BUAD 827 Note

DISTANCE LEARNING CENTRE
AHMADU BELLO UNVERSITY, ZARIA, NIGERIA.
COURSE MATERIAL
FOR
Course Code & Title: BUAD 827- Financial Markets and Economic
Development
Programme Title: Master in Business Administration

COPYRIGHT PAGE
© 2018 Ahmadu Bello University (ABU) Zaria, Nigeria
All rights reserved. No part of this publication may be reproduced in any form or by any means,
electronic, mechanical, photocopying, recording or otherwise without the prior permission of the
Ahmadu Bello University, Zaria, Nigeria.
First published 2018 in Nigeria.
ISBN:
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Ahmadu Bello University
Zaria, Nigeria.
Tel: +234
E-mail:
COURSE WRITERS/DEVELOPMENT TEAM
Ekpo Sunday Jumbo: Subject Matter Expert
Prof. Abiola Awosika & Halima Shuaibu: Subject Matter Reviewers
Auwal Nasiru: Language Reviewer
Dr. Fatima Kabir & Ibrahim Otukoya: Instructional Designers/Graphics
Prof. Adamu Z. Hassan: Editor
QUOTE
1. The brain will not fail if the will is earnest.
2. If others have succeeded, why can’t 1?
3. Never leave till tomorrow what should be done today for a stitch in time saves Nine.
4. If you have anything to do; when you have anything to do; you better do it well!
5. What is worth doing is worth doing well.
6. Tick says the clock, tick tick, what you have to do, do quick.
TABLE OF CONTENT
Title Page
Acknowledgement Page
Copyright Page
Course Writers/Development Team
Table of Content
INTRODUCTION
Preamble
i. Course Information
ii. Course Introduction and Description
iii. Course Prerequisites
iv. Course Learning Resources
v. Course Objectives and Outcomes
vi. Activities to Meet Course Objectives
vii. Time (To Complete Syllabus/Course)
viii. Grading Criteria and Scale
ix. Course Structure and Outline
STUDY MODULES
1.0 Module 1: Introduction to Financial Market
Study Session 1 Introduction
Study Session 2: Types of financial markets
Study Session 3: Legal environment of Financial Market
Study Session 4: Foreign Exchange Market
2.0 Module 2: Financial Institutions

Study Session 1: Introduction to financial institutions
Study Session 2: Types of financial Institution
Study Session 3: The Role of Central Bank
Study Session 4: Role of the Stock Exchange Markets
Study Session 5: Securities Analysis
3.0 Module 3: Financial Instruments

Study Session 1 Introduction to financial Instruments
Study Session 2: Investment in Bonds Market
Study Session 3 Other forms of financial Instruments
Study Session 4: Financial Market and Economic Development
INTRODUCTION
i. COURSE INFORMATION
Course Code: BUAD 827
Course Title: Financial Market and Economic Development
Credit Units: 3
Year of Study: 2
Semester: 1st
ii. COURSE INTRODUCTION AND DESCRIPTION

All over the world, the financial system occupies a crucial place in the lives of the
people. Its role at raising the living standard of the people cannot be compared. It
provides the needed funds for all aspects of human comfort and economic
wellbeing or empowerment and the platform for efficient allocation of these funds
by overcoming the problem of information asymmetry that could exist between
those entities that have funds to invest and those entities that need funds to invest.
Information asymmetry is said to exist when one party to a transaction has more or
superior information than the other party, resulting in an imbalance of power in a,
transaction. It can hinder efficient allocation of financial resources.
Finance according to Fabozzi and Drake (2009), is the "application of economic

principles to decision making that involves the allocation of money under
conditions of uncertainty". Finance provides the framework for the sourcing and
investing of funds by different entities - investors, governments and businesses to
meet their desired needs. Through the financial system of money and capital
market most governments try to regulate their economic performance, promote
economic growth, combat inflation and provide employment for the large number
of job seekers who enter the job market every year. They are indeed vehicles for
achieving stronger and more stable economies globally. When there is crisis in
these sectors, a global economy crisis erupts as was witnessed in 2008.
The system of money and capital market of the global economy is indeed a
huge dynamic system that is constantly changing, with new products and
services, new institutions and new methods emerging faster than can be
imagined. 'In any economy, there exist a financial system that regulates the
financial environment of that economy, determine the types and amounts of
funds to be issued, cost of funds and the use to which these funds are to be put'.
(Osaze 1991).
The financial system refers to the totality of the regulatory and participating
institutions, including financial markets and instruments, involved in the process of
financial intermediation.' (A CBN/NDIC Collaborative Study, October 1995). It is
the collection of markets, individuals, institutions, laws, regulations and techniques
through which bonds, stocks, and other securities are traded, financial services
provided and delivered, and interest rates determined.' It provides a means by
which society harnesses the savings of its residents and non-residents arid channels
same into the production process, (SEC Quarterly, December, 1998 vol. 15 No. 4).
The financial system is an integral part of the economic system which plays a part
in the allocation of scarce resources - land, labour, management skills, and capital
for the production of goods and services for the wellbeing of the society. What
happens in the financial system affects the wellbeing of the economy whether
developed or undeveloped.
This course is designed to introduce you to the basic concepts in financial markets.
The course in designed in simple language to enable the you to understand the
terms applied in financial markets so that they can also apply the terms in true life
situations and be able to integrate fully into the Nigeria economic system.
iii. COURSE PREREQUISITES

You should note that although this course has no subject pre-requisite, you are
expected to have:
1. Satisfactory level of English proficiency
2. Basic Computer Operations proficiency
iv. COURSE LEARNING RESOURCES

You should note that there are no compulsory textbooks for the course.
Notwithstanding, you are encouraged to consult some of those listed for further
reading at the end of each study session.
v. COURSE OUTCOMES
After studying this course, you should be able to:
1. Describe and apply the models and methods covered by the modules.
2. Understand the Financial market as well as the various regulatory agencies
and their roles.
vi. ACTIVITIES TO MEET COURSE OBJECTIVES

The module provides for a learning plan which outlines the formal sessions,
together with the instructor-directed study and independent reading. The Course
will consist of a significant amount of reading, writing and researching, and case
analyses and group discussions in your knowledge acquisition. Throughout, the
emphasis will be on high levels of your participation in all activities/sessions
through undertaking activities which facilitate your application of theory to real-
life situations, critically analyse and make recommendations for appropriate ways
forward for the organisation/individuals.
Group discussion will be run primarily as a seminar with emphasis on discussing

assigned readings, cases or other assignments. Each week, course
materials/resources will be provided with a list of articles to be read along with
required tasks and case-related questions but you are encouraged to read outside
these references. Additional contemporary materials may be provided and a critical
review of the topical issue encouraged
Course materials/resources will provide the basis for much of the work in this
Course. You will be required to read and be fully prepared to discuss the
appropriate issues. Each person will be required to view the cases in the course
materials/resources differently and to discuss each case from different perspectives
to enhance the quality of the study. Your participation will be judged by your
contribution.
You are expected to work together on team assignments. You will be assigned to a
group. Members of a group are expected to exchange e-mail addresses and
telephone numbers for ease of communication among group members. Each group
is to appoint a ‘group leader’ whose responsibility will be to liaise between the
group and the instructor.
For a comprehensive understanding of the material, keeping current with the

reading is strongly encouraged. Assignments are to be completed by midnight on
the due date noted on the course syllabus. Lateness in submission of assignments
will not be acceptable. Also, tutorials will be arranged within the two weeks on
campus activities in which questions will be clarified to enable you understand
fully what you’ve learnt.
Specifically, this course shall comprise of the following activities:

i. Studying courseware
ii. Listening to course audios
iii. Watching relevant course videos
iv. Field activities, industrial attachment or internship, laboratory or
studio work (whichever is applicable)
v. Course assignments (individual and group)
vi. Forum discussion participation
vii. Tutorials (optional)
viii. Semester examinations (CBT and essay based).
vii. TIME (TO COMPLETE SYLABUS/COURSE)

It is expedient that you patiently read through the study sessions, and consult the
suggested texts and other related materials. The study sessions contain self-
assessment questions to help you. As such, you are advised to devote at least 3
hours every day for this course.
viii. GRADING CRITERIA AND SCALE

Grading Criteria
A. Formative assessment
Grades will be based on the following:
Individual assignments/test (CA 1,2 etc) 20
Group assignments (GCA 1, 2 etc) 10
Discussions/Quizzes/Out of class engagements etc 10
B. Summative assessment (Semester examination)

CBT based 30
Essay based 30
TOTAL 100%
C. Grading Scale (as appropriate for the course):

A = 70-100
B = 60 – 69
C = 50 - 59
D = 45-49
F = 0-44
D. Feedback
Courseware based:
1. In-text questions and answers (answers preceding references)
2. Self-assessment questions and answers (answers preceding references)
Tutor based:
1. Discussion Forum tutor input
2. Graded Continuous assessments
Student based:
1. Online programme assessment (administration, learning resource,
deployment, and assessment).
ix. COURSE STRUCTURE AND OUTLINE
Course Structure
WEEK/DAYS MODULE STUDY ACTIVITY
SESSION
1 Study Session 1: 1. Read Courseware for the corresponding Study Session.

2. Listen to the Audio on this Study Session
Introduction 3. View any other Video/U-tube (address/sitehttps://goo.gl/CWUMmM
& https://goo.gl/PGGdRZ)
4. View referred Animation (Address/Sitehttps://goo.gl/XpbEmA )
2 Study Session 2 1. Read Courseware for the corresponding Study Session.
Types of 3. View any other Video/U-tube (address/sitehttps://goo.gl/XgkHXD &
financial markets https://goo.gl/sjGXgY)
4. View referred Animation (Address/Sitehttps://goo.gl/aHrzbS)
Legal
environment of
Financial Market

Foreign 3. View any other Video/U-tube (address/sitehttps://goo.gl/AoxQzL)
STUDY Exchange 4. View referred Animation (Address/Sitehttps://goo.gl/cR6Djh
Market https://goo.gl/cgbf8A)
MODULE 1
Introduction to 3. View any other Video/U-tube (address/sitehttps://goo.gl/XY5NLA &
financial https://goo.gl/euszBq)
institutions 4. View referred Animation (Address/Sitehttps://goo.gl/zaKR6e)
6 STUDY Study Session 2 1. Read Courseware for the corresponding Study Session.
MODULE 2 Types of 2. Listen to the Audio on this Study Session
3. View any other Video/U-tube (address/sitehttps://goo.gl/fS2Mun &
financial https://goo.gl/TPZ56d)
Institution 4. View referred Animation (Address/Sitehttps://goo.gl/R4dbai)
The Role of 3. View any other Video/U-tube (address/sitehttps://goo.gl/9txn2T &
Central Bank https://goo.gl/2sXbUf)
4. View referred Animation (Address/Sitehttps://goo.gl/8Rym3S)
Role of the Stock 3. View any other Video/U-tube (address/sitehttps://goo.gl/ZyR3pR &
Exchange https://goo.gl/UBE7qS)
Markets 4. View referred Animation (Address/Sitehttps://goo.gl/h8cuvE)
Securities 2. Listen to the Audio on this Study Session
Analysis 3. View any other Video/U-tube (address/sitehttps://goo.gl/SszZpB &
https://goo.gl/c8h7vu)
4. View referred Animation (Address/Sitehttps://goo.gl/TdQHSX)

Introduction to 2. Listen to the Audio on this Study Session
financial 3. View any other Video/U-tube (address/sitehttps://goo.gl/mfM1Ct &
Instruments https://goo.gl/cMwWiX)
4. View referred Animation (Address/Sitehttps://goo.gl/F1zwQP)

Investment in 2. Listen to the Audio on this Study Session
Bonds Market 3. View any other Video/U-tube (address/sitehttps://goo.gl/PGii1h &
STUDY https://goo.gl/Y5Fe3q)
4. View referred Animation (Address/Sitehttps://goo.gl/W2vEPN)
MODULE 3
12 Study Session 1. Read Courseware for the corresponding Study Session.
3 2. Listen to the Audio on this Study Session
3. View any other Video/U-tube (address/site: https://goo.gl/b5KbXU
Other forms of & https://goo.gl/LykeD4)
financial 4. View referred Animation (Address/Sitehttps://goo.gl/uicBSh)
Instruments

Financial Market 3. View any other Video/U-tube (address/sitehttps://goo.gl/FDJVSN &
and Economic https://goo.gl/39GS62)
Development 4. View referred Animation (Address/Sitehttps://goo.gl/97eid3)
Week 14 & 15 REVISION/TUTORIALS (On Campus or Online)
Week 16 & 17 SEMESTER EXAMINATION

Course Outline
MODULE 1: Introduction to financial Market
MODULE 2: Financial Institutions

MODULE 3: Financial Instruments

Study Session 1 Introduction to financial Instruments
Study Session 3 Other forms of financial Instruments
STUDY MODULES
1.0 MODULE 1: Introduction to financial Market
Contents:
STUDY SESSION 1
Introduction
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 Financial Markets
2.2 Functions of Financial Markets
2.2.1 Indirect financial
2.2.2 Direct financial
2.3 Classification of Financial Markets
2.3.1 Commodity markets
2.3.2 Money markets
2.3.3 Derivative market
2.3.4 Futures markets
2.3.5 Foreign exchange markets
2.3.6 Insurance markets
2.4 Role of Financial Markets
2.5 Players in the Financial Market
3.0Tutor Marked Assignments (Individual or Group assignments)
4.0Study Session Summary and Conclusion
5.0Self-Assessment Questions and Answers
6.0Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings
Introduction:
You are welcome to this study session. In this study session you will be introduced
to the topic introduction to financial markets where we are going to discuss what
the financial market is, the functions of the financial market, classification of
financial market and the role of financial market.
1.0 Study Session Learning Outcomes

After studying this study session, I expect you to be able to:
1. Explain what the financial market is all about
2. List the functions of the financial market
3. Describe the roles of financial markets
4. Mention the players of the financial markets.
2.0 Main Content

2.1 Financial Markets
The financial system refers to the totality of the regulatory and participating
institutions including financial markets and instruments involved in the process of
financial intermediation. It is the collection of markets,
individuals, institution, laws, regulations and techniques
through which bonds, stocks, and other securities are
traded, financial services provided and delivered, and
interest rate determined. It provides a means by which
society harnesses the savings of the residents and non-
residents and channels same into the production process.
A financial market is a market where financial assets are bought and sold
(exchanged). Such financial assets include treasury bills, treasury certificates, bills
of exchange, the call money, stocks, shares, bonds, debentures, etc. Financial
markets bring together the savers and the investors and by interaction of the two
groups in an open market. The financial market is made up of two important
markets. These are money market and capital market.
ITQ 1: What is a financial system?
2.2 Functions of Financial Markets

The fundamental function of financial markets is the transfer of funds from
individuals or institutions with surplus funds (savers-lender) to those who require
funds (borrower-spenders) by:
 Indirect financial: via financial intermediaries- banks, savings institutions and
investment intermediaries that facilitate the transfer of funds from saver-lender to
borrower-spenders.
 Direct financial: via financial markets - the purchase of securities issued by
borrower-spenders, by savers-lender themselves or by financial intermediaries. The
borrower-spenders raise fund from savers-lenders by selling securities to them
through financial intermediaries.
Other economic functions performed by the financial markets include price

discovery, liquidity and reduced transaction costs. Others include:
 Providing avenues for the populace to partake and share in the wealth of
the nations.
 Channeling savings and investments for business to survive and prosper.
 Providing credits to businessmen, households, and others to cater for
their needs over and above what their current income can contain.
 Storing wealth for the future
 Promoting solvency, efficiency and competitiveness of the financial
system,
 Protecting against risks from loss as a result of negligence, theft and
other unforeseen calamities.
 Promoting financial discipline, accountability, and transparency of the
corporate sector of the nation which in turn enhances corporate
performance and the level of its tax to government.
 Providing channel for the application of economic policies for sustaining
strong and stable economies.
 Reducing over reliance of the corporate sector on debt financing by
producing equity (ownership) capital and improving balance sheet
through better debt equity ratio.
 Enabling easy adjustment of portfolio of investment thus encouraging
investors to provide funds to industry and government for developmental
purposes.
 Promoting venture capital.
 Indeed financial markets facilitate:
 The saving of capital (in the capital market)
 The transfer of risk (in the derivatives market)
 International trade (in the currency market)
2.3 Classification of Financial Markets
The financial markets can be classified into (a) internal market and (b) external
market also known as international market, off-shore markets, among others. It can
also be classified into two distinct groups based on types and maturity of
instruments traded.
 The internal market is made up of the domestic markets and foreign market. In
the domestic market, issues domiciled in the country of issue and the securities
are traded in the country. The foreign market on the other hand is where
securities of issues non domiciled in the country are sold and traded. A
corporation that seeks to issue securities in the foreign markets must comply
with that country’s securities law.
 The external market is where the following securities are traded (1) securities
issued and offered simultaneously to investors in a number of countries and (2)
securities issued outside the jurisdiction of any single country.
The financial markets can also be classified according to types of instruments:

Stock markets which provide financing through the issuance of share-common
stock and preferred stock and facilitate the subsequent trading thereof.
Bond markets which provide financing through the issuance of bounds and
facilitate subsequent trading thereof.
Commodity markets which facilitate the trading of commodities.
Money markets which provide short-term debt financing and investment.
Derivative market which provide instrument for the management of financial
risks.
Futures markets which provide
standardized forward contracts for trading
products at some future dates.
Foreign exchange markets which facilitate
the trading in foreign exchange.
Insurance markets which facilitate the
redistribution of various risks.
ITQ 2: What is a Market?
2.4 Role of Financial Markets

Financial markets play the following roles in an economy
 Savings and investment
 Wealth creation
 Liquidity
 Credit
 Payment
 Risk management
 Arbitrage
 Watching
 Asset valuation
 Price setting
 Policy function
2.5 Players in the Financial Market

Players in the financial market that buy and sell financial instruments comprise
insurance companies, pension funds and investment companies. Big corporations,
government and government agencies, municipalities, central banks, international
bodies (such as the World Bank) and foreign investors are among the important
players in the financial markets.
Lenders
Lenders and borrowers play important role in the financial markets. Almost
everybody play a part in lending in one way or the other without really being aware
that he/she is a lender. An individual lends money that he/she
 Pay money in a savings account in the bank
 Contributes to a pension plan
 Pays premium to an insurance company
 Invests in government bonds
 Invest in company shares
Borrowers
These include:
 Individuals
 Government
 Municipalities and local government authorities
 Public corporation
Investor
An investor is the party that makes an investment. An investment is a commitment
of funds to one or more assets that will be held over some future time period in the
hope that it will generate more income. The asset could be tangible like real estate
properties or non-tangible monetary assets like security. In other words, investment
is the acquisition of capital goods such as building and equipment, and purchase of
inventories of raw materials to produce other goods services causing future
production hand income to rise. Consumption spending such as purchase of food,
clothing, fuel, etc, are not investments but government spending to build and
maintain public facilities are investments.
Investment may involve huge funds which are usually raised by institutions or
government from the financial markets, packaged in form of stocks, bonds,
deposits, and insurance policies which are expected to materialize inform of
interest, dividends or other claims. The financial markets, thus, make possible the
exchange of current income for future income and the transfer of savings into
investment for improved standard of living and growth of the economy. Investing
in securities becomes a means of savings.
ITQ 3: Who are the players in the financial market?
Other benefits of investing in securities include:

 Income generation
 Capital appreciation
 Voting right
 Use of shares as collateral to obtain loans
 Idle funds are used wisely
 Helps to keep money in money yielding instrument
 Money can easily be recovered on the floor of the exchange.
ITQ 4: What is Funding?

3.0 Tutor Marked Assignments (Individual or Group)
4.0Conclusion/Summary
In this study session we have discussed the topic introduction to financial market
where we discussed what the financial market is all about, the functions of the
financial market, the classification of the financial market, the roles of the financial
market, and the players in the financial markets.
5.0 Self-Assessment Questions and Answers

Self Assessment Question
1. Analyse the definition of financial markets
2. What are the functions of financial markets
3. Explain the classification o0f financial markets
4. Discuss the role of financial markets
5. Who are the players in the financial markets? discuss their roles
6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube: https://goo.gl/CWUMmM & https://goo.gl/PGGdRZ . Watch
the video & summarise in 1 paragraph
b. View the animation on: https://goo.gl/XpbEmA and critique it in the

discussion forum
c. Take a walk and engage any 3 students on: ???????????; In 2 paragraphs

summarise their opinion of the discussed topic. Etc.
ITA 1: The financial system refers to the totality of the regulatory and participating institutions including financi
ITA 2: A market is an arena for potential exchanges.
ITA 3: They are: Lenders, Borrowers and Investors.
ITA 4: Funding is the act of providing financial resources, usually in the form of money, or other values such as
1. Adekanye, Femi;(1984) The Element of Banking in Nigeria, 2nd Ed
(Bedfordshire: Graham Bum,).
2. Adekanye, Femi, (1986) Practice of Banking, Volume 1. (Lagos: F&A
publisher ltd,)
3. E.S.Ekazie;(1997) the element of banking(African-Fep publishers limited,
Onitsha Nig).
4. Van Horne, James C., (1986) Financial Management and Policy, 7th Ed.,
(Englewood Clieffs, New Jersey: Prentice Hall,).
5. Peter, S. R & Sylvia, C. (2008). Bank Management & Financial Services (7 th
International Edition). New York: McGraw-Hill.
6. Khan, M. Y (2008). Financial Services (4th Edition). New-Delhi: Tata
McGraw-Hill Publishing Company limited.
STUDY SESSION 2
Types of Financial Markets
Introduction
2.0 Main Content
2.1 Money Market
2.2 Capital Market
2.3 The Nigerian Capital Market
2.3.1 Operators
2.3.2 Instruments of Capital Markets
2.3.3 Type of Capital Market
2.4 Function of Capital Market
7.0References/Further Readings
Introduction:
You are welcome to this study session. In this study session we are going to be
discussing the topic types of financial market which will form the basis of our
discussions in this study unit. I hope we will have a wonderful time together.

1. Types of financial markets
2. The different operators in the financial market
3. The money market and its functions
4. The capital market and its functions.
5. Types of capital market.
2.0 Main Content
2.1 Money Market
Meaning
 This is a financial market that deals with short-term finances and securities.
 Those who have funds to loan and those who need funds to borrow for a short
period of time go to money market.
 It is a market for very short term loans which could be required almost on
demand.
 The price at which money is bought and sold is known as
rate of interest.
 Short-term loans are loans required for any period up to 3
years.
 It consists of individuals and organisations who wish to lend
out money on short term and those who wish to borrow money.
 It is normally involved in the mobilisation of funds on a short-term basis.
ITQ 1: What are Securities?

Operators
 The operators in the money market include the financial institutions such as the
commercial banks, the central bank, finance houses, discount houses, hire
purchase firms, issuing houses, merchant banks, acceptance houses, foreign
exchange market, bills brokers, etc.
Instruments
The instruments of the money market include:
 Treasury bills which is an instrument that runs for 91 days.
 Treasury certificates which are medium term government securities which
mature after a period ranging from one to two years.
 Bills of exchange which run for a period of 90 days.
 Call money fund which runs overnight.
Functions of the Money Market
The main functions are:
 Provision of circulating capital for commerce and
industry.
 Offering investment opportunities on a short-term basis
for people and organisations to enable them earn interest.
 Provision of investment advice to customers.
2.2 Capital Market

The term money market and capital market need to be carefully distinguished.
There is no clear boundary between them. The money market is normally involve
in the mobilisation of funds on a short-term basis (Perhaps for two years or more)
and the capital market caters for organisations that wish to raise money for much
longer periods (perhaps indefinitely).
 Capital market is a market that deals with medium and long-term financial
assets for the development of the economy.
 It is a market for long-term loans and investment.
 Capital market is the citadel of capital, the bazzar of human efforts and the
forum the nations capitalized values are bought and sold.
 It consists of people and organisation who wish to lend out money or to borrow
on a long-term basis.
 It is a market which finances long term investments
 It is not a single institution but all those institutions involved in the supply and
demand for long term capital and claims for capital.
ITQ 2: What’s the difference between a Money and Capital market?

2.3 The Nigerian Capital Market
The Nigerian capital market is a network of financial institutions that interact to
mobilise and efficiently allocate savings into the productive sectors of the economy
for overall growth and development. It is an arrangement of participants,
institutions, rules and instrument that facilitate the mobilisation and transfer of
long term funds between the surplus and deficit sectors of the economy.
The key players in the market can be classified into 2 – Regulators and Operators.
The regulators are Securities and Exchange Commission (SEC) the Nigerian Stock
Exchange (NSE) and the National Association of Security Dealers (NASD). The
operators include the Issuing house, Registrars, Bankers/Dealers, Investment
Managers/Portfolios Advisers, Lawyers and Accountant etc. The SEC is the apex
regulator of the Nigerian Capital Market, while NSE and NASD are self regulatory
Organisation (SROS).
Operators
Financial institutions which operate in the capital market are the commercial
banks, Central bank, Mortgage banks, Investment Trust, Insurance Companies,
Issuing Houses, Building Societies, Pension and Provident funds, Stock Exchange
Market, Development firm companies, Development banks, etc.
Instruments of Capital Markets

The instruments of the capital market include stock, shares, debentures,
government bonds, company bonds and other second hand securities.
Type of Capital Market

There are two types of financial institutions these are:-
 Primary market which deals with new securities
 Secondary market which deals with second hand securities
Primary- the public for the purchase and sale of new or fresh securities. Here, the
issued process go to the issues which are the entities that issued the securities.
Secondary- exists for the trading of already issued securities it is a market such as
the stock exchange or the Over the Counter (OTC) markets for selling and buying
the existing securities of corporative or government through services of brokers.
The proceeds of the sale go to the selling investor. The security market provides
liquidity to investors by providing the awareness for investors to sell and buy
financial instruments.
Function of Capital Market

 Provision of capital for permanent or long term investment in industry or
commerce.
 Provision of long term investment opportunities for people and organisations.
 Provision of managerial, technical and financial advice on investment.
ITQ 3: What are the types of capital market?
3.0 Tutor Marked Assignments (Individual or
Group) 4.0Conclusion/Summary
In this study session we have discussed the topic types of financial markets where
we were able to discuss the money market and the capital market, operators of the
money and capital market as well as their functions.

