CH#2 Financial Markets and their functions

Terms to know: 1 Classification of Financial Markets: 2 What is Money Market? 3 4 What are Financial Markets? Instruments of money market 5 What is capital market?

Financial markets:  Financial markets are markets in which funds are transferred from people who have surplus funds to people who have a shortage of funds.  Its allow the movement of surplus funds from savers to investors.  Financial sectors in development countries comprises of commercial banks, development financial institution, micro finance companies, investment banks, stock exchange and insurance companies.

Classification of Financial Markets: Financial Markets Financial markets basically divided into two: CAPITAL MARKET MONEY MARKET

Money Market: 1.Money market is a financial market for short term loans.  In the money market, commercial banks are the most important lenders.

Instruments of money market:  The main short term credit instruments traded in the money market are as follows: I.Call loans:  The call loans are generally granted maximum for seven days.  The commercial banks lend their surplus funds on call to other banks as they need them.  Call loans are usually made without any security.

Instruments of money market: II.Treasury bills:  Treasury bills are short term govt. securities.  These are sold by the central bank on behalf of the government.  The period of maturity generally ranges from 3 to 12 months.  Treasury bills are usually issued for meeting the temporary deficit which a government faces.

Instruments of money market: III.Bankers acceptance:  These are bills of exchange accepted by commercial banks on behalf of their customers. A bill of exchange is a piece of paper representing a promise by the buyers of goods on credit, to pay the seller at a specified time.

Instruments of money market: IV.Collateral loans:  The commercial banks usually grant short term loans against collateral securities to stock exchange dealers and brokers..

What is capital market? 2.Capital Market:  Capital market deals with the grant of medium and long term loans.  The capital market refer to the institutional arrangements which facilitate the lending and borrowing of medium and long term loans.

Instruments of capital market: Capital Market Issue of Debt instruments Issue of shares Issue of debt instruments such as a bonds or securities having a maturity of more than one year. Rising funds by issuing of Equities (shares) by public Limited companies.

Instruments of capital market: BONDS GOVERNMENT SECURITIES Mortgages Debt instruments

Instruments of capital market: A.Issue of debt instruments: I.Bonds:  Bond is a debt security that promises to make payments periodically for specified period of time.  Companies issue long term bonds for raising of funds. II.Mortgages:  Mortgages are long term loans to individuals or firms.

Instruments of capital market: III.Government securities:  The long term debt instruments are issued by the govt. of a country to finance the deficit of the budget. B.Issue of shares:  The second method of raising funds is by issuing of shares by the public limited companies.  The market where the shares of public companies are traded is called the equity market.  Equity market is of two types (a) Primary market(b) Secondary market

CH#2