Financial Instruments, Markets and

Institutions

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 MEANING OF FINANCIAL
MARKETS
• Financial markets - market where financial
instruments or securities are traded (bought
and sold). Other words, financial markets are
markets where financial securities (direct or
indirect) are traded and their prices (interest
rates) are determined.

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 Features of a full fledged fin mkt
• A full fledged and organised financial market is
characterised by:
• A large number of
players/actors/participants/intermediaries(width)
• Varieties of financial assets/securities (length).
• Securities of small and large value/denomination
are traded in the market to varied needs of
participants in the market (depth).

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 Features of a full fledged fin mkt
• An extensive, intensive and efficient
communication network to facilitate full and
prompt gathering, processing and disseminating
the information.
• Ready and availability of information, low search
costs of information.
• All investors are assumed to rational.
• There are instanteous price discovery and
securities are valued to commensurate the risk-
return features.
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 Background of capital market in TZ
• Capital markets in Tanzania came as a result of
economic and structural reforms of the late 80’s
and early 90’s which involved liberation of the
country’s economy from a planned economy
mainly dominated by inefficient parastatal
enterprises to a free market economy.
• the objective considered was bringing
competition and efficiently in the economy and
encouragement of broader ownership by
Tanzanians in the privatized SOE
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Background of capital market in TZ
• Among the steps taken then were the
enactment of the Banking and Financial
Institution Act of 1991 which liberalized the
banking industry and paved way for separate
co-existence of money and capital markets
under different regulatory regions.

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 Background of Fin market in TZ
• The Bank of Tanzania (BOT) continued to
regulate the money markets where as the
capital markets industry fallen under
regulatory sphere of Capital Markets and
Securities Authority (CMSA) the government
body established by the Capital Markets and
Securities Act of 1994 for this purpose.

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 Background of Fin market in TZ
• Before the end of 1980’s there were no capital
markets institutions and there were only few
Government banks like NBC, THB, TIB but
after the structural reforms and development
of 1991 foreign bank were established
including Standard Chartered. Barclays, City
Bank and Exim Bank.
• Some of the Government banks like NBC and
CRDB were privatized.
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 Background of Fin market in TZ
• In the world of economic liberalization and
globalization, capital markets have
increasingly become an import aspect in
economic development.
• they are markets for long term instruments
with maturity period of more than one year
Example bonds, debentures, stock shares and
collaterals DSE as one of the country’s most
macro economy agency has succeeded in;
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 Success of DSE..
• Creation of efficient mechanisms for economy
Companies can raise funds to finance by
issuing corporate bonds or shares to the
public.
• Mobilization of funds from idle users to
productive users through the former buying of
shares of companies, corporate bond sand
treasury bonds.

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 Success of DSE..
• provision of investment opportunity to
investors with excess resources
• Broadening of corporate ownership
• Promotion of saving culture
• Facilitating privatization and boarder share
ownership of state owned institutions.

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 LT SOURCES OF FINANCE
• The sources of long-term finance refer to the
institutions or agencies from, or through which
finance for a long period can be procured
• in case of sole proprietary concerns and
partnership firms, long-term funds are generally
provided by the owners themselves and by the
retained profits.
• But, in case of companies whose financial
requirement is rather large, the following are
the sources from, or through which long-term
funds are raised DR.Kembo Bwana
 LT SOURCES OF FINANCE
• Capital Market
• Special Financial Institutions
• Mutual Funds
• Leasing Companies
• Foreign Sources
• Retained Earnings

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 Summary of Classification of Financial
Markets

• Classification by nature of claim.

– Debt market; Equity market
• Classification by maturity of claim.
– Money market; Capital market
• Classification by seasoning of claim.
– Primary market; Secondary market
• Classification by immediate delivery or future
delivery
– Cash or spot market; Derivative market
• Classification by organizational structure
– Auction market; Over-the-counter market; Intermediated market

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Financial Instruments and Markets
• Primary Markets
– Market for issuing a new security and distributing to
saver-lenders.
– Investment Banks—Information and marketing specialists
for newly issued securities.
• Secondary Markets
– Market where existing securities can be exchanged
• New York Stock Exchange
• American Stock Exchange
• Over-the-counter (OTC) markets

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 Bonds Represent Borrowing
• Agreement by issuer to pay interest on specified
dates and redeem the bond upon maturity.
• Consol
– Bond with no maturity date, pay interest forever
• Coupon Securities
– Make interest payments – usually semiannually.
• Zero-coupon
– Make no interest payments.
– Sold at price well below face value.
• Tax Exempt
– Interest earned is not taxed.

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 Stock Represents Ownership

• Stockholders
– Owns part of the corporation and receives
dividends from the issuer.
• Capital Gains
– Difference between price initially paid and
amount received when stock is sold.

