Download - Various Instruments in Capital Market
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UNDER THE GUIDANCE OF PROF. Kamal Rohara
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AZIM (39) DHAVAL(40)
VINAYA(16)
SHWETA(25)
KAVERI(03)
SUNITA(05)
Royal College of Arts, Science and Commerce SUBJECT: .5.5 (SECURITY ANALYSIS & PORTFOLIO
MANAGEMENT) PROJECT ON : Various Instruments in Capital market
T.Y.BANKING & INSURANCE
SEMESTER – 5
(2011-2012)
GROUP NO: 02
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We would like to express our profound gratitude to our project guide
Prof. KAMAL ROHRA, who has so ably guided our research project with his vast
fund of knowledge, advice and constant encouragement, which made us, think
past the difficulties and lead us to successful completion of the project.
We have tried to cover all the aspects of the project & every care has been taken
to make the project faultless. We have tried to write the project in our words as
far as possible and simplified all the concepts by presenting it in a different form.
We’ll be looking forward in future for such type of project. We are eagerly waiting
for fruitful comments & constructive suggestions.
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SR.NO TOPIC PAGE.NO1 Meaning & Concept of Capital Market. 05
2 Significance, Role or Functions of Capital
Market.
07
3 Regulation of the Market 09
4 How to issue New Securities in capital
Market.
10
5 Trading Principles & System. 12
6 Capital Market Instruments. 15
7 Different Instruments in Capital Maket. 17
8 Conclusion 30
9 Webliography 31
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VARIOUS INSTRUMENT IN CAPITAL MARKET
MEANING AND CONCEPT Capital Market is one of the significant
aspect of every financial market. Hence
it is necessary to study its correct
meaning. Broadly speaking the capital
market is a market for financial assets
which have a long or indefinite
maturity. Unlike money market
instruments the capital market
intruments become mature for the
period above one year. It is an institutional arrangement to borrow and lend
money for a longer period of time. It consists of financial institutions like IDBI,
ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital
market. Business units and corporate are the borrowers in the capital market.
Capital market involves various instruments which can be used for financial
transactions. Capital market provides long term debt and equity finance for
the government and the corporate sector. Capital market can be classified into
primary and secondary markets. The primary market is a market for new
shares, where as in the secondary market the existing securities are traded.
Capital market institutions provide rupee loans, foreign exchange loans,
consultancy services and underwriting.
The capital market is the market for the issue and trading of long-term
securities. The term in this instance is measured as the term to maturity of
the security and in order to be classified as a capital market instrument, theterm to maturity should be longer than 3 years. During the trading of these
instruments, the securities traded are informally classified into short-term,
medium-term and long-term securities depending on their term to maturity.
Where the term to maturity of the instrument is up to five years, the security
is classified as a short-term capital market instrument. Where the term to
maturity is five to ten years, the security is classified as medium term, and
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where the term to maturity is more than 10 years, the security is known as
long-term.
The primary market is the market for the first issue of securities. This issue is
normally done by means of a public issue or by private placement. The
secondary market is the market for trading securities once they have beenissued. The secondary market has a big influence on the issues in the primary
market, as the market rate is determined in the secondary market. Issues in
the primary market at below market rate, determined in the secondary
market, would be issued at a discount on the nominal value of the instrument.
If the volumes traded in the secondary market are high it could be an
indicator that an excess of long-term money is available in the market, and it
may thus be an opportune time to issue new securities into the market by
means of the primary market. Therefore, if the liquidity in the secondary
market is high, chances are that new issues would be more successful than in
an illiquid market.
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SIGNIFICANCE, ROLE OR FUNCTIONS OF CAPITAL
MARKET
Like the money market capital market is
also very important. It plays a significant role in the national economy. A developed,
dynamic and vibrant capital market can
immensely contribute for speedy economic
growth and development.
Let us get acquainted with the important
functions and role of the capital market.
1. Mobilization of Savings : Capital market is an important source for
mobilizing idle savings from the economy. It mobilizes funds from people
for further investments in the productive channels of an economy. In that
sense it activate the ideal monetary resources and puts them in proper
investments.
