PROJECT REPORT

ON

Money and Capital Market

Submitted By:

Tanveer Ahmad
Exam# 394
MBA (B/F) Final

Submitted To:

Prof: Sir M. Yasir

Deptt: of Business Administration

Gomal University
Dera Ismail Khan
 Table Of Contents

S.N
Title Page #
o
1 Introduction 1

2 What is it? 1

3 Treasury Bills (T Bills) 2

4 Certificates of Deposit (CD) 3

5 Commercial Paper 4

6 Banker’s Acceptance 4

7 Repose 5

8 Conclusion 5

9 Features of Money Market 6

10 Dhaka 2009 Summit 9

11 Current Members 10

12 Observers 10

13 Future Membership 11

14 Secretaries General 12

15 List Of SAARC Summits 13

16 SAARC Preferential Trading Arrangement 14

17 South Asian Free Trade Area 15

18 End Notes 16-17

 Money Market

Introduction

Whenever a bear market comes along, investors realize (yet again!) that the
stock market is a risky place for their savings. It's a fact we tend to forget while
enjoying the returns of a bull market! Unfortunately, this is part of the risk-return
tradeoff. To get higher returns, you have to take on a higher level of risk. For
many investors, a volatile market is too much to stomach - the money market
offers an alternative to these higher-risk investments.

The money market is better known as a place for large institutions and
government to manage their short-term cash needs. However, individual
investors have access to the market through a variety of different securities. In
this tutorial, we'll cover various types of money market securities and how they
can work in your portfolio.

What Is It actually?

The money market is a subsection of the fixed income market. We generally

think of the term fixed income as being synonymous to bonds. In reality, a bond
is just one type of fixed income security. The difference between the money
market and the bond market is that the money market specializes in very short-
term debt securities (debt that matures in less than one year). Money market
investments are also called cash investments because of their short maturities.

Money market securities are essentially IOUs issued by governments, financial

institutions and large corporations. These instruments are very liquid and
considered extraordinarily safe. Because they are extremely conservative,
money market securities offer significantly lower returns than most other
securities.

One of the main differences between the money market and the stock market is
that most money market securities trade in very high denominations. This limits
access for the individual investor. Furthermore, the money market is a dealer
market, which means that firms buy and sell securities in their own accounts, at
their own risk. Compare this to the stock market where a broker receives
commission to acts as an agent, while the investor takes the risk of holding the
stock. Another characteristic of a dealer market is the lack of a central trading
floor or exchange. Deals are transacted over the phone or through electronic
systems.

The easiest way for us to gain access to the money market is with a money
market mutual funds, or sometimes through a money market bank account.
These accounts and funds pool together the assets of thousands of investors in
order to buy the money market securities on their behalf. However, some money
market instruments, like Treasury bills, may be purchased directly. Failing that,
they can be acquired through other large financial institutions with direct access
to these markets.

There are several different instruments in the money market, offering different
returns and different risks. In the following sections, we'll take a look at the major
money market instruments.

Treasury Bills (T-Bills)

These are the most marketable money market security. Their

popularity is mainly due to their simplicity. Essentially, T-bills are a way for the
U.S. government to raise money from the public. In this tutorial, we are referring
to T-bills issued by the U.S. government, but many other governments issue T-
bills in a similar fashion.

T-bills are short-term securities that mature in one year or less from their issue
date. They are issued with three-month, six-month and one-year maturities. T-
bills are purchased for a price that is less than their par (face) value; when they
mature, the government pays the holder the full par value. Effectively, your
interest is the difference between the purchase price of the security and what you
get at maturity. For example, if you bought a 90-day T-bill at $9,800 and held it
until maturity, you would earn $200 on your investment. This differs from coupon
bonds, which pay interest semi-annually.

Treasury bills (as well as notes and bonds) are issued through a competitive
bidding process at auctions. If you want to buy a T-bill, you submit a bid that is
prepared either non-competitively or competitively. In non-competitive bidding,
you'll receive the full amount of the security you want at the return determined at
the auction. With competitive bidding, you have to specify the return that you
would like to receive. If the return you specify is too high, you might not receive
any securities, or just a portion of what you bid for.

