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Summary
Economics Class 32

MONEY MARKET INSTRUMENTS- 5:00 PM

  • Certificate of deposit (CDs)-
  • It is issued by scheduled commercial banks and selected financial institutions that are permitted by RBI.
  • The maturity period is more than 7 days and less than one year.
  • All individual residents in India can invest in CDs.
  • RBI has increased the minimum denomination in CDs to five lakhs and multiples of five lakhs.
  • CDs can be issued in dematerialized form only.
  • Commercial bills- 
  • These are negotiable instruments drawn by the seller or buyer of goods on the value of goods delivered.
  • Trade bills become commercial bills when they are accepted by commercial banks.
  • The maximum allowed period is 90 days and these bills are first discounted by commercial banks and then rediscounted by RBI.
  • Call money -
  • It is also part of the money market where banks borrow among themselves (inter-bank borrowings) for a short-term period.

TYPES OF BONDS - 5:40 PM

  • Zero-Coupon Bonds-
  • A coupon bond pays interest to bondholders over the life of the bond and repays the principle at the time of maturity.
  • But a zero coupon bond does not pay interest, the face value of the bond is received by the bondholder after it reaches maturity.
  • Masala Bonds-
  • Rupee-denominated bonds issued in other countries before the introduction of masala bonds companies and financial institutions borrowed through issuing bonds in the overseas market like Singapore, the US, the UK, etc. 
  • The depreciation of the Rupee led to an increase in the cost of capital and this has exposed Indian borrowers to foreign currency exchange risk.
  • Masala bonds help in reducing currency-related risks.
  • The first masala bond was issued by an international finance corporation in 2014 to fund infrastructure projects in India.
  • Inflation index bonds-
  • It provides constant return irrespective of the level of inflation and protects the investor against macroeconomic risk.
  • Initially, IIBs were issued in the name of capital index bonds in 1997.
  • The CIBS provided inflation protection only to the principal amount and not to the interest payment.
  • However, IIB provides inflation protection to both principal and interest payments.
  • FCCB- Foreign currency convertible bonds 
  • It is a bond issued by an Indian company in foreign currency and subscribed by a Non- resident in foreign currency and convertible into ordinary shares of the issuing company either in whole or part.
  • FCCBs represent the debt obligation of the corporate, investors have the option ot redeem or convert them into underlying local shares or global depository receipts.
  • If investors prefer to hold the FCCBs until the redemption date, the corporate has to redeem the FCCBs on the redemption date.
  • Dilution would take place when debt is converted into equity.
  • Since these bonds are convertible into equity shares over a period of time as provided in the instrument.
  • Therefore they are covered under the FDI policy and counted towards FDI.
  • If they are redeemed they count as ECB and a debt obligation, only on converting into equity it is counted towards FDI.
  • Negative yield bonds-
  • A negative bond yield is when an investor receives less money at the maturity of the bond than the original purchase price of the bond.
  • They are used by the central bank during times of stress and uncertainty as investors try to protect their capital from significant erosion.

CAPITAL MARKET- 6:15 PM

  • Share-
  • The capital of a company is divided into shares and each share forms a unit of ownership of the company.
  • Shares are offered to raise capital for the company 
  • Shares can be divided into two broad categories -
  • Equity shareholders-
  • They have voting rights in the annual general meetings of the company.
  • The shareholders have a share in the profit and also bear losses incurred by the company.
  • Equity shareholders do not have assured dividends.
  • Preference share-
  • They received a fixed amount of dividend and they do not have voting rights.
  • Preferential shareholders are given preference over the equity shareholders during the settlement of the company.
  • Debentures-
  • These are debt instruments with a fixed rate of interest and the debentures issued by the company are generally unsecured (unsecured load).
  • Debenture holders do not have voting rights, unlike equity shareholders.
  • Convertible debentures-
  • They can be converted into shares after a particular period of time.
  • Non-convertible debentures-
  • They cannot be converted into shares.

DERIVATIVES- 6:45 PM

  • Derivative-  
  • It is a financial instrument whose value is derived from one or more underline assets or securities.
  • The underline assets could be shares, bonds, currencies, or commodities like gold, silver, sugar, etc. 
  • In a derivative market, contracts are made to buy or sell a commodity or security at a predetermined rate and date in the future.
  • Derivative trading refers to transactions of the forward market.
  • A derivative itself is a contract between two or more parties and helps in protecting parties from price fluctuation and uncertainty.
  • Derivatives can be traded over the counter or at an exchange.

FORWARDS- 7:39 PM

  • These are bilateral contracts to buy/sell a commodity or security at a predetermined rate or date in the future.
  • These are not traded in exchanges.
  • Ex- Selling of onion by a farmer after three months and buying by ITC at a predetermined rate of Rs 10/kg.
  • In this contract farming agreement, there is a guaranteed market for farmers along with price hedging, easy credit facility, reduction in intermediaries, and also an increase in quality and productivity.
  • Futures- 
  • It is similar to forwards but not bilateral (biding through exchanges like MCX).
  • The future is exchange-traded standardized commodities to buy/sell. 
  • Futures are trades in commodity exchanges like MCX and national commodity and derivative exchanges.
  • Option-
  • These are exchange-traded contracts under which an investor purchases an option (right to buy or sell but not obligated to buy or sell a commodity)  or security at a predetermined rate and date in the future.
  • Put- Right to sell but not obligated to sell.
  • Call- Right to buy but not obligated to buy.

The topic for the next class- continuation of the topic Capital market