capital market and money market

capital market and money market

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  Topic Assigned:Capital Market AndMoney Market Presented by:SMG 2 Group Consisting:Archit Sharma,Ashish Dubey,Ayushi Verma,Chinmay Gosavi ,Chandrasekhar Padhi
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  MONEY MARKET • Introduction: Moneymarket is a market for short term loan or financial assets. It is a market for lending and borrowing of short term funds. As the name implies , it does not actually deal in cash or money. But it actually deals with near substitutes for money or near like trade bills, promissory notes and government papers drawn for a short period not exceeding one year. According to Crowther: The money market is a name given to the various firms and institutions that deal in the various grades of near money. According to Nadler and shipman: a money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the fianancial transactions of a particular country or world are degraded.
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  Difference between MoneyMarket and Capital Market Money Market • It is market for short term funds not exceeding period of one year. • Money market is known for higher liquidity. • Money market has low risk. • Money market instruments generally do not have secondary market. • Transactions mostly take place over informal place. i.e.phone. • Generally no role of broker. • Instruments involved: treasury bills, commercial papers, certificate of deposit etc. Capital Market • It is a market for long term funds exceeding a period of one year. • Capital market is comparatively lesser liquidity than money market. • Capital market are riskier than money market. • It has secondary market. • Transactions generally take place at formal places. i.e stock exchange. • Broker plays an important role. • Instruments involved: shares, debentures, government bonds etc.
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  Characteristics features ofMoney Market 1. Highly organized banking system. Commercial bank are nerve center of the whole money market. They supply the short term funds. The commercial banks serve as vital link between the central bank and the various segments of the money market. Consequently, a well developed money market and a highly organized banking system co exist. 2. Presence of central bank. The central bank acts as a banker’s bank. It keeps their cash reserves and provides them financial accommodation in difficulties by discounting their eligible securities. In others words, it enables the commercial banks and other institutions to convert their assets into cash in time of financial crisis. 3. Availability of proper credit instruments. It is necessary for the existence of developed money market a continuous availability of readily acceptable negotiable securities such as bill of exchange, promissory note etc in the market. 4. Integrated interest rate structure. It is an important characteristics of a developed money market is that it has an integrated interest rate structure. The interest prevailing in various sub market are integrated to each other. A change in bank rate leads to proportionate change in the interest rate prevailing in the sub markets.
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  Characteristic features cont… 5.Existence of sub markets. A developed money market consist of number of specialized sub market dealing in various types of credit instruments. There is the call money market, the treasury bill market etc. The larger the number of sub market the more developed is the money market. 6. Ample resources There must be availability of ample funds to the financial transaction in the submarket. These funds may come from within the country and also from foreign countries. The London, New York and Paris money markets attract funds from all over the world.
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  Instruments of MoneyMarket: Money market consist of various money market instruments which collectively constitute money market. These markets instruments are as follows: (1) T- bill market: # An instrument of short term borrowing by the government maturing in less than one year. # Also known as Zero coupon bonds issued by the Reserve Bank of India on behalf of Central government to meet the short term requirement of funds. # Issued in the form of promissory note. # Highly liquid and have assured yield and negligible risk of default. # it has a maturity of less than one year. On the basis of maturity period, T bills may be classified into three. They are: (i) 91 days, T bills (ii) 182 days, T bills and (iii) 364 days, T bills. # issued at discount and paid at par and available for minimum amount of 25000 and its multiple thereof.
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  Benefits of Tbills • No tax deduction at source. • Zero default risk being sovereign paper. • Better returns especially in the short term. • Transparency.
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  Instruments continued… (2)Commercial paper: #On 27th march 1989, commercial paper in india was introduced by RBI. # unsecured promissory note having a maturity of 15 days to 1 year. # Negotiable Instrument transferable by the endorsement and delivery. # Sold at discount and redeemded at par. # Alternative to bank borrowing. # The issuer guarantees the buyer to pay a fixed amount in future in terms of liquid cash and no assets. # It acts as an evidence certificate of unsecured debt. # Used for Bridge Financing(Suppose a company needs long term finance to buy some machinery. In order to raise the long term funds in the capital market the company will have to incur floatation costs. Funds raised through this is used to meet floatation costs).
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  Instruments continued… (3) CallMoney Market: # Short term finance repayable on demand. # Maturity period varies from one day to 14 days. #The interest rate on call money is known as the call rate. # Interest rate are market driven and are highly sensitive to demand and supply. # Big PSUs are mostly lender and small private and co-operative banks are mostly borrower. # These instruments are borrowed without any security. # Call money methods are used by banks by which banks borrow from each other to be able to maintain CRR and SLR. # One of its demerit is “volatility in call money market”.
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  Instruments continued… (4) CommercialBills Market : # when goods are sold on credit, the buyer becomes liable to make payment on specified date in future. For this, seller draws the bill and the buyer accepts it. On being accepted., the bill becomes a marketable instruments and is called trade bill or bill of exchange. # Many types of bill: ~Demand Bill and Issuance Bill: Demand bill is payable at sight or on presentation of to the drawee. Issuance or time bill is payable at a specified later date. ~Clean bill and documentary bill: when bill have to be accomplished by documents of title of goods like railway receipts, bill of landing, etc., the bills are called documentary bill. When bills are drawn without accompanying any documents, they are called clean bill. ~Inland and foreign bills: ~ Export and import bills:
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  Recent Developments • Integrationof unorganized sector with the unorganized sector. • Widening of call money. • Promotion of bill culture. • Introduction of innovative instruments. • Setting up of credit rating agencies. • Entry of Money Market Mutual Funds. • Establishment of DFHI(Discount And Finance House of India).
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  THANKING YOU