Financial System and Institutions 1.pdf

FINANCIAL SYSTEM AND INSTITUTIONS MODULE 1 FINANCIAL SYSTEM FINANCIAL SYSTEM ❖Financial system refers to a set of activities , which facilitate transfer of resources from savers to borrowers. ❖It is an institutional framework existing in a country to enable financial transactions. ❖It comprises...

FINANCIAL SYSTEM AND INSTITUTIONS MODULE 1 FINANCIAL SYSTEM FINANCIAL SYSTEM ❖Financial system refers to a set of activities , which facilitate transfer of resources from savers to borrowers. ❖It is an institutional framework existing in a country to enable financial transactions. ❖It comprises of financial institutions, financial markets, financial instruments and financial services. ❖This system provides for regular , smooth , efficient and cost effective linkage between depositors and investors. ❖A financial system may be defined as a set of institutions, instruments and markets which foster savings and channelise them to their most efficient use. FINANCIAL INTERMEDIATION ❖Financial system receives financial resources from the surplus units of the economy in the form of savings and transfer them to the deficits units through lending activities. ❖This role of transferring financial resources from the surplus units to the deficit units is referred to as financial intermediation FEATURES OF FINANCIAL SYSTEM ❖ It plays a vital role in economic development of a country. ❖ Organised and unorganised financial markets are part of financial system. ❖ It regulates transactions between various economic units( i.e., Govt, Industry and Household) ❖ It encourages both savings and investment. ❖ Financial system provides a linkage between depositors and investors. ❖ It promotes efficient allocation of financial resources. ❖ It promotes economic development. ❖ It facilitates expansion of financial markets. ❖ It aids in financial deepening and broadening. ❑FINANCIAL DEEPENING Financial deepening may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. (The Committee on Financial Inclusion , Chairman Dr. C Rangarajan)  FINANCIAL BROADENING Financial broadening means offering a wider range of financial goods and services with different maturities , risks and returns from a variety of financial intermediaries. COMPONENTS OF FINANCIAL SYSTEM 1.FINANCIAL MARKETS ❖Financial markets include any place or system that provides buyers and sellers the means to trade financial instruments, including bonds , equities , the various international currencies and derivatives. ❖Financial markets facilitate the interaction between those who need capital with those who have capital to invest. ❖In addition to making it possible to raise capital , financial markets allow participants to transfer risk ( generally through derivatives ) and promote commerce. ❖The Financial markets may be organised or unorganised. ❖An organised financial market is a recognised and formal market governed by rules and regulations and controlled by market regulators. ❖Organised sector of financial market consist of two important markets viz.,money market and capital market. ❖Unorganised financial market is an informal arrangement for financial intermediation by individuals or firms characterized by exorbitant interest rates, exploitation , non-standardised procedures and is out of the purview of market regulators. 2.FINANCIAL INSTITUTIONS ❖Financial institutions are organizations that mobilize savings and provide finance or credit to individuals and organizations. ❖These institutions are necessary for free , fair and transparent market operations. ❖Regulatory Institutions play a regulatory role in the market by controlling other financial institutions and ensuring fair and transparent market operations.Example , Ministry of Finance (MoF) , SEBI , RBI etc. ❖Financial Institutions are also called Financial Intermediaries because they act as middlemen between lenders and borrowers. ❖Financial institutions can be classified into three : 1.Monetary or Banking Financial institutions 2.Non-monetary or Non-banking institutions 3.Specialized Financial institutions. ❖Monetary institutions include Central Bank , Commercial banks , RRBs , Co –operative banks etc. ❖Non-monetary institutions comprise of NBFCs , Investment companies , leasing firms,VCFs etc. ❖Specialised institutions include state level financial institutions ( like SFCs , SIDCs ) , industrial development banks etc. 3.FINANCIAL INSTRUMENTS ❖A financial instrument is any agreement that results in a financial obligation for one entity and a financial asset for another. ❖Financial instruments are contracts or securities that represent a monetary value and can be traded in financial markets. ❖Financial instruments are documentary evidence of claim against an