1. Discuss the role of Nigerian capital market
2. What are the differences between a money market and a capital market?
3. Explain the types of capital market
a. Visit U-tube: https://goo.gl/XgkHXD & https://goo.gl/sjGXgY . Watch the
video & summarise in 1 paragraph
b. View the animation on: https://goo.gl/aHrzbS and critique it in the discussion

forum

ITA 1: Securities are tradable financial assets. They are a form of ownership that can be traded on a secondary ma
ITA 2: The money market is the global financial market for short-term borrowing and lending and provides short
ITA 3: Primary market which deals with new securities and Secondary market which deals with second hand secu

1. Adekanye, Femi;(1984) The Element of Banking in Nigeria, 2nd Ed
2. Adekanye, Femi, (1986) Practice of Banking, Volume 1. (Lagos: F&A
publisher ltd,)
3. Chaholiades, Miltiades, (1981) International Monetary Theory and Policy;
International Student Edition (London: Macgraw-Hill,Inc).
4. E.S.Ekazie;(1997) the element of banking(African-Fep publishers limited,
Onitsha Nig).
5. Van Horne, James C., (1986) Financial Management and Policy, 7th Ed.,
6. Peter, S. R & Sylvia, C. (2008). Bank Management & Financial Services (7 th
7. Khan, M. Y (2008). Financial Services (4th Edition). New-Delhi: Tata
McGraw-Hill Publishing Company limited.
STUDY SESSION 3
The Legal Environment of the Nigerian Capital Market
Introduction
2.0Main Content
2.1 The Legal Environment of the Nigerian Capital Market
2.1.1 Laws/Codes affecting the Nigerian Capital Market
2.1.2 The Companies and Allied Matters Act (CAMA)CAP59 of 1990
2.1.2 Trustees Investment Acts (CAP, 449) 1990
2.1.4 Pension Reform Act, 2004
2.1.5 Banks and Other Financial Institutions Act (BOFIA) 1991
2.1.6 Nigerian Investment Promotion Commission Act (NIPC) No 16 of
1995
2.1.7 Foreign Exchange (Miscellaneous) Provision Act, l 995
2.1.8 The Chartered Institute of Stockbrokers Act, 1995
2.1.9 Money Laundering (Prohibition) Act, 2011,
2.2 Some Terminologies in the Capital market
Introduction:
You are welcome to another study session. In this study session we are going to be
discussing the topic the legal environment of the Nigeria capital market.
1. Understand what the legal environment of the Nigeria capital market is
2. The laws guiding the operations of the Nigerian capital market
3. Some terminologies in the financial markets
2.0 Main Content

2.1 The Legal Environment of the Nigerian Capital Market
The vision of the Nigerian government for the capital market and the objective of
its freeform are to make the Nigerian capital market a leading market in Africa,
comparable to the best in the world, and the engine of national growth. To achieve
these, there should exist among others a conducive environment with effective
legal framework to attract both local and foreign investments, regulatory structure
that ensures transparency, efficiency, fairness and liquidity, precise and
comprehensive legislation, rules and procedures and an independent strong
regulator with enforcement powers and capacity to perform its roles.
The Nigeria capital market like most sectors of the economy is regulated by laws,
rules and regulation, code of conduct, norms and ethics.
The legal framework of the Nigeria capital market is anchored on the Investments
and Securities Act (ISA) 2007. The ISA is a comprehensive legal framework that
guides the workings of the capital market. The SEC is enabled by this law to carry
out the functions designed to make the capital market transparent, fair, and
efficient and thereby promoting investors' confidence in the system. Securities laws
are meant to protect investors and to prevent fraud and misrepresentation in the
public offering and trading of securities.
The Nigerian capital market is regulated not only by the ISA 2007, but is also
affected by some other enactments such as:
• The Companies and Allied Matters Act (CAMA) 1990
• Central Bank of Nigeria Act (CBND) 1991
• Banks and Other Financial Institutions Act (BOFIA) 1991
• Lagos Stock Exchange Act 1961 repealed by ISA 1999
• Chartered Institute of Stockbrokers Act 1995
• Nigerian Investment Promotion Commission Act (NIPC) No 16 of 1995
• Public Enterprises (Privatization and Commercialization) Act 1999
• Trustee Investment Act (CAP. 449) 1990
• Foreign Exchange (Monitoring and Miscellaneous Provisions)Act 1995
• Capital Gain Tax Act (CAP. 42) 1990
• Venture Capital (Incentives) Act 1993.
• Money Laundering (Prohibition) Act, 2011
• Pension Reform Act, 2004
 Insurance Act 2003
 Anti-Money Laundry Combating and Counter Financing of Terrorism
compliance manual for capital market operation
ITQ 1: What ids the legal frame work of the Nigeria capital market anchored by?
Laws/Codes affecting the Nigerian Capital Market
CODE OF CONDUCT CODE OF GOOD CORPORATE GOVERNANCE

INEVSTMENT & SECURITIES ACT NO. 29
COMPANIES & ALLIEDTHE

MATTERS ACT OF 1990
REGULATORY ENVIROMENT OF THE
THE NIGERIN ACT OF 2003
INSURANCE
SEC RULES THE TRUSTEES INVESTMENT

TRADE GROUPS
The Companies and Allied Matters Act (CAMA) CAP59 of 1990
This statute created the Corporate Affairs Commission primarily to register and
incorporate business names, limited and unlimited private and public companies
whether by guarantee or not. It is important to note that only public companies that
can assess the capital market and any business enterprise seeking to source funds
from the capital market must be incorporated as a company, or be converted from a
private to a public company in accordance with the provision of the Companies
and Allied Matters Act 1990.
Trustees Investment Acts (CAP, 449) 1990

These Acts specify the type of securities in which trust funds may be invested e.g.
debenture and fully paid up shares of any company incorporated under the
Companies Act, and which inu.st be quoted on the stock exchange.
Pension Reform Act, 2004

This Act was enacted with the primary purpose of establishing pension system,
promoting savings culture, and ensuring transparency and efficient management of
pension funds.
S: 72 of the Act provides for investment of all contributions under the Act and
maintenance of fair returns on amount invested.
S: 73 provided specifically for how pension fund assets are to be invested i.e. in
bonds, debentures, bills, redeemable preference/ordinary of public companies
listed on the stock exchange.
Banks and Other Financial Institutions Act (BOFIA) 1991
The statute is being administered by the Central Bank of Nigeria. It allows
investments to be made in securities of the Federal Government and the securities
of any corporation or company for the purpose of promoting the development of
the Nigerian economy.
Nigerian Investment Promotion Commission Act (NIPC) No 16 of 1995

The Nigerian Investment Promotion Commission (NIPC) was established by this
law to provide conducive environment for investment in Nigeria. The Act has
made it possible for foreigners to participate in the Nigerian capital market both as
operators and investors, and percentage of foreign holding in any company
registered in the country is limitless.
S: 17 of the Act provides that non-Nigerian may invest in the operations of any
enterprise in Nigeria except the negative list i.e. production of arms and
ammunition, drugs and psychotropic substances, military and paramilitary wears
etc.
S: 21 provide that foreign enterprise may buy the shares of any Nigerian enterprise
in any convertible currency.
Foreign Exchange (Miscellaneous) Provision Act, l 995

S:26 (l )of the Foreign Exchange (Miscellaneous) Act 1995 provides That-
a. person whether resident in Nigeria or outside, or
b. whether a citizen of Nigeria or not may deal in, invest in, acquire or dispose
or create or transfer any interest in securities or other money market
instruments whether denominated in a foreign currencies in Nigeria or not S
26(2) a person may invest in securities traded on the Nigeria capital market
or by private placement.
The Chartered Institute of Stockbrokers Act, 1995

The Act established the Institute to assist in ensuring that only fit and proper
persons are certified to perform the functions of broker, dealer.
• S8 confers power on the CIS to approve qualification of members as well as
power to conduct courses and training.
• S10 provides for the establishment of a disciplinary tribunal and
investigative panel to investigate allegation of misbehavior of members.
Money Laundering (Prohibition) Act, 2011,

The objectives of this Act are to make money laundering an offence, prohibit
inflow of illegal cash, monitor suspicious transactions and cross border movements
of currency, identify organised crime, identify financial service providers and other
persons that engage in business that are susceptible to being used for money
laundering, promote information sharing on money laundering issues with relevant
authorities within and outside of the country, and permit freezing, seizure and
forfeiture of assets of money launders.
All registered capital market operators are expected to comply with the Money
Laundering Act. They are expected to file with the Nigerian Financial Intelligence
Unit of the Economic Financial Crime Commission on:
• Returns on suspicious transaction (s 6)
• Returns on mandatory disclosure relating to transaction of N1m and above
on individual accounts, and N5m and above on Corporate accounts, (s-10)
• Returns on Foreign Exchange transactions relating to sale or transfer of
securities of USS10,000 or its equivalent by any person or body corporate.
(s2)
ITQ 2: what is the main objective of the money laundry act?
2.2 Some Terminologies in the Capital

market 90\10 Strategy
This is an investing strategy that involves deploying 90% of one's investment
capital in interest-bearing instruments that have a lower degree of risk, and the
balance 10% in high risk investments.
A common application of the 90/10 strategy involves the use of short term treasury
bills for the fixed-income component (90% of the portfolio), with the balance 10%
used for higher risk securities such as equity index options or warrants.
Above Par
A term used to describe the price of a security when it is trading above its face
value. A security usually trades at above par when its income distributions are
higher than those of other instruments currently available in the market. If an
investor purchases a security above face value, he or she will incur a capital loss at
maturity when it is redeemed for face value rather to make its yield equal current
market rates, the bond should trade at its present value.
Acid-Test Ratio
This is a stringent indicator that determines whether a firm has enough short-term
assets to cover its immediate liabilities without selling inventory.
Calculated by:
(Cash +Account Receivables + Short Term Investments)
Current Liabilities
Companies with ratios of less than 1 cannot pay their current liabilities and calls
for caution. Again, if the acid-test ratio is much lower than the working capital
ratio, it means current assets are highly dependent on inventory. If a company's
financial statements pass the figurative acid test, it is an indication of its financial
integrity.
Asset Base
It is the underlying assets giving value to a company, investment or loan. The asset
base is not fixed but will appreciate or depreciate according to market forces.
Lenders use physical assets as a guarantee that at least a portion of money lent can
be recouped through the sale of the backed asset in the case that the loan itself
cannot be repaid.
The value of a home might increase or decrease over time, affecting the underlying
collateral in a mortgage. The same way, the price of a commodity used as the asset
base of derivative can also increase or decrease rapidly, changing the price that
investors are willing to pay for it.
Bear Market
This is a market condition in which the prices of securities are falling. It should not
be confused with a correction which is a short-term trend of at least two months
that enable value investor to find an entry point. Bear markets rarely provide great
entry points, as timing the bottom is very difficult to do.
Bond Rating
It refers to a grade given to bonds that indicate their credit quality. Private
independent rating services such as Standard & Poor's, Moody's and Fitch provide
these evaluations of a bond issuer's financial strength, or its ability to pay a bond's
principal and interest in a timely manner.
Bond ratings are expressed as letters ranging from 'AAA', which is the highest
grade, to 'C' ("junk"), which is the lowest grade. Different rating services use the
same letter grades, but use various combinations of upper- and lower-case letters to
differentiate themselves. For example standard and poor's rating for depicting bond
rating and their meaning.
AAA and AA: High credit-quality investment grade

AA and BBB: Medium credit-quality investment grade
BB, B, CCC, CC, and C: Low credit-quality (non-investment grade), or "junk
bonds"
D: Bonds in default for non-payment of principal and/or interest.
Buy and Hold Strategy

A passive investment strategy in which an investor buys stocks and holds them for
a long period of time, regardless of fluctuations in the market, such investor is not
concerned with short-term price movements and technical indicators once he/she
selects stocks.
Bonds and Debentures

These are debt instruments usually issued for a period of more than one year with
the purpose of raising capital by borrowing. They are legal documents representing
a promise by the company (debenture) or by Government (in case of a bond) to pay
certain amount of interest over a definite period of time.
Demutualisation of a stock exchange
The demutualization of a stock exchange refers to the process by which a member
owned exchange is reorganised as a shareholder-owned exchange, thereby
switching from private to public ownership.
A demutualised stock exchange does not face the same conflict of interest that a
member-owned stock exchange faces. And as more exchanges demutualise, the
heightened competition drives exchanges to improve technologies and fee
structures, are able to have access to more capital and expand into new markets.
Toronto, Canada's stock exchange was the first North American exchange to
demutualize in 2002. By 2010, most of the world's largest exchanges have
demutualised, including the New York Stock Exchange (NYSE) Euro next, which
covers markets in the United States, the United Kingdom and continental Europe.
The Nigerian Stock Exchange is worming up for demutualisation.
Emerging Market Fund

A mutual fund or exchange-traded fund that invests the majority of its assets in the
financial markets of a single developing country or a group of developing countries
such as countries in Eastern Europe, Africa, the Middle East, Latin America, the
Far East and Asia.
A developing country is characterized as being vulnerable to political and

economic instability, having low average per-capita income, and of being in the
process of building its industrial and commercial base. The "emerging market"
label has been adopted by the investment community to identify developing
countries with superior growth prospects and the potential for rewarding
investment opportunities with relatively high risk.
Encumbered Securities
These are securities that are owned by one entity, but subject to a legal claim by
another. When an entity borrows from another, legal claim on the securities owned
by the borrower can be taken as security by the lender should the borrower default
on its obligation. The securities' owner still has title to the securities, but the claim
or lien remains on record. In the event that the securities are sold, the party with
the legal claim on them must be given first opportunity to be paid back. In some
cases, encumbered securities cannot be sold until any outstanding debts belonging
to the owner of the securities are paid to the lender who holds claim against the
securities. Just as a house may be used as collateral for a mortgage, securities may
be used as collateral for borrowing. While title does not change hands, it is limited
by the extent of the lien on the assets. Contrast with "unencumbered".
Equity Fund
It is a mutual fund that invests principally in stocks. It is also known as a "stock
fund". Stock mutual funds are principally categorized according to company size,
the investment style of the holdings in the portfolio and geography. Size is
determined by a company's market capitalisation while the investment style,
reflected in the fund's stock holdings, is also used to categorize equity mutual
funds. Stock funds are also categorized by whether they are domestic (U.S.) or
international. These can be broad market, regional or single-country funds.
Equity Unit Investment Trust
This is a registered trust in which investors purchase units from a fixed portfolio of
equities, which are chosen and managed by a professional money manager.
Securities in the trust remain there for the life of the trust, most often one year and
can either be liquidated at market value or rolled over into a newer, current version
of the trust. This investment allows investors to diversify and participate in
dividends and capital gains without purchasing a large number of the equities
themselves.
Ex-Dividend
It is the classification of trading shares when a declared dividend belongs to the
seller rather than the buyer. A stock will be given ex-dividend status if a person has
been confirmed by the company to receive the dividend payment.
A stock trades ex-dividend on or after the mark down date (ex-date). After the ex-
date has been declared, the stock usually drops in price by the amount of the
expected dividend
Face Value
It is also known as "par value" or simply "par". It is the nominal value or naira
value of a security stated by the issuer. For stocks, it is the original cost of the
stock shown on the certificate. For bonds, it is the amount paid to the holder at
maturity.
In bond investing, face value, or par value, is commonly referred to the amount
paid to a bondholder at the maturity date, provided the issuer does not default.
However, bonds sold on the secondary market fluctuate with interest rates. For
example, if interest rates are higher than the bond's coupon rate, then the bond is
sold at a discount (below par). Conversely, if interest rates are lower than the
bond's coupon rate, then the bond is sold at a premium (above par).
Fiscal Year-End
It is the completion of a one-year, or 12-month, accounting period. A firm's fiscal
year- end does not necessarily need to fall on December 31, it can actually fall on
any day throughout the year depending on the company's needs.
Fixed Income
It refers to a type of investing or budgeting style for which real return rates or
periodic income is received at regular intervals at reasonably predictable levels,
stable income stream. The most common type of fixed-income security is the bond;
bonds are issued by federal governments, local municipalities or major
corporations.
Foreclosure-FCL
This is a situation in which a homeowner is unable to make principal and/or
interest payments on his or her mortgage, so the lender, be it a bank or building
society, can seize and sell the property as stipulated in the terms of the mortgage
contract. To avoid foreclosing on a home, creditors make adjustments to the
repayment schedule to allow the homeowner to retain ownership, a situation which
is known as a special forbearance or mortgage modification.
Forced Initial Public Offering – IPO

It is an instance in which a company is forced into issuing shares to the public for
the first time. Forced IPOs occur when a company goes public due to certain
conditions being met which are set by the securities regulatory body of the country.
Initial public offerings are usually conducted at the discretion of the current
management and/or owners of the private company.
Fundamental Analysis
It is a scientific study of the basic factors which determine a share's value. The
analyst studies the industry and the company's sales, assets, liabilities, debt
structure, earnings, products, market share; evaluates the company's management,
compares the company with its competitors, and then estimates the share's intrinsic
worth. The fundamental analysts' tools are FINANCIAL RATIOS arrived at by
studying a company's BALANCE SHEET and PROFIT AND LOSS ACCOUNT
over a number of years.
Global Fund
A type of mutual fund, closed-end fund or exchange-traded fund that can invest in
companies located anywhere in the world, including the investor's own country.
These funds provide more global opportunities for diversification and act as a
hedge against inflation and currency risks. Many people confuse a global fund with
an international, or foreign, fund. The difference is that a global fund includes the
entire world, whereas an international foreign fund includes the entire world except
for companies in the investor's home country".
Headline Risk
It is the possibility that a news story will have adverse effect on the stock's price
and also impact the performance of the stock market as a whole.
Hedge Fund
Hedge Fund is an aggressively managed portfolio of investments that uses
advanced investment strategies such as leveraged, long, short and derivative
positions in both domestic and international markets with the goal of generating
high returns (either in an absolute sense or over a specified market benchmark).
Hedge funds are most often set up as private investment partnerships that are open
to a limited number of investors and require a very large initial minimum
investment. Hedge funds (unlike mutual funds) are unregulated because they cater
for sophisticated investors (the supper rich). They are similar to mutual funds in
that investments are pooled and professionally managed, but differ in that the fund
has far more flexibility in its investment strategies.
Immobilisation
It is the practice of using physical certificates as evidence of total ownership while
recording the specific investors proportional holding by book-entry.
Initial Public Offering – IPO
This is the first sale of stock by a private company to the public looking for capital
to expand or looking to become publicly traded. In an IPO, the issuer obtains the
assistance of an underwriting firm, which helps it determine the type of security to
issue (common or preferred), the best offering price and the time to bring it to
market.
Institutional Buyout (IBO)

It refers to when an institutional investor such as a private equity firm or a venture
capitalist firm acquires a controlling interest in a separate company. Institutional
buyouts are the opposite of Management Buyouts (MBO) in which a business's
current management acquires a large part of the company. Typically, the investor
in an IBO will look to dispose of its stake in the company within a certain time
frame.
An institutional buyout can also involve instances where a private equity firm
acquires a company and keeps the current management or hires new managers and
gives them stakes in the business. In general, the private equity firm involved in
the IBO will take charge in structuring and exiting the deal as well as hiring
managers.
Insider Trading
An "insider" is any person who possesses at least one of the following:
1) access to valuable non-public information about a corporation (this makes a
company's directors and high-level executives insiders)
2) ownership of stock that equals more than 10% of a firm's equity A common
misconception is that all insider trading is illegal, but there are actually two
methods by which insider trading can occur. One is legal, and the other is not. An
insider is legally permitted to buy and sell shares of the firm - and any subsidiaries
that employ him or her. However, these transactions must be properly registered
with the Securities and Exchange Commission(SEC) and are done with advance
filings. The more infamous form of insider trading is the illegal use of undisclosed
material information for profit. For example, when the CEO of a publicly-traded
firm inadvertently discloses his/her company's quarterly earnings while in a bar
having a good time if somebody in the bar takes this information and trades on it, it
is considered illegal insider trading.
Interim Dividend
This is a dividend payment made before a company's AGM and final financial
statements. It usually accompanies the company's interim financial statements.
Intangible Asset
An asset that is not physical in nature. Corporate intellectual property (items such
as patents, trademarks, copyrights, business methodologies), goodwill and brand
recognition are all common intangible assets in today's marketplace. An intangible
asset can be classified as either indefinite or definite depending on the specifics of
that asset. A company brand name is considered to be an indefinite asset, as it stays
with the company throughout the company's continuous existence. However, if a
company enters a legal agreement to operate under another company's patent, with
no plans of extending the agreement, it would have a limited life and would be
classified as a definite asset.
International Financial Reporting Standards – IFRS

It is a set of international accounting standards stating how particular types of
transactions and other events should be reported in Financial statements. IFRS are
issued by the International Accounting Standards Board. IFRS should not be
confused with International Accounting Standards (LAS), which are the older
standards that IFRS replaced. (IASs were issued from 1973 to 2000.)
Leverage
1. The use of various financial installments or borrowed capital, such as margin, to
increase the potential return of an investment.
2. The amount of debt used to finance a firm's assets. A firm with significantly
more debt than equity is considered to be highly leveraged. Most companies use
debt to finance operations without necessarily increasing their equity. For example,
if a company formed with an investment of N15 million from investors, the equity
in the company is N 15 million and this being the money the company uses to
operate. If the company uses debt financing by borrowing N50 million, the
company now has N65 million to invest in business operations and has created
more opportunity to increase value for shareholders.
Therefore leverage helps both the investor and the firm to invest or operate but
with greater risk. If an investor uses leverage to make an investment and the
investment moves against the investor, the investor incurs greater loss than it
would have been if the investment had not been leveraged, thus leverage magnifies
both gains and losses.
Margin Account
It is a brokerage account in which the broker lends the customer cash to purchase
securities. The loan in the account is collateralized by the securities and cash. If the
value of the stock drops sufficiently, the account holder will be required to deposit
more cash or sell a portion of the stock. In a margin account, the investor is
investing with the broker's money.
Market Capitalisation (Market CAP)

This is the total market value of all of a company's outstanding shares. Market
capitalisation is calculated by multiplying a company's shares outstanding by the
current market price of one share. This figure is used to determine a company's
size, as opposed to sales or total asset figures.
Market Makers
A market marker is a broker-dealer firm that accepts the risk of holding a certain
number of shares of a particular security in order to facilitate trading in that
security. They can also be referred to as a bank or brokerage company that stands
ready every second of the trading day with a firm ask and bid price. When an
investor places an order to sell certain securities, the market marker purchases the
stock from the investor, even when the market marker does not have a seller
waiting. By so doing, the market marker is literally "making a market" for the
stock. Each market marker competes for customer order flow by displaying buy
and sell quotations for a guaranteed number of shares. Once an order is received,
the market marker immediately sells from its own inventory or seeks an offsetting
order.
Market markers compensate for the risks they take when they purchase a particular
stock from an investor for say N25.00 each (asking price), and then sell to a buyer
at
N25.05 (bid). The difference between the ask and bid price is only 5k, but by
trading millions of shares a day he is able to have so much to offset his risk.
Margin Trading
It allows securities to be purchased by making part payment of the purchasing
price of the security. The margin which is the credit the purchaser is allowed
according to the prevailing regulation is fixed usually by the country central
monetary authority (the central bank). The margin trading facility is a device to
stimulate an inactive market particularly during the nation's economic recession.
In margin buying, the trader borrows money (at interest) to buy a stock and with
the hope that it would rise. A margin call is made if the total value of the investor's
account cannot support the loss of the trade. In other words, a decline in the value
of the margined securities calls for additional funds to be made to maintain the
account equity. Invariably, the margin security or any others within the account
may be sold by the brokerage to protect its loan position.
Municipal Bond
This is debt security issued by a state, municipality or county to finance its capital
expenditures such as the construction of highways, bridges, schools, hospital.
NSE All-share Index

The NSE All-share Index is a total market (broad-base) index, reflecting a total
picture of the behaviours of the common shares quoted on the Nigerian Stock
Exchange. It is calculated on a daily basis, showing the movements of prices. It
started in January 1984, the base year, with a value of 100 and has now risen
beyond the 24,000 mark as at 25th October, 2010.
Options
Liking a choice whether to sell or purchase a certain security at a specified future
date at a stipulated price.
Ordinary Shares
Also known as common stock is any shares that are not preferred shares and do not
have any predetermined dividend amounts. An ordinary share represents equity
ownership in a company and entitles the owner to a vote in matters put before
shareholders. Ordinary shareholders are entitled to receive dividends if any are
available after dividends on preferred shares have been paid. They are also entitled
to their share of the residual economic value of the company should the business
go under; however, they are last in line after bondholders and preferred
shareholders for receiving business proceeds. As such, ordinary shareholders are
considered unsecured creditors.
Preferred Stock
Preferred stock is a class of ownership in a corporation that has a higher claim on
the assets and earnings than common stock. Preferred stock is a financial
instrument that has both debt (fixed dividends) and equity (potential appreciation)
characteristics and generally has a dividend that must be paid out before dividends
to common stockholders and the shares usually do not have voting rights.
Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-share
earnings.
Calculated as:
For example, if a company is currently trading at N23 a share and earnings over
the last 12 months were N1.50k per share, the P/E ratio for the stock would be 15.3
(N23/N 1.50k).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be
taken from the estimates of earnings expected in the next four quarters (projected
or forward P/E). A third variation uses the sum of the last two actual quarters and
the estimates of the next two quarters.
Prospectus
Prospectus is a disclosure and selling document which is made available to the
public in respect of the issue that is being floated. The prospectus contains all the
necessary information the public needs to know about the company whose
securities are being considered.
Raising Money from the Capital Market
To raise money from the capital market requires the services of issuing houses but
for listing of securities after issuance, the services of a stockbroker would be
needed. Stockbrokers also help investors to trade their securities in the Stock
Exchange. An individual or a company cannot go to the Stock Exchange to buy or
sell securities except through a stockbroker.
There are two main ways funds can be raised in the capital market;
a. Issuance of ordinary shares (common stock) in the case of equities
b. Borrowing in the case of debt instruments
Base-Year Analysis
1. It is the analysis of economic trends in relation to a specific base year. Base-year
analysis expresses economic measures in base-year prices to eliminate the effects
of inflation.
2. The analysis of a company's financial statements by comparing current data with
that of a previous year, or base year. Base-year analysis allows for comparison
between current performance and historical performance.
Record High
This refers to the highest historical price level reached by a security, commodity or
index during trading. The record high is measured from when the instrument first
starts trading and updates whenever the last record high is exceeded. The values
for record highs are usually nominal, which means they do not account for
inflation. All-time record highs typically represent significant price news for
companies with investor's inclination to purchase the stock believing that the
company will continue to perform well in the future.
Second Tier Securities Market
The 2nd tier securities market was introduced in Nigeria to assist small and
medium sized companies that are unable to meet the stringent requirements of the
first-tier market in raising long-term capital.
Securities Lending
The act of loaning a stock, derivative, other security to an investor or firm.
Securities lending requires the borrowers to put up collateral either cash, security
or a letter of credit. When a security is loaned, the title and the ownership are also,
transferred to the borrower.
Short Selling
The selling of a security that the seller does not own, or any sale that is completed
by the delivery of a security borrowed by the seller. Short sellers assume that they
will be able to buy the stock at a lower amount than the price at which they sold
short. Selling short is the opposite of going long. Short sellers make money if the
stock goes down in price.
Share Buy Back

It means a company buying back its shares from its investors at a price which is
satisfactory to the investor. Buying back may be resorted to when a corporation
wishes to reduce the number of its shares in the market, either to increase the
return on the shares still in the market or to eliminate threatening shareholders.
Share Capital
Share capital is the funds raised by issuing shares in return for cash or other
considerations. The amount of share capital a company has can change over time
because each time a business sells new shares to the public in exchange for cash,
the amount of share capital will increase. Share capital can be composed of both
common and preferred shares. Share capital is also known as "equity financing".
The amount of share capital a company reports on its balance sheet only accounts
for the initial amount for which the original shareholders purchased the shares
from the issuing company. Any price differences arising from price
appreciation/depreciation as a result of transactions in the secondary market are not
included. For example, suppose HAANET Consult Plc raised N5 billion from its
initial public offering. If 12 months later the total value of its shares increases to
N8 billion, the value of the share capital is still only N5 billion because HAANET
Consult Plc had received only N5 billion from the sale of its securities to the
investing public.
Sovereign Bond
A debt security issued by a national government within a given country and
denominated in a foreign currency, mostly in hard currency. The government of a
country with an unstable economy will tend to denominate its bonds in the
currency of a country with a stable economy. Because of default risk, sovereign
bonds tend to be offered at a discount.
Stock Market Index

It measures the daily movement of stock prices and is able to assess investors'
confidence in the market by their buy/sell attitude. When the stock index is on the
upward trend. It is an indication of positive economic performance.
Sovereign Wealth Fund – SWF
Pools of money derived from a country's reserves, which are set aside for
investment purposes that will benefit the country's economy and citizens. The
funding for a sovereign wealth fund (SWF) comes from central bank reserves that
accumulate as a result of budget and trade surpluses, and even from revenue
generated from the exports of natural resources. The types of acceptable
investments included in each SWF vary from country to country; countries with
liquidity concerns limit investments to only very liquid public debt instruments.
Weighted Average Market Capitalisation

A stock market indices weighted by market capitalisation of each stock in the
index. In such a weighting scheme, larger companies account for a greater portion
of the index. For example, if a company's market capitalisation is N1 million and
the market capitalisation of all stocks in the index is N100 million, then the
company would be worth 1 % of the index. The alternative to weighting by market
cap is a price-weighted index such as the Dow Jones Industrial Average.
Yield
This is the income return on an investment, interest or dividends received from a
security and is usually expressed annually as a percentage based on the
investment's cost, its current market value or its face
value. For example, there are two stock dividend yields.
If you buy a stock for N30 (cost basis) and its current
price and annual dividend is N33 and N1, respectively,
the "cost yield" will be 3.3% (N 1 /N30) and the
"current yield" will be 3% (N 1/N33). Bonds have four yields: coupon (the bond
interest rate fixed at issuance), current (the bond interest rate as a percentage of the
current price of the bond), and yield to maturity (an estimate of what an investor
will receive if the bond is held to its maturity date). Non-taxable municipal bonds
will have a tax-equivalent (TE) yield determined by the investor's tax bracket".
ITQ 3: What is a sovereign bond?
In this study session we have discussed the legal environment of financial market
where we discussed some of the laws guiding the operations of the legal
environment of financial markets in Nigeria and we also went further to understand
some terminologies in the financial markets.