2. Capital Formation : Capital market helps in capital formation. Capital
formation is net addition to the existing stock of capital in the economy.
Through mobilization of ideal resources it generates savings; the mobilized
savings are made available to various segments such as agriculture,
industry, etc. This helps in increasing capital formation.
3. Provision of Investment Avenue : Capital market raises resources for longer
periods of time. Thus it provides an investment avenue for people who wish
to invest resources for a long period of time. It provides suitable interest
rate returns also to investors. Instruments such as bonds, equities, units of
mutual funds, insurance policies, etc. definitely provides diverse investment
avenue for the public.
4. Speed up Economic Growth and Development : Capital market enhancesproduction and productivity in the national economy. As it makes funds
available for long period of time, the financial requirements of business
houses are met by the capital market. It helps in research and development.
This helps in, increasing production and productivity in economy by
generation of employment and development of infrastructure.
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5. Proper Regulation of Funds : Capital markets not only helps in fund
mobilization, but it also helps in proper allocation of these resources. It can
have regulation over the resources so that it can direct funds in a qualitative
manner.
6. Service Provision : As an important financial set up capital market providesvarious types of services. It includes long term and medium term loans to
industry, underwriting services, consultancy services, export finance, etc.
These services help the manufacturing sector in a large spectrum.
7. Continuous Availability of Funds : Capital market is place where the
investment avenue is continuously available for long term investment. This
is a liquid market as it makes fund available on continues basis. Both buyers
and seller can easily buy and sell securities as they are continuously
available. Basically capital market transactions are related to the stock
exchanges. Thus marketability in the capital market becomes easy.
These are the important functions of the capital market.
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HOW TO ISSUES NEW SECURITIES
The major issuers of bonds in South Africa at
present are the Republic of South Africa("RSA") through the Treasury and semi-
governmental bodies such as Eskom,
Development Bank of Southern Africa, Telkom,
Transnet and Land Bank. Government bonds
are commonly referred to as "gilts".
Intermediaries such as brokers and banks
(especially merchant banks) are often used by
borrowers to administer the issuing of new
bonds.
Bonds can be issued in the primary market using several different methods.
As with equities, bonds can be issued by way of public subscription where a
prospectus is issued which contains details of the company issuing the bond,
and of the bond itself. The public can then subscribe to the bond, and the
borrower or an intermediary on behalf of the borrower will allocate bonds to
subscribers on issue date by means of a certain process.
Bonds can also be issued through private placing. This method is used when
the borrower (or an intermediary on behalf of the borrower) places bonds
with certain investors selected by the borrower. The selected investor would
then receive a certain amount of bonds at issue date and pay the borrower the
issue price for the bonds received.
A third method used to issue bonds is known as the "tender" method. The
borrower or intermediary will issue a media statement that bonds will be
issued in the market on a certain date. The details of the bonds and the
capitalisation of the issue (total nominal amount to be issued) will also be
communicated. Interested parties are then invited to tender before a certaindate for these bonds. Tenders from interested parties would normally consist
of the nominal amount plus the percentage of the nominal amount that the
interested party is willing to pay for the bonds at issue, for example, a tender
for R5 million worth of bonds at 97% of the nominal amount. If this tender
succeeds, the tendering party will take up R5 million worth of bonds at issue
date and pay the borrower (R5 000 000 x 97%) = R4 850 000. The borrower
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Trading principles and systems
Capital market instruments or bonds
are instruments that represent futurecash flow streams. In the case of an
interest-paying bond, the cash flow
will be made up of periodic interest
payments and the nominal amount at
redemption date. In the case of nil or
zero-rated coupon bonds, the cash
flow is a single payment of the
nominal or redemption amount at the
redemption date.
As can be seen from the value determination in 4.6, the values of these
instruments are determined by discounting the cash flows back to the current
date at an applicable rate (the yield or market rate). If the rate used to
discount the cash flows back to a present value is high, the present value is
low. If the rate used to discount the cash flows is low, the current value is
high. This rate used for discounting the cash flows will be the yield that the
investor would receive (known as the yield-to-maturity or YTM) on his
original investment (the physical investment being the present value) if he
keeps the bond up to maturity.
