CAPITAL MARKET

INSTRUMENTS
 FINANCIAL MARKET
 MONEY MARKET
 Where short-term instruments with a maturity not
exceeding one year are traded.

 CAPITAL MARKET
 It is the market for trading long-term securities and
primary purpose is to direct flow of savings of
people and business into long-term investments.
 Features of Capital Market
 Location
 Securities
 Control
 Participants
 Foreign investors
 Functions of Capital Market
 Funds allocation
 Liquidity
 Fair prices of assets
 Financial engineering
 Stock Market
 Primary Market
 Secondary Market
 OTC (Over The Counter)
 Time Value of Money
 Intrinsic Value

Concept of Present Value

After 2 Years
 Valuation of Stock
 One year Holding period
P0 = D1 P1
(1+k)1 (1+k)1
 P0= Present Value of stock
 D1 = Dividend expected after a year
 P1 = Selling price expected after a year
 K = Rate of return required by the Investor
 Multiple year Holding period
P0 = D1 D2 D3 ….. Dn+Pn
(1+k)1 (1+k)2 (1+k)3 (1+k)n

Where;
 D1, D2, D3,…. Dn= annual dividends to be received
each year
 P = Sale price at the end of holding period
n
 K= Investor’s required rate of return
 n = Holding period in years
 Methods
1. Zero growth model = D
r
2. Constant growth model (Gordon’s share valuation
model)
D1 = D0 (1+g)1

D2 = D0 (1+g)2
D3 = D0 (1+g)3
Dn = D0 (1+g)n

P0 = D1 or D0 (1+g)
 Multiple Growth Model/Differential Growth
P0=V1+V2

V1= D0(1+g1)t
(1+r)t

V2= Dn+1/(r-g2)
(1+r)n
 Bonds and Debentures
 A bond is a debt instrument issued by
government, corporations and other entities.

 Can be defined as., A Bond is a (written and

signed promise) debt instrument in which an
investor loans money to an entity (typically
corporate or Govt.,) which borrows the funds
for a defined period of time at a valuable or
fixed interest rate (coupon rate)
 Features
 Principal/Nominal/Par/face-value
 Maturity
 Coupon/Interest
 Credit quality
 Types
 Government bonds

 Municipal bonds

 Corporate bonds
 Valuation
 Zero coupon bonds

PV = F
(1+r) T
 Coupon bonds

PV = C+ C +……….+ C+ F
1+r (1+r)2 (1+r)T (1+r)T
 Perpetual bonds
PV = C
r
 Yield – To – Maturity
 YTM= r1+NPV@r1 *[r2-r1]
[GPV@r1]-[GPV@r2]
 ADRs
 American Depository Receipts
 An American depositary receipt (ADR) is
a negotiable certificate issued by a U.S. depositary
bank representing a specified number of shares—
often one share—of a foreign company's stock. The
ADR trades on U.S. stock markets as any domestic
shares would.
 US (ADR)/
INDIA OTHER COUNTRIES (GDR

Depository
equities receipts

money money

CUSTODIAN BANK
IN US (ADR)/
OTHER COUNTRIES (GDR)

Depository Receipts
 Types
 Unsponsored ADRs

 Sponsored Level I ADRs (OTC facility)

 Sponsored Level II ADRs (Listing facility)

 Sponsored Level III ADRs (offering facility)

 Pros. & Cons.
 Pros.
 Foreign Diversification
 US reporting standards
 Denomination in US dollars
 Lower costs
 Dividend reinvestment
 Cons.
 Lack of diversification
 Foreign market risks
 GDRs
 Global Depository Receipts
 Global Depository Receipt (GDR) is an instrument in
which a company located in domestic country issues
one or more of its shares or
convertibles bonds outside the domestic country. In
GDR, an overseas depository bank i.e. bank outside
the domestic territory of a company, issues shares of
the company to residents outside the domestic
territory. Such shares are in the form of depository
receipt or certificate created by overseas the
depository bank.
 IDR
 Pre issue paid up capital

 Continuous trading record

 Track record of profits

 Shouldn’t have any legal issues

 Advantages to Companies
 Depository receipts are cheaper and more convenient than
trading in foreign markets. There’s no need for foreign
currency or having to deal with exchange rates.
 They allow investors to diversify their portfolios. It gives
investors access to companies in different markets and
economies.
 It gives them exposure to global markets and a bigger pool
of investors.
 A lot of people don’t want to trade OTC stocks because
they’re so sketchy. That’s exactly why I like them. Because
the big Wall Street players don’t trade them. I don’t have
to compete against hedge funds and algorithms.
 ETFs (Exchange Traded Funds)
 Pool of different kinds of securities.

 An exchange traded fund (ETF) is a type of

security that tracks an index, sector, commodity,
or other asset, but which can be purchased or sold
on a stock exchange the same as a regular stock.
An ETF can be structured to track anything from
the price of an individual commodity to a large
and diverse collection of securities. ETFs can even
be structured to track specific investment
strategies.
 Pros.
 Access to many stocks across various industries
 Low expense ratios and fewer broker commissions.
 Risk management through diversification
 ETFs exist that focus on targeted industries

 Cons.
 Actively-managed ETFs have higher fees
 Single industry focus ETFs limit diversification
 Lack of liquidity hinders transactions