funds for trade and industry. It provides liquidity and activates the money market. In India, commercial banks play a significant role in this market due to the following advantages:

1) Liquidity2) Self- liquidating and Negotiable Assets3) Certainty of Payment4) Ideal Investment5) Simple Legal Remedy6) High and Quick Yield7) Easy Central Bank Control

Drawbacks:

In spite of these merits, the bill market has not been well developed in India. The reasons for the slow growth are the following:

1) Absence of Bill Culture2) Absence of Rediscounting among Banks3) Stamp Duty4) Absence of Secondary Market5) Difficulty in Ascertaining Genuine Trade Bills6) Limited Foreign Trade7) Attitude of Banks

Treasury Bill Market.

Meaning and Features:1) A treasury bill is nothing but a promissory note issued by the

Government under discount for a specified period stated therein.

2) The period does not exceed a period of one year. It is purely a finance bill since it does not arise out of any trade transaction.

3) It does not require any ‘grading’ or ‘endorsement’ or ‘acceptance’ since it is a claim against the Government.

4) Treasury bills are issued only by the RBI on behalf of the Government. Treasury bills are issued for meeting temporary Government deficits.

5) The Treasury bill rate or the rate of discount is fixed by the RBI from time-to-time.

6) short-term maturity and high degree of liquidity and security.

•91 days treasury bills

•182 days treasury bills

•364 days treasury bills

On the basis of periodicity, treasury bills may be classified into three.

Types of Treasury Bills:

Importance or Merits:

1) Safety2) Liquidity3) Ideal Short-Term Investment4) Ideal Fund Management5) Statutory Liquidity Requirement6) Source of Short- Term Funds

Defects:

1) Poor Yield

2) Absence of Competitive Bids

3) Absence of Active Trading

Certificates of Deposit

A CD is a time deposit with a bank. Like most time

deposit, funds can not withdrawn before maturity

without paying a penalty. CD’s have specific maturity

date, interest rate and it can be issued in any

denomination. The main advantage of CD is their safety.

Anyone can earn more than a saving account interest.

Certificates of Deposit

• CDs are short-term borrowings in the form of UPN issued by all scheduled banks and are freely transferable by endorsement and delivery.

• Introduced in 1989• Maturity of not less than 7 days and maximum up to a

year. FIs are allowed to issue CDs for a period between 1 year and up to 3 years

• Subject to payment of stamp duty under the Indian Stamp Act, 1899

• Issued to individuals, corporations, trusts, funds and associations

• They are issued at a discount rate freely determined by the market/investors

Commercial Papers

• Short-term borrowings by corporate, financial institutions, primary dealers from the money market

• Can be issued in the physical form (Usance Promissory Note) or demat form

• Introduced in 1990• When issued in physical form are negotiable by

endorsement and delivery and hence, highly flexible• Issued subject to minimum of Rs. 5 lacs and in the

multiple of Rs. 5 lacs after that• Maturity is 7 days to 1 year• Unsecured and backed by credit rating of the issuing

company• Issued at discount to the face value

Types of Commercial Papers

• Direct paper-

Large finance & bank holding companies

• Dealer paper-

Security dealers & non- financial companies

Features of Commercial Papers

• Eligibility criteria for all corporate.

• The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore.

• Company has been sanctioned working capital limit by banks or all- India financial institutions

• The borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/sCredit Rating.

Inter bank Participation

This is purely an inter bank instrument. The RBI has authorized the banks to fund their short term needs from within the system through issuance of IBPC.There are also bill rediscounting and refinance drawl facilities to enable bank to tide over their liquidity shortages.

Regional Rural Banks (RRBs) allowed to issue Inter-Bank Participation Certificates (IBPCs)

August 3, 2009: Reserve Bank of India has been decided that henceforth, Regional Rural Banks (RRBs) can also issue Inter-Bank Participation Certificates (IBPCs) of a tenor of 180 days on risk sharing basis to scheduled commercial banks against their priority sector advances in excess of 60% of their outstanding advances.

Stock investment

Risk appetite and Return

•Non-Resident Indians can open accounts under this scheme.

•The account should be opened by the non-resident account holder himself and not by the holder of power of attorney in India.

•These deposits can be maintained in 5 designated currencies i.e. U.S. Dollar (USD), Pound Sterling (GBP) and Euro, Australian Dollar (AUD) & Canadian Dollar (CAD).

•These accounts can only be maintained in the form of terms deposits for maturities of minimum 1 year to maximum 5 years.

•Interest rates are reviewed periodically and determined by directives from the Reserve Bank (Department of Banking Operations and Development).

•Payment of InterestInterest on FCNR (B) deposits is being paid on the basis of 360 days to a year. However, depositor is eligible to earn interest applicable for a period of one year if the deposit has completed a period of 365 days.

Foreign Currency Non-Resident (Banks)Accounts - "FCNR"

Non-Resident (External) Account - NRE Account•Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs) can open and maintain NRE accounts with authorized dealers and with banks (including co-operative banks) authorized by the Reserve Bank of India (RBI) to maintain such accounts.

The account has to be opened by the Non Resident account holder himself and not by the holder of the power of attorney in India.

•Opening NRE accounts in the names of individuals/entities of Bangladesh/Pakistan nationality/ownership requires approval of RBI

•Types of Accounts - Savings, Current, Recurring or Fixed Deposit accounts.

•In 2010, Advertised interest rates on NRI accounts range between 6% and 8%.

•Can be opened jointly with another Non-Resident Indian

FEATURES OF BONDS

1. Par value

2. Maturity

3. Call feature

4. Indenture

5. Pledge of security

6. Fixed income

7. Coupon rate

8. Acceleration clause

REASONS FOR ISSUING BONDS

1. To reduce the cost of capital

2. To get the benefit of leverage

3. To effect tax saving

4. To preserve control

TYPES OF BONDS

1. Serial

2. Sinking fund

3. Registered

4. Mortgage

5. Collateral trust

6. Equipment trust

7. Guaranteed

8. Joint

9. Assumed

10. Convertible

11. Income

12.Foreign

Forward Rate Agreement• Meaning• Example

On Jan 1,2010,Mr.A agrees to buy a certain asset on May 1,2010 for Rs.1 lakh from Mr.B. This is a forward contract where Mr.A has to pay Rs.1 lakh to Mr. B on May 1 and Mr. B has to supply the asset.

Features

1.Over the counter Trading

2.No Down Payment

3.Linearity

4.No Secondary Market

5.Settlement at maturity

6.Need for a intermediary

• Advantages1.Protection against price fluctuation2.Proper portfolio management3.No burden on carrying cost4.Flexibility5.Cash management6.Facilitates planning7.Development of financial market

• Financial FRAForward rate currency contractForward rate Interest rate contract

SWAPs• Meaning• For example,

In the case of a swap involving two bonds, the Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated. Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price. The cash flows are calculated over a notional principal amount, which is usually not exchanged between counterparties.

• Use

• Types of swaps

• Interest rate swap

• Currency swaps

• Commodity swaps

• Equity Swap

• Credit default swaps