The biggest reasons that T-Bills are so popular is that they are one of the few
money market instruments that are affordable to the individual investors. Other
positives are that T-bills (and all Treasuries) are considered to be the safest
investments in the world because the U.S. government backs them. In fact, they
are considered risk-free. Furthermore, they are exempt from state and local
taxes.

The only downside to T-bills is that you won't get a great return because
Treasuries are exceptionally safe. Corporate bonds, certificates of deposit and
money market funds will often give higher rates of interest. What's more, you
might not get back all of your investment if you cash out before the maturity date.
Certificate Of Deposit (CD)

A certificate of deposit (CD) is a time deposit with a bank. CDs are generally
issued by commercial banks but they can be bought through brokerages. They
bear a specific maturity date (from three months to five years), a specified
interest rate, and can be issued in any denomination, much like bonds. Like all
time deposits, the funds may not be withdrawn on demand like those in a
checking account.

CDs offer a slightly higher yield than T-Bills because of the slightly higher default
risk for a bank but, overall, the likelihood that a large bank will go broke is pretty
slim. Of course, the amount of interest you earn depends on a number of other

factors such as the current interest rate environment, how much money you
invest, the length of time and the particular bank you choose. While nearly every
bank offers CDs, the rates are rarely competitive, so it's important to shop
around.

A fundamental concept to understand when buying a CD is the difference

between annual percentage yield (APY) and annual percentage rate (APR). APY
is the total amount of interest you earn in one year, taking compound interest into
account. APR is simply the stated interest you earn in one year, without
taking compounding into account.

The difference results from when interest is paid. The more frequently interest is
calculated, the greater the yield will be. When an investment pays interest
annually, its rate and yield are the same. But when interest is paid more
frequently, the yield gets higher. For example, say you purchase a one-year,
$1,000 CD that pays 5% semi-annually. After six months, you'll receive an
interest payment of $25 ($1,000 x 5 % x .5 years). Here's where the magic of
compounding starts. The $25 payment starts earning interest of its own, which
over the next six months amounts to $ 0.625 ($25 x 5% x .5 years). As a result,
the rate on the CD is 5%, but its yield is 5.06. It may not sound like a lot, but
compounding adds up over time.

The main advantage of CDs is their relative safety and the ability to know your
return ahead of time. You'll generally earn more than in a savings account, and
you won't be at the mercy of the stock market. Plus, in the U.S. the Federal
Deposit Insurance Corporation guarantees your investment up to $100,000.
Despite the benefits, there are two main disadvantages to CDs. First of all, the
returns are paltry compared to many other investments. Furthermore, your
money is tied up for the length of the CD and you won't be able to get it
out without paying a harsh penalty.
Commercial Paper

Commercial paper is an unsecured, short-term loan issued by a corporation,

typically for financing accounts receivable and inventories. It is usually issued at
a discount, reflecting current market interest rates. Maturities on commercial
paper are usually no longer than nine months, with maturities of between one
and two months being the average.

For the most part, commercial paper is a very safe investment because the
financial situation of a company can easily be predicted over a few months.
Furthermore, typically only companies with high credit ratings and credit
worthiness issue commercial paper. Over the past 40 years, there have only
been a handful of cases where corporations have defaulted on their commercial
paper repayment.

Commercial paper is usually issued in denominations of $100,000 or more.

Therefore, smaller investors can only invest in commercial paper indirectly
through money market funds.

Bankers' Acceptance

A bankers' acceptance (BA) is a short-term credit investment created by a non-

financial firm and guaranteed by a bank to make payment. Acceptances are
traded at discounts from face value in the secondary market.

For corporations, a BA acts as a negotiable time draft for financing imports,

exports or other transactions in goods. This is especially useful when the
creditworthiness of a foreign trade partner is unknown.

Acceptances sell at a discount from the face value:

Face Value of Banker's Acceptance $1,000,000

Minus 2% Per Annum Commission for One Year -$20,000
Amount Received by Exporter in One Year $980,000

Repos

Repo is short for repurchase agreement. Those who deal in government

securities use repos as a form of overnight borrowing. A dealer or other holder of
government securities (usually T-bills) sells the securities to a lender and agrees
to repurchase them at an agreed future date at an agreed price. They are usually
very short-term, from overnight to 30 days or more. This short-term maturity and
government backing means repos provide lenders with extremely low risk.