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 Types of Corporate Stock
• Preferred Stock
– Fixed dividends, priority over common stock
• Common Stock
– Variable dividends, based on company’s profits.
• Convertible
– Preferred stock that can be converted into
common stock at a stated price

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• Both stocks and bonds represent a claim to a
stream of payments in the future.
– Bonds—Interest payment and face value at
maturity
– Stocks—Dividends and sales price when sold

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 Mortgages
• Debt incurred in order to buy land or building
• Amortized—principal and interest is gradually repaid
over the life of loan
• Fixed Rate—Rate of interest is fixed
• Variable-Rate—Rate of interest varies depending on
financial environment
• Cash flow for lender is uncertain
– Interest payments may vary - variable rate mortgages
– Home owner may prepay
– Refinance a fixed mortgage if interest rates decline

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 Mortgages
• Securitization—Individual mortgages may be
“pooled” and sold as a unit to reduce
uncertainty.
• Mortgages may be insured by government
agencies

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 Options and Futures Contracts
• Contractual agreement between two parties to
exchange an asset in the future at a stated price
• Derivative financial instruments
– Derive value from underlying assets
• Long
– Buyer of the contract, receive commodity in the future
• Short
– Seller of the contract, provide commodity in the future
• Speculators
– Gamble on price fluctuations and hope to profit
• Hedgers
– Eliminate the risk of price fluctuations
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 The Capital Market
• Exchange of long-term securities—in excess of one
year
• Generally used to secure long-term financing for
capital investment
– Stock market—Largest part of capital market and held by
private and institutional investors
– Corporate bond market—Held by insurance companies,
pension and retirement funds
– Local and state government bonds—Primarily held for
tax-exempt feature
– Government securities—Held by commercial banks, the
Fed, individual Americans/foreigners, and dealers

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 The Money Market
• Exchange of short-term instruments—less than one year
• Highly liquid, minimal risk
• Use of a temporary surplus of funds by banks or businesses
– Treasury bills—short-term debts of US government
– Certificates of Deposits—liabilities of issuing bank, interest bearing to
corporations that hold them
– Commercial paper—short-term liabilities of prime business firms and
finance companies

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 Role of Financial Intermediaries
• Act as agents in transferring funds from savers-
lenders to borrowers-spenders.
• Acquire funds by issuing their liabilities to public and
use money to purchase financial assets
– Earn profits on difference between interest paid and
earned
– Diversify portfolios and minimize risk
– Lower transaction costs
– Competition lowers interest rates—beneficial to economic
growth

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 Economic Functions of Financial
Markets
• Interactions of buyers and sellers determines
price.
– Price discovery process.
• Provides a mechanism to sell.
– Liquidity.
• Reduces transactions costs.
– Search costs.
– Information costs.

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 Commercial Banks
• Most prominent financial institution
• Range in size from huge to small (local banks)
• Major sources of funds
– used to be demand deposits of public
– now rely more on “other liabilities”
– also accept savings and time deposits
• Uses of funds
– short-term government securities
– long-term business loans
– home mortgages

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 Life Insurance Companies
• Insure against death
• Receive funds in form of premiums
• Use of funds is based on mortality statistics—
predict when funds will be needed
• Invest in long-term securities—high yield
– Long-term corporate bonds
– Long-term commercial mortgages

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 Pension and Retirement Funds
• Concerned with long run
• Receive funds from working individuals
building
• Accurate prediction of future use of
funds
• Invest mainly in long-term corporate
bonds and high-grade stock

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 Mutual Funds
• Stock or bond market related institutions
• Pool funds from many people
• Invest in wide variety of securities—
minimize risk

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 Money Market Mutual Funds
• Individuals purchase shares in the fund
• Fund invests in highly liquid short-term money
market instruments
– Large-size negotiable CD’s
– Treasury bills
– High-grade commercial paper

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 Savings and Loan Associations (S&L’s)
• Traditionally acquired funds through savings deposits
• Used funds to make home mortgage loans
• Now perform same functions as commercial banks
– issue checking accounts
– make consumer and business loans

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 Commercial and Consumer Finance
Companies

• Acquire funds primarily by selling short term

loans (commercial paper)
• Lend money for consumer purchases or
business firms to finance inventories

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 Property and Casualty Insurance
Companies
• Insure homeowners and businesses against losses
• Receive premiums
• Need to be fairly liquid due to uncertainty of claims
• Purchase a variety of securities
– high-grade stocks and bonds
– short-term money market instruments for liquidity

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 Credit Unions
• Organized as cooperatives for people with
common interest

• Members buy shares [deposits] and can

borrow
– checking [share] accounts

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 THANK YOU

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