individual/firm/state for payment of principal and/or interest or dividend on a specified maturity date. ❖They are issued by financial intermediaries in financial markets for channelising funds from lenders to borrowers. ❖Basically financial instruments/securities are of primary or secondary nature. ❖Primary or direct instruments are directly issued by the ultimate borrowers (companies) in the market to the ultimate savers(investors).E.g., Equity shares , Debentures etc. ❖Secondary or indirect instruments are issued by financial intermediaries to the ultimate savers. E. g., Mutual Fund Units , Insurance Policies etc. ❖Financial instruments are broadly classified into money market instruments and capital market instruments. ❖Financial instruments differ in terms of rate of return , marketability , nature , risk , transaction cost etc. 4.FINANCIAL SERVICES ❖The financial services sector provides financial services to people and corporations. ❖Financial services are a broad range of more specific activities such as banking , investing , and insurance. ❖This segment of the economy is made up of a variety of financial firms including banks , investment houses , lenders , finance companies , real estate brokers and insurance companies NON BANKING FINANCIAL COMPANY (NBFC) ? A Non – Banking Financial Company (NBFC) is a company registered under the Companies Act , 1956 and is engaged in the business of loans and advances , leasing , hire – purchase , insurance business , chit business. It does not include any institution whose principal business is that of agriculture activity , industrial activity , sale/purchase/construction of immovable property. An NBFC cannot accept demand deposit or issue cheques to the customers. All NBFCs should register with RBI E.g. Bajaj Finance ,Mahindra Financial Service , Shriram Transport Finance Company , Kosamattom Finance , Manappuram Finance , Muthoot Finance Ltd etc  NBFCs , also known as Non Banking Financial Institutions (NBFIs) , are financial institutions that offer various banking services but do not have a banking licence. Services Offered by NBFCs: Personal Loans ,Vehicle loan , Home Loans , Gold Loans , Microfinance , Insurance Services , Services related to leasing and hire purchase etc SMALL FINANCE BANKS AND PAYMENT BANKS ❖ Small Finance banks are the financial institutions which provide financial services to the unserved and unbanked region of the country. ❖Entities with a small finance bank license can provide basic banking service within limited area of operation. ❖The objective is to financially include sections of the economy not being served by other banks, such as small business units , small and marginal farmers , micro and small industries and unorganised sector entities. ❖Eg. ESAF ❖ The small Finance Banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units , small and marginal farmers , micro and small industries and unorganised sector entities. PAYMENT BANKS ❖ Payments bank is a new form of bank – created under the purview of the Reserve bank of India (RBI). ❖Payments banks can accept a limited deposit of ₹ 100000 per customer but cannot undertake lending activities. ❖These banks cannot lend loans and issue credit cards but they can offer services such as net banking , ATM cards , Mobile Banking etc. ❖They offer small savings accounts , payment/remittance services to migrant labour , low income households , small businesses etc. ❖ These banks will be extensively operated on technology , to reduce operational costs. ❖Example : India Post Payments Bank, Paytm Payments Bank etc. ROLE AND FUNCTIONS OF FINANCIAL SYSTYEM 1. Mobilisation of savings and allocating them to projects 2. Organisation of the payment and settlement system to ensure safe and quick movement of funds. 3. Provision of liquidity of financial claims and securities. 4. Provision of a good corporate governance system. 5. Generation of information for economic/financial decision making.\ 6. Creation of innovative schemes and features to make financial instruments attractive to investors i.e., financial innovation. 7. Management of uncertainty and risk associated with mobilisation of savings and allocation of credit. 8. Encourage investments by lowering cost of transactions and offering increased rate of return to investors. 9. Facilitate judicious allocation of financial resources for the economic development of the nation. 10. Facilitate financial engineering (development of new and improved financial products or repack existing ones) in financial instruments , market , services etc. to ensure better performance of the system. 11. Promoting capital formation by channelising the flow of savings into productive investments. 