function of financial markets

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PRESENTATION OF FINANCEONFUNCTION OF FINANCIAL MARKET

Presented ByPrabal ShresthaSem 5th KVC Subm itted To

Ramit Dev Shrestha

2013 04 -19


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Acknowledgment

I do hereby express my heartfelt appreciation to these who havecontributed a lot to this presentation both explicitly and implicitly.

Indeed I pay a large debt and sincere gratitude to my esteem guideMr. Ramit Dev Shrestha for his valuable advice and precious

guidance in every stage.

I owe my thanks to my parents for their inspiration andencouragement to perform the work successfully. I also express my

thankfulness to all my teachers for their help and timely advice.

Thank You!


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Table of Content

Financial Market

Functions of Financial Market

Types/Structure of Financial Marketa) Debt and Equity Markets

b) Primary and Secondary Marketc) Money and Capital Market

d) Organized and Over-the-Country Market

Financial Intermediaries

Types of Financial IntermediariesI. Depository Institution

II. Contractual Saving Institution

III. Investment Intermediaries


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Table of Content

Money Market InstrumentI. Treasury Bills

II. Commercial Paper

III. Certificate of Deposit

IV. Bankers AcceptancesV. Repurchase Agreement ( Repo )

VI. Eurodollars

Capital Market InstrumentI. Common Stock

II. Preferred Stock

III. Corporate Bonds

IV. Treasury Notes and Bonds


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The term financial market refers to the place where financialmarket transaction take place through the network of borrowersand lenders of fund.

Financial market is a platform where buyers and sellers areinvolved in sale and purchase of financial products like shares,mutual funds, bonds and so on.

It brings borrowers and lenders together to place buying andselling orders with the help of brokerage and other financialintermediaries.

It is a market in which people and entities can trade financialsecurities, commodities, and other fungible items of value atlow transaction costs and at prices that reflect supply and

demand. Shares debentures treasur bills certificate of de osit etc are

Financial Market


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Function of Financial Market

Economic growth : Financial market facilities the effective utilization of saving toeconomic growth.

Capital formation : The important function of financial market is to help in the capita

formation to the economy by encouraging investment in infrastructure like hydropower

projects.

Mobilization of saving : Financial market encourages the people to deposit thescattered saving in bank and other financial institution .

Promotion of security market: Financial market promotes securities market as well as

underwriting shares and debentures, buying and selling securities, organizing the

secondary market.

Confidence of investors : Financial market has already recorded a favorable growth in

generation the confidence of the investors as investors could materialize higher return

and value from engagement financial market.

Generate employment: Financial market generates employment which is basic need of

economic development.

Provide liquidity: Providing financial liquidity to financial instrument is also an important

function of it.


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Financial market can be classify in different ways. The major

types of financial markets include the following:

a) Debt and Equ ity Markets

b) Primary and Secondary Market

c) Money and Capital Market

d) Organized and Over-the-Country Market

Types of Financial Market


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Structure / Types of Financial

MarketDebt and Equity Markets

Debt Market

Issue of debt instrument, such as mortgage or a bond, which is contractual

agreement by the borrower to pay the holder fixed amount as interest

periodically and principal payments on maturity date

Debt instrument can be of short term long term and intermediate term

It is short term if its maturity is less than a year. It is long term if its maturity

is 10 year or longer. It is intermediate if its maturity is between 1 to 10 year

Equity Market It is another way for raising funds by issuing equities, such as common

stock, which are claims to share in the net income and the assets of a

business.

It is long term because equities often make periodic payments to their

holders and it has no maturity date.

Equity holder have right to vote on issues important to the firm and to elect


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Structure / Types of Financial

MarketPrimary and Secondary Markets

Primary Market

Primary market Securities are dealt for the first time in primary markets. Itis also called as the new issue markets.

The new issue market deals with the new securities which were not

previously available to the investing public. i.e., the securities that areoffered to the investing public for the first time.

Initial public offering, right offering, private placement, etc are primarymarket activities

Secondary Market

Secondary Markets or the stock exchange is a market for old securities,i.e., those which have been already issued and listed on a stock exchange.

These securities are purchased and sold continuously among investorswithout the involvement of companies.

All Securities whether government or corporate which are already floated in

the security market, are dealt in this market


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Money and Capital Markets Money Market

It refers to such market where the transaction of securities having maturityperiod of less than one year takes place.

It is one of the types of financial market which facilities the transaction of thosesecurities which maturity period of less than one year.

It involves individuals who deal with the lending and borrowing of money for ashort time frame.

Various instruments exist, such as Treasury bills, commercial paper, bankersacceptances, deposits, certificates of deposit, bills of exchange, repurchaseagreements, federal funds, and short-lived mortgage-, and asset-backedsecurities

Capital Market It refers to such market where the transaction of securities having maturity

period of more than one year take place.

These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-terminvestments

A market where individuals invest for a longer duration .


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Organized and Over-the-Country Market Organized Market

It is financial market consist of physically located organized stockexchanges where listed securities are traded

Trading normally take place on the exchange floor and only registered

brokers and dealers are permitted to trade on the exchange. Nepal Stock Market (NEPSE) is the only one organized market.

Over-the-Country Market

It is not a formal exchange like organized stock exchange.

Government securities, corporate bonds, common stock, preferred stockand other securities which are not listed in the organized stock exchangeare traded here.