Bonds are thus traded in terms of yields-to-maturity expressed as interest
rates. The rate at which the bond traded for a specific day or period would be
known as the market rate for that specific day or period.
South African bonds can be screen traded, or by open outcry, through a BESA
member. Screen trading takes place through intermediaries such as FCB or
IMB. Bids and offers received telephonically from players in the market are
quoted on a screen. This screen is available to traders in the market. If atrader wants to trade on one of the bids or offers quoted, he phones the
intermediary (FCB or IMB) who then lets the other party to the transaction
know that the deal is closed and the detail thereof. Both parties have to book
the deal with BESA who matches the deal and sends a report of deals done to
every member at the end of the day. Trading hours on BESA are from Monday
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through to Friday from 07h00 to 17h00. Bonds are exempt from marketable
securities tax and stamp duty.
A dealer's note or a capital market transaction note is normally completed by
the dealer, mostly on screen, who then hands it to the administrative section
for confirmation, settlement and accounting purposes. The dealer or capitalmarket transaction note normally has at least the following information
indicated
the name of the bond traded, e.g. E168
the nominal amount traded
the rate or yield at which traded (from which the settlement amount or
value will be calculated)
the counter party
whether the transaction is a buy or a sell
the date and time of the transaction the settlement date (which differs from the transaction date)
the dealer's name and signature.
Dealers do different kinds of transactions. If a dealer acts only as an agent,
transactions are done in such a manner that the dealer's company has no open
position. A back-to-back deal, for instance, is a transaction where the
instrument involved is bought and sold, resulting in no open position for the
trader.
Small participators in the market often do not have the funds to settle the
transaction on the settlement date. If such a trader in the market is of the
opinion that rate will decrease, resulting in an increase in value of the
security, he could do the following deal:
He could buy the instrument for settlement in three days time (for this
example, assume that the first settlement date is 1 March). If the rates
have not moved down on 1 March, he will want to keep the instrument,
but does not have the cash to settle the transaction. He can then do a
transaction with a large institution where he sells the instrument tothem for settlement on 1 March, and buys the instrument back from
them for settlement on 4 March. This transaction, where an instrument
is simultaneously bought and sold to the same party for different
settlement dates, is called a carry transaction. The trader's position for
1 March is a net nil position because he has bought and sold the
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instrument. He must, however, settle on 4 March, or do a similar carry
transaction for that date. Since the implementation of the T+3
settlement period on the bond exchange (settlement within three
working days of the transaction), these transactions have mainly been
replaced by scrip lending (see below) or future swaps transactions.
An instrument can be sold short in the capital market (a bear sale). If an
instrument is sold on 1 April for settlement on 4 April, without the seller
physically owning the instrument, it can be bought back before 4 April for
settlement on 4 April. Alternatively, the certificates needed to settle the
transaction could be borrowed from a large institution owning some of these
instruments and not trading in them. Security will have to be given, and credit
risk checks will be done on the borrower. This is known as scrip lending.
Scrip lending typically costs the borrower between 2% and 3% per year of the
value of the scrip for the period that the scrip is being borrowed.
Some institutions that have scrip on hand also offer physical/future swap
transactions. This means that the person or institution that is short of scrip
because of a bear sale, can swap the physical scrip and a future to sell the
same stock, with the institution that has the scrip on hand physically. The
difference between the buying price of the physical stock and the selling price
of the future contract will be the profit that the facilitator would make.
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CAPITAL MARKET INSTRUMENTS
Capital market instruments are those
instruments which are not facilitate thetransfer of capital in the financial markets
(!).Let's start with a basic definition of
capital markets. A capital market is where
people (individuals, corporations,
governments)lend or borrow money. To
facilitate an example, we ask: how do
lenders decide who should borrow from
them? The markets have evolved uniform
instruments to help lenders in the capital
markets make investment decisions.
One example of these uniform instruments is a fixed rate bond. A fixed rate
bond allows a company/government to borrow money for a fixed period of
time while paying a fixed interest rate on that borrowed money. In the capital
markets, the uniformity of fixed rate bonds facilitate the transfer of capital
from lender to borrower. Other examples of capital market instruments
include equity, floating rate bonds, convertible bonds, asset backed securities,
mortgage backed securities, and interest rate swaps.