1. Discuss the legal environment of the Nigerian capital market
2. Explain some terminologies in the capital market
3. What is the objectives of money laundry act,2011
4. Explain the term "insider trading"
5. Discuss extensively what an option trading is.
a. Visit U-tube: ???????????????? . Watch the video & summarise in 1 paragraph
b. View the animation on: ??????? and critique it in the discussion forum

ITA 1: It is anchored on the Investments and Securities Act (ISA) 2007.
ITA 2: The objectives of the Act are to make money laundering an offence, prohibit inflow of illegal cash, moni
ITA 3: Sovereign bond is a debt security issued by a national government within a given country and denominat
Adekanye, Femi;(1984) The Element of Banking in Nigeria, 2nd Ed (Bedfordshire:

Graham Bum,).
Adekanye, Femi, (1986) Practice of Banking, Volume 1. (Lagos: F&A publisher
ltd,)
Chaholiades, Miltiades, (1981) International Monetary Theory and Policy;
International Student Edition (London: Macgraw-Hill,Inc).
E.S.Ekazie;(1997) the element of banking(African-Fep publishers limited, Onitsha
Nig).
Van Horne, James C., (1986) Financial Management and Policy, 7th Ed.,
Peter, S. R & Sylvia, C. (2008). Bank Management & Financial Services (7 th
Khan, M. Y (2008). Financial Services (4th Edition). New-Delhi: Tata McGraw-
Hill Publishing Company limited.
STUDY SESSION 4
The Foreign Exchange Market
Introduction
2.0 Main Content
2.1 The Foreign Exchange Market
2.2 Geographical Extent of the Foreign Exchange Market
2.3 The Size of the Market
2.4 Functions of the Foreign Exchange Market
2.4.1 Transfer of Purchasing Power:
2.4.2 Provision of Credit:
2.4.3 Minimizing Foreign Exchange Risk:
2.4.4 Market Participants
2.4.5 Foreign Exchange Dealers:
2.4.6 Participants in Commercial and Investment Transactions:
2.4.7 Speculators and Arbitragers:
2.4.8 Central Banks and Treasuries:
2.4.9 Foreign Exchange Brokers:
2.4.10 Transactions in the Interbank Market
2.4.11 Spot Transactions:
2.4.12 Outright Forward Transactions:
2.4.13 Swap Transactions:
2.4.14 Foreign Exchange Rates and Quotations
2.4.15 Interbank Quotations:
2.5 Interbank Marketing
2.5.1 Interbank Foreign Exchange Market
2.5.2 Market makers
2.6 Interbank lending market
2.6.1 Interbank segment of the money market
2.6.2 A source of funds for banks
2.6.3 Funding liquidity risk
2.6.4 Longer-term trends in banks' sources of funds
2.6.5 Benchmarks for short-term lending rates
2.6.6 Monetary policy transmission
2.6.7 Interest rate channel of monetary policy
3.0 Tutor Marked Assignments (Individual or Group assignments)
Introduction:
In the previous study session, we discussed the legal framework of financial
market. We are going to discuss the foreign exchange market in this study session
as well as the functions of the foreign exchange market.

1. What foreign exchange market is all about?
2. The geographical extent of the foreign exchange market
3. Functions of the foreign exchange market
4. The foreign exchange dealers.
5. Interbank foreign exchange marketing.
2.0 Main Content

2.1 The Foreign Exchange Market
The foreign exchange market provides the physical and institutional structure
through which the money of one country is exchanged for that of another country,
the rate of exchange between currencies is determined, and foreign exchange
transactions are physically completed. A foreign exchange transaction is an
agreement between a buyer and a seller that a given amount of one currency is to
be delivered at a specified rate for some other currency.
2.2 Geographical Extent of the Foreign Exchange Market
Geographically, the foreign exchange market spans the globe with prices moving
and currencies traded somewhere every hour of every business day. The market is
deepest or most liquid early in the European afternoon when the markets of both
Europe and the U.S East coast are open. The market is thinnest at the end of the
day in California, when traders in Tokyo and Hong Kong are just getting up for the
next day. In some countries, a portion of foreign exchange trading is conducted on
an official trading floor by open bidding. Closing prices are published as the
official price, or 'fixing' for the day and certain commercial and investment
transactions are based on this official price.
2.3 The Size of the Market

In April 1992, the Bank of International Settlements (BIS)
estimated the daily volume of trading on the foreign
exchange market and its satellites (futures, options, and
swaps) at more than USD 1 trillion. This is about 5 to 10
times the daily volume of international trade in goods and services.
The market is dominated by trading in USD, DEM, and JPY, respectively. The
major markets are London (USD 300 billion), New York (USD 200 billion), and
Tokyo (USD 130 billion).
ITQ 1: What is a foreign exchange transaction?
2.4 Functions of the Foreign Exchange Market

The foreign exchange market is the mechanism by which a person or firms
transfers purchasing power from one country to another, obtains or provides credit
for international trade transactions, and minimises exposure to foreign exchange
risk.
i. Transfer of Purchasing Power: Transfer of purchasing power is necessary
because international transactions normally involve parties in countries with
different national currencies. Each party usually wants to deal in its own currency
but the transaction can be invoiced in only one currency.
ii. Provision of Credit: Because the movement of goods between countries takes
time, inventory in transit must be financed.
iii. Minimizing Foreign Exchange Risk: The foreign exchange market provides
"hedging" facilities for transferring foreign exchange risk to someone else.
ITQ 2: List 3 functions of the foreign exchange market
2.5 Market Participants

The foreign exchange market consists of two tiers: the interbank or wholesale
market, and the client or retail market. Individual transactions in the interbank
market usually involve large sums that are multiples of a million USD or the
equivalent value in other currencies. By contrast, contracts between a bank and its
client are usually for specific amounts, sometimes down to the last penny.
Foreign Exchange Dealers:

Banks, and a few nonbank foreign exchange dealers operate in both the interbank
and client markets. They profit from buying foreign exchange at a bid price and
reselling it at a slightly higher ask price.
Worldwide competitions among dealers narrows the spread between bid and ask
and so contributes to making the foreign exchange market efficient in the same
sense as securities markets. Dealers in the foreign exchange departments of large
international banks often function as market makers. They
stand willing to buy and sell those currencies in which they
specialize by maintaining an inventory position in those
currencies.
Participants in Commercial and Investment

Transactions:
Importers and exporters, international portfolio investors, multinational firms,
tourists, and others use the foreign exchange market to facilitate execution of
commercial or investment transactions. Some of these participants use the foreign
exchange market to hedge foreign exchange risk.
Speculators and Arbitragers:

Speculators and arbitragers seek to profit from trading in the market. They operate
in their own interest without a need or obligation to serve clients or to ensure a
continuous market. Speculators seek all of their profit from exchange rate changes.
Arbitragers try to profit from simultaneous exchange rate differences in different
markets.
Central Banks and Treasuries:

Central banks and treasuries use the market to acquire or spend their country's
foreign exchange reserves as well as to influence the price at which their own
currency is traded. In many instances they do best when they willingly take a loss
on their foreign exchange transactions. As willing loss takers, central banks and
treasuries differ in motive and behavior from all other market participants.
Foreign Exchange Brokers:

Foreign exchange brokers are agents who facilitate trading between dealers
without themselves becoming principals in the transaction. For this service, they
charge a small commission and maintain access to hundreds of dealers worldwide
via open telephone lines. It is a broker's business to know at any moment exactly
which dealers want to buy or sell any currency. This knowledge enables the broker
to find a counterpart for a client quickly without revealing the identity of either
party until after an agreement has been reached.
Transactions in the Interbank Market

Transactions in the foreign exchange market can be executed on a spot, forward, or
swap basis.
Spot Transactions:
A spot transaction requires almost immediate delivery of foreign exchange.
In the interbank market, a spot transaction involves the purchase of foreign
exchange with delivery and payment between banks to take place, normally, on the
second following business day. The date of settlement is referred to as the "value
date." Spot transactions are the most important single type of transaction (43 % of
all transactions).
Outright Forward Transactions:

A forward transaction requires delivery at a future value date of a specified amount
of one currency for a specified amount of another currency. The exchange rate to
prevail at the value date is established at the time of the agreement, but payment
and delivery are not required until maturity. Forward exchange rates are normally
quoted for value dates of one, two, three, six, and twelve months. Actual contracts
can be arranged for other lengths. Outright forward transactions only account for
about 9% of all foreign exchange transactions.
Swap Transactions:
A swap transaction involves the simultaneous purchase and sale of a given amount
of foreign exchange for two different value dates.
The most common type of swap is a spot against forward where the dealer buys a
currency in the spot market and simultaneously sells the same amount back to the
same in the forward market. Since this agreement is executed as a single
transaction, the dealer incurs no unexpected foreign exchange risk. Swap
transactions account for about 48 % of all foreign exchange transactions.
Foreign Exchange Rates and Quotations

A foreign exchange rate is the price of a foreign currency.
A foreign exchange quotation or quote is a statement of willingness to buy or sell
at an announced rate.
Interbank Quotations:
The most common way that professional dealers and brokers state foreign
exchange quotations and the way they appear on all computer trading screens
worldwide is called European terms. The European terms quote shows the number
of units of foreign currency needed to purchase one USD:
CAD 1.5770/USD
An alternative method is called the American terms. The American terms quote
shows the number of units of USD needed to purchase one unit of foreign
currency:
USD 0.6341/CAD
Clearly, those two quotations are highly related. Define the price of a USD in CAD
to be
S(CAD I USD) = CADI .5770 / USD
Also, define the price of a CAD in USD to be

S(USD I CAD) = USD0.6341 / CAD
Then, it must be that

S(CAD/USD)= S(USDICAD)
Because CAD 1.5770/USD = 1 / {USD 0.6341 / CAD}.
These rules also apply to forward rates as well. We will denote an outright forward
quote using the following notation:
F (CAD I USD)
Direct and Indirect Quotations:
A direct quote is a home currency price of a unit of foreign currency. An indirect
quote is a foreign currency price of a unit of home currency.
In the US, a direct quote for the CAD is
USD 0.6341/CAD
This quote would be an indirect quote in Canada.
Bid and Ask Quotations:

Interbank quotations are given as "bid" and "ask". A bid is the exchange rate in one
currency at which a dealer will buy another currency. An ask is the exchange rate
at which a dealer will sell the other currency. Dealers buy at the bid price and sell
at the ask price, profiting from the spread between the bid and ask prices: bid <
ask. Bid and ask quotations are complicated by the fact that the bid for one
currency is the ask for another currency:
Sb(USD/ CAD) = 1 .
Sa(CAD/USD)
Sa(CAD/USD) = 1 .
Sb(CAD /USD)
Example: A dealer provides you the following quote:

USD 0.6333 - 0.6349/ CAD.
This suggests that the bid price for the CAD is USD 0.6333/CAD and that the ask
price is USD 0.6349/ CAD.
The indirect version of this quote would be

CAD 1.5750-1.5790/USD
Clearly, a dealer willing to purchase CAD at a price of USD 0.6333/USD is

implicitly willing to sell USD at the reciprocal price of CAD 1.5790/USD. The
spread between bid and ask prices exists for two reasons: 1. Transaction costs and
dealers as financial intermediaries and 2. Profits.
The Law of One Price and Cross Rates

The law of one price states that homogenous goods and assets should have the
same price everywhere (efficient markets and free trade).
Cross Rates:
Many currency pairs are only inactively traded, so their exchange rate is
determined through their relationship to a widely traded third currency (generally
the USD):
For example, imagine that an investor in Thailand would like to purchase some
Barbados Dollars (BBD). As both currencies are quoted against the USD, the
investor can figure out the price of the Thai Baht (TUB) against the BBD.
Assuming that the exchange rates are:
Quotations:
Thai Baht: Barbados THB41.6982/USD
Dollars: BBD 2.0116/USD
The cross rate is THB/BBD is:

THB412.6982/USD = THB20.7289/BBD
BBD2.0116/USD
In general, the formula for cross rate is:
S(I / j) = S(i/USD) = S(I / USD) x S(USD / J)

S(j/USD)
2.6 Interbank Marketing

Interbank Foreign Exchange Market
The interbank market is the top-level foreign exchange market where banks
exchange different currencies. The banks can either deal with one another directly,
or through electronic brokering platforms. The Electronic Broking Services (EBS)
and Thomson Reuters Dealing are the two competitors in the electronic brokering
platform business and together connect over 1000 banks. The currencies of most
developed countries have floating exchange rates.
These currencies do not have fixed values but, rather, values that fluctuate relative
to other currencies. The interbank market is an important segment of the foreign
exchange market. It is a wholesale market through which most currency
transactions are channeled. It is mainly used for trading among bankers. The three
main constituents of the interbank market are the spot market the forward market
SWIFT (Society for World-Wide Interbank Financial Telecommunications) The
interbank market is unregulated and decentralised.
There is no specific location or exchange where these currency transactions take

place. However, foreign currency options are regulated in the United States and
trade on the Philadelphia Stock Exchange. Further, in the U.S., the Federal Reserve
Bank publishes closing spot prices on a daily basis.
ITQ 3: What is interbank market?
Market makers
Unlike the Stock Market, the Foreign Currency Exchange Market (Forex) does not
have a physical central exchange like the NYSE does at 11 Wall Street. Without a
central exchange, currency exchange rates are made, or set, by market makers.
Banks constantly quote a bid and ask price based on anticipated currency
movements taking place and thereby make the market. Major Banks like UBS /
Barclays Capital, Deutsche Bank and Citigroup handle very large currency trading
(forex) transactions often in billions of dollars. These transactions cause the
primary movement of currency prices in the short term.
Other factors contribute to currency exchange rates and these include forex
transactions made by smaller banks, hedge funds / companies, forex brokers and
traders. Companies are involved in forex transaction due to their need to pay for
products and services supplied from other countries which use a different currency.
Forex traders on the other hand use forex transaction, of a much smaller volume
with comparison to banks, to benefit from anticipated currency movements by
buying cheap and selling at a higher price or vice versa. This is done through forex
brokers who act as a mediator between a pool of traders and also between
themselves and banks.
Central banks also play a role in setting currency exchange rates by altering
interest rates. By increasing interest rates they stimulate traders to buy their
currency as it provides a high return on investment and this drives the value of the
corresponding central bank's currency higher with comparison to other currencies.
2.7 Interbank lending market

The interbank lending market is a market in which banks extend loans to one
another for a specified term. Most interbank loans are for maturities of one week or
less, the majority being overnight. Such loans are made at the interbank rate (also
called the overnight rate if the term of the loan is overnight). Low transaction
volume in this market was a major contributing factor to the financial crisis of
2007.
Banks are required to hold an adequate amount of liquid assets, such as cash, to
manage any potential bank runs by clients. If a bank cannot meet these liquidity
requirements, it will need to borrow money in the interbank market to cover the
shortfall. Some banks, on the other hand, have excess liquid assets above and
beyond the liquidity requirements. These banks will lend money in the interbank
market, receiving interest on the assets.
The interbank rate is the rate of interest charged on short- term loans between
banks. Banks borrow and lend money in the interbank lending market in order to
manage liquidity and satisfy regulations such as reserve requirements. The interest
rate charged depends on the availability of money in the market, on prevailing
rates and on the specific terms of the contract, such as term length. There is a wide
range of published interbank rates, including the federal funds rate (USA)/ the
LIBOR (UK) and the Euribor (Eurozone).
Interbank segment of the money market
The interbank lending market refers to the subset of bank- to-bank transactions that
take place in the money market. The money market is a subsection of the financial
market in which funds are lent and borrowed for periods of one year or less. Funds
are transferred through the purchase and sale of money market instruments highly
liquid short-term debt securities. These instruments are considered cash
equivalents since they can be sold in the market easily and at low cost. They are
commonly issued in units of at least one million and tend to have maturities of
three months or less. Since active secondary markets exist for almost all money
market instruments/ investors can sell their holdings prior to maturity. The money
market is an over-the-counter (OTC) market.
Banks are key players in several segments of the money market. To meet reserve
requirements and manage day-to-day liquidity needs/ banks buy and sell short-term
uncollateralized loans in the federal funds market. For longer maturity loans/ banks
can tap the Eurodollar market. Eurodollars are dollar-denominated deposit
liabilities of banks located outside the United States (or of International Banking
Facilities in the United States). US banks can raise funds in the Eurodollar market
through their overseas branches and subsidiaries. A second option is to issue large
negotiable certificates of deposit (CDs). These are certificates issued by banks
which state that a specified amount of money has been deposited for a period of
time and will be redeemed with interest at maturity. Repurchase agreements
(repos) are yet another source of funding.
Repos and reverse repos are transactions in which a borrower agrees to sell
securities to a lender and then to repurchase the same or similar securities after a
specified time, at a given price, and including interest at an agreed-upon rate.
Repos are collateralised or secured loans in contrast to federal funds loans which
are unsecured. Role of interbank lending in the financial system To support the
fractional reserve banking model The creation of credit and transfer of the created
funds to another bank, creates the need for the 'net-lender' bank to borrow to cover
short term withdrawal (by depositors) requirements. This results from the fact that
the initially created funds have been transferred to another bank. If there was
(conceptually) only one commercial bank then all the new credit (money) created
would be re-deposited in that bank (or held as physical cash outside it) and the
requirement for interbank lending for this purpose would reduce. (In a fractional
reserve banking model it would still be required to address the issue of a 'run' on
the bank concerned).
ITQ 4: What is interbank lending market?
A source of funds for banks

Interbank loans are important for a well-functioning and efficient banking system.
Since banks are subject to regulations such as reserve requirements, they may face
liquidity shortages at the end of the day. The interbank market allows banks to
smooth through such temporary liquidity shortages and reduce 'funding liquidity
risk'.
Funding liquidity risk
Funding liquidity risk captures the inability of a financial intermediary to service
its liabilities as they fall due. This type of risk is particularly relevant for banks
since their business model involves funding long-term loans through short-term
deposits and other liabilities. The healthy functioning of interbank lending markets
can help reduce funding liquidity risk because banks can obtain loans in this
market quickly and at little cost. When interbank markets are dysfunctional or
strained, banks face a greater funding liquidity risk which in extreme cases can
result in insolvency.
Longer-term trends in banks' sources of funds

In the past, checkable deposits were US banks' most important source of funds; in
1960, checkable deposits comprised more than 60 percent of banks' total liabilities.
Over time, however, the composition of banks' balance sheets has changed
significantly. In lieu of customer deposits, banks have increasingly turned to short-
term liabilities such as commercial paper (CP), certificates of deposit (CDs),
repurchase agreements (repos), swapped foreign exchange liabilities, and brokered
deposits.
Benchmarks for short-term lending rates

Interest rates in the unsecured interbank lending market serve as reference rates in
the pricing of numerous financial instruments such as floating rate notes (FRNs),
adjustable-rate mortgages (ARMs), and syndicated loans. These benchmark rates
are also commonly used in corporate cash flow analysis as discount rates. Thus,
conditions in the unsecured interbank market can have wide-reaching effects in the
financial system and the real economy by influencing the investment decisions of
firms and households.
Efficient functioning of the markets for such instruments relies on well-established
and stable reference rates. The benchmark rate used to price many US financial
securities is the three-month US dollar Libor rate. Up until the mid-1980s, the
Treasury bill rate was the leading reference rate. However, it eventually lost its
benchmark status to Libor due to pricing volatility caused by periodic, large swings
in the supply of bills. In general, offshore reference rates such as the US dollar
Libor rate are preferred to onshore benchmarks since the former are less likely to
be distorted by government regulations such as capital controls and deposit
insurance.
Monetary policy transmission

Central banks in many economies implement monetary policy by manipulating
instruments to achieve a specified value of an operating target. Instruments refer to
the variables that central banks directly control; examples include reserve
requirements, the interest rate paid on funds borrowed from the central bank, and
balance sheet composition. Operating targets are typically measures of bank
reserves or short-term interest rates such as the overnight interbank rate. These
targets are set to achieve specified policy goals which differ across central banks
depending on their specific mandates.
Interest rate channel of monetary policy

The interest rate channel of monetary policy refers to the effect of monetary policy
actions on interest rates that influence the investment and consumption decisions of
households and businesses. Along this channel, the transmission of monetary
policy to the real economy relies on linkages between central bank instruments,
operating targets, and policy goals. For example, when the Federal Reserve
conducts open market operations in the federal funds market, the instrument it is
manipulating is its holdings of government securities. The Fed's operating target is
the overnight federal funds rate and its policy goals are maximum employment,
stable prices, and moderate long-term interest rates. For the interest rate channel of
monetary policy to work, open market operations must affect the overnight federal
funds rate which must influence the interest rates on loans extended to households
and businesses.
As explained in the previous section, many US financial instruments are actually

based on the US dollar Libor rate, not the effective
federal funds rate. Successful monetary policy
transmission thus requires a linkage between the Fed's
operating targets and interbank lending reference rates
such as Libor. During the 2007 financial crisis, a
weakening of this linkage posed major challenges for
central banks and was one factor that motivated the creation of liquidity and credit
facilities. Thus, conditions in interbank lending markets can have important effects
on the implementation and transmission of monetary policy.
In this study session, we were able to discuss what the foreign exchange market is
all about, the geographical extend of the foreign exchange market, functions of the
foreign exchange market, the foreign exchange dealers and the interbank foreign
exchange marketing.
1. Discuss what you understand by the foreign exchange market
2. What are the functions of foreign exchange market?
3. Discuss who are the participants in foreign exchange market
4. Differentiate between interbank marketing and interbank lending market
5. Describe the size and geographical extend of the foreign exchange
market
a. Visit U-tube: & https://goo.gl/AoxQzL . Watch the video & summarise in 1
paragraph
b. View the animation on: https://goo.gl/cR6Djh https://goo.gl/cgbf8A and

critique it in the discussion forum.

ITA 1: A foreign exchange transaction is an agreement between a buyer and a seller that a given amount of one curr
ITA 2: 1. Transfer of purchasing power, 2. Provision of credit, 3. minimizing foreign exchange risk
ITA 3: The interbank market is the top-level foreign exchange market where banks exchange different currencies.
ITA 4: The interbank lending market is a market in which banks extend loans to one another for a specified term.

Graham Bum,).
ltd,)
International Student Edition (London: McGraw-Hill ,Inc).
Nig).
2.0 MODULE 2: Financial Institutions
Contents:
STUDY SESSION 1
Financial institutions
Introduction
2.0 Main Content
2.1 Historical Development of Nigeria's Financial Institutions
2.1.1 The Origin of Banks
2.2 Discussion Questions
Introduction:
You are welcome to another study session. In this study session you will be
introduced to the topic financial institutions which will form the basis of our
discussion in the next study session.