12. Facilitate the integration of the domestic economy with that of other foreign economies i.e., globalisation of the economy. Thus , it is clear that “without sound financial system economic progress will be impossible” DEVELOPMENT OF INDIAN FINANCIAL SYSTEM A) THE PRE – INDEPENDENCE FINANCIAL SYSTEM The pre – independence financial system was unorganized and weak. With limited number of financial intermediaries and absence of a mechanism to mobilize savings , the industrial sector had no access to the savings of the economy. Capital market was primitive and the unorganized sector played a major role in the provision of finance B) DEVELOPMENT SINCE INDEPENDENCE The Indian Financial System has undergone a remarkable change since independence. By the adoption of mixed economic system , government resorted to a planned financial system which essentially includes control over credit and finance. Govt started to strengthen the institutional structure by establishing development financial institutions , term lending institutions and banks  RBI was nationalized in 1949 to act as a regulator and supervisor of financial intermediaries and facilitate the development of the system. The government continued its nationalization policy to bring a host of banks and insurance companies under its ambit and strengthen the institutional infrastructure of the financial system. C) DEVELOPMENT OF INDIAN FINANCIAL SYSTEM AFTER 1991. Indian financial system has undergone a sea change with the economic reforms in 1991. The reforms included opening for international trade and investment , deregulation , initiation of privatization , tax reforms , and inflation – controlling measures. This initiated the LPG regime ( Liberalisation , Privatisation and Globalisation ) in India.  The major developments during the post economic reforms are ; ▪ Abolishment of the Controller of Capital Issues ( which decided the prices and number of shares that a firm could issue ) in 1992.This wa a break through reform in the Indian financial system. ▪ Introduction of the SEBI Act , 1992 which gave SEBI the legal authority to register and regulate all security market intermediaries. ▪ Gradual liberalisation of interest rates , commencing in 1992. ▪ Measures were introduced to liberalise credit allocation , improve regulation and supervision , liberalise capital account etc. ▪ Starting of Over The Counter Exchange of India in 1992.It was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading. ▪ Establishment of the National Stock Exchange (1994) with screen based trading system. This was a motivation for reforms of India’s other stock exchanges. ▪ In 1992 , Indian firms permitted to raise capital from international markets by issuing bonds and Global Depository Receipts(GDRs) ▪ Establishment of National Multi-Commodity Exchange (NMCE). ▪ Liberalisation of the restrictions on Foreign Direct Investment ▪ Foreign Exchange Management Act(FEMA) 2000 was enacted by repealing FERA 1973. ▪ Development of a share Depository in 1996, National Securities Depositories Ltd.(NSDL) according to the provisions of Depositories Act 1996. ▪ Introduction of new variety of innovative financial instruments.  Development of sub-markets like foreign exchange , derivatives , commodity market etc. Establishment of Credit rating agencies ( CRISIL ,ICRA , CARE etc) jointly by development banks and all India financial institutions for facilitating informed investing and risk reduction. Enactment of Fiscal Responsibility and Budget Management Act 2003 , for reducing fiscal deficit.  Developments in Banking sector; ▪ Entry of new private and foreign banks and easing of restrictions of foreign banks. ▪ Reduced Cash Reserve and Statutory Liquidity Requirements. ▪ Measures to improve credit quality and risk management. ▪ Tightening of Prudential Norms and NPA ( Non –Performing Assets) and improved Banking supervision. ▪ Implementation of BASEL 2 norms. ▪ Diversification to various areas like merchant banking , Underwriting , lease financing , venture capital financing , factoring , portfolio management, Mutual Funds etc. Development of pension and Insurance sector for increased finance for long term investment. ▪ Private insurance companies are allowed to enter. ▪ IRDA Act 1999 passed and Insurance Regulatory and Development Authority formed to regulate the insurance market. ▪ Private players are allowed to operate pension funds. Constitution of Pension Fund Development and Regulatory Authority in 2003 to regulate the and develop the Indian Pension Sector. Entrance of Private sector mutual funds. This offers wide range of investment options to Indian investors and efficient mobilisation of public savings. Adoption of Book Building mechanism for pricing of issues. Non –Banking Financial Companies (NBFC) were allowed to