NAME: LAGUDA SOLOMON

LEVEL: 100L

ADMINISTRATION: FAMS

DEPARTMENT: BANKING AND FINANCE

MATRIC NO: AMS/19/20/0417

TOPIC: ASSIGNMENT

1.) DIFFERENCES BETWEEN MONEY MARKET

AND CAPITAL MARKET

2.) List the various instrument traded in

The money market and capital market

With the aid of diagram

A.) Money market

Instruments of the Money Market

Promissory Note:

A promissory note is one of the earliest type of bills. It is a financial instrument with a written promise by
one party, to pay to another party, a definite sum of money by demand or at a specified future date,
although it falls in due for payment after 90 days within three days of grace. However, Promissory notes
are usually not used in the business, but USA is an exception.

Bills of exchange or commercial bills

The bills of exchange can be compared to the promissory note; besides it is drawn by the creditor and is
accepted by the bank of the debater. The bill of exchange can be discounted by the creditor with a bank or
a broker. Additionally, there is a foreign bill of exchange which becomes due for payment from the date
of acceptance. However, the remaining procedure is the same for the internal bills of exchange.

Treasury Bills (T-Bills)

The Treasury bills are issued by the Central Government and known to be one of the safest money market
instruments available. Besides, they carry zero risk, so the returns are not attractive. Also, they come with
different maturity periods like 1 year, 6 months or 3 months and are also circulated by primary and
secondary markets. The central government issues them at a lesser price than their face-value.

The difference of maturity value of the instrument and the buying price of the bill, which is decided with
the help of bidding done via auctions, is basically the interest earned by the buyer.

There are three types of treasury bills issued by the Government of India currently that is through auctions
which are 91-day, 182-day and 364-day treasury bills.

Call and Notice Money

Call and Notice Money exist in the market. With respect to Call Money, the funds are borrowed and lent
for one day, whereas in the Notice Market, they are borrowed and lent up to 14 days, without any
collateral security. The commercial banks and cooperative banks borrow and lend funds in this market.
However, the all-India financial institutions and mutual funds only participate as lenders of funds.

Inter-bank Term Market

The inter-bank term market is for the cooperative and commercial banks in India who borrow and lend
funds for a period of over 14 days and up to 90 days. This is done without any collateral security at the
rates determined by markets.
Commercial Papers (CPs)

Commercial papers can be compared to an unsecured short-term promissory note which is issued by top
rated companies with a purpose of raising capital to meet requirements directly from the market.

They usually have a fixed maturity period which can range anywhere from 1 day up to 270 days.

They offer higher returns as compared to treasury bills. They are automatically not as secure in
comparison. Also, Commercial papers are traded actively in secondary market.

Certificate of Deposits ( CD’s )

This functions as a deposit receipt for money which is deposited with a financial organization or bank.
The Certificate of Deposit is different from a Fixed Deposit receipt in two ways. i. Certificate of deposits
are issued only of the sum of money is huge. ii. Certificate of deposit is freely negotiable.

The RBI first announced in 1989 that the Certificate of Investments have become the most preferred
choice of organization in terms of investments as they carry low risk whilst providing high interest rates
than the Treasury bills and term deposits.

CD’s are also issued at discounted price like the Treasury bills and they range between a span of 7 days
up to 1 year.

The Certificate of Deposit issued by banks range from 3 months, 6 months and 12 months.

Note: CD’s can be issued to individuals (except minors), companies, corporations, funds, non–resident
Indians, etc.

Banker’s Acceptance (BA)

A Banker’s Acceptance is a document that promises future payment which is guaranteed by a commercial
bank. Also, it is used in money market funds and will specify the details of repayment like the date of
repayment, amount to be paid, and details of the individual to which the repayment is due.

BA’s features maturity periods that range between 30 days up to 180 days.

Repurchase Agreements (Repo)

Repo’s are also known as Reverse Repo or as Repo. They are loans of short duration which are agreed by
buyers and sellers for the purpose of selling and repurchasing.