1. Brief Historical development of Nigerian financial institutions
2. Understand what a bank is
2.0 Main Content
2.1 Historical Development of Nigeria's Financial Institutions
The Origin of Banks
According to history, in the medieval age of history where there was no
civilization, there was nothing like banks all over the whole world. Banking first
came into Britain by accident rather than design through three classes of people,
viz., the goldsmiths, silver smiths and the money lenders and since then spread to
everywhere, including Nigeria. The fact that these set of people were wealthy and
as such could not be fraudulent to other people's money, coupled with the fact that
according to the nature of their work, they had strong rooms where valuable
securities could be kept, people customarily deposited their securities with them.
At the early stage, the goldsmiths charged the public for the services they provided
for them. But as time went on, by means of experience, they realized that the
money deposited with them was not usually withdrawn at once. Immediately they
received deposits, they lent it out to people with security, thereby making a high
rate of interest which they shared with the depositors. This interest they paid the
depositors acted as a sort of inducement to them as well as enticing other
merchants to deposit with them. This marked the beginning of the British banking
system.
The goldsmiths kept separate accounts for different individuals. Ranging from this
time, a debtor could settle his debts by taking the creditors
to the appropriate quarters from which the debts were not
paid in cash but the accounts of the creditors adjusted.
They also issued receipts to the depositors in small
denominations to cover the deposits. This also marked the
beginning of the issue of bank notes. From the work of the Goldsmiths, Silver
Smiths and the Money lenders, modern banks developed. Today as could be seen.
Bank notes and cheques have taken the place of the goldsmiths' receipts while
Banks take the place of their strong room. Hence we can safely conclude that the
goldsmiths were the fore runners of modern banking system.
The development of modern financial institutions in Nigeria is fairly recent when

compared with
the Traditional financial institutions were in existence the before the coming of the
Europeans.
ITQ 1: What are the three classes of people that banking came through?
The first commercial bank (British Bank of West Africa) was established in 1894.
It is now known in Nigeria as ‘First Bank of Nigeria Plc. After its establishment,
other foreign banks such as Union Bank PLC, United Bank for Africa etc, came
into existence. Before independence, only a few financial institutions (Institutions
Companies, Commercial Banks, and Merchant Banks etc) were indigenous ones.
The first servicing indigenous bank (National Bank of Nigeria) established in
1933.
The Central Bank of Nigeria was established in 1959. Before the establishment of
Central Banks in British West Africa, what existed (then was the West African
Currency Board (established in 1912). Its main function was the issuing of the
West African Pound converting It to the pound sterling as the need arose. The
setting up of Central Banks in West African countries was done for a number of
reasons: to effectively control the activities of commercial banks and other
financial institutions, to have a body to formulaic and implement government
monetary and financial policies, and to foster the development of the money and
capital markets in West Africa.
The setting up of the Central bank of Nigeria institutions. The need for rapid
economic development, the provision of necessary
incentives by government and the Central Bank
and the high profit making tendency of financial
institutions (especially in the wake of deregulation
of credit control in the early 1990s) saw an
astronomical increase in the number of financial institutions in Nigeria. The
Nigeria's Enterprises Promotion Decree (1977) led to the death of fully foreign-
owned financial institutions. In commercial banks, for example
Nigerians now have at least 60% equity interest in such banks as First Bank, Union
Bank etc. which were -previously completely foreign-owned.
ITQ 2: What was in existence before the Central Bank of Nigeria?
In this study session, we were only able to discuss the historical development of
Nigerian financial institutions.

Discuss the historical development of Nigerian financial institutions.
a. Visit U-tube: https://goo.gl/XY5NLA & https://goo.gl/euszBq . Watch the video &
summarise in 1 paragraph
b. View the animation on: https://goo.gl/zaKR6e and critique it in the discussion

forum

ITA 1: The gold smith, silver smiths and the money lenders.
ITA 2: The West African Currency Board (established in 1912)

Graham Bum,).
ltd,)
International Student Edition (London: McGraw-Hill, Inc).
Nig).
STUDY SESSION 2
Types of Financial Institution
Introduction
2.0 Main Content
2.1 Types of Financial Institutions
i. Traditional Financial institutions
ii. Central Bank
iii. Commercial Banks
iv. Non-Bank Financial Institutions
v. Development Banks
vi. Mortgage Banks
vii. Insurance Companies
viii. The Merchant Banks
ix. The Discount Houses
2.2 The Commercial Bank
i. Acceptance of deposit:
ii. Granting Loan:
iii. Issuance of Cheque:
iv. Agents for Payment:
v. Issue of Bankers' Draft and Travelers Cheques:
vi. Discounting Bills of Exchange:
vii. Acting as a bailee, trustee and referee:
viii. Custodian of Valuable Commodities
Introduction:
In the previous study session we briefly discussed the historical development of
financial institutions. We are going to continue our discussions in this study
session with the types of financial institutions.

1. Types of financial institutions
2. Functions of mortgage banks
3. Functions of commercial banks
2.0 Main Content

2.1 Types of Financial Institutions
Financial Institutions can be grouped under the following:
a. Traditional Financial institutions: This is a kind of cooperative which consists
of people who agree to contribute a certain sum of money each and hand it over to
a member of the group and at the agreed period, the money is returned to the
depositor with or without interest. Sometimes the keeper of the money gives it out
as loan to other members or members of the public. The purpose of this type of
financial institution is to encourage thriftiness amongst members. A good example
include Etibe, Esusu, Asusu, Adashi, etc
b. Central Bank: The Central Bank is the apex regulatory body of the financial
system of a country. It is the pinnacle of all financial institutions of a country. It is
the government bank as well as the bankers’ bank. The central bank has the
prerogative responsibility of controlling and regulating the flow of money in
circulation in a country and also has the absolute monopoly of issuing the notes
and coins in the country. It has the right to regulate and control the operations of
other financial institutions in accordance with the monetary and economic policies
of the government. It does not operate on profit maximization principles.
ITQ 1: what is the major role of the central bank?
c. Commercial Banks: These are financial institutions that perform the services of
holding people's money and accounts and using such money to make loans and
other financial services available to customers. The loans are usually for short and
medium terms. Commercial banks are regarded as the most important bank in a
country since they act as the bank of the people. Commercial banks can create
money in the economy.
d. Non-Bank Financial Institutions: These are so called because they are not
banks in themselves in the strictest sense of it but perform the functions performed
by a commercial bank. These include Hire purchase, Finance Companies, savings
banks, Insurance companies, Merchant Banks, Building Societies, Housing
Mortgage Banks, etc. These banks have much in common with the commercial
banks. They are financial intermediaries borrowing from the public through
deposits and lending to the public through loans. Non-bank financial institutions
differ from commercial banks in that while the commercial banks pay back their
deposits on demand-or at a short notice, they pay back theirs on fixed or specific
periods. Commercial banks perform retail banking services, accepting deposit of
any kind from anybody for any purpose and also gives loans of any amount to
anybody for any purpose, the non-bank operate wholesale banking accepting
deposits of a specific amount and grants loans for specific purposes and only above
certain minimum amounts.
ITQ 2: what are some of the role performed by non-bank financial institutions?
e. Development Banks: These are financial institutions set up by the government

to provide long and medium term loans to group of individuals and governments
for the development of the economy. They provide financial assistance in high
risk, low profit and long gestation period investments which are attractive to
commercial banks. Development banks differ from all other types of banks in that
while others accept deposit from the public, they do not accept deposit from the
public. The government sets them up and money is provided for loans. The lending
operation is purely on long term basis. Also, they only lend money for specific
purposes. They are either wholly government owned or jointly owned by
government, private institutions and individuals. Examples include the Nigerian
Industrial Development Bank (NIDB) set up for the development of industries;
Nigerian Agricultural and Cooperative Bank (NACB) now Nigerian Agricultural,
Co-operative and Rural Development Bank (NACRDB) set up for the development
of agriculture; Nigerian Bank for Commerce and Industry (NBCI) set up for the
development of commerce and industry; Federal Mortgage Bank of Nigeria
(FMBN) set up for the development of housing: Nigerian Export and Import Bank
(NEXIM) set up for the development of imports and exports, etc. There are two
types of development hanks. These are functional development banks set up for
functional development of the country such as NBC1, NIDB, NACB, FMBN,
NEXIM, etc., and geographical development banks set up for the development of a
particular area or region of the country such as National Development Bank, Area
Development Bank, International Development Bank (such as the World Bank,
International Finance Corporation (IFC), International Development Association
(IDA) and African Development Bank (ADB).
f. Mortgage Banks
A mortgage bank is specifically set up for the purpose of providing long-term loans
for building houses, e.g. Federal Mortgage Bank, Imani Mortgage Finance Ltd.
Functions of Mortgage Banks

(i) Provision of long-term housing loans: They make loans to people and
organisations who wish to build their own houses.
(ii)Acceptance of money deposits: They accept deposits from people and
organisations, especially those who wish to save part of the money required for
setting up their own houses.
(iii)Encouragement of the growth of industries which produce building materials:
By encouraging the setting up of houses by individuals and organisations, there
is a higher demand for building materials, this in turn encourages the industries'
output.
(iv)Provision of advice: They advise investors (those
wishing to set up their own houses) on how to
invest meaningfully, how to raise capital, how to
cut down costs, etc.
(v) Execution of government housing policies: They
assist the government in its policies relating to the
provision of houses eg. The Federal Housing Scheme for Civil Servant and
Federal Low Cost Housing Projects etc.
g. Insurance Companies An insurance company is a financial institution whose
primary function is to receive premiums and enter into contract with individuals
and organisations (the insured) with the purpose of indemnifying, (pay
compensation to) the insured if they suffer certain losses in future.
Functions or Role's of Insurance Companies

(i) Pooling of risks: The insured pay premiums which are pooled into a fund.
Compensation is paid to those who suffer losses from the fund.
(ii) Boosting expansion of commercial and industrial banks: Entrepreneurs are
encouraged to expand their businesses being fully aware that they will receive
compensation if they incur certain loses.
(iii)The provision of finance to local authorities and other bodies: this ability to
branch out into markets other than their traditional one’s stems directly from
the discount houses' high standing and reputation for integrity. In countries
where no system of specialised discount houses has yet developed, these
functions are performed by other financial institutions, such as the commercial
banks and the merchant banks.
h. The Merchant Banks

These are financial institutions that provide specialised services like acceptance of
bills of exchange, corporate financing, portfolio management, equipment leasing
and acceptance of deposits.
Merchant banks are important financial intermediaries for industrial concerns.

Although relatively recently introduced into West African countries, they have
already contributed significantly to the progress and development of the Nigerian
economy, no doubt, because of their close connections with some of the largest
banks all over the world. In addition, they have within their reach enormous
technical human and financial resources.
Because of the under-developed nature of the money and capital markets in most
West African countries, merchant banks are uncommon there. The first merchant
bank to establish a branch in Nigeria was Philip Hill, in I960, which changed its
name to Nigerian Acceptances Limited in 1965; others include the Nigerian
Merchant Bank (established in 1973), the First National City Bank of New York
(1974), ICON Securities Limited, the International Merchant Bank and the Chase
Merchant Bank.
The importance of the merchant banks cannot be judged by their assets, however,
because they provide a number of services that are not easily quantifiable. Their
main functions can be summaried as follows:
(a) They assist in the sale of shares to the public. During the indigenisation
exercise in Nigeria, the merchant banks helped to underwrite some of the
issues and provide the necessary expertise in terms of marketing and pricing
of company shares. In addition they provided funds for privately placed
equities.
(b) They deal in Stock Exchange securities. When a company wants to raise new
long-term capital it will normally ask a merchant bank to arrange the issue of
the shares.
(c) Merchant banks act as general financial advisers to their industrial clients by
guiding them not only in connection with new issues but also on the timing
and scale of investment and on the merits and demerits of take-over bids and
mergers.
(d) They might provide fixed-interest medium-term loans to their clients. For
example, to finance the insinuation of new machinery which does not require
the raising of extra long-term capital.
(e) Although on a smaller scale, merchant banks perform normal banking functions
like any other commercial bank. They prepare documentary credits, accept and
discount hills, and open and confirm letters of credit.
(f) They act as acceptance houses and have close connections with the public
sector by holding modest amounts of Treasury bills.
(g) They provide advice and guidance to institutions on the management of
investment portfolios belonging to pension funds and superannuation funds.
i. The Discount Houses

Discount houses play an important part in the issue and distribution of Treasury
bills. In well-developed money and capital markets such as those in Britain, the
discount houses are responsible for handling most of the businesses in short-term
securities. Their functions today involve gathering funds that are temporarily
surplus to the requirements of the large financial institutions, and channeling them
towards other organisations temporarily in need of money. In this way they act as
middlemen providing an important service to both sides of the market. Those with
surplus funds do not have to seek those wanting to borrow but simply lend to the
discount houses, while those wanting to borrow go direct to the discount houses.
Most of the discount houses funds come from the commercial banks. Other sources
include industrial and commercial firms with cash assets available for a short
period.
The main functions of the discount market can be summarized as follows:

(a) The provision of short-term finances for industry and trade through bills of
exchange
(b) The provision of short-term finances for the Government through the
acquisition of Treasury bills in particular as guarantee to the Government
that all Treasury bills will be taken up each week.
(c) The provision of safe liquid assets to the banking system as and when they
are wanted.
ITQ 3: What are the categories of financial institutions?
2.2 The Commercial Bank

A commercial bank is a joint stock financial institution which accepts deposit of
money from the public and repays cash on demand with the sole aim of raising
profits for the shareholders who wish to take advantage of the money and varied
services which they provide. The function of the commercial banks inter alia could
be seen as below:
i. Acceptance of deposit: This is the primary function of the bank Commercial
banks accept deposits from people and thus credit them which the amount of their
deposit. They accept deposit under various accounts, viz., Deposit Account:
Account withdraw able after a specified period of notice. They pay interest to the
depositors usually at 2% below bank rate. Current Account: This is withdraw
able on demand by the use of a cheque. In this case, no interest is paid to the
depositors rather the bank charges them interest for the services provided for them
Home Safe or Saving Accounts: This accounts opened to customers to place
money in a small safe, which is periodically taken to the bank to be opened. And
the proceeds credited to the customers accounts.
ii. Granting Loan: Commercial banks make money available to customers who
are in dieing need of money to finance their businesses. This of course is done to
customers who are able to offer acceptable securities. Customers could obtain
money from the bank through (a) Loan Account Payable to customers who may
not have any hank account but are able to offer acceptable securities. Banks do
charge interest on loan accounts, and (b) Overdraft given to people who are
already bank customers. They are allowed to withdraw more than what they
deposited and thus pay interest on the amount overdrawn.
iii. Issuance of Cheque: Cheques are issued to customers who have current
accounts with the bank. With the use of cheque a debtor can settle his accounts
with a creditor without the use of actual cash.
iv. Agents for Payment: Banks act as agents for their customers. They collect
cheques, bills of exchange, etc on behalf of their customers. Apart from the agency
of payment, banks also serve their customers in payment of subscription, insurance
premium, salaries, rents, etc.
v. Issue of Bankers' Draft and Travelers Cheques: Another function of the bank
is the issue of banker draft and travelers cheque. This is particularly useful to those
traveling afar such that instead of making away with the actual cash they go to the
bank to obtain this cheque, which is cashable at a bank of their destination. This
reduces the problem of theft while traveling.
vi. Discounting Bills of Exchange: Commercial banks discount bills for their
customers. This simply is the purchase of at their
face value less-Interest for the period to run before
maturity. Discounting bills of exchange enables the
creditors to be paid at once and at the same time
allows the debtors a period of credit. This of course
is among the various ways of bank lending money to customers.
vii. Acting as a bailee, trustee and referee: A commercial bank acts as a bailee
and trustee for its customers. This means that it will agree to take care of its
customer's property and other valuables. It can give advice to its customers on
available investment opportunities in various firms and industries.
viii. Custodian of Valuable Commodities
Commercial banks provide facilities for the safe keeping of valuables such as gold,
marriage certificates, jewelleries, marriage rings, and other valuable commodities.
ITQ 4: What is a commercial bank?
In this study session we have discussed the types of financial where we discussed
function of mortgage bank, functions of commercial banks and the role of
insurance companies.

1. Describe a financial institution
2. What are the types of financial institutions?
3. Analyse the definition of a commercial bank and discuss its functions
4. What is the role of insurance company in economy development
5. Explain the functions of Central Bank of Nigeria
6. Differentiate between a development bank and a mortgage bank
7. What are the benefit of traditional financial institutions?
8. Discuss what you understand by non bank financial institutions
a. Visit U-tube: https://goo.gl/fS2Mun & https://goo.gl/TPZ56d . Watch the video
& summarise in 1 paragraph
b. View the animation on: https://goo.gl/R4dbai and critique it in the discussion forum

ITA 1: It has the right to regulate and control the operations of other financial institutions in accordance with th
ITA 2: They include Hire purchase, Finance Companies, savings banks, Insurance companies, Merchant Banks
ITA 3: Traditional financial institutions, Central bank, Commercial banks, Non bank financial institutions, Mer
ITA 4: A commercial bank is a joint stock financial institution which accepts deposit of money from the public

Graham Bum,).
ltd,)
Nig).
STUDY SESSION 3
The Roles of Central Bank
Introduction
2.0 Main Content
2.1 The Central Bank
2.2 Functions of Central Bank
i. Issuance and Replacement of Bank Notes
ii. Government's Bank
iii. Monetary Policy
iv. International Functions
v. Reservoir of Gold
vi. Bankers' Bank
vii. Lender of Last Resorts
2.3 Control of Commercial Banks by the Central Bank
i. Open Market Operations (OMO)
ii. Bank Rate
iii. Liquid asset ratio
iv. Special Deposit
v. Directives
vi. Moral suasion:
vii. Funding:
2.4Problems of Financial Institutions in Nigeria
Introduction:
The discussions in the previous study session was limited to the types of financial
institutions. However, in this study session, we are going to discuss the roles of
central banks, you will appreciate the fact that Central Banks play significant role
in the development of the economy.

1. What is the central bank?
2. The functions of the central bank.
3. How do the central bank control commercial banks?
4. Understand the problems of financial institutions in Nigeria.
2.0 Main Content

2.1 The Central Bank
The Central Bank is always an instrument of the central government in carrying
out monetary and fiscal policies. The Nigerian Central Bank was established in
1959) and since then, its primary purpose is to regulate the flow of money and
credit in national economy.
The history of the central bank could be traced back to

1694 when the Bank of England was established as an
ordinary Joint stock bank. But it gradually assumed a privileged position in the
conduct of the nation’s affairs and seems to compete in the normal commercial
banking field after the Bank Charter Act of 1844 until it formerly nationalized in
1946. In the United States, the Central Bank is the Federal Reserves System
organised in 1930. All Central Banks perform the same functions even though they
have different forms of organisation.
2.2 Functions of Central Bank

The Central Banks perform the following functions:
i. Issuance and Replacement of Bank Notes: The Central Bank supervises the
issue and replacement of bank notes which are the principal forms of legal tender
in Nigeria. In Nigeria, the Central Bank of Nigeria is responsible for the issuance
of Naira and Kobo and is responsible for the replacement of old notes with new
ones.
ii. Government's Bank: It is the bank of the government, keeping the accounts of
the Exchequer (Minister of Finance) and many other government departments. It
receives money (e.g. the proceeds of taxation) from the government and makes
payment on their behalf. It manages the National debts, arranging new bond issues.
It keeps the register of the bondholders, records, transfers and pays interest in
respect of all government loans. It also makes short-term loans to the government.
When the government requires money, it needs to borrow and it does so by
printing bonds some of which are sold to the public. But the more usual way of
raising funds is to sell bonds through the Central Banks.
iii. Monetary Policy: It controls and regulates the supply of money. This it does
through various ways: (a). Controlling the issue of currency (b). Carrying out
monetary policy of the government merely through its open market operations, (c)
fixing the bank rate (i.e. the rate at which it will agree to rediscount bills of
exchange), (d) reserves requirement - in most countries, the Central Bank forces
the commercial banks to hold cash reserves where in excess of what prudent could
dictate, (e) Special deposits - the Bank of England, for instance, was empowered to
require the commercial banks to make special deposits with it in addition to their
normal reserve requirement (legal minimum ratio). (f) Bank directives to
commercial hanks on the areas they should make loans available to the public and
at what rate.
iv. International Functions: It manages international aspect of the government’s
monetary affairs, supervising the operation of exchange control and exchange
equalization accounts. It also maintains close co-operation with the Central Banks
in other countries, Participates in the work of international institutions to which
country is a member. E.g International Monetary Funds (I.M.F) International Bank
for Reconstruction and Development (I.B.R.D) otherwise known as World Bank.
v. Reservoir of Gold: - It is the custodian of the country's gold reserve and foreign
currency.
vi. Bankers' Bank: It is the banker's Bank, acting for the commercial banks in
much the same capacity as they act for their customers. The commercial banks
need a place to deposit their funds, they need a mechanism for transferring funds to
other bank (clearing system) and they need a place to borrow money when they are
short of liquid funds. The central bank performs these functions. All commercial
banks maintain accounts with the central banks. Apart from accepting deposits
from the commercial bank central bank transfers these funds from account of one
bank to another.
vii. Lender of Last Resorts: It acts as the tender of last resorts in the sense that it
lends money to the commercial banks when they are in need e.g rediscounting of
commercial papers. The rate of interest the commercial banks pay to the central
bank is known as bank rate.
ITQ 1: what are the functions of the central bank?
Other Functions: The bank is responsible for giving advice to politicians, rulers
and government departments on the formation of policies as well as for seeing that
this policy is implemented. The bank is involved in the problem of maintaining
equilibrium in the balance of payments. It also issues directives to the commercial
banks from time to time, emphasizing the main objectives of current monetary
policies and requesting their co-operation. The Central Bank is in between the
commercial banks and the government. It should be noted that the presence of the
expatriate banks in most parts of Africa makes the control and the supervisory
actions of the monetary policy of the Central bank difficult, if not sometimes
ineffective.
2.3 Control of Commercial Banks by the Central Bank

In order to carry out its monetary policy and thus be able to regulate and control
the supply of money, the central bank employs
different types of weapons to control the activities
of commercial banks. With these weapons, the
Central Bank force the commercial banks to dance
to its tune and as such be to expand or contract the
volume of purchasing power. To stabilise the
economy, the central bank employs the following techniques:
i. Open Market Operations (OMO): The most important tool which the Central
Bank uses to influence the supply of money in an economy is the purchase and sale
of government bonds in the open market. The use of this tool depends on the
financial situation in the economy. If there is too much money in circulation
(inflationary situation) and the Central Bank wants to contract the volume of
money in circulation, it sells bonds in the open market thereby collecting money
from the public. On the other hand, if there is too less money in circulation
(deflationary situation) and the Central Bank wants to expand the volume of
money, it can pump in money to the economy by buying back the bonds from the
public in the open market. More money will now be in circulation and the
commercial banks can now enhance loans to the public.
ii. Bank Rate: This is another weapon which the central bank uses to control the
money supply in the economy and may otherwise be referred to as the rediscount
rate. The interest rates charged by the commercial banks and other financial
institutions depends on the bank rate fixed the central bank. If the bank rate is high,
the interest rate charged by the commercial bank and other financial institution s
will also be high and if the bank rate is low, the interest rate will also be low. Thus,
if there is too much money in circulation and the central bank wishes to contract
the volume, it can raise the bank rate such that it becomes dearer and less
profitable to borrow. Conversely, if there is too less money in circulation and the
central bank wants to increase the money supply by increasing loans and advances
it can reduce the bank rate when the bank rate is reduced, the interest rate charged
will equally be reduced and the public will be attracted to obtain more loans and
advances and hence more money in circulation.
iii. Liquid asset ratio: This could be called Reserved Requirements or Legal
Reserves Ratio. All commercial banks are legally required to maintain a minimum
ratio between liquid assets and deposits. The liquid ratio in Nigeria is 25 per cent.
The central banks have the right to raise or lower the required legal reserve ratio
that the Commercial banks keep with them. If there is too much money in
circulation and the Central Bank wants to tighten credit facilities, it can raise the
rate of the reserve ratio thereby reducing the powers of the commercial banks to
give loans. But, on the other hand, if there is little money in the economy and the
central bank wants to pump in more money, it can reduce the rate of the legal ratio
such that the commercial banks are now able to give out loans and advances to the
public.
iv. Special Deposit: In addition to the reserve requirement as required by the law,
depending on the situation in the country, the Central Bank can ask the commercial
banks to make special deposits. This will further reduce the amount of cash in the
possession of the commercial banks and will twist their hands from giving more
loans.
v. Directives: This refers to the directives given by the central bank to commercial
banks with regards to lending. This could be to either reduce or increase lending
generally or to increase lending to priority sectors of the economy.
vi. Moral suasion: This refers to subtle appeal by the Central Bank to the
commercial banks to pursue credit policies. These appeals must be obeyed by the
commercial banks.
vii. Funding: This is a situation whereby short-term securities are changed to long-
term securities
ITQ 2: What are the techniques used by Central Bank to Control credit?
2.4 Problems of Financial Institutions in Nigeria
(i) Concentration in urban centers: Most modern financial institutions are
located in urban centers leading to Inadequate mobilisation of savings in
rural areas.
(ii) Inadequate collateral securities and poor records of business activities by
individual and firms. These limit the ability of the financial institutions to
make loans.
(iii) High incidence of bad debts: Many borrowers do not repay their loans.
(iv) High incidence of fraud by officials and customers: There have been many
reported cases of fraud by officials and customers of financial institutions.
(v) Strict government control: The government through the Central Bank may
impose a number of stringent controls which may reduce the ability of
financial institutions to make loans.
(vi) Unnecessary political interference: The government sometimes interferes
with the decision-making process in some of the financial institutions
through its appointment of Board members.
(vii) Inadequate mobilisation of savings and capital: They do not mobilise
adequate deposits due to illiteracy and lack of confidence.
(viii) Limited use of cheques and other financial instruments. The use of cheques,
bank, bank, drafts, and bill of exchange e.t.c are still limited thereby
reducing transactions.
In this study session, we were able to discuss the role of central bank. We went
further to discuss the functions of the central bank, control of the commercial by
the central bank and we concluded by discussing the problems of financial
institutions in Nigeria.

1. Discuss the functions of Central Bank
2. What are the techniques used by central banks to control commercial banks?
3. Discuss the problems of financial institutions
a. Visit U-tube: https://goo.gl/9txn2T & https://goo.gl/2sXbUf . Watch the video &
b. View the animation on: https://goo.gl/8Rym3S and critique it in the discussion

forum

ITA 1: issuance and replacement of notes, governments bank, monetary policies, international functions, reser
ITA 2: i. Open Market Operations (OMO) ii. Bank Rate iii. Liquid asset ratio iv. Special Deposit v. Directives
Graham Bum,).
ltd,)
Nig).
STUDY SESSION 4
Role of the Stock Exchange Market
Introduction
2.0 Main Content
2.1 The stock exchange market
2.2 Function of Stock Exchange
2.3 The Stock Exchange
2.4 Role of stock exchanges
i. Raising capital for businesses
ii. Mobilising savings for investment
iii. Facilitating company growth
iv. Profit sharing
v. Creating investment opportunities for small investors
vi. Government capital-raising for development projects
2.5 The Nigerian Stock Exchange
i. Primary vs. Secondary Market
3.0 Tutor Marked Assignments (Individual or Group assignments)

4.0 Study Session Summary and Conclusion
Introduction:
The role of Central bank was the basis of our discussions in the previous study
session, I am quite sure that you agree with me that central bank plays a vital role
in an economy. In this study session, we are going to discuss the role of the stock
exchange market, you will also appreciate the role it plays in its own part.