operate. Development in financial services sector to improve the welfare and satisfaction of customers with financial innovation and engineering. RECENT DEVELOPMENTS IN INDIAN FINANCIAL SYSTEM ❑ Foreign companies are allowed to raise capital by issuing Indian Depository Receipts. ❑ Establishment of a ‘Commission for legislative reforms’ in financial sector in 2010 and the issue of licenses for establishment of new banks for corporates and existing NBFCs. Two new private banks were given licence in 2014 viz. IDFC Ltd and Bandhan Financial Services Pvt.Ltd. ❑Govt. opened domestic equity market to qualified foreign investors (QFIs). Foreign individual investors can invest in public issues. This will increase overseas capital inflows. ❑The merger of the Forward Market Commission with SEBI ( in Sep. 2015) increased the scope and functions of SEBI as a unified regulator for securities and derivatives. ❑ Establishment of Micro Units Development & Re finance Agency Ltd (MUDRA) – a new institution for development and refinancing activities relating to micro units. The purpose is to provide funding to the non corporate small business sector. ❑ Recently RBI has granted licences to ten Small Finance Banks and eleven Payment Banks. These banks will reach into unbanked areas and underserved sections of the population. Small finance banks can undertake basic banking operations in a limited geographical area. Payment banks can accept deposits and provide payment services , but cannot lend. This is regarded as the biggest banking revolution in India since nationalisation and termed as ‘Banking Revolution 2.0’. ❑ Shift towards Digital economy and digital payments after demonetisation. The demand for digital payment options and mobile payments systems increased tremendously with the govt. support. ❑ Establishment of a Monetary Policy Committee (MPC) with much role for the Government , which is responsible for fixing benchmark interest rates in India. ❑ Introduction of Goods and Service Tax (GST) in 2017 , is the biggest tax reform in India since 1947. CLASSIFICATION OF FINANCIAL MARKETS ▪ The main organised financial markets in India are the money market and the capital market. I. The Capital Market - It is a market for long –term equity and debt instruments. II. The Money Market – It is a market for short – term debt instruments. 1.CAPITAL MARKET o Capital Market is a market for long term capital. o It is a comprehensive term consisting of all the facilities and institutional arrangements for borrowing and lending long term capital. o Business enterprises , government and other organisations raise finance from this market to meet their long term requirements. o The capital is collected through the issue of shares , debentures and other financial instruments. o Initially , shares are issued by a company in the new issue market. These shares are traded in the Secondary market. o Thus , new issue market (Primary Market) and Secondary Market (Stock Exchanges) are two wings of Capital Market. SIGNIFICANCE / FUNCTIONS OF CAPITAL MARKET o Capital Market promotes capital formation and thereby economic growth. o It mobilises savings of the people for investment. o It channelizes the funds to the most productive sector. o It increases production and productivity and enhances economic welfare of the society. o It makes possible the technological upgradation in the industrial sector with the channelized funds. o It helps the corporate sector expand , grow and diversify leading to the growth of the economy. o The borrowers with deficit have funds from lenders with surplus in the capital market. CAPITAL MARKET INSTRUMENTS ❑ The financial instruments through which corporate raise fund can be divided into Ownership instruments/securities and Creditorship instruments/securities. ❑ Ownership securities are equity shares and preference shares which represents ownership in the issuing company. They are also known as ‘Capital Stock’. ❑ Creditorship securities include debentures , bonds etc and the holders of such instruments are the creditors of the issuing company. They are also referred to as ‘Debt Capital’ 1.EQUITY SHARES ❑ Equity shares constitute the ownership capital of a company. ❑ Equity shareholders are the legal owners of a company. ❑ It is an instrument , a contract , which guarantees a residual interest in the assets of an enterprise after deducting all its liabilities , including dividends on preference shares. ❑Equity shares are regarded as the corner stones of the capital structure of a company. They are the source of permanent capital which does not have a maturity date. ❑ As the owners of equity shares , the equity shareholders participate in the management of the company through the elected board of directors and through the voting rights in important decisions. ❑They share the profits and assets in proportion to their holding in the net assets of the company. ❑ Equity shareholders are eligible for the entire balance of profit available after paying dividend to preference shareholders. FORMS OF EQUITY SHARES  A.EQUITY SHARES WITH DETACHABLE WARRANTS ❑ Fully paid up shares can be issued with detachable warrants. ❑Equity shares with detachable warrants are a type of financial instrument that combines two components : 1. Equity Shares : Represent ownership in a company , giving shareholders voting rights and potential dividend payments. 