A capital market is a market for securities (debt or equity), where businessenterprises and government can raise long-term funds. It is defined as a
market in which money is provided for periods longer than a year, as the
raising of short-term funds takes place on other markets (e.g., the money
market). The capital market is characterized by a large variety of financial
instruments: equity and preference shares, fully convertible debentures
(FCDs), non-convertible debentures (NCDs) and partly convertible
debentures (PCDs) currently dominate the capital market, however new
instruments are being introduced such as debentures bundled with warrants,participating preference shares, zero-coupon bonds, secured premium notes,
etc.
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Capital market instruments are responsible for generating funds
for companies, corporations, and sometimes national governments.
These are used by the investors to make a profit out of their respective
markets. There are a number of capital market instruments used for market
trade, including
StocksBonds
Debentures
Treasury-bills
Foreign Exchange
Fixed deposits, and others
Capital market is also known as securities market because long term funds are
raised through trade on debt and equity securities. These activities may be
conducted by both companies and governments. This market is divided
into primary capital market. and secondary capital market. The primarymarket is designed for the new issues and the secondary market is meant for
the trade of existing issues. Stocks and bonds are the two basic capital market
instruments used in both the primary and secondary markets. There are three
different markets in which stocks are used as the capital market instrument:
the physical, virtual, and auction markets.
Bonds, however, are traded in a separate bond market. This market is also
known as a debt, credit, or fixed income market. Trade in debt securities are
done in this market. There are also the T-bills and Debentures which are used
as capital market instruments by the investors. These instruments are more
secured than the others, but they also provide less return than the other
capital market instruments. While all capital market instruments are designed
to provide a return on investment, the risk factors are different for each and
the selection of the instrument depends on the choice of the investor. The risk
tolerance factor and the expected returns from the investment play a decisive
role in the selection by an investor of a capital market instrument. Capital
market instruments should be selected only after doing proper research in
order to increase one.
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DIFFERENT INSTRUMENTS IN CAPITAL
MARKET
A capital market is a market for
securities (debt or equity), where
business enterprises and
government can raise long-term
funds. It is defined as a market in
which money is provided for
periods longer than a year, as the
raising of short-term funds takes
place on other markets (e.g., themoney market). The capital
market is characterized by a large
variety of financial instruments:
equity and preference shares, fully convertible debentures (FCDs), non-
convertible debentures (NCDs) and partly convertible debentures (PCDs)
currently dominate the capital market, however new instruments are being
introduced such as debentures bundled with warrants, participating
preference shares, zero-coupon bonds, secured premium notes, etc.
1. SECURED PREMIUM NOTES
SPN is a secured debenture redeemable at premium issued along with a
detachable warrant, redeemable after a notice period, say four to seven years.
The warrants attached to SPN gives the holder the right to apply and get
allotted equity shares; provided the SPN is fully paid. There is a lock-in period
for SPN during which no interest will be paid for an invested amount. The SPN
holder has an option to sell back the SPN to the company at par value after thelock in period. If the holder exercises this option, no interest/ premium will be
paid on redemption. In case the SPN holder holds it further, the holder will be
repaid the principal amount along with the additional amount of interest/
premium on redemption in installments as decided by the company. The
conversion of detachable warrants into equity shares will have to be done
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within the time limit notified by the company. Ex-TISCO issued warrants for
the first time in India in the year 1992 to raise 1212 crore.
2. DEEP DISCOUNT BONDS
A bond that sells at a significant discount from par value and has no coupon
rate or lower coupon rate than the prevailing rates of fixed-income securities
with a similar risk profile. They are designed to meet the long term funds
requirements of the issuer and investors who are not looking for immediate
return and can be sold with a long maturity of 25-30 years at a deep discount
on the face value of debentures.
3. EQUITY SHARES WITH DETACHABLE WARRANTS
A warrant is a security issued by company entitling the holder to buy a given
number of shares of stock at a stipulated price during a specified period.
These warrants are separately registered with the stock exchanges and traded
separately. Warrants are frequently attached to bonds or preferred stock as a
sweetener, allowing the issuer to pay lower interest rates or dividends.