1. What is the stock exchange?
2. What are the functions of the stock exchange?
3. What are the roles of the stock exchange?
4. Understand the operation of Nigerian stock exchange.
2.0 Main Content

2.1 The stock exchange market
The stock exchange market is a market which deals with the buying and selling or
long term financial assets (securities) such as stocks and shares e.g. the Nigerian
Stock Exchange (formerly the Lagos Stock Exchange) was established in 1960.
Dealers in the Stock Exchange

On the Stock Exchange there are two main dealers: The Stock brokers and the
Jobbers. The brokers deal directly with the public. They act as their agent who buy
and sell securities on their behalf and offer them advice. They charge a
commission for their functions.
The Jobber is the main dealer at the Stock Ex-
change. He does not deal directly with the public
but with brokers. The broker requests the Jobber
for his price for a particular security. He quotes
two prices - a higher price for selling and a lower
price for buying. His profit is known as the
'jobbers turn' i.e. the difference between his
selling and buying price.
ITQ 1: What is the stock exchange market?
2.2 Function of Stock Exchange

(i) Raising of long-term capital for investment: It enables firms and the
government to raise long-term finance for investment.
(ii) Easy marketing of long-term securities: It enables individuals and firms to
easily dispose of or purchase stocks and shares of companies.
(iii) Protection of the public against fraud: It scrutinises the accounts of publicly
quoted companies to protect shareholders interest.
(iv) Offering investment, opportunities for those with small income base It,
advertises the prices of securities thereby enabling those with small capita! to
acquire shares (invest).
(v) It ads as a barometer for measuring the economic performance of firms and
general level of economic prosperity. It monitors the economic performance
of quoted companies. The state of the market (i.e. a boom or depression in the
buying and selling of securities) indicates the state of the economy).
(vi) Stabilisation of prices of securities. The Jobber acts like a wholesaler. He
holds stocks of securities and may manage supply in such a way as to prevent
frequent price fluctuations.
2.3 The Stock Exchange

But what happens if an investor, either an institution or an individual, wants to
withdraw his money when the company has already spent it on machinery and
therefore cannot repay'? The Stock Exchange reconciles the opposing view- points,
for it is here that the shareholder can turn his asset into cash without damaging the
company in which lie has invested. If an investor has N100 of securities to sell, he
has to contact a stockbroker who will go to the Stock exchange to sell them on his
behalf: he must employ a broker as his agent, because members of the public are
not allowed into the Stock exchange (except as observers).
The Stock exchange itself is divided into a number of markets and the broker will
go to that area of the floor of the Exchange where there is a market for the shares
he has to sell. There he will sell the shares for the best price he can obtain. This
price will depend on a number of factors including supply and demand. If the
shares are those of a declining company, there are likely to be many sellers and
prices will be low; hut if the shares are for expanding and profitable companies
then demand and price will be high. Political movements, general elections and
military crises can also have an effect on the level of Stock Exchange prices.
Whatever the price obtained, the Stock Exchange has allowed the original investor
to obtain his money without embarrassing the company which regards the
investment as permanent. The transaction affects the company only insofar as it
will have to alter its register of shareholders.
Without the existence of u dependable market for securities individuals would be
very reluctant to commit their savings to investments for tear that they would never
be able to sell their securities. One of the most important aspects of launching a
new public company is to obtain the Stock Exchange Council's approval for
dealing in the shares to take place. Without this approval, which is not lightly
granted, the task of an issuing house in raising money becomes monumental.
The provision of a market for securities is the most important function of the Stock
Exchange but it does perform other tasks. As we have seen, its very existence
enables firms to raise capital. Moreover, the mass of information it issues gives an
important guide to the profitability of different industries and companies. Finally, it
serves as an important 'economic indicator', rising prices indicating optimism about
the future of the economy and falling prices showing pessimism.
To some extent price fluctuations may be the result of speculation. In the Stock
Exchange special terms are applied to speculators. Bulls are those who buy shares
today at N1.00 hoping to sell tomorrow at, say, N 1.05; if there are enough of them
they will induce the rise in prices they are expecting. Bears
are those who sell shares today at N1.00 hoping to buy
them back tomorrow at N0.97; similarly, if there are
enough bears they can force prices down. Speculators
incur a great deal of criticism but in general they can bring
stability to the market by anticipating fluctuations, acting
on their anticipation and preventing the fluctuation from
being excessive.
2.4 Role of stock exchanges
Stock exchanges have multiple roles in the economy. This may include the
following:
i. Raising capital for businesses
A stock exchange provides companies, with the facility to raise capital for
expansion through selling shares to the investing public. However, besides the
borrowing capacity provided to an individual or firm by the banking system, in the
form of credit or a loan, there are four common forms of capital raising used by
companies and entrepreneurs. Most of these available options might be achieved,
directly or indirectly, through a stock exchange.
1. Going public
Capital intensive companies, particularly high tech companies, always need to
raise high volumes of capital in their early stages. For this reason, the public
market provided by the stock exchanges has been one of the most important
funding sources for many capital intensive startups. After the 1990s and early-
2000s hi-tech listed companies' boom and bust in the world's major stock
exchanges, it has been much more demanding for the high-tech entrepreneur to
take his/her company public, unless either the company already has products in the
market and is generating sales and earnings, or the company has completed
advanced promising clinical trials, earned potentially profitable patents or
conducted market research which demonstrated very positive outcomes. This is
quite different from the situation of the 1990s to early-2000s period, when a
number of companies (particularly Internet boom and biotechnology companies)
went public in the most prominent stock exchanges around the world, in the total
absence of sales, earnings and any well-documented promising outcome. Anyway,
every year a number of companies, including unknown highly speculative and
financially unpredictable hi-tech startups, are listed for the first time in all the
major stock exchanges - there are even specialized entry markets for these kind of
companies or stock indexes tracking their performance (examples include the
Altemext, CAC Small, SDAX, TecDAX, or most of the third market companies).
2. Limited partnerships
A number of companies have also raised significant amounts of capital through
Research and Development limited partnerships. Tax law changes that were
enacted in 1987 in the United States changed the tax deductibility of investments in
R&D limited partnerships. In order for a partnership to be of interest to investors
today, the cash on cash return must be high enough to entice investors. As a result,
R&D limited partnerships are not a viable means of raising money for most
companies, especially hi-tech startups.
3. Venture capital
A third usual source of capital for startup companies has been venture capital. This
source remains largely available today, but the maximum statistical amount that
the venture company firms in aggregate will invest in any one company is not
limitless (it was approximately $15 million in 2001 for a biotechnology
company).161 At those level, venture capital firms typically become tapped-out
because the financial risk to any one partnership becomes too great.
4. Corporate partners
A fourth alternative source of cash for a private company is a corporate partner,
usually an established multinational company, which provides capital for the
smaller company in return for marketing rights, patent rights, or equity. Corporate
partnerships have been used successfully in a large number of cases.
ii. Mobilising savings for investment
When people draw their savings and invest in shares (through an IPO or the
issuance of new company shares of an already listed company), it usually leads to
rational allocation of resources because funds, which could have been consumed,
or kept in idle deposits with banks, are mobilised and redirected to help companies'
management boards finance their organisations. This may promote business
activity with benefits for several economic sectors such as agriculture, commerce
and industry, resulting in stronger economic growth and higher productivity levels
of firms. Sometimes it is very difficult for the stock investor to determine whether
or not the allocation of those funds is in good faith and will be able to generate
long-term company growth, without examination of a company's internal auditing.
iii. Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase their market share, or
acquire other necessary business assets. A takeover bid or a merger agreement
through the stock market is one of the simplest and most common ways for a
company to grow by acquisition or fusion.
iv. Profit sharing

Both casual and professional stock investors, as large as institutional investors or
as small as an ordinary middle-class family, through dividends and stock price
increases that may result in capital gains, share in the wealth of profitable
businesses. Unprofitable and troubled businesses may result in capital losses for
shareholders.
v. Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares
is open to both the large and small stock investors because a person buys the
number of shares they can afford. Therefore the Stock Exchange provides the
opportunity for small investors to own shares of the same companies as large
investors.
vi. Government capital-raising for development projects

Governments at various levels may decide to borrow money to finance
infrastructure projects such as sewage and water
treatment works or housing estates by selling another
category of securities known as bonds. These bonds
can be raised through the Stock Exchange whereby
members of the public buy them, thus loaning money
to the government. The issuance of such bonds can
obviate the need, in the short term, to directly tax citizens to finance development
—though by securing such bonds with the full faith and credit of the government
instead of with collateral, the government must eventually tax citizens or otherwise
raise additional funds to make any regular coupon payments and refund the
principal when the bonds mature.
ITQ 2: What are the roles of stock exchanges?
2.5 The Nigerian Stock Exchange (NSE) was established in 1960 as the Lagos
Stock Exchange. As of December 31, 2013, it has about 200 listed companies with
a total market capitalisation of about N12.88 trillion ($80.8 billion). All listings are
included in the Nigerian Stock Exchange All Shares index.
History
The Nigerian Stock Exchange was founded in 1960 as the Lagos Stock Exchange.
It started operations in Lagos in 1961 with 19 securities listed for trading. In
December 1977 it became known as The Nigerian Stock Exchange, with branches
established in some of the major commercial cities of the country.
Operation
The NSE is regulated by the Securities and Exchange Commission, which has the
mandate of Surveillance over the exchange to forestall breaches of market rules
and to deter and detect unfair manipulations and trading practices. The Exchange
has an automated trading System. Data on listed companies' performances are
published daily, weekly, monthly, quarterly and annually.
The Nigerian Stock Exchange has been operating an Automated Trading System
(ATS) since April 27, 1999, with dealers trading through a network of computers
connected to a server. The ATS has facility for remote trading and surveillance.
Consequently, many of the dealing members trade online from their offices in
Lagos and from all the thirteen branches across the country. The Exchange is in the
process of establishing more branches for online real time trading. Trading on The
Exchange starts at 9.30 a.m. every business day and closes at 2.30 p.m. In order to
encourage foreign investment into Nigeria, the government has abolished
legislation preventing the flow of foreign capital into the country. This has allowed
foreign brokers to enlist as dealers on the Nigerian Stock Exchange, and investors
of any nationality are free to invest. Nigerian companies are also allowed multiple
and cross border listings on foreign markets.
Pricing
The Nigerian Capital Market was deregulated in 1993. Consequently, prices of
new issues are determined by issuing houses and stockbrokers, while the secondary
market prices are made by stockbrokers only. The market/quoted prices, along with
the All-Share Index plus NSE 30 and Sector Indices are published daily in The
Stock Exchange Daily Official List. The Nigerian Stock Exchange CAPNET (an
intranet facility), newspapers, and on the stock market page of the Reuters
Electronic Contributor System.
Regulation
The NSE is regulated by the Securities and Exchange Commission which has the
mandate of Surveillance over the exchange to forestall breaches of market rules
and to deter and detect unfair manipulations and trading practices. The exchange
has an automated trading System. Data on listed companies' performances are
published daily, weekly, monthly, quarterly and annually.
Transactions on The Exchange are regulated by The Nigerian Stock Exchange, as a

self-regulatory organisation (SRO) and the Securities & Exchange Commission
(SEC) – apex regulator, which administers the Investments & Securities Act of
1999.
The All-Share Index

The Exchange maintains an All-Share Index formulated in January 1984 (January
3, 1984 = 100). Only common stocks (ordinary shares) are included in the
computation of the index. The index is value-weighted and is computed daily. The
highest value of 66,371.20 was recorded on March 3. 2008. Also. The Exchange
has introduced the NSE-30 Index, which is a sample-based capitalisation-weighted
index plus four sectorial indices. Similarly, five sectoral indices have been
introduced to complement existing indices. These are NSE-Food/Beverages Index,
(Later renamed NSE - Consumer Goods Index) NSE Banking Index, NSE
Insurance Index, NSE Industrial Index and NSE Oil/Gas Index.
Associations
The Nigerian Exchange is an affiliate member of the World Federation of
Exchanges (FIBV). It is also an observer at meetings of International Organisation
of Securities Commissions (IOSCO), and a foundation member of the African
Stock Exchanges Association (ASEA). On 31 October 2013, it joined the United
Nation's Sustainable Stock Exchanges (SSE) initiative. The NSE is regulated by
the Securities and Exchange Commission, which has the mandate of Surveillance
over the exchange to forestall breaches of market rules and to deter and detect
unfair manipulations and trading practices. The exchange has an automated trading
System. Data on listed companies performances are published daily, weekly,
monthly, quarterly and annually.
Stock Market Legislations: Transactions in the stock market are guided by the
following legislations, among others:
Investments & Securities Decree No. 45, 1999.
Companies and Allied Matters Decree 1990.
Nigerian Investment Promotion Commission Decree, 1995.
Foreign Exchange (Miscellaneous Provisions) Decree, 1995.
Internationalization of the Stock Market: Following the deregulation of the capital

market in 1993, the Federal Government in 1995 internationalized the capital
market, with the abrogation of laws that constrained foreign participation in the
Nigerian capital market. Consequent upon the abrogation of the Exchange Control
Act 1962 and the Nigerian Enterprise Promotion Decree 1989, foreigners can now
participate in the Nigerian capital market both as operators and investors. Also,
there are no limits any more to the percentage of foreign holding in any company
registered in the country. Ahead of this development, The Exchange had since June
2, 1987, linked up with the Reuters Electronic Contributor System for online
global dissemination of stock market information - trading statistics, All-Share
Index, company investment ratios, and company news (financial statements and
corporate actions).
a. Primary vs. Secondary Market
A study on the primary vs. secondary market gives information on the various
aspects of the capital market trading. Both the primary market and secondary
market are two types of capital market depending on the issuance of securities.
Primary Market
The primary markets deal with the trading of newly issued securities. The
corporations, governments and companies issue securities like stocks and bonds
when they need to raise capital. The investors can purchase the stocks or bonds
issued by the companies. Money thus earned from the selling of securities goes
directly to the issuing company. The primary markets are also called New Issue
Market (NIM). Initial Public Offering is a typical method of issuing security in the
primary market. The functioning of the primary market is crucial for both the
capital market and economy as it is the place where the capital formation takes
place.
Secondary Market
The secondary market is that part of the capital market that deals with the
securities that are already issued in the primary market. "The investors who
purchase the newly issued securities in the primary market sell them in the
secondary market. The secondary market needs to be transparent and highly liquid
in nature as it deals with the already issued securities. In the secondary market, the
value of a particular stock also varies from that of the face value. The resale value
of the securities in the secondary market is dependent on the fluctuating interest
rates.
ITQ 3: What is the difference between a primary market and a secondary market?
4.0 Conclusion/Summary
4. In this study session we have discussed the topic the role of stock exchange
market where we discussed what the stock exchange market is, functions of
stock exchange, the roles of stock exchange and the operation of the Nigeria
stock exchange.

1. Describe the meaning of stock exchange market and discuss its functions
2. What is the role of stock exchange market?
3. Discuss the evolution of Nigeria stock exchange market and its basic
functions
a. Visit U-tube: https://goo.gl/ZyR3pR & https://goo.gl/UBE7qS . Watch the video &
b. View the animation on: https://goo.gl/h8cuvE and critique it in the discussion forum

ITA 1: The stock exchange market is a market which deals with the buying and selling or long term financial ass
ITA 2: Raising capital for business, Mobilising savings for investments, Facilitating company growth, Profit sha
ITA 3: The primary markets deal with the trading of newly issued securities while the secondary market is that p
Adekanye, Femi; (1984) The Element of Banking in Nigeria, 2nd Ed

ltd,)
Nig).
STUDY SESSION 5
Security Analysis
Introduction
2.0 Main Content
2.1 Security analysis
2.2 Equity Value and Enterprise Value
2.3 Valuation Methods
i. Free Cash Flow Calculation.
ii. Leverage
iii. Calculating the Cost of Capital
iv. Share Buy-Back
v. Project Valuation
vi. Warrant Valuation
vii. Valuation Calculation
viii. PEG Ratio
ix. Treatment of Goodwill

4.0 Study Session Summary and Conclusion
Introduction:
You are welcome to another study session. In this study session we are going to
discuss the topic security analysis.

1. What security analysis is
2. The concept of equity value and enterprise value
3. Valuation method.
2.0 Main Content

2.1 Security analysis
Security analysis is the analysis of trade able financial instruments called
securities. These can be classified into debt securities, equities, or some hybrid of
the two. More broadly, futures contracts and trade able credit derivatives are
sometimes included. Security analysis is typically divided into fundamental
analysis, which relies upon the examination of fundamental business factors such
as financial statements, and technical analysis, which focuses upon price trends and
momentum. Quantitative analysis may use indicators from both areas.
Security analysis is about valuing the assets, debt, warrants, and equity of
companies from the perspective of outside investors using
publicly available information. The security analyst must have
a thorough understanding of financial statements, which are an
important source of this information. As such, the ability to
value equity securities requires cross-disciplinary knowledge
in both finance and financial accounting.
While there is much overlap between the analytical tools used in security analysis
and those used in corporate finance, security analysis tends to take the perspective
of potential investors, whereas corporate finance tends to take an inside perspective
such as that of a corporate financial manager.
ITQ 1: what is security analysis?
2.2 Equity Value and Enterprise Value

The equity value of a firm is simply its market capitalisation; that is, the market
price per share multiplied by the number of outstanding shares. The enterprise
value, also referred to as the firm value, is the equity value plus the net liabilities.
The enterprise value is the value of the productive assets of the firm, not just its
equity value, based on the accounting identity:
Assets = Net Liabilities + Equity
Note that net values of the assets and liabilities are used. Any cash and cash-
equivalents would be used to offset the liabilities and therefore are not included in
the enterprise value.
As an analogy, imagine purchasing a house with a market value of $100,000, for

which the owner has $50,000 in equity and a $50,000 assumable mortgage. To
purchase the house, the new owner would pay $50,000 in cash and assume the
$50,000 mortgage, for a total capital structure of $100,000. If $20,000 of that
market value were due to $20,000 in cash locked in a safe in the basement, and the
owner pledged to leave the money in the house, the cash could be used to pay
down the $50,000 mortgage and the net assets would become $80,000 and the net
liabilities would become $30,000. The "enterprise value" of the house therefore
would be $80,000.
ITQ 2: what is equity value?
2.3 Valuation Methods

Two types of approaches to valuation are discounted cash flow methods and
financial ratio methods.
Two discounted cash flow approaches to valuation are: 1. value the cash flow to
equity, and 2. value the cash flow to the enterprise.
The "cash flow to equity" approach to valuation directly discounts the firm's cash
flow to the equity owners. This cash flow takes the form of dividends or share
buybacks. While intuitively straightforward, this technique suffers from numerous
drawbacks. First, it is not very useful in identifying areas of value creation.
Second, changes in the dividend payout ratio result in a change in the calculated
value of the company even though the operating performance might not change.
This effect must be compensated by adjusting the discount rate to be consistent
with the new payout ratio. Despite its drawbacks, the equity approach often is more
appropriate when valuing financial institutions because it treats the firm's liabilities
as a part of operations. Since banks have significant liabilities that are owed to the
retail depositors, they indeed have significant liabilities that are part of operations.
The "cash flow to the enterprise" approach values the equity of the firm as the
value of the operations less the value of the debt. The value of the operations is the
present value of the future free cash flows expected to be generated. The free cash
flow is calculated by taking the operating earnings (earnings excluding interest
expenses), subtracting items that required cash but that did not reduce reported
earnings, and adding non-cash items that did reduce reported earnings but that did
not result in cash expenditures. Interest and dividend payments are not subtracted
since we are calculating the free cash flow available to all capital providers, both
equity and debt, before financing. The result is the cash generated by operations.
The free cash flow basically is the cash that would be available to shareholders if
the firm had no debt – the cash produced by the business regardless of the way it is
financed. The expected future cash flow then is discounted by the weighted
average cost of capital to determine the enterprise value. The value of the equity
then is the enterprise value less the value of the debt.
When valuing cash flows, pro forma projections are made a certain number of
years into the future, then a terminal value is calculated for years thereafter and
discounted back to the present.
Free Cash Flow Calculation

The free cash flow (FCF) is calculated by starting with the profits after taxes, then
adding back depreciation that reduced earnings even though it was not a cash
outflow, then adding back after-tax interest (since we are interested in the cash
flow from operations), and adding back any non-cash decrease in networking
capital (NWC). For example, if accounts receivable decreased, this decrease had a
positive effect on cash flow. If the accounting earnings are negative and the free
cash flow is positive, the carry- forward tax benefit is in effect realised in the
current year and must be added to the FCF calculation.
Leverage
In 1958, Economists and now Nobel laureates Franco Modigliani and Merton H.
Miller proposed that the capital structure of a firm did not affect its value,
assuming no taxes, no bankruptcy costs, no transaction costs, that the firm's
investment decisions are independent of capital structure, and that managers,
shareholders, and bondholders have the same information. The mix of debt and
equity simply reallocates the cash flow between stockholders, and bondholders, but
the total amount of the cash flow is independent of the capital structure. According
to Modigliani and Miller's first proposition, the value of the firm if levered equals
the value if unlevered:
VL = Vu
However, the assumptions behind Proposition I do not all hold. One of the more
unrealistic assumptions is that of no taxes. Since the firm benefits from the tax
deduction associated with interest paid on the debt, the value of the levered firm
becomes:
VL = Vu + tcD
where tc = marginal corporate tax rate.

When considering the effect of taxes on firm value, it is worthwhile to consider
taxes from a potential investors point of view. For equity investors, the firm first
must pay taxes at the corporate tax rate, t c1 then the investor must pay taxes at the
individual equity holder tax rate, te.
Then for debt holders,
After-tax income = (debt income)(1 - td)
For equity holders,
After-tax income = (equity income)(1 - tc)(1 - te)
The relative advantage (if any) of equity to debt can be expressed as:
Relative Advantage (RA) = (1 - tc)(1 - te) / (1 - td)
RA > 1 signifies a relative advantage for equity financing.
RA < 1 signifies a relative advantage for debt financing.
One can define T as the net advantage of debt:
T = 1 – RA
For T positive, there is a net advantage from using debt; for T negative there is a
net disadvantage.
Empirical evidence suggests that T is small; in equilibrium T = 0. This is known as

Miller's equilibrium and implies that the capital structure does not affect enterprise
value (though it can affect equity value, even if T = 0).
Calculating the Cost of Capital

Note that the return on assets, ra, sometimes is referred to as ru, the unlevered
return.
Gordon Dividend Model:
Po = Div1 / (re - g )
Where
P0= current stock price,
Div1 = dividend paid out one year from now,
re = return of equity
g = dividend growth rate
Then:
re = ( Div1 / P0 ) + g
Capital Asset Pricing Model:
The security market line is used to calculate the expected return on equity:
re = rf + Be ( rm - rf )
where
rf = risk-free rate,
rm = market return
Be = equity beta
However, this model ignores the effect of corporate income taxes.
Considering corporate income taxes:
re = rf (1 - tc) + Be [rm - rf (1 - tc) ]
where tc = corporate tax rate.
Once the expected return on equity and on debt are known, the weighted average
cost of capital can be calculated using Modigliani and Miller's second proposition:
WACC = re E / ( E + D ) + rd D / ( E + D )
Taking into account the tax shield:
WACC = reE/(E+D) + rd(1-tc)D/(E+D)
For T = 0 (no tax advantage for debt), the WACC is equivalent to the return on
assets, ra.
rd is calculated using the CAPM:
rd = rf + Bd [rm - rf (1 - tc) ]
For a levered firm in an environment in which there are both corporate and
personal income taxes and in which there is no tax advantage to debt (T=0),
WACC is equal to ra, and the above WACC equation can be rearranged to solve for
re:
re = ra + (D/E)[ra-rd(1-tc)]
From this equation it is evident that if a firm with a constant future free cash flow
increases its debt-to-equity ratio, for example by issuing debt and repurchasing
some of its shares, its cost of equity will increase.
ra also can be calculated directly by first obtaining a value for the asset beta, B a,
and then applying the CAPM. The asset beta is:
Ba = Be(E/V) + Bd(D/V)(1-tc)
Then return on assets is calculated as:
ra = rf(1-tc) + Ba[im-rf(1- tc)]
In summary, for the case in which there is personal taxation and in which Miller's
Equilibrium holds (T = 0 ), the following equations describe the expected returns
on equity, debt, and assets:
re = rf (1 - tc) + Be [im - rf ( 1 - tc)]

ra = rf ( 1 - tc ) + Ba [ rm - rf ( 1 - tc ) ]
rf = rf + Bd [ rm - rf (1 - tc) ]
The cost of capital also can be calculated using historical averages. The arithmetic
mean generally is used for this calculation, though some argue that the geometric
mean should be used.
Finally, the cost of equity can be determined from financial ratios. For example,
the cost of unleveraged equity is:
re,u = [re,L + rf,debt(1- tc)D/E]/(1+D/E)

re,L = b(1+g)/(P/E)+g
where b = dividend payout ratio

g = ( 1 - b ) (ROE)
where (1 - b) = plowback ratio.
The payout ratio can be calculated using dividend and earnings ratios;
b = (Dividend / Price ) ( Price / Earnings)
Share Buy-Back
Take a firm that is 100% equity financed in an environment in which T is not equal
to zero; i.e., there is a net tax advantage to debt. If the firm decides to issue debt
and buyback shares, the levered value of the firm then is:
VL= Vu + T (debt)
The number of shares that could be repurchased then is:
n = (debt) / ( price per share after relevering)
where the price per share after relevering is:
VL/ (original number of outstanding shares)
The buyback will lower the firm's WACC.
Project Valuation
The NPV of a capital investment made by a firm, assuming that the investment
results in an annual free cash flow P received at the end of each year beginning
with the first year, and assuming that the asset is financed using current debt/equity
ratios, is equal to:
NPV = -Po + P/WACC
Warrant Valuation
Warrants are call options issued by the firm and that would require new shares to
be issued if exercised. Any outstanding warrants must be considered when valuing
the equity of the firm. The Black-Scholes option pricing formula can be used to
value the firm's warrants.
Valuation Calculation
Once the free cash flow and WACC are known, the valuation calculation can be
made. If the free cash flow is equally distributed across the year, an adjustment is
necessary to shift the year-end cash flows to mid-year. This adjustment is
performed by shifting the cash flow by one-half of a year by multiplying the
valuation by ( 1 + WACC )V2.
The enterprise value includes the value of any outstanding warrants. The value of
the warrants must be subtracted from the enterprise value to calculate the equity
value. This result is divided by the current number of outstanding shares to yield
the per share equity value.
PEG Ratio
As a rule of thumb, the P/E ratio of a stock should be equal to the earnings growth
rate. Mathematically, this can be shown as follows:
P = D/re + PVGO
Where
P = price
D = annual dividend
re = return on equity
PVGO = present value of growth opportunities.
For high growth firms, PVGO usually dominates D / re. PVGO is equal to the
earnings divided by the earnings growth rate.
ITQ 3: What are the two approaches to valuation?

Treatment of Goodwill
Prior to 2002, amortization of goodwill was an expense on the income statement,
but unlike depreciation of fixed assets, amortization of goodwill is not tax
deductible.
In 2002, FASB Statement No. 142 discontinued the depreciation of goodwill and
specified that it be kept on the books as a non-depreciating asset and written off
only when its value is determined to have declined.
In this study session we have discussed the security analysis as Security
analysis is the analysis of trade able financial instruments called securities.
These can be classified into debt securities, equities, or some hybrid of the two.
More broadly, futures contracts and trade able credit derivatives are sometimes
included.