Repos are popular because they can virtually eliminate credit problems.
 There are also variations on standard repos:

Reverse Repo - The reverse repo is the complete opposite of a repo. In

this case, a dealer buys government securities from an investor and then
sells them back at a later date for a higher price

Term Repo - exactly the same as a repo except the term of the loan is greater
than 30 days.

Conclusion
We hope this tutorial has given you an idea of the securities in the money
market. It's not exactly a sexy topic, but definitely worth knowing about, as there
are times when even the most ambitious investor puts cash on the sidelines.

Features Of Money Market

 The money market specializes in debt securities that mature in less

than one year.
 Money market securities are very liquid, and are considered very safe.
 As a result, they offer a lower return than other securities.
 The easiest way for individuals to gain access to the money market is
through a money market mutual fund.
 T-bills are short-term government securities that mature in one year or
less from their issue date.
 T-bills are considered to be one of the safest investments – they don't
provide a great return.
 A certificate of deposit (CD) is a time deposit with a bank.
 Annual percentage yield (APY) takes into account compound interest,
annual percentage rate (APR) does not.
 CDs are safe, but the returns aren't great, and your money is tied up for
the length of the CD.
 Commercial paper is an unsecured, short-term loan issued by a
corporation. Returns are higher than T-bills because of the higher
default risk.
 Banker's acceptances (BA)are negotiable time draft for financing
transactions in goods.
 BAs are used frequently in international trade and are generally only
available to individuals through money market funds.
 Repurchase agreements (repos) are a form of overnight borrowing backed
by government securities.
What are Capital Markets?
Capital markets are like any other markets, but differ in terms of the products
traded and their organization. Capital markets deal with the trading of
Securities. Capital markets provide a venue where companies can raise funds
To expand on their businesses or establish new ones by issuing securities
Owned by the companies. Like businesses in the private sector, Government
Issue its securities to raise funds in capital markets to build electricity, damn,
Construct new roads, bridges by issues.

What are Securities?

Securities are financial instruments or legal documents signifying either an

Ownership position in a company (i.e. shares) or a creditor relationship with a
Company or government (i.e. Stocks and bonds).

What are Stocks, Bonds and Shares?

Stocks and bonds are long-term fixed interest bearing securities issued by
Government and companies. When one invests in stocks and bonds, one
Gets interest income, which is paid periodically until the loan matures or is
Called back by the issuer. The holder of stocks and bonds gets interest even if
The issuer does not make a profit.

Shares represent part-ownership in a business concern. Shareholders,

therefore, between them own the company, have a vote in how it's affairs
are run and if the company makes profit, they are entitled to a share of it.
However, the dividend which share holders receive is dependent on the
company's profitability and management decisions such as company shares,
bonds issued by governments in private companies, units In Collective
Investment Schemes, debentures, commercial paper and notes.
How are shares bought and sold?

Shares can be bought either from the primary or secondary market.

Primary Market refers to the purchase of shares in an Initial Public Offering
(IPO), where by a company offers its shares to members of the public for the
First time. During an IPO, shares are bought through the selling agents or
Banks of the company issuing the shares. In the secondary market, the
purchase and sale of shares is done through the Stock Exchange.

What Is A Stock Exchange

The Stock Exchange is one of the institutions in the Capital markets. It is an

Organized market in securities (shares, stocks and bonds).On this market,
Individuals and companies can buy shares of companies through Licensed
Dealing Member(Stockbrokers)of the Stock Exchange and hence become
part-owners or shareholders of these companies. Similarly, individuals or
companies through Stock brokers can buy stocks and bonds of other
companies and the Government, and become lenders to or creditors of
these companies or the Government.

Any individual or company who at one time or the other lent money or
Bought shares through the Stock Exchange can also sell back the relevant
Shares or stocks through the stock Exchange at anytime.

The Stock Exchange has its rules and regulations which govern it. These rules
And regulations are designed to protect all market participants, including the
Individual who puts up some funds to invest.

Are there any other Schemes available in Capital Markets?