2. Detachable Warrants : Give the holder the right , but not the obligation , to purchase additional equity shares at a predetermined price (strike price) within a specified time frame. ❑Warrants can be separated from the equity shares and traded separately.  B.SHARES WITH DIFFERENTIAL VOTING RIGHTS (SWDVR) ❑ Shares with differential voting rights are shares which ‘carry’ more votes than ordinary shares do. ❑ In India , the SEBI first introduced the concept of DVRs in 2000.However , they are not so popular in India. ❑Tata Motors Ltd. (November 2008) became the first company to issue equity shares with differential voting rights in India  C. NON- VOTING SHARES(NVS) ❑ Non-Voting Shares (NVS) do not carry voting rights. ❑ But the holder of NVS is eligible for higher dividend for sacrificing the voting rights. ❑ Features : 1. No voting rights 2. Typically receive dividend payments 3. Represent ownership in the company 4. May have limited or no control over company operations.  D. SWEAT EQUITY SHARES ❑These are equity shares issued by the company to its employees or directors at a discount or for consideration other than cash as recognition for providing the know-how, Intellectual Property Rights (IPRs) or other value additions to the company. ❑Sweat equity shares refer to shares issued to employees , directors , or founders of a company in recognition of their non-monetary contributions, such as: 1. Intellectual Property 2. Expertise 3. Time and effort 4. Ideas and innovation  2.PREFERENCE SHARES ❑The Companies Act describes preference shares as those which : i. Carry a preferential right to payment of dividend during the life time of the company. ii. Carry a preferential right for repayment of capital in the event of winding up of the company. ❑ Preference shares have the features of equity capital and features of fixed income like debentures. ❑Preference shareholders get priority to dividend. They are paid a fixed dividend before any dividend is declared to the equity holders. ❑Preference shares are non-participatory.This means that the holders of such shares are not entitled for a share in the extra profit earned by the company. ❑Preference shares are given preference in liquidation next to creditors. They have no voting right. TYPES OF PREFERENCE SHARES 1. Redeemable preference shares: These shares are redeemed after a given period. 2. Irredeemable preference shares: These shares are not redeemable except on the liquidation of the company. 3. Convertible preference shares: Such shares can be converted to equity shares at the option of the holder. Hence , these shares are also known as quasi equity shares. 4. Non-convertible preference shares: These preference shares do not carry the right of conversion in to equity shares. 5. Participating preference shares: The holders of these shares are entitled to (1) a fixed rate of dividend , and (2) a share in the surplus profit. 6. Non – participating preference shares: The holders of these shares are entitled to a fixed rate of dividend only and not to share in the surplus profits. 7. Cumulative preference shares: The dividend payable for such shares is fixed. The dividend not paid in a particular year can be cumulated for the next year in this case. 8. Non-cumulative preference shares: In case of non-cumulative preference shares , dividend is not allowed to accumulate. The right to claim dividend will lapse if there is no sufficient profit to pay dividend in a year. 9. Preference shares with warrants: This instrument has a certain number of warrants. The holder such warrants can apply for equity shares at premium. 10. Fully convertible cumulative preference shares(FCCPS): Fully convertible cumulative preference shares are a type of preference share that combines the features of: 1. Cumulative preference shares: Dividends accumulate if not paid 2. Convertible preference shares: Can be converted into ordinary shares. 