1. What is security analysis?
2. What do you understand by equity value and enterprise value?
a. Visit U-tube: https://goo.gl/SszZpB & https://goo.gl/c8h7vu . Watch the video &
b. View the animation on: https://goo.gl/TdQHSX and critique it in the discussion
forum

ITA 1: Security analysis is the analysis of trade able financial instruments called securities. Security analysis is
ITA 2: The equity value of a firm is simply its market capitalisation; that is, the market price per share multipli
ITA 3: They are the discounted cash flow methods and financial ratio methods.

Graham Bum,).
ltd,)
Nig).
3.0 MODULE 3: Financial Instruments

Contents:
Study Session 1: Introduction to financial Instruments
Study Session 3: Other forms of financial Instruments
STUDY SESSION 1
Financial Assets
Introduction
2.0 Main Content
2.1 Financial assets
2.2 Types of Financial Assets
2.3 Characteristics of financial assets.
i. Liquidity
ii. Moneys
iii. Divisibility and denomination
iv. Reversibility (round-trip cost)
v. Terms to maturity
vi. Convertibility
vii. Complexity
viii. Tax status
ix. Cash flow and return predictability

Introduction:
You are welcome to another study session. In this study session we are going to be
discussing the topic financial asset whereby u will understand what financial asset
are, types of financial assets and characteristics of financial assets.

1. What financial assets is
2. Types of financial assets
3. Characteristics of financial assets
2.0 Main Content

2.1 Financial Assets
Asset, simply, is any resource that has value and capable of being owned. Asset
can be tangible such as land, building, automobile, machinery, jewelries etc or
intangible, such as bonds issued by Federal Government of Nigeria, bond issued by
a corporation such as Power Holding Authority of Nigeria, mortgage loan,
common stock issued by Nigerian Railway corporation. These are legal claims to
some future benefits, the cash payment expected on the asset. The issuer of the
financial asset for example has agreed to make payment in the future to the
investor that is the owner of the financial asset. The bond issued by the Federal
government of Nigeria, i.e. the issuer has agreed to pay investors interest until the
bond matures, and also repay the amount borrowed at
maturity date. The same thing is applicable with the bond
issued by a corporation - Electric Power Authority or Power
Holding Company of Nigeria. The issuer agrees to pay the
investors interest until the bond matures, then at the maturity date repay the
amount borrowed.
With the mortgage loan, the issuer is the individual who borrows the money while
the investor is the entity-bank that lent the money to the individual. There is loan
agreement which specifies how the borrower will repay the loan and the interest on
it. The common stock issued by Railway Corporation qualifies the investor to
receive dividends distributed by the Corporation and claim to a pro rata share of
the net asset value of the corporation on liquidation.
2.2 Types of Financial Assets

Financial assets can be categorized into four groups, namely:
a. Money
b. Equities (commonly known as stocks)
c. Debt securities
d. Derivatives
Money - generally accepted in payment for purchases of goods and services e.g.
chequing account and currency.
Equities - evidencing ownership interest in a business and claims against profits

and proceeds from sales of the firm's assets. It is also called common stock, which
entitles holder to vote at Annual General Meetings and other meetings of
shareholders.
Debt securities - include bonds, notes, accounts payable, and savings deposits.
Holders of these assets have legal priority claim over the holders of equities to the
assets and income of an individual, business firm. or unit of government. The
claim fixed in amount and time (maturity) and may be backed up by collateral.
There is also the preferred stock which carries no voting privileges but entitles
holder to a fixed share of the firm's net earnings ahead of its common stockholders.
Debt securities may be negotiable or non-negotiable. Negotiable debt security can
be transferred from holder to holder as a marketable security. Non-negotiable debt
security cannot legally be transferred to another party e.g. passbook saving
accounts.
Derivatives - such as future contracts, options and swaps, have market value that is
tied or influenced by the value or return on a related financial instrument, such as
stocks (equities) and bonds, notes and other loans (debt securities). Derivatives are
used to hedge or manage risk.
ITQ 1: list the type of financial asset.
2.3 Characteristics of Financial Assets.

i. They serve as store of value (purchasing power)
II. Promise future returns
III. No depreciation unlike physical goods that wear out
IV. Fungible-shares and bonds can be converted into
another desired asset.
Financial assets have certain traits that make them attractive to certain groups of
investors.
1) Liquidity
The liquidity or otherwise of an asset is determined by:
• How much a seller stands to lose if he or she wants to sell immediately against
what it would cost to search for a buyer in terms of time and money. The stock
or bond of a small corporation for example, is relatively illiquid with less
suitable buyers which it must search out to be able to sell its stock or bond.
• Contractual arrangement i.e. bank deposit is perfectly liquid because the bank
has an obligation to convert the deposit at par on demand. A claim on a private
pension fund can only be cashed on retirement, and so, it is illiquid.
2) Moneys
Some financial assets are money, serving as a medium of exchange such as,
currency, demand deposits that allow cheque writing, near money which can easily
be converted into money. Near money instruments include time and savings
deposits and treasury bills with maturity of three months.
3) Divisibility and denomination

The minimum size of a financial asset can be liquidated and exchanged for money,
the smaller the size, the more divisible the financial asset is. Deposit at a bank is
infinitely divisible. It is the value of the amount that a unit of the asset will pay at
maturity e.g. bonds and some debt instruments set varying degrees of divisibility
depending on their denominations. Some bonds come in N1000.00 denominations
which is the Naira value of the amount that each unit of the asset will pay at
maturity.
Most financial assets are denominated in one currency but some bonds carry a
currency option that allows the investor to specify that payment of either interest or
principal be made in either one or two currencies
4) Reversibility (round-trip cost)

It is the cost of investing in a financial asset and getting out of it and back into cash
again. A financial asset such as bank deposits is easily reversible with no cost to
the investor when adding or withdrawing from the deposit. Other financial assets
traded in an organised market has round-trip cost component referred to as the bid-
ask spread or bid-offer spread and which may be added to other costs, commission
and time, if any, to deliver the asset. The spread charged by a market maker varies
from one financial asset to another to reflect risk assumed by the market maker
while market making a market couple with thickness/thinness of the market
(frequency of transactions). The greater the variability of prices the more
likelihood the market maker incurring loses more than expected between the time
of buying and selling of the asset. The higher the frequency of transactions, the
shorter the period the asset is held before disposal and the less likelihood of an
unfavorable price movement. The bid-ask spread is the difference between the
price a 'market maker' is willing to sell an asset and the price a' market maker' is
willing to buy the asset. A market maker may be willing to sell a financial asset for
N3500 (the ask price) and buy it for N3000 (the bid price), the bid-ask spread is
N500 which is also the bid- offer spread.
5) Terms to maturity
It is the length of the interval an instrument is expected to be held and the final
payment made. The maturity period ranges from one day to hundred years e.g. the
'Mickey Mouse' bond that was issued by Walt Disney in July 1993 and matures in
100 years, and the 50 years bond issued by Tennessee Valley Authority in
December 1993, whereas, equities instruments arc perpetual, without any maturity.
6) Convertibility
Some financial assets are convertible either within the same class of financial
assets – a bond converted into another bond or spans class - corporate convertible
bond being changed into equity shares, preferred stock being converted into
common stock. The conditions for conversion, timing and costs, are usually
expressed at the time of issuance.
7) Complexity
Some financial assets combine the features of two or more assets and to determine
the true value, they have to be broken into component parts and priced.
8) Tax status
Tax rates differ from financial asset to another depending on who the issuers are,
the nature of the owner of the asset, and how long the asset is being held.
9) Cash flow and return predictability

The predictability of the expected return of any financial asset depends on the
predictability of the expected cash flow which include
dividend payment on stock and the expected sale price
of the stock, or the interest payment on debt instrument
and repayment of principal. Return predictability will
enable an investor determine the value of the asset to
enable the investor make investment decision.
ITQ 2: Financial assets have certain traits that make them attractive to certain groups of investors. What are those
In this study session we have discussed introduction to financial instruments
with main emphasis on financial asset where we discussed what a financial
asset is, types of financial asset i.e. money, equity, debt and derivatives. And we
went further to look at characteristics of financial assets.

1. What is a financial asset?
2. Explain the types of financial asset
3. Discuss the characteristics of financial assets
4. What are the differences between equity and derivatives
5. Explain the traits that make financial assets to be attractive to certain
group of investors.
a. Visit U-tube: https://goo.gl/mfM1Ct & https://goo.gl/cMwWiX . Watch the
b. View the animation on: https://goo.gl/F1zwQP and critique it in the

discussion forum

ITA 1: They are Money, Equity and Debt securities and Derivatives
ITA 2: 1) Liquidity 2) Moneys 3) Divisibility and denomination 4) Reversibility (round-trip cost)

5) Terms to maturity 6) Convertibility 7) Complexity 8) Tax status
9) Cash flow and return predictability.

Graham Bum,).
ltd,)
Nig).
STUDY SESSION 2
Investment in Bonds Market
Introduction
2.0 Main Content
2.1 Definition
2.2 The bond market.
2.3 Types of bond markets
2.4 Types of bonds
i. Straight bond
ii. Callable bonds
iii. Non-refundable bonds
iv. Putable bonds
v. Perpetual debentures
vi. Zero-coupon bonds
2.5 Risk Associated with Investing in Bonds
i. Interest Rate Risk
ii. Call and Prepayment Risk
iii. Credit Risk
iv. Liquidity Risk
v. Exchange Rate or Currency Risk
vi. Inflation or Purchasing power risk
2.6 Features of bonds
2.7 Investing in bonds
2.8 Characteristics of Bonds
i. Face Value/Par Value
ii. Coupon (The Interest Rate)

Introduction:
In the previous study session, our discussions was centered on financial assets. In
this session, you will learn how to invest in bond market, where we will get to
understand what a bond is, types of bonds as well as features of bonds.

1. A bond and a bond market
2. Types and features of a bond market
3. Participants in the bond market
4. Risk associated with investing in bonds.
2.0 Main Content

2.1 Definition
A Bond is a debt instrument issued for a period of more than one year with the
purpose of raising capital by borrowing. The Federal government, states, cities,
corporations, and many other types of institutions sell bonds. Generally, a bond is a
promise to repay the principal along with interest (coupons) on a specified date
(maturity). Some bonds do not pay interest, but all bonds require a repayment of
principal. When an investor buys a bond, he/she becomes a creditor or the issuer.
However, the buyer does not gain any kind of ownership rights to the issuer, unlike
in the case of equities. On the hand, a bond holder has a greater claim on an issuer's
income than a shareholder in the case of financial distress (this is true for all
creditors). Bonds are often divided into different categories based on tax status,
credit quality, issuer type, maturity and secured/unsecured (and there are several
other ways to classify bonds as well). U.S. Treasury bonds are generally
considered the safest unsecured bonds, since the possibility of the Treasury
defaulting on payments is almost zero.
The yield from a bond is made up of three components: coupon interest, capital
gains and interest on interest (if a bond pays no coupon interest, the only yield will
be capital gains). A bond might be sold at above or below par (the amount paid out
at maturity), but the market price will approach par value as the bond approaches
maturity. A riskier bond has to provide a higher payout to compensate for that
additional risk. Some bonds are tax-exempt, and these are typically issued by
municipal, county or state governments, whose interest payments are not subject to
federal income tax, and sometimes also state or local income tax.
In finance, a bond is an instrument of indebtedness of the bond issuer to the

holders. It is a debt security, under which the issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay them interest (the coupon)
and/or to repay the principal at a later date, termed the maturity date. Interest is
usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very
often the bond is negotiable, i.e. the ownership of the instrument can be transferred
in the secondary market. This means that once the transfer agents at the bank
medallion stamp the bond, it is highly liquid on the second market.
Thus a bond is a form of loan or IOU (sounded "I owe you"): the holder of the
bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and
the coupon is the interest. Bonds provide the borrower with external funds to
finance long-term investments, or, in the case of government bonds, to finance
current expenditure. Certificates of deposit (CDs) or short term commercial paper
are considered to be money market instruments and not bonds: the main difference
is in the length of the term of the instrument.
Bonds and stocks are both securities, but the major difference between the two is
that (capital) stockholders have an equity stake in the
company (i.e. they are investors), whereas
bondholders have a creditor stake in the company (i.e.
they are lenders). Being a creditor, bondholders have
absolute priority and will be repaid before
stockholders (who are owners) in the event of
bankruptcy. Another difference is that bonds usually have a defined term, or
maturity, after which the bond is redeemed, whereas stocks are typically
outstanding indefinitely. An exception is an irredeemable bond, such as Consoles,
which is a perpetuity, i.e. a bond with no maturity.
ITQ 1: what is a bond?
2.2 The Bond Market.

A bond is a loan debt instrument, and its holder gets interest from time to time till
the loan matures and the principal (amount originally borrowed) is returned to the
Investor (lender). Who the borrower is either the federal government, a state local
municipality, or a big company who is in need of funds to operate or fund Federal
deficit, for instance, to build roads, provide pipe-borne water, health, electricity
and finance factories - and so they borrow capital from the public by issuing bonds.
Bonds do not offer direct participation in the fortunes of a business but instead
promise investors a guaranteed rate of interest. As long as interest is paid, the bond
owner has no control over the direction of the company. But if the company fails to
pay interest on its bonds the bond investors would exercise legal rights and take
control. A bond has, sinking fund. When it is issued, the price paid is known as its
'face value'. Once it is bought by the buyer, the issuer (borrower) promises to pay
back on a particular day (the 'maturity date') at a predetermined rate of interest the
'coupon'. For example, John buys a bond with a N1,000 face value, a 5% coupon
and a 10-year maturity. John would collect interest payments totaling N50 in each
of those 10 years. At the end of 10 years, John collects back his N1, 000. The key
difference between bond and stock is that stocks do not make promises about
dividends or returns. A company is not in any obligation to pay dividends.
Whereas when a company issues a bond, it guarantees to pay back the principal
(the face value) plus interest. If a person buys a bond and holds into maturity, the
holder can always know how much would be gotten at the end of the day. Hence,
bonds are also known as 'fixed-income' securities assuring the person steady
payout or yearly income which makes them inherently less volatile than stocks.
Bonds and stocks share common characteristics. By issuing stocks or bonds,
vendors obtain money for immediate use and by buying stocks or bonds, a
purchaser receives promise of future gain.
The bond market also known as the credit, debt, or fixed income market is a
financial market where the issuance and trading of debt securities occurs, which
include government-issued securities. It facilitates the transfer of capital from
savers to the issuers or organisations needing capital for government projects,
business expansion and ongoing operations.
The bond market has a primary and secondary segment. In the primary market
bonds are sold in auctions. Bids are divided into competitive bids which are
restricted to primary government dealers, and non-competitive bids which are open
to individual investors and small institutions. In the secondary market trading in
bonds takers place over-the-counter through electronic trading networks. If interest
rates decline after a bond has been issued, the value of bonds already issued with
higher interest rates will rise and hence the bond market is said to be "up". A rise in
interest rates will lower the value of bonds issued with lower rates of interest and
send the bond market "down".
Bond markets in most countries are decentralized and lack common exchanges like
stock, future and commodity markets, due in part, because no two bond issues are
exactly alike.
2.3 Types of Bond Markets

The market can be classified into:
• Corporate
• Government and agency
• Municipal - securities issued by state and local governments are referred
to as municipal bonds or municipal securities. They are tax exempt
• Mortgage backed, asset backed, and collateralized debt obligation
• Funding
Bond market can also be classified in terms of the global bond market. Within a
given country's bond market, there can be a national bond market and an
international bond market. And also within a country's national bond market there
can be a domestic bond market and a foreign bond market. The distinction is the
domicile of the issuer. Whereas the domestic bond market is the market where
bond issues of entities domiciled entities that country are issued and traded, the
foreign bond market is the market where bond issues of non-domiciled entities of
that country are issued and subsequently traded within the country.
The international bond market, can also referred to as offshore bond market, are
bond issued and then traded outside of the country and not regulated by the
country. Within the international bond market is the euro bond market, a market
for bond issues underwritten by an international syndicate, issued simultaneously
to investors in several countries, and issued outside of the jurisdiction of any single
country. Here the bonds are called Eurobonds, which often creates some
misconceptions. The currencies in which the Eurobonds are denominated are not
just Euros but any currency, nor are they just traded in Europe.
ITQ 2: what is an international bond market?
Participants in the bond market are similar to participants in most financial markets
and are essentially either buyers (debt issuer) of funds or sellers (institution) of
funds and often both. They include:
• Institutional investors
• Governments
• Traders
• Individuals
2.4 Types of bonds
There are varieties of bonds that are available in the market place. An issuer may
resign a bond with specific characteristics required by a particular institutional
investor such a bond is privately placed and not traded in the bond market. Publicly
issued bonds fit into one or more of the following categories.
• Straight bond
Straight bonds also known as debentures are the basic fixed-income investment
whose interests are predetermine and paid to the owner on a specified dates,
usually bi-annually or annually following the date of issue. The issuer must redeem
the bond from the owner at its face value, known as par value, on a specific date.
• Callable bonds
A call obliges the owner when the bond was issued to sell the bonds to the issuer
for a specified price usually above the current market price. The call premium is
the difference between the call price and the current market price. A callable bond
is worth less than a bond that is non-callable, to compensate investor for the risk
that it will not receive all of the anticipated interest payments.
• Non-refundable bonds
This occurs if the issuer is able to generate the funds from sales or taxes internally.
This the issuer is not allowed to sell new bonds at a lower interest rate and use the
proceeds to call bonds that bear a higher interest rate.
• Putable bonds
With put able bonds, the investor has the right to sell the bonds back to the issuer
at par value on designated dates. The investor benefits if interest rates rise, so a
putable bond is worth more than a similar bond that is not putable.
• Perpetual debentures
They are also called irredeemable debentures that will last forever except the
holder agrees to sell them back to the issuer.
• Zero-coupon bonds
These types of bonds do not pay periodic interest but are issued at less than par
value and redeemed at par value while the difference is the interest payment. They
are so designed to remove reinvestment risk, the loss an investor suffers if future
income or principal payments from a bond must be invested at a lower rate than the
current rates. The owner of a zero-coupon bond has no payments to reinvest until
the bond matures and certain about the returns on the investment.
Structured securities
These are bonds that have options attached to them e.g. callable bonds, convertible
bond and warrant bonds - a warrant entitles the holder to buy a different bond
under certain renditions at some future dates. Many structured securities are more
complex with interest rates that can vary only within given limits, can change at
exponential rate or may not be payable in certain circumstances.
ITQ 3: List the types of bonds you know
Government and Agencies

Bond backed by the full faith and credit of national government e.g. the Federal
Government of Nigeria, are called sovereigns. They are generally considered the
most secure Type of bond because a national government has strong incentives to
pay on time to remain access to credit market. It also has extraordinary powers,
including the ability to print money and to take control of foreign currency reserves
which can be used to make payments.
Bonds issued by a government at the sub-national level such as local government

or a state are called semi-sovereigns and are generally riskier than sovereigns
because of the local government's or state's inability to print money and to take
control of foreign exchange. Depending how repayment is assured, a general
obligation bond allows bondholders a priority claim on the issuer's tax revenue in
the event of default. A revenue bond finances a particular project and allows the
bondholder a claim only on the revenue the project generates.
Bonds issued by entities such as government agencies, national government have

to make legally binding commitment to repay.
Corporate bonds
There are three choices available when a company wants to raise cash to grow its
business, expand to new locations, upgrade equipment etc. They can issue shares
of stock, borrow from the bank or from the investors by issuing bonds. Corporate
bonds are in varieties:
 Many corporate bonds feature a call provision that allow the issuing company
to pay back the principal to the bond holders before maturity.
 A corporate bond can be secured or unsecured. By secured debt it is meant that
some of collateral is pledged to ensure repayment of the debt.
 Other corporate bonds are known as convertibles because they carry a provision
that the bond can be converted into shares of common stock under certain
circumstances. Convertible bonds can be more attractive than bonds with no
conversion provision, depending on the price of the underlying stock.
 Most corporate bonds are fixed-rate bonds. The interest rate the corporation
pays is fixed until maturity and will never change. Some corporate bonds use
floating rates to determine the exact interest rate to be paid to bond holders. The
interest rate paid on these bonds changes, depending on some index, such as
short-term Treasury bills or money markets. Corporate bonds do offer
protection against increases in interest rates, but the trade-off is that their yields
are lower than those of fixed-rate securities with the same maturity.
 Other corporate bonds, called zero-coupons, do not pay regular interest rather
they sell at a deep discount to face value, and then are redeemed at the full face
value at maturity. The bond holder earns interest on the bonds along the way
and it is paid back with the principal when the bond matures.
Corporate bonds usually offer higher yields than municipal bonds for two reasons.
First, there is generally more risk involved with corporate bonds since companies
are more likely to run into financial problems than states and local governments.
Second, earnings from a corporate bond are taxable compared to the tax-free status
of municipal bonds. Municipal bonds are often referred to as "tax-except- bonds".
Reasons for issuing bonds:

1. To diversify sources of funding. Any amount a bank may lend to a borrower is
limited. By issuing bonds, the issuer can raise far more money.
2. Bonds help issuers carry out specific financial management strategies such as:
a) Minimizing financing costs. Firms prefer bonds to other forms of leverage such
as bank loans because the cost is lower and the funds can be repaid over a longer
period.
b) Matching revenue with expenses. Bond funds are mostly tied to capital projects
that take years to finish and are expected to generate revenue over a long period.
Bonds have a way of linking the repayment of borrowings for such projects to
revenue being anticipated. It is also a means of requiring future tax payers to pay
for the benefits they enjoy.
c) Governments and firms are able to avoid short term financial constraints by
turning to the bond markets.
2.5 Risk Associated with Investing in Bonds
The investor is faced with one or more of the following risks in investing in bonds:
1. Interest Rate Risk
Investors who buy and sell bonds before maturity are exposed to changes in
interest rates. The price of a typical bond will change in the opposite direction from
a change in interest rate. In other words, changes in bond prices are inverse to
changes in interest rates. When interest rates decrease, the value of existing bonds
rise, since new issues pay a lower yield. Same applies, when interest rate increases,
the value of existing bonds fall, since new issues pay a higher yield. The
implication of this to the bond investor is that since the price of a bond fluctuates
with market interest rates, the risk that an investor faces is that the price of a bond
held in a portfolio will decline when market interest rate goes up.
2. Call and Prepayment Risk
The cash flow pattern of a callable bond is unknown and because the issuer will
call the bond when interest rates are down, the investor is exposed to reinvestment
risk, that is, the investor will have to reinvest the proceeds when the bond is called
at relatively lower interests. In addition, the capital appreciation potential of a bond
will be reduced because the price of a callable bond may not raise much above the
price at which the issuer will call the bond. Because of these disadvantages to the
investor, a callable bond is to expose the investor to call risk. The same
disadvantages apply to bonds that can prepay. The risk here is referred to as
prepayment risk.
3. Credit Risk
There are three dimensions to credit risk. Firstly, there is Credit default risk which
is the risk that the issuer will not be able to make timely payment of interest and
amount borrowed as at when due. Secondly, there is Credit spread risk which is the
risk of financial loss or underperformance of an issue or issues resulting from
changes in the level of credit spreads. The higher the credit rating, the smaller the
credit spread to the benchmark yield. Thirdly, there is Downgrade risk which is the
risk that an issue or issuer will be downgraded, resulting in an increase in the credit
spread. Where there is an improvement in the credit quality of an issue or issuer is
rewarded with a better credit rating, referred to as upgrade. But deterioration in the
credit rating of an issue or issuer is assigned an inferior credit rating referred to as
downgrade.
4. Liquidity Risk
There is liquidity risk if the investor will have to sell a bond below its true value
indicated by recent transactions. Liquidity is measured by the size of the spread
between the bid price (the price at which a dealer is willing to buy a security) and
the ask price (the price at which a dealer is willing to sell a security). The wider the
bid-ask spread, the greater the liquidity risk. A "small bid-ask spreads" connotes a
liquid market which do not materially increase for large transactions".
5. Exchange Rate or Currency Risk
If an investor buys a bond for example in euro and the euro depreciates relative to
the U.S. dollar in which the bond was denominated, fewer dollars will be received
and the investor will not benefit. But if the euro appreciates relative to the U.S.
dollar, the investor will receive more dollars and thus benefits. The dollar cash
flow would depend on the prevailing exchange rates of the time payments were
received.
6. Inflation or Purchasing power risk

If an investor buys a bond whose coupon rate for example is 5% which is lower
than inflation of 7%, the purchasing power of the cash flow has declined. There is
inflation or purchasing power risk when there is variation in the value of cash
flows from securities, except floating rate securities, as a result of inflation as
measured in terms of purchasing power. Floating rate security has a lower rate of
inflation risk.
ITQ 4: What are the risk associated with investing in bonds?
Issuance
Bonds are issued by public authorities, credit institutions, companies and
supranational institutions in the primary markets. The most common process for
issuing bonds is through underwriting. When a bond issue is underwritten, one or
more securities firms or banks, forming a syndicate, buy the entire issue of bonds
from the issuer and re-sell them to investors. The security firm takes the risk of
being unable to sell on the issue to end investors. Primary issuance is arranged by
book runners who arrange the bond issue, have direct contact with investors and
act as advisers to the bond issuer in terms of timing and price of the bond issue.
The book runner is listed first among all underwriters participating in the issuance
in the tombstone ads commonly used to announce bonds to the public. The book
runners' willingness to underwrite must be discussed prior to any decision on the
terms of the bond issue as there may be limited demand for the bonds.
In contrast, government bonds are usually issued in an auction. In some cases both
members of the public and banks may bid for bonds. In other cases only market
makers may bid for bonds. The overall rate of return on the bond depends on both
the terms of the bond and the price paid." The terms of the bond, such as the
coupon, are fixed in advance and the price is determined by the market.
In the case of an underwritten bond, the underwriters will charge a fee for
underwriting. An alternative process for bond issuance, which is commonly used
for smaller issues and avoids this cost, is the private placement bond. Bonds sold
directly to buyers and may not be tradeable in the bond market. Historically an
alternative practice of issuance was for the borrowing government authority to
issue bonds over a period of time, usually at a fixed price, with volumes sold on a
particular day dependent on market conditions. This was called a tap issue or
bond tap.
2.6 Features of Bonds