Yes, Collective Investment Schemes (CIS) such as Mutual Funds or Unit Trusts.
These are form a listed system of Community Savings Schemes otherwise
known
As Osusu. The CIS allows individuals to make periodic contributions of various
amounts.

What Is A Unit Trust Scheme?

It is a vehicle established to enable many small investors pool their funds

Together and enjoy the benefits of diversification and professional
Management at low cost without impairing the liquidity and safety of the
investment. In some jurisdictions it is called Mutual Fund.

What is Community Savings Scheme?

Community Savings Schemes otherwise known as Osusu is the in-formal way

Of capital formation by traders or other individuals by making periodic
Contributions of various amounts. These schemes are used by low income
Earners to acquire assets, initial capital for petty trading, etc. However some
 People have lost their meager savings in these schemes as some of the
Collectors vanish after collecting the money of their victims.

The Osusu schemes will therefore stand to benefit from the development of a
Capital market which will provide the enabling environment for the effective
And secure operation of the schemes which are registered with recognized
Regulatory body, like the Bank of Sierra Leone.

What Are The Benefits To Be Gained By A Formalized Community Savings

Scheme?

 The business will be recognized by Government

 Access to free investment and financial advice
 Opportunity to participate in capital market operations
 Builds confidence and attracts more contributors.

What Does The Saver Stand To Gain By Saving With A Registered Collector?

 Savings will be more secured by maintaining proper records by the collectors.

 A saver will be assisted in locating his collector should he abscond
 A saver will have a wider choice of collector
What Are The Potential Advantages Of Investing In Collective Investment
Schemes?

There are many advantages for investing in Collective Investment Schemes.

Diversification
Investing in a number of different securities helps reduce the risk of investing.
When the investor buys a share/unit in a fund, he/she buys an interest in a
Portfolio of dozens of different securities, giving him/her instant diversification,
At least within the type of securities held by the fund. For example, a portfolio
Made up of shares from various companies is a good example of
diversification.

Affordability

With many funds, the investor can begin buying shares/units with a relatively
Small amount of money .Some funds allow investors to buy more shares on a
regular basis with even smaller Monthly installments.

Professional Management
Mutual funds/Unit trusts are managed by professionals who are experienced
In investing money and who have the skills and resources to research many
Different investment opportunities. Investors in these funds, therefore, get
Access to the professional management of their funds.

Liquidity
Shares of CIS can be redeemed at any time.

Flexibility

Many fund management companies administer several different funds.(e.g.

Money market, fixed-income, growth, balanced and international funds) and
Allow the investor to switch between funds within their‘fund family’ at little or
No charge. This can enable the investor change the balance of his portfolio
As his personal needs or market conditions change.

Performance Monitoring
The bid and offer prices of CIS are reported in the press and on many internet
Sites as obtains in other markets, allowing the investor to continually monitor
The performance of his/her invest
What role do capital markets play in an economy?
Capital markets have an important role to play in stimulating economic
development. The following are some of the examples:

Capital markets help mobilize domestic savings, hence facilitating the

Real location of financial resources from dormant to more productive
activities.

Capital markets provide an avenue for the divestiture of State Owned

Enterprises(SOEs),where by shares in these companies may be sold
Through the Stock exchange, allowing members of the public to
Participate in the ownership of these companies. The privatization of
SOEs through a stock exchange helps to broaden the asset base by
Providing a means through which ordinary citizens can acquire a share
In the country’s assets.

Companies have the opportunity to raise long-term finance through

Equity and debt financing (issuing shares and bonds respectively).

Members of the public are given an opportunity to buy shares or bonds

Providing them with an alternative method of investing their savings.

Capital raised through the issue of shares, bonds or other instruments

Can be invested by the company to expand production, invest in more
Efficient productive processes and improve competitiveness.

How do companies benefit from capital markets?

A share issue allows companies to increase the equity base of the company
And raise capital without bearing the burden of interest payments associated
With borrowed funds.

Full disclosure requirements encourage companies to observe good business

And management practices and ensure better corporate governance,
Benefiting not just the firm but the economy as a whole.

The public profile of the company is improved thus attracting greater business
opportunities.

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