4. FULLY CONVERTIBLE DEBENTURES WITH INTEREST
This is a debt instrument that is fully converted over a specified period into
equity shares. The conversion can be in one or several phases. When the
instrument is a pure debt instrument, interest is paid to the investor. After
conversion, interest payments cease on the portion that is Oral Tution Classes-
EIRC of ICSI Securities Laws and Compliances by Neha Singhi converted. If
project finance is raised through an FCD issue, the investor can earn interest
even when the project is under implementation. Once the project is
operational, the investor can participate in the profits through share price
appreciation and dividend payments
5. EQUIPREF
They are fully convertible cumulative preference shares. This instrument is
divided into 2 parts namely Part A & Part B.
Part A is convertible into equity shares automatically /compulsorily on date
of allotment without any application by the allottee.
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Part B is redeemed at par or converted into equity after a lock in period at the
option of the investor, at a price 30% lower than the average market price.
6. SWEAT EQUITY SHARES
The phrase `sweat equity' refers to equity shares given to the company's
employees on favorable terms, in recognition of their work. Sweat equity
usually takes the form of giving options to employees to buy shares of the
company, so they become part owners and participate in the profits, apart
from earning salary. This gives a boost to the sentiments of employees and
motivates them to work harder towards the goals of the company. The
Companies Act defines `sweat equity shares' as equity shares issued by the
company to employees or directors at a discount or for consideration other
than cash for providing knowhow or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
7. TRACKING STOCKS
A tracking stock is a security issued by a parent company to track the results
of one of its subsidiaries or lines of business; without having claim on the
assets of the division or the parent company. It is also known as "designer
stock". When a parent company issues a tracking stock, all revenues and
expenses of the applicable division are separated from the parent company's
financial statements and bound to the tracking stock. Oftentimes, this is done
to separate a subsidiary's high-growth division from a larger parent company
that is presenting losses. The parent company and its shareholders, however,
still control the operations of the subsidiary.
8. DISASTER BONDS
Also known as Catastrophe or CAT Bonds, Disaster Bond is a high-yield debt
instrument that is usually insurance linked and meant to raise money in case
of a catastrophe. It has a special condition that states that if the issuer
(insurance or Reinsurance Company) suffers a loss from a particular pre-
defined catastrophe, then the issuer's obligation to pay interest and/or repay
the principal is either deferred or completely forgiven.
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9. MORTGAGE BACKED SECURITIES(MBS)
MBS is a type of asset-backed security, basically a debt obligation that
represents a claim on the cash flows from mortgage loans, most commonly on
residential property. Mortgage backed securities represent claims and derive
their ultimate values from the principal and payments on the loans in the pool.These payments can be further broken down into different classes of
securities, depending on the riskiness of different mortgages as they are
classified under the MBS.
Mortgage originators to refill their investments
New instruments to collect funds from the market, very economic and
more effective
Conversion of assets into funds
Financial companies save on the costs of maintenance of the assets and
other costs related to assets, reducing overheads and increasing profit
ratio.
Kinds of Mortgage Backed Securities:
Commercial mortgage backed securities: backed by mortgages on
commercial property
Collateralized mortgage obligation: a more complex MBS in which the
mortgages are ordered into tranches by some quality (such as repayment time), with each tranche sold as a separate security Stripped mortgage backed
securities: Each mortgage payment is partly used to pay down the loan's
principal and partly used to pay the interest on it.
10. GLOBAL DEPOSITORY RECEIPTS/ AMERICAN DEPOSITORY RECEIPTS
A negotiable certificate held in the bank of one country (depository)
representing a specific number of shares of a stock traded on an exchange of
another country. GDR facilitate trade of shares, and are commonly used toinvest in companies from developing or emerging markets. GDR prices are
often close to values of related shares, but they are traded and settled
independently of the underlying share. Listing on a foreign stock exchange
requires compliance with the policies of those stock exchanges. Many times,
the policies of the foreign exchanges are much more stringent than the
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policies of domestic stock exchange. However a company may get listed on
these stock exchanges indirectly – using ADRs and GDRs. If the depository
receipt is traded in the United States of America (USA), it is called an American
Depository Receipt, or an ADR. If the depository receipt is traded in a country
other than USA, it is called a Global Depository Receipt, or a GDR. But the
ADRs and GDRs are an excellent means of investment for NRIs and foreign
nationals wanting to invest in India. By buying these, they can invest directly
in Indian companies without going through the hassle of understanding the
rules and working of the Indian Oral Tution Classes-EIRC of ICSI
Securities Laws and Compliances.
