Financial Markets - Primary, Secondary, Debt, Equity, Call Money

Structure of the Financial Markets

· Debt and Equity Market
-- A firm or individual can obtain funds in financial markets in two ways; issue of bonds or issue of equities.
· Bonds: A contractual agreement by the borrower of the fund to pay the holder of the instrument fixed amount at regular interval (int. payments and principal) until a specified time (maturity period).
· Equity: Claims to the share in the net income (income after expenses and taxes) and the assets of a business.

· Primary and Secondary Market
· A primary market is a financial market in which new issues of a security such as bond or stocks are sold to initial buyers by the corporations or Government.
· Secondary markets deals with securities that previously issued. These securities are resold in these markets.
· Exchanges and Over-the-Counter Markets
· Secondary markets can be organized in two ways; one is to organize exchanges, where the buyers and sellers or their agents or brokers meet at central location to conduct trades. - BSE
· The other method of organizing a secondary market is to have an over-the-counter(OTC) market, in which dealers at different locations who have inventory of securities stand ready to buy and sale securities over the counter – local stock exchanges.
· Money and Capital Markets:
· MM: Money market is a financial market in which only short-term debt instruments are traded. Generally, those instruments are maturity less than one year.
· Money market securities are usually less fluctuating. Corporations use money market instruments to earn money.
· Money market is a market for very short term
· CM: Capital market is the market in which longer term debt and equity instruments are traded(maturity greater than one year).
· Capital market instruments are generally held by financial intermediaries, insurance companies and pension funds.

Segments of Money Market:
· Call Money Market
· Acceptance Market
· Bill discount Market
· Collateral loan market.

· Call money market deals in loans at call and short notices.
· Deals with extreme form of short term loans; 24 hours, 7-15 days maturity.
· They can be recalled on demand or shortest possible notice.
· Call Money Rate is the interest rate at which money is lended in the market.
· Normally, collaterals are not insisted upon.
· In India, CMM provides facilities for inter-bank tending.

Types of Credit Market Instruments

Simple loans:
Lender provides the borrower with an amount of funds, which must be repaid to the lender at the maturity date along with an additional payment for the interest.
Fixed Payment Loans:
Lender provides the borrower with an amount of funds, which must be repaid by making the same payments every year/month, consisting of part of principal and interest for a set number of years.

Coupon Bond:
Coupon bond pays the owner of the bond a fixed interest payment (coupon payment) every year until the maturity date, when a specified final amount (face/par value) is repaid.
Discount Bond:
It is also called zero coupon bond. It is bought at a price below its face value (at a discount) and the face value is repaid at the maturity date.