3.DEBENTURES ❑ Debenture is an instrument under seal , evidencing debt. ❑ It is a debt instrument issued by a company with a promise to pay interest and repay the principal on maturity. ❑ Debenture holders are Creditors of the company. ❑This is necessary as debenture deed would specify the rights of the debenture holders and the obligations of the company. TYPES OF DEBENTURES  1.SECURED DEBENTURES ❑ Debentures which create a charge on the property of the company is a secured debenture. ❑ The charge may be floating or fixed. ❑ The floating charge is not attached to any particular assets of the company. ❑ Fixed charge debentures are those where specific asset or group of assets is pledged as security. 2.UNSECURED DEBENTURES ❑ These are not protected through any charge by any property or assets of the company. ❑ They are also known as naked debentures. ❑ Since they are unsecured , they carry a higher risk for investors compared to secured debentures. ❑ Issued by companies with good creditworthiness. 3.REDEEMABLE DEBENTURES ❑ A redeemable debenture is a type of debenture that can be redeemed or repaid by the issuer (company) at a specified date or after a certain period. ❑ It is a long term debt instrument that offers a fixed rate of interest and a return of principal amount on maturity or redemption. ❑ When the debentures are redeemable , the company has the right to call them before maturity.  4.IRREDEEMABLE DEBENTURES ❑ Irredeemable debentures are a type of debenture that has no maturity date or redemption date. ❑ They are essentially permanent loans to the company , with no obligation to repay the principal amount. ❑Typically issued by companies with strong creditworthiness. ❑Irredeemable debentures are less common than other types of debentures , and their issuance is typically limited to companies with excellent credit rating.  5.CONVERTIBLE DEBENTURES ❑ When an option is given to convert debentures into equity shares after a specified period , they are called convertible debentures. ❑ It combines features of both debt and equity instruments. 6.NON – CONVERTIBLE DEBENTURES ❑ NCDs are a type of debenture that cannot be converted into equity shares of the issuing company. ❑ They are essentially debt instruments that offer a fixed rate of interest and a return of principal amount on maturity. ❑Non-convertible debentures are a popular investment option for those seeking regular income and lower risk , but returns may be lower compared to other investment options. 7.BEARER DEBENTURES ❑ Bearer debentures are a type of debenture that can be transferred without notifying the company. ❑ The debenture is issued in the name of the bearer , and ownership is determined by possession of the debenture certificate. 8.REGISTERED DEBENTURES ❑ In the case of registered debentures the name and address of the holder and date of registration are entered in a book kept by the company. ❑ Registered debentured offer more security and transparency compared to bearer debentures , but may have less flexibility and higher administrative costs. 9.NON-CONVERTIBLE DEBENTURES WITH DETACHABLE EQUITY WARRANTS ❑ NCD-DEW are a type of hybrid instrument that combines a non-convertible debenture with a detachable equity warrant. ❑ The holders of such debentures can buy a specified number of shares from the company at a predetermined price. ❑ The option can be exercised only after a specified period.  4.BONDS ❑ Bonds are debt instruments that are issued by companies/governments to raise funds for financing their capital requirements. ❑ By purchasing a bond, an investor lends money for a fixed period of time at a predetermined interest (coupon) rate. ❑ Bonds have a fixed face value, which is the amount to be returned to the investor upon maturity of the bond. ❑ During this period, the investors receive a regular payment of interest, half-yearly or annually. ❑ Interest is calculated as a certain percentage of the face value and known as "coupon payment”. ❑ Bonds can be issued at par, at discount or at premium. ❑ A bond, whether issued by a government or a corporation, has a specific maturity date, which can range from a few days to 20-30 years or even more. ❑ Both debentures and bonds mean the same. ❑ In India, debentures are issued by corporates and bonds by government or semi-government bodies. ❑ But now, corporates are also issuing bonds which carry comparatively lower interest rates and preference in repayment at the time of winding up, comparing to debentures. Basically there are two types of bonds viz. 1) Government Bonds are fixed income debt instruments issued by the government to finance their capital requirements (fiscal deficit) or development projects. 2) Corporate Bonds are debt securities issued by public or private corporations that need to raise money for working capital or for capital expenditure needs.  