11. FOREIGN CURRENCY CONVERTIBLE BONDS(FCCBs)
A convertible bond is a mix between a debt and equity instrument. It is a bond
having regular coupon and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock. FCCB is issued in a
currency different than the issuer's domestic currency. The investors receive
the safety of guaranteed payments on the bond and are also able to take
advantage of any large price appreciation in the company's stock. Due to the
equity side of the bond, which adds value, the coupon payments on the bond
are lower for the company, thereby reducing its debt-financing costs.
Advantages
• Some companies, banks, governments, and other sovereign entities may
decide to issue bonds in foreign currencies because, as it may appear to be
more stable and predictable than their domestic currency.
• Gives issuers the ability to access investment capital available in foreign
markets.
• Companies can use the process to break into foreign markets.
• The bond acts like both a debt and equity instrument. Like bonds it makes
regular coupon and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock.
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• It is a low cost debt as the int erest rates given to FCC Bonds are normally 30-
50 percent lower than the market rate because of its equity component.
• Conversion of bonds into stocks takes place at a premium price to market
price. Conversion price is fixed when the bond is issued. So, lower dilution of
the company stocks.
Advantages to investors
• Safety of guaranteed payments on the bond.
• Can take advantage of any large price appreciation in the company’s stock .
• Redeemable at maturity if not converted.
• Easily marketable as investors enjoys option of conversion in to equity if
resulting to capital appreciation.
Disadvantages
• Exchange risk is more in FCCBs as interest on bond would be payable in
foreign currency. Thus companies with low debt equity ratios, large forex
earnings potential only opted for FCCBs.
• FCCBs means creation of more debt and a FOREX outgo in terms of interest
which is in foreign exchange.
• In case of convertible bond the interest rate is low (around 3 to 4%) but
there is exchange risk on interest as well as principal if the bonds are not
converted in to equity.
• If the stock price plummets, investors will not go for conversion but
redemption. So, companies have to refinance to fulfill the redemption romise
which can hit earnings.
• It remains a debt in the balance sheet until conversion.
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13. DERIVATIVES
A derivative is a financial instrument whose characteristics and value depend
upon the characteristics and value of some underlying asset typically
commodity, bond, equity, currency, index, event etc. Advanced investors
sometimes purchase or sell derivatives to manage the risk associated with theunderlying security, to protect against fluctuations in value, or to profit from
periods of inactivity or decline. Derivatives are often leveraged, such that a
small movement in the underlying value can cause a large difference in the
value of the derivative.
Derivatives are usually broadly categorized by:
• The relationship between the underlying and the derivative (e.g. forward,
option, swap)
• The type of underlying (e.g. equity derivatives, foreign exchange derivatives
and credit derivatives)
• The market in which they trade (e.g., exchange traded or over-the-counter)
Futures
A financial contract obligating the buyer to purchase an asset, (or the seller to
sell an asset), such as a physical commodity or a financial instrument, at apredetermined future date and price. Futures contracts detail the quality and
quantity of the underlying asset; they are standardized to facilitate trading on
a futures exchange. Some futures contracts may call for physical delivery of
the asset, while others are settled in cash. The futures markets are
characterized by the ability to use very high leverage relative to stock
markets. Some of the most popular assets on which futures contracts are
available are equity stocks, indices, commodities and currency.
Options
A financial derivative that represents a contract sold by one party (option
writer) to another party (option holder). The contract offers the buyer the
right, but not the obligation, to buy (call) or sell (put) a security or other
financial asset at an agreed-upon price (the strike price) during a certain
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period of time or on a specific date (excercise date). A call option gives the
buyer, the right to buy the asset at a given price. This 'given price' is called
'strike price'. It should be noted that while the holder of the call option has a
right to demand sale of asset from the seller, the seller has only the obligation
and not the right. For eg: if the buyer wants to buy the asset, the seller has to
sell it. He does not have a right.
Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike
price' to the buyer. Here the buyer has the right to sell and the seller has the
obligation to buy. So in any options contract, the right to exercise the option is
vested with the buyer of the contract. The seller of the contract has only the
obligation and no right contract bears the obligation, he is paid a price called
as 'premium'. Therefore the price that is paid for buying an option contract is
called as premium.
The primary difference between options and futures is that options give the
holder the right to buy or sell the underlying asset at expiration, while the
holder of a futures contract is obligated to fulfill the terms of his/her contract.
14. PARTICIPATORY NOTES
Also referred to as "P-Notes" Financial instruments used by investors or
hedge funds that are not registered with the Securities and Exchange Board of
India to invest in Indian securities. Indian-based brokerages buy India-based
securities and then issue participatory notes to foreign investors. Any
dividends or capital gains collected from the underlying securities go back to
the investors. These are issued by FIIs to entities that want to invest in the
Indian stock market but do not want to register themselves with the SEBI. RBI,
which had sought a ban on PNs, believes that it is tough to establish the
beneficial ownership or the identity of ultimate investors.
15. HEDGE FUND
A hedge fund is an investment fund open to a limited range of investors that
undertakes a wider range of investment and trading activities in both
domestic and international markets, and that, in general, pays a performance
fee to its investment manager. Every hedge fund has its own investment
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strategy that determines the type of investments and the methods of
investment it undertakes. Hedge funds, as a class, invest in a broad range of
investments including shares, debt and commodities. As the name implies,
hedge funds often seek to hedge some of the risks inherent in their
investments using a variety of methods, with a goal to generate high returns
through aggressive investment strategies, most notably short selling, leverage,
program trading, swaps, arbitrage and derivatives. Legally, hedge funds are
most often set up as private investment partnerships that are open to a
limited number of investors and require a very large initial minimum
investment. Investments in hedge funds are illiquid as they often require
investors keep their money in the fund for at least one year.
16. FUND OF FUNDS
A "fund of funds" (FoF) is an investment strategy of holding a portfolio of
other investment funds rather than investing directly in shares, bonds or
other securities. This type of investing is often referred to as multi-manager
investment. A fund of funds allows investors to achieve a broad diversification
and an appropriate asset allocation with investments in a variety of fund
categories that are all wrapped up into one fund.
17. EXCHANGE TRADED FUNDS
An exchange-traded fund (or ETF) is an investment vehicle traded on stock
exchanges, much like stocks. An ETF holds assets such as stocks or bonds and
trades at approximately the same price as the net asset value of its underlying
assets over the course of the trading day. Most ETFs track an index, such as
the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of
their low costs, tax efficiency, and stock-like features, and single security can
track the performance of a growing number of different index funds currently
the NSE Nifty.
18. GOLD ETF
A gold Exchange Traded Fund (ETF) is a financial instrument like a mutual
fund whose value depends on the price of gold. In most cases, the price of one
unit of a gold ETF approximately reflects the price of 1 gram of gold. As the
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price of gold rises, the price of the ETF is also expected to rise by the same
amount. Gold exchange-traded funds are traded on the major stock exchanges
including Zurich, Mumbai, London, Paris and New York There are also closed-
end funds (CEF's) and exchange-traded notes (ETN's) that aim to track the
gold price.
19.DEBT INSTRUMENTS
To meet the long term and short term needs of finance, firms issue various
kinds of Securities to the public. Securities represent claims on a stream of
income and /or particular assets.Debentures are debt securities, and there is a
wide range of them. Market loans are raised by the government and public
sector institutions through debt securities. Equity shares issued by cooperates
are ownership securities. Preference shares are a hybrid security. It is amixture of an ownership security and debt security.
DEBENTURES
A debenture is a document which either creates a debt or acknowledges it.
Debenture issued by a company is in the form of a certificate acknowledging
indebtedness. The debentures are issued under the Company's Common Seal.
Debentures are one of a series issued to a number of lenders. The date of
repayment is specified in the debentures. Debentures are issued against a
charge on the assets of the Company. Debentures holders have no right to vote
at the meetings of the companies.