Principal
Nominal, principal, par or face amount is the amount on which the issuer pays
interest, and which, most commonly, has to be repaid at the end of the term. Some
structured bonds can have a redemption amount which is different from the face
amount and can be linked to performance of particular assets.
Maturity
The issuer has to repay the nominal amount on the maturity date. As long as all due
payments have been made, the issuer has no further obligations to the bond holders
after the maturity date. The length of time until the maturity date is often referred
to as the term or tenor or maturity of a bond. The maturity can be any length of
time, although debt securities with a term of less than one year are generally
designated money market instruments rather than bonds. Most bonds have a term
of up to 30 years. Some bonds have been issued with terms of 50 years or more,
and historically there have been some issues with no maturity date (irredeemable).
In the market for United States Treasury securities, there are three categories of
bond maturities:
 short term (bills): maturities between one to five year; (instruments with maturities
less than one year are called Money Market Instruments)
 medium term (notes): maturities between six to twelve years;
 long term (bonds): maturities greater than twelve years.
Coupon
The coupon is the interest rate that the issuer pays to the holder. Usually this rate is
fixed throughout the life of the bond. It can also vary with a money market index,
such as LIBOR, or it can be even more exotic. The name "coupon" arose because
in the past, paper bond certificates were issued which had coupons attached to
them, one for each interest payment. On the due dates the bondholder would hand
in the coupon to a bank in exchange for the interest payment.
Interest can be paid at different frequencies: generally semi-annual, i.e. every 6
months, or annual.
Yield
The yield is the rate of return received from investing in the bond. It usually refers
either to
• the current yield, or running yield, which is simply the annual interest payment
divided by the current market price of the bond (often the clean price), or to
• the yield to maturity or redemption yield, which is a more useful measure of the
return of the bond, taking into account the current market price, and the amount
and timing of all remaining coupon payments and of the repayment due on
maturity. It is equivalent to the internal rate of return of a bond.
Credit Quality
The "quality" of the issue refers to the probability
that the bondholders will receive the amounts
promised at the due dates. This will depend on a
wide range of factors. High-yield bonds are bonds
that are rated below investment grade by the credit
rating agencies. As these bonds are riskier than
investment grade bonds, investors expect to earn a higher yield. These bonds are
also called junk bonds.
Market Price
The market price of a tradeable bond will be influenced amongst other things by
the amounts, currency and timing of the interest payments and capital repayment
due, the quality of the bond, and the available redemption yield of other
comparable bonds which can be traded in the markets.
The price can be quoted as clean or dirty. ("Dirty" includes the present value of all
future cash flows including accrued interest. "Dirty" is most often used in Europe.
"Clean" does not include accrued interest. "Clean" is most often used in the U.S.)
The issue price at which investors buy the bonds when they are first issued will
typically be approximately equal to the nominal amount. The net proceeds that the
issuer receives are thus the issue price, less issuance fees. The market price of the
bond will vary over its life: it may trade at a premium (above par, usually because
market interest rates have fallen since issue), or at a discount (price below par, if
market rates have risen or there is a high probability of default on the bond).
Others
o Indentures and Covenants - An indenture is a formal debt agreement that
establishes the terms of a bond issue, while covenants are the clauses of such an
agreement. Covenants specify the rights of bondholders and the duties of issuers,
such as actions that the issuer is obligated to perform or is prohibited from
performing. In the U.S., federal and state securities and commercial laws apply to
the enforcement of these agreements, which are construed by courts as contracts
between issuers and bondholders. The terms may be changed only with great
difficulty while the bonds are outstanding, with amendments to the governing
document generally requiring approval by a majority (or super-majority) vote of
the bondholders.
o Optionality - Occasionally a bond may contain an embedded option; that is, it
grants option-like features to the holder or the issuer:
o Callability - Some bonds give the issuer the right to repay the bond before the
maturity date on the call dates; see call option. These bonds are referred to as
callable bonds. Most callable bonds allow the issuer to repay the bond at par. With
some bonds, the issuer has to pay a premium, the so-called call premium. This is
mainly the case for high-yield bonds. These have very strict covenants, restricting
the issuer in its operations. To be free from these covenants, the issuer can repay
the bonds early, but only at a high cost.
o Puttability - Some bonds give the holder the right to force the issuer to repay the
bond before the maturity date on the put dates; see put option. These are referred to
as retractable or puttable bonds.
o call dates and put dates - the dates on which callable and puttable bonds can be
redeemed early. There are four main categories.
o A Bermudan callable has several call dates, usually coinciding with coupon dates.
o A European callable has only one call date. This is a special case of a Bermudan
callable.
• An American callable can be called at any time until the maturity date.
• A death put is an optional redemption feature on a debt instrument allowing the
beneficiary of the estate of a deceased bondholder to put (sell) the bond (back to
the issuer) at face value in the event of the bondholder's death or legal
incapacitation. Also known as a "survivor's option".
 sinking fund provision of the corporate bond indenture requires a certain portion of
the issue to be retired periodically. The entire bond issue can be liquidated by the
maturity date. If that is not the case, then the remainder is called balloon maturity.
Issuers may either pay to trustees, which in turn call randomly selected bonds in
the issue, or, alternatively, purchase bonds in open market, then return them to
trustees.
The following descriptions are not mutually exclusive, and more than one of them
may apply to a particular bond.
• Fixed rate bonds have a coupon that remains constant throughout the life of the
bond. A variation are stepped-coupon bonds, whose coupon increases during the
life of the bond.
• Floating rate notes (FRNs, floaters) have a variable coupon that is linked to a
reference rate of interest, such as LIBOR or Euribor. For example the coupon may
be defined as three month USD LIBOR + 0.20%. The coupon rate is recalculated
periodically, typically every one or three months.
• Zero-coupon bonds (zeros) pay no regular interest. They are issued at a substantial
discount to par value, so that the interest is effectively rolled up to maturity (and
usually taxed as such). The bondholder receives the full principal amount on the
redemption date. An example of zero coupon bonds is Series E savings bonds
issued by the U.S. government. Zero-coupon bonds may be created from fixed rate
bonds by a financial institution separating (stripping off) the coupons from the
principal. In other words, the separated coupons and the final principal payment of
the bond may be traded separately. Sec 10 (Interest Only) and PO (Principal Only).
• High-yield bonds (junk bonds) are bonds that are rated below investment grade by
the credit rating agencies. As these bonds are more risky than investment grade
bonds, investors expect to earn a higher yield.
• Convertible bonds let a bondholder exchange a bond to a number of shares of the
issuer's common stock. These are known as hybrid securities, because they
combine equity and debt features.
• Exchangeable bonds allows for exchange to shares of a corporation other than the
issuer.
• Inflation-indexed bonds (linkers) (US) or Index-linked bond (UK), in which the
principal amount and the interest payments are indexed to inflation. The interest
rate is normally lower than for fixed rate bonds with a comparable maturity (this
position briefly reversed itself for short-term UK bonds in December 2008).
However, as the principal amount grows, the payments increase with inflation. The
United Kingdom was the first sovereign issuer to issue inflation linked gilts in the
1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of
inflation linked bonds issued by the U.S. government.
• Other indexed bonds, for example equity-linked notes and bonds indexed on a
business indicator (income, added value) or on a country's GDP.
• Asset-backed securities are bonds whose interest and principal payments are
backed by underlying cash flows from other assets. Examples of asset-backed
securities are mortgage-backed securities (MBS's), collateralized mortgage
obligations (CMOs) and collateralized debt obligations (CDOs).
• Subordinated bonds are those that have a lower priority than other bonds of the
issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors.
First the liquidator is paid, then government taxes, etc. The first bond holders in
line to be paid are those holding what is called senior bonds. After they have been
paid, the subordinated bond holders are paid. As a result, the risk is higher.
Therefore, subordinated bonds usually have a lower credit rating than senior bonds.
The main examples of subordinated bonds can be found in bonds issued by banks,
and asset-backed securities. The latter are often issued in tranches. The senior
tranches get paid back first; the subordinated tranches later.
• Covered bonds are backed by cash flows from mortgages or public sector assets.
Contrary to asset-backed securities the assets for such bonds remain on the issuers
balance sheet.
• Perpetual bonds are also often called perpetuities or Perps'. They have no maturity
date. The most famous of these are the UK Consols, which are also known as
Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888
and still trade today, although the amounts are now insignificant. Some ultra-long-
term bonds (sometimes a bond can last centuries: West Shore Railroad issued a
bond which matures in 2361 (i.e. 24th century) are virtually perpetuities from a
financial point of view, with the current value of principal near zero.
• Bearer bond is an official certificate issued without a named holder. In other
words, the person who has the paper certificate can claim the value of the bond.
Often they are registered by a number to prevent counterfeiting, but may be traded
like cash. Bearer bonds are very risky because they can be lost or stolen. Especially
after federal income tax began in the United States, bearer bonds were seen as an
opportunity to conceal income or assets. U.S. corporations stopped issuing bearer
bonds in the 1960s, the U.S. Treasury stopped in 1982, and state and local tax-
exempt bearer bonds were prohibited in 1983.
• Registered bond is a bond whose ownership (and any subsequent purchaser) is
recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond.
Interest payments, and the principal upon maturity, are sent to the registered
owner.
• A government bond, also called Treasury bond, is issued by a national government
and is not exposed to default risk. It is characterized as the safest bond, with the
lowest interest rate. A treasury bond is backed by the "full faith and credit" of the
relevant government.
• For that reason, for the major OECD countries this type of bond is often referred to
as risk-free.
Municipal bond is a bond issued by a state, U.S. Territory, city, local government,
or their agencies. Interest income received by holders of municipal bonds is often
exempt from the federal income tax and from the income tax of the state in which
they are issued, although municipal bonds issued for certain purposes may not be
tax exempt.
•Build America Bonds (BABs) are a form of municipal bond authorized by the
American Recovery and Reinvestment Act of 2009. Unlike traditional US
municipal bonds, which are usually tax exempt, interest received on BABs is
subject to federal taxation. However, as with municipal bonds, the bond is tax-
exempt within the US state where it is issued. Generally, BABs offer significantly
higher yields (over 7 percent) than standard municipal bonds.
•Book-entry bond is a bond that does not have a paper certificate. As physically
processing paper bonds and interest coupons became more expensive, issuers (and
banks that used to collect coupon interest for depositors) have tried to discourage
their use.
•Some book-entry bond issues do not offer the option of a paper certificate, even to
investors who prefer them.
• Lottery bonds are issued by European and other states. Interest is paid as on a
traditional fixed rate bond, but the issuer will redeem randomly selected individual
bonds within the issue according to a schedule. Some of these redemptions will be
for a higher value than the face value of the bond.
• War bond is a bond issued by a country to fund a war.
• Serial bond is a bond that matures in installments over a period of time. In effect, a
$100,000, 5-year serial bond would mature in a $20,000 annuity over a 5-year
interval.
• Revenue bond is a special type of municipal bond distinguished by its guarantee of
repayment solely from revenues generated by a specified revenue-generating entity
associated with the purpose of the bonds. Revenue bonds are typically "non-
recourse", meaning that in the event of default, the bond holder has no recourse to
other governmental assets or revenues.
• Climate bond is a bond issued by a government or corporate entity in order to raise
finance for climate change mitigation- or adaptation-related projects or
programmes.
• Dual currency bonds
• Retail bonds are a type of corporate bond mostly designed for ordinary investors.
They have become particularly attractive since the London Stock Exchange (LSE)
launched an order book for retail bonds.
• Social impact bonds are an agreement for public sector entities to pay back private
investors after meeting verified improved social outcome goals that result in public
sector savings from innovative social program pilot projects.
Foreign currencies
Some companies, banks, governments, and other sovereign entities may decide to
issue bonds in foreign currencies as it may appear to be more stable and
predictable than their domestic currency. Issuing bonds denominated in foreign
currencies also gives issuers the ability to access investment capital available in
foreign markets. The proceeds from the issuance of these bonds can be used by
companies to break into foreign markets, or can be converted into the issuing
company's local currency to be used on existing operations through the use of
foreign exchange swap hedges.
Foreign issuer bonds can also be used to hedge foreign exchange rate risk. Some
foreign issuer bonds are called by their nicknames, such as the "samurai bond".
These can be issued by foreign issuers looking to diversify their investor base away
from domestic markets. These bond issues are generally governed by the law of the
market of issuance, e.g., a samurai bond, issued by an investor based in Europe,
will be governed by Japanese law. Not all of the following bonds are restricted for
purchase by investors in the market of issuance.
Bond valuation
At the time of issue of the bond, the interest rate and other conditions of the bond
will have been influenced by a variety of factors, such as
current market interest rates, the length of the term and the
creditworthiness of the issuer.
These factors are likely to change over time, so the market

price of a bond will vary after it is issued. The market price is expressed as a
percentage of nominal value. Bonds are not necessarily issued at par (100% of face
value, corresponding to a price of 100), but bond prices will move towards par as
they approach maturity (if the market expects the maturity payment to be made in
full and on time) as this is the price the issuer will pay to redeem the bond. This is
referred to as "Pull to Par". At other times, prices can be above par (bond is
priced at greater than 100). which is called trading at a premium, or below par
(bond is priced at less than 100), which is called trading at a discount. Most
government bonds are denominated in units of $1000 in the United States, or in
units of £100 in the United Kingdom. Hence, a deep discount US bond, selling at a
price of 75.26, indicates a selling price of $752.60 per bond sold. (Often, in the US,
bond prices are quoted in points and thirty-seconds of a point, rather than in
decimal form.) Some short-term bonds, such as the U.S. Treasury bill, are always
issued at a discount, and pay par amount at maturity rather than paying coupons.
This is called a discount bond.
The market price of a bond is the present value of all expected future interest and
principal payments of the bond discounted at the bond's yield to maturity, or rate of
return. That relationship is the definition of the redemption yield on the bond,
which is likely to be close to the current market interest rate for other bonds with
similar characteristics. (Otherwise there would be arbitrage opportunities.) The
yield and price of a bond are inversely related so that when market interest rates
rise, bond prices fall and vice versa.
The market price of a bond may be quoted including the accrued interest since the
last coupon date. (Some bond markets include accrued interest in the trading price
and others add it on separately when settlement is made.) The price including
accrued interest is known as the "full" or "dirty price". (See also Accrual bond.)
The price excluding accrued interest is known as the "flat" or "clean price".
The interest rate divided by the current price of the bond is called the current yield
(this is the nominal yield multiplied by the par value and divided by the price).
There are other yield measures that exist such as the yield to first call, yield to
worst, yield to first par call, yield to put, cash flow yield and yield to maturity. The
relationship between yield and term to maturity (or alternatively between yield and
the weighted mean term allowing for both interest and capital repayment) for
otherwise identical bonds is called a yield curve. The yield curve is a graph
plotting this relationship.
Bond markets, unlike stock or share markets, sometimes do not have a centralized
exchange or trading system. Rather, in most developed bond markets such as the
U.S., Japan and western Europe, bonds trade in decentralized, dealer-based over-
the-counter markets. In such a market, market liquidity is provided by dealers and
other market participants committing risk capital to trading activity. In the bond
market, when an investor buys or sells a bond, the counterparty to the trade is
almost always a bank or securities firm acting as a dealer. In some cases, when a
dealer buys a bond from an investor, the dealer carries the bond "in inventory", i.e.
holds it for his own account. The dealer is then subject to risks of price fluctuation.
In other cases, the dealer immediately resells the bond to another investor.
Bond markets can also differ from stock markets in that, in some markets,
investors sometimes do not pay brokerage commissions to dealers with whom they
buy or sell bonds. Rather, the dealers earn revenue by means of the spread, or
difference, between the price at which the dealer buys a bond from one investor—
the "bid" price—and the price at which he or she sells the same bond to another
investor—the "ask" or "offer" price. The bid/offer spread represents the total
transaction cost associated with transferring a bond from one investor to another.
F. Investing in bonds
Bonds are bought and traded mostly by institutions like central banks, sovereign
wealth funds, pension funds, insurance companies, hedge funds, and banks.
Insurance companies and pension funds have liabilities which essentially include
fixed amounts payable on predetermined dates. They buy the bonds to match their
liabilities, and may be compelled by law to do this. Most individuals who want to
own bonds do so through bond funds. Still, in the U.S., nearly 10% of all bonds
outstanding are held directly by households.
The volatility of bonds (especially short and medium dated bonds) is lower than
that of equities (stocks). Thus bonds are generally viewed as safer investments than
stocks, but this perception is only partially correct. Bonds do suffer from less day-
to-day volatility than stocks, and bonds' interest payments are sometimes higher
than the general level of dividend payments. Bonds are often liquid — it is often
fairly easy for an institution to sell a large quantity of bonds without affecting the
price much, which may be more difficult for equities — and the comparative
certainty of a fixed interest payment twice a year and a fixed lump sum at maturity
is attractive. Bondholders also enjoy a measure of legal protection: under the law
of most countries, if a company goes bankrupt, its bondholders will often receive
some money back (the recovery amount), whereas the company's equity stock
often ends up valueless. However, bonds can also be risky but less risky than
stocks:
• Fixed rate bonds are subject to interest rate risk, meaning that their market prices
will decrease in value when the generally prevailing interest rates rise. Since the
payments are fixed, a decrease in the market price of the bond means an increase in
its yield. When the market interest rate rises, the market price of bonds will fall,
reflecting investors' ability to get a higher interest rate on their money elsewhere —
perhaps by purchasing a newly issued bond that already features the newly higher
interest rate. This does not affect the interest payments to the bondholder, so long-
term investors who want a specific amount at the maturity date do not need to
worry about price swings in their bonds and do not suffer from interest rate risk.
Bonds are also subject to various other risks such as call and prepayment risk,
credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility
risk, inflation risk. sovereign risk and yield curve risk. Again, some of these will
only affect certain classes of investors.
Price' changes in a bond will immediately affect mutual funds that hold these
bonds. If the value of the bonds in their trading portfolio falls, the value of the
portfolio also falls. This can be damaging for professional investors such as banks,
insurance companies, pension funds and asset managers (irrespective of whether
the value is immediately "marked to market" or not). If there is any chance a holder
of individual bonds may need to sell his bonds and "cash out", interest rate risk
could become a real problem (conversely, bonds' market prices would increase if
the prevailing interest rate were to drop, as it did from 2001 through 2003. One
way to quantify the interest rate risk on a bond is in terms of its duration. Efforts to
control this risk are called immunization or hedging.
• Bond prices can become volatile depending on the credit rating of the issuer – for
instance if the credit rating agencies like Standard & Poor's and Moody's upgrade
or downgrade the credit rating of the issuer. An unanticipated downgrade will
cause the market price of the bond to fall. As with interest rate risk, this risk does
not affect the bond's interest payments (provided the issuer does not actually
default), but puts at risk the market price, which affects mutual funds holding these
bonds, and holders of individual bonds who may have to sell them.
• A company's bondholders may lose much or all their money if the company goes
bankrupt. Under the laws of many countries (including the United States and
Canada), bondholders are in line to receive the proceeds of the sale of the assets of
a liquidated company ahead of some other creditors. Bank lenders, deposit holders
(in the case of a deposit taking institution such as a bank) and trade creditors may
take precedence.
• Some bonds are callable, meaning that even though the company has agreed to
make payments plus interest towards the debt for a certain period of time, the
company can choose to pay off the bond early. This creates reinvestment risk,
meaning the investor is forced to find a new place for his money, and the investor
might not be able to find as good a deal, especially because this usually happens
when interest rates are falling.
Debt Versus Equity

Bonds are debt, whereas stocks are equity. This is the important distinction
between the two securities. By purchasing equity (stock) an investor becomes an
owner in a corporation. Ownership comes with voting rights and the right to share
in any future profits. By purchasing debt (bonds) an investor becomes a creditor to
the corporation (or government). The primary advantage of being a creditor is that
you have a higher claim on assets than shareholders do: that is, in the case of
bankruptcy, a bondholder will get paid before a shareholder. However, the
bondholder does not share in the profits if a company does well - he or she is
entitled only to the principal plus interest.
To sum up, there is generally less risk in owning bonds than in owning stocks, but
this comes at the cost of a lower return.
2.7 Characteristics of Bonds

Bonds have a number of characteristics of which you need to be aware. All of
these factors play a role in determining the value of a bond and the extent to which
it fits in your portfolio.
Face Value/Par Value
The face value (also known as the par value or principal) is the amount of money a
holder will get back once a bond matures. A newly issued bond usually sells at the
par value. Corporate bonds normally have a par value of $1,000, but this amount
can be much greater for government bonds.
What confuses many people is that the par value is not the price of the bond. A
bond's price fluctuates throughout its life in response to a number of variables
(more on this later). When a bond trades at a price above the face value, it is said to
be selling at a premium. When a bond sells below face value, it is said to be selling
at a discount.
Coupon (The Interest Rate)

The coupon is the amount the bondholder will receive as interest payments. It's
called a "coupon" because sometimes there are physical coupons on the bond that
you tear off and redeem for interest. However, this was more common in the past.
Nowadays, records are more likely to be kept electronically.
As previously mentioned, most bonds pay interest every six months, but it's
possible for them to pay monthly, quarterly or annually. The coupon is expressed
as a percentage of the par value. If a bond pays a coupon of 10% and its par value
is $1,000, then it'll pay $100 of interest a year. A rate that stays as a fixed
percentage of the par value like this is a fixed-rate bond. Another possibility is an
adjustable interest payment, known as a floating-rate bond. In this case the interest
rate is tied to market rates through an index, such as the rate on Treasury bills. You
might think investors will pay more for a high coupon than for a low coupon. All
things being equal, a lower coupon means that the price of the bond will fluctuate
more.
Maturity
The maturity date is the date in the future on which the investor's principal will be
repaid. Maturities can range from as little as one day to as long as 30 years (though
terms of 100 years have been issued).
A bond that matures in one year is much more predictable and thus less risky than
a bond that matures in 20 years. Therefore, in general, the longer the time to
maturity, the higher the interest rate. Also, all things being equal, a longer term
bond will fluctuate more than a shorter term bond.
Issuer
The issuer of a bond is a crucial factor to consider, as the issuer's stability is your
main assurance of getting paid back. For example, the U.S. government is far more
secure than any corporation. Its default risk (the chance of the debt not being paid
back) is extremely small - so small that U.S. government securities are known as
risk-free assets. The reason behind this is that a government will always be able to
bring in future revenue through taxation. A company, on the other hand, must
continue to make profits, which is far from guaranteed. This added risk means
corporate bonds must offer a higher yield in order to entice investors - this is the
risk/return tradeoff in action.
In this study session we have discussed investment in bond markets which
where we looked at what a bond is, different types of bonds, who issues a bond
and some features of a bond as well as characteristics of bonds and bond
valuation.

1. Analyse the definition of a bond and explain the types of bonds.
2. What are the characteristics of bonds?
3. Discuss the types of risks associated with investing in bonds.
4. Explain the types of bonds market that you know.
a. Visit U-tube: https://goo.gl/PGii1h & https://goo.gl/Y5Fe3q . Watch the
b. View the animation on: https://goo.gl/W2vEPN and critique it in the

discussion forum

ITA 1: A Bond is a debt instrument issued for a period of more than one year with the purpose of raising capita
ITA 2: An international bond market can also be referred to as offshore bond market, are bond issued and then
ITA 3: Straight bond , Callable bond, Non- refundable bond, Putable bond, Perpetual debentures, Zero- coupon
ITA 4: 1. Interest Rate Risk 2. Call and Prepayment Risk 3. Credit Risk 4. Liquidity Risk
5. Exchange Rate or Currency Risk 6. Inflation or Purchasing power risk
Graham Bum,).
ltd,)
Nig).
STUDY SESSION 3
Other Forms of Financial Instruments
Introduction
2.0 Main Content
2.1 Treasury Bills
What are treasury bills
Low risk, safe return
What Are Nigerian Treasury Bills (T-bills)
Why Does the Government Issue T-bills
Understanding the Nigerian Treasury Bills Market
Features of the Nigerian Treasury Bills
When Are T-bills Issued and How Treasury Securities Work
2.2 Commercial Papers
Basic Characteristics
Types of Commercial Paper
Negotiability
Endorsements
Liability of Parties
Secondary Liability
2.2 A Bankers Acceptance
Introduction:
You are welcome to another study session. In this study session you will be
introduced to other forms of financial instruments where we are going to be
discussing about treasury bills, commercial papers, and bankers acceptance.
1. What treasury bills is
2. What commercial papers are
3. Understand the advantages and disadvantages of commercial paper
4. Understand what a banker’s acceptance is and its comparison with other
commercial papers.
2.0 Main Content

2.1 Treasury Bills
What are treasury bills?
Treasury bills are discounted short-term instruments used by the national or federal
governments to regulate money supply or manage liquidity systems in a country.
The T-bills as familiarly known, are provided through a national central bank to
the public for a maturity period (not less than one year). The T-bills are regarded as
one of the safest investments since they are regarded there exists the faith of the
government hence carry no or less risks. In most countries, T-bills are very popular
with institutional investors. The credit worthiness of national or federal
governments and that of the T-bills is enhanced by the volume of investment these
funds.
Low risk, safe return
Treasury Bills are issued at a discount by the Central Bank of Nigeria (CBN) on
behalf of the federal Government. If you would like to invest your money at low
risk Treasury Bills will provide you with a level of confidence.
Although the rate of return is typically the lowest on the

market. Treasury Bills have high liquidity and are offered
for 91 days at a weekly auction. If you do not wish to invest
for the full period Diamond can provide rediscounting
facilities and can purchase your bills from you at any point.
We can also guarantee your Treasury Notes, but at a slightly lower rate of return.
Minimum investment amount N10 000
Investment fee 0.25%
ITQ 1: what are treasury bills?
What Are Nigerian Treasury Bills (T-bills)?

T-bills are marketable debt instruments issued by the Federal Government. The
Government is obliged to pay the holders of T-bills a fixed sum of money on the
maturity date of the securities. When you invest in T-bills, you are lending your
money to the Government in exchange for interest payments. The tenors are
typically 91,182 and 364 days (maximum).
Why Does the Government Issue T-bills?

• Provide a liquid investment alternative with little or no risk of default for
individual and institutional investors;
• To raise the money needed to pay off maturing debt and finance their operating
and development expenditure
Are Treasury bill Investments Considered Safe?
Nigeria's ratings indicate that it has a strong credit rating with a minimal
probability of default on its local currency debt obligations. From the perspective
of individual investors, this means that T bills are among the safest possible
investments to hold, and the principal value of their investments is preserved if
held to maturity.
Understanding The Nigerian Treasury Bills Market Nigerian Treasury Bills

These are discountable instruments used by the Central Bank of Nigeria (CBN) to
manage liquidity in the system, usually on short-term basis. In recent times, the
market has witnessed a tremendous higher yield in the Nigerian Treasury Bills.
The tenors are short with a maximum of 364-days with yields far higher in
comparison to what the money market offers:
Features of the Nigerian Treasury Bills

Issuer is the Federal Government through the Central Bank of Nigeria (CBN).
Typically, Nigerian Treasury Bills are zero-risk and rediscount-able through
licensed Money Market Dealers. The Rates are offered on a discount basis and are
often referred to as risk-free rates. Primary Issue of 91 days and 182 days are
offered bi-monthly, while 364 days bills are offered monthly.
The investor earns upfront interest, hence, invests discounted value. They are used
by CBN as an instrument for managing liquidity through the Open Market
Operations (OMO). They are traded actively in the secondary market amongst
Banks and Discount houses on an outright or repo basis. Liquidity Status: The
Nigerian Treasury Bills qualify for liquidity ratio computation.
It also has an active two-way quote secondary market which provides additional
liquidity for all the primary auctions. Tenors are short and range from 91, 182 and
364 days. Institutions or individuals can borrow using Nigerian Treasury Bills as
collateral. You can invest as low as N100,000.00 in the Nigerian Treasury Bills.
When Are T-bills Issued?

