PRESENTATION OF FINANCE ON FUNCTION OF FINANCIAL MARKET

Presented By
Prabal Shrestha Sem 5th KVC
2013 04 -19

Submitted To Ramit Dev Shrestha

Acknowledgment
I do hereby express my heartfelt appreciation to these who have contributed a lot to this presentation both explicitly and implicitly. Indeed I pay a large debt and sincere gratitude to my esteem guide Mr. Ramit Dev Shrestha for his valuable advice and precious guidance in every stage.

I owe my thanks to my parents for their inspiration and encouragement to perform the work successfully. I also express my thankfulness to all my teachers for their help and timely advice.

Thank You!

Table of Content
Financial Market Functions of Financial Market Types/Structure of Financial Market
a) b)

c)
d)

Debt and Equity Markets Primary and Secondary Market Money and Capital Market Organized and Over-the-Country Market

Financial Intermediaries Types of Financial Intermediaries

I.
II. III.

Depository Institution Contractual Saving Institution Investment Intermediaries

Table of Content
Money Market Instrument
I. II. III. IV. V. VI.

Treasury Bills Commercial Paper Certificate of Deposit Bankers Acceptances Repurchase Agreement ( Repo ) Eurodollars
Common Stock Preferred Stock Corporate Bonds Treasury Notes and Bonds

Capital Market Instrument

I. II. III. IV.

Financial Market

The term financial market refers to the place where financial market transaction take place through the network of borrowers and lenders of fund. Financial market is a platform where buyers and sellers are involved in sale and purchase of financial products like shares, mutual funds, bonds and so on. It brings borrowers and lenders together to place buying and selling orders with the help of brokerage and other financial intermediaries. It is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Shares, debentures, treasury bills, certificate of deposit etc are

Function of Financial Market

Economic growth : Financial market facilities the effective utilization of saving to economic 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 the scattered 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.

Types of Financial Market

Financial market can be classify in different ways. The major types of financial markets include the following:
a)
b) c) d)

Debt and Equity Markets Primary and Secondary Market Money and Capital Market Organized and Over-the-Country Market

Structure / Types of Financial Market

Debt 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

Structure / Types of Financial Market

Primary and Secondary Markets

Primary Market

Primary market Securities are dealt for the first time in primary markets. It is 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 are offered to the investing public for the first time. Initial public offering, right offering, private placement, etc are primary market 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 investors without the involvement of companies. All Securities whether government or corporate which are already floated in the security market, are dealt in this market

Types of Financial Market

Money and Capital Markets

Money Market

It refers to such market where the transaction of securities having maturity period of less than one year takes place. It is one of the types of financial market which facilities the transaction of those securities which maturity period of less than one year. It involves individuals who deal with the lending and borrowing of money for a short time frame. Various instruments exist, such as Treasury bills, commercial paper, bankers acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities

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 longterm productive use, such as companies or governments making long-term investments A market where individuals invest for a longer duration .

Types of Financial Market

Organized and Over-the-Country Market Organized Market

It is financial market consist of physically located organized stock exchanges 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 stock and other securities which are not listed in the organized stock exchange are traded here. It is financial market where the transaction of securities not listed in stock exchange market take place. Securities of those companies which are not listed in stock exchange market are traded in the over the country market

Financial Intermediaries

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.

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 Association d. Mutual Saving Banks 2. Contractual Saving Institutions 1. Insurance Companies 2. Pension Fund 3. Investment Intermediaries 1. Finance Companies 2. Mutual Fund

Types of Financial Intermediaries

Depository 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) that is legally allowed to accept monetary deposits from consumers.

It includes :

Commercial banks Credit Unions Saving and loan association Mutual saving Banks

Types of Financial Intermediaries

Depository Institutions

Commercial Banks

It accept the deposit from individual and institutions which are repayable on demand. A commercial bank is a type of retail bank that provides services, such as accepting deposits, giving business loans and basic investment products. These deposits from individuals and institutions are invested to satisfy short-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 of economic 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 services to 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.

Types of Financial Intermediaries

Depository Institutions Saving and loan Association

The most important purpose of these institutions is to make mortgage loans 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 financial institution that specializes in accepting savings deposits and making mortgage and other loans.

Mutual Saving Banks

A mutual savings bank is a financial institution chartered by a central or regional government, without capital stock, that is owned by its members who subscribe to a common fund. From this fund claims, loans, etc., are paid. Profits after deductions are shared between the members.

Types of Financial Intermediaries

Contractual 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

Types of Financial Intermediaries

Investment Intermediaries

Finance 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.

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.

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

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

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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