KINDS OF DEBENTURES
(a) Bearer Debentures:
They are registered and are payable to the bearer. They are negotiable
instruments and are transferable by delivery.
(b) Registered Debentures:
They are payable to the registered holder whose name appears both on the
debentures and in the Register of Debenture Holders maintained by thecompany. Registered Debentures can be transferred but have to be registered
again. Registered Debentures are not negotiable instruments. A registered
debenture contains a commitment to pay the principal sum and interest. It
also has a description of the charge and a statement that it is Issued subject to
the conditions endorsed therein.
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(c) Secured Debentures:
Debentures which create a change on the assets of the company which may be
fixed or floating are known as secured Debentures. The term "bonds" and
"debentures"(secured) are used interchangeably in common parlance. In USA,
BOND is a long term contract which is secured, whereas a debentures is an
unsecured one.
(d) Unsecured or Naked Debentures:
Debentures which are issued without any charge on assets are insecured or
naked debentures. The holders are like unsecured creditors and may see the
company for the recovery of debt.
(e) Redeemable Debentures:
Normally debentures are issued on the condition that they shall be redeemed
after a certain period. They can however, be reissued after redemption.
(f) Perpetual Debentures:
When debentures are irredeemable they are called perpetual. Perpetual
Debentures cannot be issued in India at present.
(g) Convertible Debentures:
If an option is given to convert debentures into equity shares at the stated rate
of exchange after a specified period, they are called convertible debentures.
Convertible Debentures have become very popular in India. On conversion the
holders cease to be lenders and become owners.
Debentures are usually issued in a series with a pari passu (at the same rate)
clause which entitles them to be discharged rateably though issued at
different times. New series of debentures cannot rank pari passu with the old
series unless the old series provides so.
New debt instruments issued by public limited companies are participating
debentures, convertible debentures with options, third party convertible
debentures convertible debentures redeemable at premiums, debt equity
swaps and zero coupon convertible notes. These are discussed below:
(h) Participating Debentures:
They are unsecured corporate debt securities which participate in the profits
of the company. They might find investors if issued by existing dividend
paying companies.
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(i) Convertible Debentures with options:
They are a derivative of convertible debentures with an embedded option,
providing flexibility to the issuer as well as the investor to exit from the terms
of the issue. The coupon rate is specified at the time of issue.
(j) Third Party Convertible Debentures: They are debt with a warrant allowing the investor to subscribe to the equity
of third firm at a preferential price visa vis the market price. Interest rate on
third party convertible debentures is lower than pure debt on account of the
conversion option.
(k) Convertible-Debentures Redeemable at a Premium:
Convertible Debentures are issued at face value with 'a put option entitling
investors to sell the bond to the issuer at a premium. They are basically
similar to convertible debentures but embody less risk.
(I) Debt-Equity Swaps:
Debt-Equity Swaps are an offer from an issuer of debt to swap it for equity.
The instrument is quite risky for the investor because the anticipated capital
appreciation may not materialize.
(m) Deep discount Bonds:
They are designed to meet the long term funds requirements of the issuer and
investors who are not looking for immediate return and can be sold with a
long maturity of 25-30 years at a deep discount on the face value of debentures. IDBI deep discount bonds for Rs 1 lakh repayable after 25 years
were sold at a discount price of Rs. 2,700.
(n) Zero-Coupon Convertible Note:
A zero-coupon convertible note can be converted into shares. If choice is
exercised investors forego all accrued and unpaid interest. The zero-coupon
convertible notes are quite sensitive to changes in interest rates.
(o) Secured Premium Notes (SPN) with Detachable Warrants:
SPN which is issued along with a detachable warrant, is redeemable after anotice period, say four to seven years. The warrant attached to it ensures the
holder the right to apply and get allotted equity shares; provided the SPN is
fully paid.
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Webliography Websites:
@ http://finance.mapsofworld.com/capital-
market/instruments.html
@ http://www.capitalmarket.com/personal/pfdebent.htm
@ http://www.bapepam.go.id/old/old/E_Public/Press/June2003/Ch
apter%20IIa.pdf
Thank you