However, these transactions can be carried out between RBI approved parties.

Note: Transactions can only be permitted between securities approved by RBI like the central or state
government securities, treasury bills, central or state government securities, and PSU bonds.
B.) Capital market

The capital market, as it is known, is that segment of the financial market that deals with the effective
channeling of medium to long-term funds from the surplus to the deficit unit. The process of transfer of
funds is done through instruments, which are documents (or certificates), showing evidence of
investments. The instruments traded (media of exchange) in the capital market are:

1. Debt Instruments

A debt instrument is used by either companies or governments to generate funds for capital-intensive
projects. It can obtained either through the primary or secondary market. The relationship in this form of
instrument ownership is that of a borrower – creditor and thus, does not necessarily imply ownership in
the business of the borrower. The contract is for a specific duration and
interest is paid at specified periods as stated in the trust deed* (contract
agreement). The principal sum invested, is therefore repaid at the
expiration of the contract period with interest either paid quarterly, semi-
annually or annually. The interest stated in the trust deed may be either
fixed or flexible. The tenure of this category ranges from 3 to 25 years.
Investment in this instrument is, most times, risk-free and therefore
yields lower returns when compared to other instruments traded in the capital market. Investors in this
category get top priority in the event of liquidation of a company.

When the instrument is issued by:

The Federal Government, it is called a Sovereign Bond;

A state government it is called a State Bond;

A corporate body (Company), it is called a Debenture, Industrial Loan or Corporate Bond

2. Equities (also called Common Stock)

This instrument is issued by companies only and can also be obtained either in the primary market or the
secondary market. Investment in this form of business translates to ownership of the business as the
contract stands in perpetuity unless sold to another investor in the secondary market. The investor
therefore possesses certain rights and privileges (such as to vote and hold position) in the company.
Whereas the investor in debts may be entitled to interest which must be paid, the equity holder receives
dividends which may or may not be declared.

The risk factor in this instrument is high and thus yields a higher return (when successful). Holders of this
instrument however rank bottom on the scale of preference in the event of liquidation of a company as
they are considered owners of the company.

3. Preference Shares

This instrument is issued by corporate bodies and the investors rank second (after bond holders) on the
scale of preference when a company goes under. The instrument possesses the characteristics of equity in
the sense that when the authorised share capital and paid up capital are being calculated, they are added to
equity capital to arrive at the total. Preference shares can also be treated as a debt instrument as they do
not confer voting rights on its holders and have a dividend payment that is structured like interest (coupon)
paid for bonds issues.

Preference shares may be:

Irredeemable, convertible: in this case, upon maturity of the instrument, the principal sum being returned
to the investor is converted to equities even though dividends (interest) had earlier been paid.

Irredeemable, non-convertible: here, the holder can only sell his holding in the secondary market as the
contract will always be rolled over upon maturity. The instrument will also not be converted to equities.

Redeemable: here the principal sum is repaid at the end of a specified period. In this case it is treated
strictly as a debt instrument.
Note: interest may be cumulative, flexible or fixed depending on the agreement in the Trust Deed.

4. Derivatives

These are instruments that derive from other securities, which are referred to as underlying assets (as the
derivative is derived from them). The price, riskiness and function of the derivative depend on the
underlying assets since whatever affects the underlying asset must affect the derivative. The derivative
might be an asset, index or even situation. Derivatives are mostly common in developed economies.

Some examples of derivatives are:

Mortgage-Backed Securities (MBS)

Asset-Backed Securities (ABS)

Futures

Options

Swaps

Rights

Exchange Traded Funds or commodities

Of all the above stated derivatives, the common one in Nigeria is Rights where by the holder of an
existing security gets the opportunity to acquire additional quantity to his holding in an allocated ratio.

*Note: a Trust Deed is a document that states the terms of a contract. It is held in trust by the Trustee.