A. ZERO COUPON BONDS ❑ Zero Coupon Bonds are issued at a discount to their face value and at the time of maturity, the principal/face value is repaid to the holders. ❑ No interest (coupon) is paid to the holders. ❑ The difference between issue price (discounted price) and redeemable price (face value) itself acts as interest to holders. ❑ These types of bonds are also known as Deep Discount Bonds.  B. MORTGAGE BONDS ❑ This is the common type of bond issued by the corporates. ❑ Mortgage bonds are secured by physical assets of the corporation such as their building or equipment.  C. CONVERTIBLE BONDS ❑ This type of bond allows the bond holder to convert their bonds into shares of stock of the issuing corporation. ❑ Conversion ratio (number of equity shares in lieu of a convertible bond) and the conversion price are pre- specified at the time of bonds issue.  D. STEP-UP BONDS ❑ A bond that pays a lower coupon rate for an initial period which then increases to a higher coupon rate. ❑ Step-up bonds are a type of bond that offers a variable interest rate, which increases (or "steps up") at predetermined intervals. ❑ This feature allows investors to benefit from rising interest rates. E. CALLABLE AND NON-CALLABLE BONDS ❑ If a bond can be called (redeemed) prior to maturity, the bond is said to be callable. ❑A callable bond, also known as a redeemable bond, is a type of bond that gives the issuer the right to redeem the bond before its maturity date. This means that the issuer can "call" the bond back from the investor and repay the principal amount, usually at a predetermined price. ❑ If a bond can not be called prior to maturity, it is said to be non-callable. ❑ Non-callable bonds, also known as non-redeemable bonds, are a type of bond that cannot be redeemed by the issuer before its maturity date. This means that the investor can hold the bond until maturity, receiving regular interest payments and the return of principal.  F. OPTION BONDS ❑ In this type, the investors have the option to choose between cumulative or non-cumulative bonds. ❑In the case of cumulative bonds interest is accumulated and is payable on maturity only. ❑ In non-cumulative type interest is paid periodically. G. BONDS WITH WARRANTS ❑ A warrant allows the holder to buy a number of equity shares at a pre-specified price in future. ❑ Bonds are issued with warrants to make it more attractive.  H. FLOATING RATE BONDS ❑ Floating rate bonds are bonds wherein the interest rate is not fixed and is linked to a benchmark rate. ❑ Floating rate bonds (FRBs) are a type of bond whose interest rate is tied to a benchmark rate, such as LIBOR (London Interbank Offered Rate), and adjusts periodically to reflect changes in the benchmark rate. ❑ LIBOR (London Interbank Offered Rate) is a benchmark interest rate at which major banks lend and borrow money from each other on the international interbank market. ❑ It's a widely used reference rate for various financial instruments  2. MONEY MARKET ❑ Money market is a market for borrowing and lending short term funds. ❑ This is one wing of the financial system dealing in short term financial assets and debt instruments like treasury bills, commercial papers etc. ❑ Banks. Financial Institutions (FIs), Companies etc use these short term debt instruments to meet their short term requirements either by lending or through borrowing. ❑ These instruments can be readily converted into cash without loss. ❑ They are also considered near substitutes of money because of their high liquidity. ❑They are of short term nature extending from few days to few months but less than one year. FEATURES OF MONEY MARKET 1) Money market has no geographical constraints as that of a stock exchange. The financial institutions dealing in monetary assets may be spread over a wide geographical area. 2) It is a wholesale market of short-term debt instruments. 3) It relates to all dealings in money or monetary assets. 4) It is a market purely for short-term funds. 5) It is not a single homogeneous market. There are various sub-markets such as call money market, Bill market, etc. i.e., it is a collection of markets for various instruments. 6) Money market establishes a link between RBI and banks and provides for implementation of monetary policy and liquidity management. 7) No fixed place for conduct of operations, transactions can be conducted even over the phone. 8) Transactions can be conducted with or without the help of brokers. 9) Variety of short-term debt instruments with maturity period less than one year are traded in money market. OBJECTIVES OF MONEY MARKET ❑ A well developed money market serves the following objectives/functions: a) Providing parking place for temporary employment of surplus fund. b) Providing facility to overcome short term deficits. c) Enabling the central bank to influence and regulate liquidity and interest rates in the economy.