It is financial market where the transaction of securities not listed in stockexchange market take place.

Securities of those companies which are not listed in stock exchange

market are traded in the over the country market


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A financial intermediary is a financial institution that connects surplus

and deficit agents. The role of the financial intermediaries is to accumulate funds from

various saver and lend those funds to borrowers.

financial intermediaries channel funds from people who have extra money

or surplus savings (savers) to those who do not have enough money to

carry out a desired activity (borrowers). The classic example of a financial intermediary is a bank that

consolidates bank deposits and uses the funds to transform them into

bank loans.

Commercial banks, finance companies, insurance companies, mutual

funds etc are the examples of financial intermediaries.

Financial Intermediaries


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Types of Financial

Intermediaries The principal financial intermediaries fall into three categories:

1. Depository Institutions

a. Commercial Banks

b. Credit Unions

c. Saving and loan Associationd. Mutual Saving Banks

2. Contractual Saving Institutions

1. Insurance Companies

2. Pension Fund

3. Investment Intermediaries

1. Finance Companies

2. Mutual Fund


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Types of Financial

IntermediariesDepository Institutions

It accept deposits from savers and lend it to other who need funds.

A depository institution is a financial institution (such as a savings

bank, commercial bank, savings and loan association, or credit union) thatis legally allowed to accept monetary deposits from consumers.

It includes :

Commercial banks

Credit Unions

Saving and loan association

Mutual saving Banks


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Types of Financial


Commercial Banks

It accept the deposit from individual and institutions which are repayable ondemand.

A commercial bank is a type of retail bank that provides services, such asaccepting deposits, giving business loans and basic investment products.

These deposits from individuals and institutions are invested to satisfyshort-term financing requirement of business and industry.

They satisfy the financial needs of the sectors such as agriculture, industry,trade, communication, so they play very significant role in a process ofeconomic social needs

Credit Unions A credit union is a member-owned financial cooperative, democratically

controlled by its members, and operated for the purpose of promoting thrift,providing credit at competitive rates, and providing other financial servicesto its members.

Credit unions are "not-for-profit" because they operate to serve their

members rather than to maximize profits They accept deposits and provide consumer loan to the individual member.


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Types of Financial


Saving and loan Association

The most important purpose of these institutions is to make mortgageloans on residential property

It makes loans for the construction, purchase, repair, or refinancing of

houses. These are the financial institutions that accept deposits from individuals and

provide residential mortgage.

A savings and loan association also known as a thrift, is a financialinstitution that specializes in accepting savings deposits and makingmortgage and other loans.

Mutual Saving Banks

A mutual savings bank is a financial institution chartered by a central orregional government, without capital stock, that is owned by its memberswho subscribe to a common fund. From this fund claims, loans, etc., are

paid. Profits after deductions are shared between the members.


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Types of Financial

IntermediariesContractual Saving Institutions

Contractual saving institution are financial intermediaries that acquire funds at

periodic interval on a contractual basis. Insurance companies and pension funds

falls under this category

Insurance Companies

They are contractual saving institutions

They collect periodic premium from insured party and in return agree to

compensate against the risk of loss of life and property.

Pension Fund

A pension fund is any plan, fund, or scheme which provides retirement

income

They are financial institutions which accept saving to provide retirement

benefits to the employees of government units and other corporations The collect funds from cor orations and overnment units for their


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Types of Financial

IntermediariesInvestment Intermediaries

Finance Companies

They are contractual saving institutions

They collect periodic premium from insured party and in return agree tocompensate against the risk of loss of life and property.

Mutual funds

They are financial institutions which accept saving to provide retirement

benefits to the employees of government units and other corporations They collect funds from corporations and government units for their

employees.


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Money market Instruments

It has a maturity period of one year or less than one year at the time of issue Interest rate on such money market instruments are often reported on a bank

discount basis

It includes

Treasury bills

Commercial paper

Certificates of deposit

Bankers acceptances

Eurodollars

Repurchase agreements

Treasury Bills

It mature in one year or less. They are short term securities

they do not pay interest prior to maturity; instead they are sold at a discount of

the par value to create a positive yield to maturity

They can easily converted to cash and sold at low transaction cost


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Money market Instruments

Commercial Paper It is an unsecured short term promissory note issued by well known

companies

Like T-bills, most commercial paper is issued on a discounted basis.

Most commercial paper has maturities ranging from a few days up to 270

days It has advantage for both issuer and purchaser.

Bankers Acceptances

It is generally used to finance foreign trade

It is a time draft drawn on a bank by an importer

It is used to serve the purpose of financing international trade

Creation of bankers acceptance means that the bank is committed to

making the specified amount even if the importing firm for whom the

acceptance was created defaults


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Capital market Instruments

Preferred Stock Fixed income security. It also called hybrid security that has characteristics of both

common stock and bonds

Less risky than common stock

Stockholder receive a fixed dividend

Preferred shock holder receive large rate of return on their investment than

bondholder More risky than bonds

Corporate Bonds

They are long term debt securities issued by corporations

They are similar in structure to treasury issues.

paying typically semiannual interests and principal at maturity They typically pay semi annual coupons over their lives and return the face value to

the bond holder at maturity

Treasury Notes & Bonds

They both make semi annual interest payment

They are traded in an active secondary market made by dealer Treasury notes are issued with maturities from one to ten year but treasury bonds are


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function of financial markets

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