T-bills are issued according to a quarterly issuance calendar that is published on
the CBN website (www.cenbank.org). Prior notice about the auction is published
on the website and also advertised in the major newspapers, typically a week ahead
of the auctions. Primary auctions are held bi-monthly on Wednesday, while the
issuance and settlement is affected on Thursday.
What Role Do Primary Dealer Banks Play In A T-bill Auction?

Only Primary Dealer banks participate directly in the auctions; the total amount of
their bids will reflect not just their own bidding interest, but also those bids taken
on behalf of investors. The Primary Dealers are appointed to play a role as
specialist intermediaries in the money markets. Primary Dealers are obliged to
provide liquidity in the market by quoting prices on all issues under all market
conditions.
How Treasury Securities Work

First, let's look at the difference in the maturities of the three types of Treasury
securities. Treasury bills (or "T-bills") are short-term bonds that mature within one
year or less from their time of issuance. T-bills are sold with maturities of four, 13,
26, and 52 weeks, which are more commonly referred to as the one-, three-, six-,
and 12-month T-bills, respectively. The one three-, and six-month bills are
auctioned once a week, while the 52-week bills are auctioned every four weeks.
Since the maturities on Treasury bills are so short, they typically offer lower yields
than those available on Treasury notes or bonds.
Treasury notes are issues with maturities of one, three, five, seven, and 10 years,
while Treasury bonds (also called "long bonds") offer
maturities of 20 and 30 years. In this case, the only
difference between notes and bonds is the length until
maturity. The 10-year is the most widely followed of all
maturities; it is used as both the benchmark for the
Treasury market and the basis for banks' calculation of
mortgage rates. Typically, the more distant the maturity date of the issue, the
higher the yield.
2.2 Commercial Papers

Commercial paper, in the global financial market, is an unsecured promissory note
with a fixed maturity of no more than 270 days. Commercial paper is a money-
market security issued (sold) by large corporations to obtain funds to meet short-
term debt obligations (for example, payroll), and is backed only by an issuing bank
or corporation's promise to pay the face amount on the maturity date specified on
the note. Since it is not backed by collateral, only firms with excellent credit
ratings from a recognized credit rating agency will be able to sell their commercial
paper at a reasonable price. Commercial paper is usually sold at a discount from
face value, and carries higher interest repayment rates than bonds. Typically, the
longer the maturity on a note, the higher the interest rate the issuing institution
pays. Interest rates fluctuate with market conditions, but are typically lower than
banks' rates.
Commercial paper - though a short-term obligation - is issued as part of a

continuous significantly longer rolling program, which is either a number of years
long (as in Europe), or open-ended (as in the U.S.). Because the continuous
commercial paper program is much longer than the individual commercial paper in
the program (which cannot be longer than 270 days), as commercial paper matures
and is paid down the proceeds from the pay-down are used to buy new commercial
paper in the same program — the process is referred to as "rolling" the commercial
paper. “Because the program is a continuous rolling one that runs for many years,
it can be viewed as a source for long-term funds for issuers, even though composed
of shorter-term obligations. By having the constituent parts of the Program be no
longer than 270 days, the issuer avoids the cost, delays, and complications of being
required to file a registrations statement.
There are two methods of issuing credit. The issuer can market the securities
directly to a buy and hold investor such as most money market funds.
Alternatively, it can sell the paper to a dealer, who then sells the paper in the
market. The dealer market for commercial paper involves large securities firms and
subsidiaries of bank holding companies. Most of these firms also are dealers in US
Treasury securities. Direct issuers of commercial paper usually are financial
companies that have frequent and sizable borrowing needs and find it more
economical to sell paper without the use of an intermediary. In the United States,
direct issuers save a dealer fee of approximately 5 basis points, or 0.05%
annualized, which translates to $50,000 on every $100 million outstanding. This
saving compensates for the cost of maintaining a permanent sales staff to market
the paper. Dealer fees tend to be lower outside the United States.
A written instrument or document such as a cheque, draft, promissory note, or a

certificate of deposit, that manifests the pledge or duty of one individual to pay
money to another. Commercial paper is ordinarily used in business transactions
since it is a reliable and expedient means of dealing with large sums of money and
minimizes the risks inherent in using cash, such as the increased possibility of
theft. One of the most significant aspects of commercial paper is that it is
negotiable, which means that it can be freely transferred from one party to another,
either through endorsement or delivery. The terms commercial paper and
negotiable instrument can be used interchangeably.
Since commercial paper constitutes Personal Property,
it is transferable by sale or gift and can be loaned, lost,
stolen, and taxed. Commercial paper is a specific type
of property primarily governed by Article 3 of the
Uniform Commercial Code (UCC), which is in effect in
all 50 states, the District of Columbia, and the Virgin
Islands. Although Louisiana has not enacted all the articles of the UCC, it has
adopted Article 3.
ITQ 2: what are commercial papers?
Basic Characteristics
Commercial paper is an unsecured form of promissory note that pays a fixed rate
of interest. It is typically issued by large banks or corporations to cover short-term
receivables and meet short-term financial obligations, such as funding for a new
project. As with any other type of bond or debt instrument, the issuing entity offers
the paper assuming that it will be in a position to pay both interest and principal by
maturity. It is seldom used as a funding vehicle for longer-term obligations because
other alternatives are better suited for that purpose.
Commercial paper provides a convenient financing method because it allows

issuers to avoid the hurdles and expense of applying for and securing continuous
business loans, and the SEC does not require securities that trade in the money
market to be registered. It is usually offered at a discount with maturities that can
range from one to 270 days, although most issues mature in one to six months.
Types of Commercial Paper

The UCC identifies four basic kinds of commercial paper: promissory notes, drafts,
cheques, and certificates of deposit. The most fundamental type of commercial
paper is a promissory note, a written pledge to pay money. A promissory note is a
two-party paper. The maker is the individual who promises to pay while the payee
or holder is the person to whom payment is promised. The payee can be either a
specifically named individual or merely the bearer of the instrument who has it in
his or her physical possession when he or she seeks to be paid according to its
terms. A note payable to "bearer" can be paid to the person who presents it for
remuneration. Such an instrument is said to be bearer paper.
A promissory note that is payable on demand can be redeemed by the payee at any
time, whereas a time note has a date for payment on its face that establishes the
date when the holder will have an enforceable right to receive payment under it.
There is no obligation to pay a time note until the date designated on its face. The
ordinary purpose of a promissory note is to borrow money. Promissory notes
should not be confused with credit or loan agreements, which are separate
instruments that are usually signed at the same time as promissory notes, but which
merely describe the terms of the transactions.
A promissory note serves as documentary evidence of a debt. It can be endorsed

and sold at a discount to other parties, and each subsequent endorser becomes
secondarily liable for the amount specified on the face of the instrument. A number
of Consumer Credit dealings are funded through the use of promissory notes.
Ordinarily, certificates of deposit come in specific denominations that vary

according to the length of the term that the bank will hold the funds and are
available only for large sums of money. They are used mainly by corporations and
individuals as savings devices since they generally bear higher interest rates than
ordinary savings accounts. They must, however, be left on deposit for the
designated time period. Ordinarily, a CD can be cashed in prior to the date of
maturity, but some interest will be forfeited. Depending upon the provisions of the
CD, however, a bank may have the legal right to refuse to close an account before
the expiration of the designated date of maturity.
Negotiability
There are basic requirements for the negotiability of commercial paper. The
instrument must be in writing and signed by either its maker or its drawer. In
addition, it must be either an unconditional promise, as in the case of a promissory
note, or an order to pay a specific amount of money, such as a draft. It must be
payable either on demand or at a fixed time to order or to bearer.
The requirement that the instrument must be in writing can be met in various ways.
The paper can be printed, typed, engraved, or written in longhand, either in ink,
pencil, or both. Ordinarily, specimens of commercial paper can be obtained from
banks or stationery stores. Similarly, there are a number of ways to comply with
the signature requirement. The signature may legally be either handwritten, typed,
printed, or stamped by a machine. Individuals who are unable to write their names
can sign with a simple mark, such as an X. Also permissible are initials, a symbol,
a business or Trade Name, or an assumed name. The pledge or order for payment
must be unconditional to insure certainty that the instrument will be paid, since it is
used in place of money and as a means of obtaining credit.
When the paper includes an unconditional promise or order, supplementary facts

can be mentioned that will not defeat its negotiability. For example, the paper can
indicate the transaction was secured by a mortgage. It might mention a specific
account or fund out of which payment is expected, although not required.
Ordinarily, such a collateral statement is made for purposes of accounting and does
not create a conditional promise or order to pay. Payment can, however, be limited
to the total assets of a partnership, unincorporated association, or trust.
A promise to pay is conditional when it indicates that it is either subject to or

governed by another agreement. When payment is conditional, negotiability is
terminated and the instrument is not commercial paper. The holder of the paper
cannot rely upon the face of the document to establish and fix his or her right to
payment.
A paper does not qualify for treatment as a negotiable instrument if payment of it is

to be made exclusively from a particular fund, unless such instrument is issued by
a government or division thereof. In dealing with a promissory note, practically
any terms that state a definite promise will suffice to make the instrument legally
enforceable. The phrase "I promise to pay" clearly demonstrates an unconditional
pledge of payment; whereas an IOU is not deemed definite enough to warrant
payment and, therefore, is not a negotiable instrument. There must be an order to
pay in a check or a draft. A mere request, as in "I wish you would pay," is
insufficient. Language used for courtesy, such as "please pay," does not, however,
defeat the order. Suitable language to instruct payment would be "pay to the order
of X. "The holder of the negotiable instrument must be able to ascertain the precise
value of the paper by looking at its face; In certain instances, it might be necessary
to compute interest, as in the case of a promissory note that bears a certain annual
rate.
A provision for interest does not impair the determination of the actual sum. In
addition, certainty regarding the amount is not altered by the fact that the interest
rate can differ before or after default or before or after a particular date.The amount
payable remains a fixed sum even in the event that it is paid in installments, or
reduced by agreement of payment prior to a set time or increased following the
date of payment. In addition, the certainty of the sum is not affected by a provision
for collection of expenses and lawyer's fees. The sum must be payable in money,
which is a medium of exchange adopted by governments; otherwise, the document
is not considered commercial paper.
An instrument must be payable either on demand or at a set time in order to have
negotiability. Papers that are payable on demand are payable upon presentation,
such as checks. When a note or a draft is payable on, or prior to, a fixed date or for
a set period thereafter, it is considered to be negotiable at a definite time. When an
instrument payable on or before a certain date, payment is required no later than
the date indicated, although it can be made prior to that date. Similarly, a paper
made payable at an established time after sight is payable at a definite time. After
sight means that upon presentation of the instrument to the maker by the holder,
payment will occur after the expiration of the time designated on the note. The
payee of a note due one week after sight must be paid by the maker within a week
of the date it is presented for payment. It need not be paid immediately upon
presentation, since the terms of the note do not make it a demand instrument.
If the time provided for payment of an instrument is definite except for the
presence of an acceleration clause, the time of payment of the instrument is still
considered definite. That is, a note can provide that the time for payment will be
accelerated if a certain event takes place or at the option of one of the parties to the
agreement without destroying its negotiability. Also acceptable are extensions of
the payment period, which can be made at the choice of the holder, maker, or
acceptor, or immediately when a particular act occurs.
An instrument retains its negotiable quality even if it is undated, antedated, or

postdated. An undated instrument takes effect immediately upon delivery to the
payee. "An antedated paper is given a date that has passed, and a postdated
instrument is given a future date. In the event that an instrument is either antedated
or postdated, the determination of the date on which it becomes legally operative is
contingent upon the date that appears on its face and upon whether it is payable on
demand or on a certain date. A postdated check cannot be cashed prior to the date
appearing on its face, in spite of the fact that a check is ordinarily payable on
demand.
An instrument is not negotiable if it is payable upon an occurrence of indefinite

timing, even when the event is certain to happen, such as death. The requirement
that an instrument be made payable either to order or to bearer is met when the
paper is made available to the bearer, or to an individual specifically designated, or
to the order of that person, as in "X, or his order." An estate, trust, corporation,
partnership, or unincorporated association may be designated as a payee of a
commercial paper.
An instrument can be made payable to two or more people, either together or in the
alternative. If the paper is made out to two parties together, as in "to X and Y,"
then both payees must endorse it before payment will be made. An instrument
made out in the alternative, however, as in "To X or Y," requires endorsement by
only one payee in order to be paid.
Cheques and drafts are ordinarily written on printed forms, made payable both to
order and bearer. An empty space is left between the words "pay to the order of
and "or bearer." When the name of the payee is inserted by the drawer, the paper is
regarded as an order instrument in spite of the fact that the phrase "or bearer" is not
deleted. In such instances, the presumption is that the drawer merely neglected to
eliminate this language. An instrument is bearer paper, however, when it is made
payable to a specific payee and the words "or bearer" are either typed or
handwritten on the document as additions to it.
Bearer paper is made payable either to the holder, a specific individual, the bearer,
or to cash. It is common for such an instrument to read "pay to the order of bearer."
This occurs in the case where a printed form is used
and the term bearer is written in following "pay to the
order of” The word bearer serves to make the
instrument bearer paper in such an instance. Bearer
instruments are tantamount to cash because they are
freely transferrable from one person to another
without requiring an endorsement. They are thereby not as secure as order
instruments since if they are stolen, their terms permit payment to be made to
whoever possesses them at the time they are presented for payment. Many banks
require customers to endorse bearer paper prior to payment as a safety measure.
This provides both the drawer and the bank with the name of the individual who is
given payment.
Endorsements
An endorsement is the process of signing the back of a paper, thereby imparting
the rights that the signer had in the paper to another person. The number of times
an instrument may be endorsed is unlimited. There is no requirement that the word
"order" be embodied in the endorsement. Four principal kinds of endorsements
exist: special, blank, restrictive, and qualified.
An endorsement that clearly indicates the individual to whom the instrument is

payable is a special endorsement. A paper containing a blank endorsement is one
that has the signature of the payee but no specific endorsee is designated. A check
that is made payable to the order of X is endorsed in the blank when X signs it.
Once endorsed, it becomes bearer paper and is negotiable by anyone who
physically holds it. A blank endorsement is changed into a special endorsement if
certain words are written above the endorsee's signature, such as "pay to the order
of Y."
A qualified endorsement is one wherein liability is disclaimed by the endorser

through inclusion of a phrase preceding his or her signature. Ordinarily, an
unqualified endorser's liability may be either secondary, whereby the endorser is
bound to pay if the individual expected to pay defaults and certain conditions are
met or by Warranty, by which the endorser incurs liability upon alteration of the
instrument. To disclaim secondary liability, the endorser can include the words
"without recourse," thereby relieving himself or herself of any responsibility to pay
it.
Attorneys who are the recipients of checks drawn in settlement of the claims of
their clients commonly sign their clients' checks with qualified endorsements. This
type of check is ordinarily made payable to the lawyer and client jointly. It is
generally endorsed by the lawyer Without Recourse and given to the client. The
attorney then is not liable if the client does not receive the money promised by the
terms of the check.
A restrictive endorsement is conditional and attempts to prevent subsequent

transfer of the document. The language of the endorsement indicates that the
instrument is intended for limited use, such as "for deposit only," or specifies that
the paper is meant for the benefit of the endorser or another individual, as in "Pay
X in trust for Y." The condition imposed by a restrictive endorsement must be
satisfied before payment can be properly made.
However, an endorsement that tries to prohibit further transfer of an instrument
will not succeed. If a cheque says "Pay X only," it is still completely negotiable
upon its endorsement by X.
Liability of Parties
An individual who signs an instrument is either primarily or secondarily liable for
payment. Primary liability is extended to the person who is expected to pay first,
and the individual who is legally responsible to pay upon the failure of the first
party to do so is secondarily liable.
The maker of a promissory note is primarily liable, since that person is -the
individual who has originally promised to pay. He or she must meet this obligation
when payment becomes due unless he or she has a valid defense or has been
discharged of the debt.
The drawer of a cheque or draft is secondarily liable, since that individual does not
make an unconditional promise to pay the instrument. He or she expects the bank
to pay and promises to pay the amount of the instrument only upon notification of
dishonor, a refusal by the drawee to accept the paper when properly presented for
payment. This might occur, for example, if the bank refuses to pay a check due to
insufficient funds in the drawer's checking account or because he or she has
notified the drawee to stop payment.
The drawee of a draft or cheque has primary liability to the holder, an individual
who has lawfully acquired possession and is entitled to payment, upon acceptance
of the instrument by the drawee.
A draft is accepted for payment when the acceptance is indicated by the drawee on
the face of the document. Certification of an instrument, such as a check, is its
acceptance by a bank guaranteeing that payment will be forthcoming. A drawee is
liable to the drawer if the drawee refuses to pay a draft or check that is properly
drawn and presented because such action constitutes a noncompliance of the
drawee's contractual obligation to the drawer.
Any person who places his or her unqualified endorsement on a commercial paper
incurs secondary liability for its payment. Such liability occurs when the individual
who has the primary duty to pay defaults on his or her obligation.
A maker or drawer is not relieved from payment of an instrument endorsed with
the payee's name when an imposter manages to have a paper issued to himself or
herself by the maker or drawer; when an individual signing on the behalf of the
maker or drawer plans that the payee shall have no interest in the paper, for
example, the case of a check being made out to a fictitious payee; and when the
agent or employee of the maker or drawer designates the name of a payee with the
intent that the named party will actually have no interest in the instrument. In the
last two instances, the failure of the employer to use reasonable care in choosing
and supervising employees makes the employer personally responsible for all
losses that arise from his or her Negligence. Many employers guard against such
risks by taking out fidelity insurance policies to cover losses that might occur
through employee misconduct.
Secondary Liability
Individuals who are secondarily liable on a negotiable instrument are not obliged
to pay unless it has been presented for payment and dishonored. The commercial
paper must first be given to the person who is primarily liable for payment. In the
event that the instrument clearly notes the date of payment, the instrument must be
presented on the date indicated. If payment is unjustifiably refused by the
individual who has primary liability, the secondary party must be given notice of
the dishonor and the presentation of the instrument for payment must be made
within a reasonable period of time. What constitutes a reasonable time is
contingent upon what type of instrument is involved. If the paper is a check, the
drawer has primary liability for thirty days following the date on the check or the
day it was given or sent to the payee, with the later date prevailing. An endorser is
secondarily liable for seven days following his or her endorsement. When
presentation does not occur within these time periods, either the drawer or the
endorser may escape liability.
Individuals who are secondarily liable must receive notice of the dishonor of a
commercial paper in order to be held liable for its payment. Such notice must be
given by a bank prior to midnight on the date following the dishonor. Notice can
be oral or in writing, as long as the language identifies the paper and indicates that
it has been dishonored. If more than one person is eligible to obtain payment, only
one of them need notify those parties who are secondarily liable.
Holders
A holder is an individual who is in possession of an instrument that is either
payable to him or her as the payee, endorsed to him or her, or payable to the
bearer. Those who obtain instruments after the payee are holders if such instrument
is either payable to the bearer or endorsed properly to their order. The party in
possession is not considered to be the holder in a case in which a necessary
endorsement has been forged.
According to law, a holder may either be an ordinary holder or a holder in due
course, who has preemptive rights to payment. An ordinary holder becomes a
holder in due course upon taking an instrument subject to the reasonable belief that
it will be paid and that there are no legal reasons why payment will not occur.
In more technical terms, to be a holder in due course, the party must take the paper
for value, in Good Faith, and absent the notice that it is overdue, has been
dishonored, or is subject to an adverse claim. Such notice of problems affecting the
validity of the instrument exists if the party either is specifically informed about
something or otherwise has reason to believe in the existence of a problem. A
holder takes a paper for value when the holder has imparted something of value,
such as property or services, in exchange for the value of the paper, as evidenced
by its terms. In such a case, the individual becomes the holder for value.
If a paper is used in satisfaction of or as security for the repayment of a debt, even

though the debt might not be due when the paper is taken, the instrument is taken
for value. In addition, value is given when one commercial paper is traded for
another.
A person who receives a cheque or other type of negotiable instrument as a gift is

an ordinary holder as opposed to a holder in due course, since no consideration that
is bargained-for value has been exchanged by the parties. A holder in due course
has greater legal rights concerning protection for enforcement of the provisions for
payment of a negotiable instrument than does an ordinary holder.
For an individual to be a holder in due course, the negotiable instrument must be

taken in good faith that it represents a valuable legal right. There must be honesty
in the transaction, but the determination of whether or not good faith is present is
totally subjective.
Frequently, a due date is clearly specified on the face of the document. A holder is
presumed to have knowledge of the terms appearing on the paper. If an individual
is presented with a note on May 15 that is payable on May 1, he or she is regarded
as having knowledge that it is overdue. A person is legally considered to have
knowledge that a demand instrument is overdue if he or she accepts it after being
informed that a demand for payment has previously been made and refused or if a
reasonable period of time has elapsed since its issuance. Ordinarily, 30 days after
the date on which a check was issued is a reasonable time period within which its
presentation to a bank for payment should occur. An individual who accepts a
check that is more than 30 days old is assumed to be doing so with the knowledge
that it is overdue.
An instrument that has been dishonored ordinarily has that fact indicated on its
face. For example, a check might be stamped "insufficient funds," "account
closed," or "payment stopped." An individual who accepts such a document
possessing knowledge of its dishonor cannot be a holder in due course. A person
cannot be a holder in due course if he or she takes an instrument subject to his or
her knowledge that a claim exists against it, such as when it has been stolen or
transferred as a result of Fraud.
Line of credit
Commercial paper is a lower-cost alternative to a line of credit with a bank. Once a
business becomes established, and builds a high credit rating, it is often cheaper to
draw on a commercial paper than on a bank line of credit. Nevertheless, many
companies still maintain bank lines of credit as a "backup". Banks often charge
fees for the amount of the line of the credit that does not have a balance. While
these fees may seem like pure profit for banks, in some cases companies in serious
trouble may not be able to repay the loan resulting in a loss for the banks.
Advantage of commercial paper:

• High credit ratings fetch a lower cost of capital.
• Wide range of maturity provide more flexibility.
• It does not create any lien on asset of the company.
• Tradability of Commercial Paper provides investors with exit options.
Disadvantages of commercial paper:
• Its usage is limited to only blue chip companies.
• Issuances of commercial paper bring down the bank credit limits.
• A high degree of control is exercised on issue of Commercial Paper.
• Stand-by credit may become necessary
Certain types of promissory notes are sold at a discount, such as U.S. savings
bonds and corporation bonds. Such an instrument is sold for an amount below its
face value and can subsequently be redeemed on the due date or date of maturity
for the entire face amount. The interest obtained by the holder of the instrument is
the difference between the purchase price and the redemption price. In certain
instances, bonds that are not redeemed immediately upon maturity accumulate
interest following the due date and are ultimately worth more than their face value
when redeemed at a later time. If such bonds are cashed in before maturity, the
holder receives less than the face value.
A draft, also known as a bill of exchange, is a three-party paper ordering the
payment of money. The drawer is the individual issuing the order to pay, while the
drawee is the party to whom the order to pay is given. As in the case of a
promissory note, the payee is either a specified individual or the bearer of the draft
who is to receive payment according to its terms. The draft is made payable on
demand or on a certain date. A common example of a draft is a cashier's check.
A draft is often used in business to obtain payment for items that must be shipped
over long distances. Drafts are often the preferred method of payment for
purchasers who want to examine goods prior to payment or who do not have the
necessary funds available at the time of sale. The vendor might have reservations
concerning the buyer's credit and desire payment as soon as possible. The
procedure ordinarily followed in such instances is that upon shipment of the goods,
the seller receives a bill of lading from the carrier. The bill of lading also serves as
a certificate of title to the goods, which is ordinarily in the seller's name.
Upon shipment, the seller draws a draft against the buyer-drawee, who is required
to pay the draft. The seller's bank is named as the payee. The seller endorses the
bill of lading to the payee and attaches the bill to the draft. The seller can either
negotiate these instruments to the payee at a discount or use them as security for a
loan. Subsequently, the papers are endorsed by the seller's bank and delivered to a
correspondent bank in the community where the buyer is located.
The correspondent bank seeks payment of the draft from the buyer and when
payment is made, the bank transfers ownership of the goods from seller to buyer by
endorsing the bill of lading to the buyer. The buyer can then obtain the goods from
the carrier upon presentation of the bill of lading, which demonstrates his or her
title to the shipped goods.
A cheque is a specific kind of draft, which is drawn on a bank and payable on

demand to a particular individual or to the bearer, in which case it can be written
payable to "cash." An individual who opens a checking account is engaged in a
contractual relationship with a bank. The individual agrees to deposit money
therein, while the bank agrees that it is indebted to the depositor for the amount in
the account, in addition to promising to honor checks written for payment against
the account when there are sufficient funds on hand to do so.
A certificate of deposit, frequently referred to as a CD, is a written recognition by a
bank of the acquisition of a sum of money from a depositor for a designated period
of time at a specified interest rate, coupled with a promise of repayment. The bank
is both the maker and the drawee, and the individual making the deposit is the
payee.
2.3 A Bankers Acceptance

A banker's acceptance, or BA, is a promised future payment, or time draft, which is
accepted and guaranteed by a bank and drawn on a deposit at the bank. The
banker's acceptance specifies the amount of money, the date, and the person to
whom the payment is due. After acceptance, the draft becomes an unconditional
liability of the bank. But the holder of the draft can sell (exchange) it for cash at a
discount to a buyer who is willing to wait until the maturity date for the funds in
the deposit.
A short-term debt instrument issued by a firm that is guaranteed by a commercial

bank. Banker's acceptances are issued by firms as part of a commercial transaction.
These instruments are similar to T-Bills and are frequently used in money market
funds. Banker's acceptances are traded at a discount from face value on the
secondary market, which can be an advantage because the banker's acceptance
does not need to be held until maturity. Banker's acceptances are regularly used
financial instruments in international trade.
Banker's acceptances vary in amount, according to the size of the commercial

transaction. The date of maturity typically ranges between 30 and 180 days from
the date of issue. However, banks or investors often trade the instruments on the
secondary market before the acceptances reach maturity. Banker's acceptances are
considered to be relatively safe investments, since the bank and the borrower are
liable for the amount that is due when the instrument matures.
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.
A banker's acceptance, or BA, is a draft or bill of exchange drawn on and accepted

by a bank. It is an order by the drawer to the bank to pay a specified sum on a
specified date to a named person or to the bearer of the draft. Once accepted it
becomes a liability of the bank. If the bank has a secure reputation it is readily
tradeable. Banker's acceptances are widely used money market instruments.
Short-term debt obligations that are secured by banks. That is, a bank promises to
pay a creditor if a borrower defaults. It is also called a documented discount note.
A banker's acceptance starts as a time draft drawn on a bank deposit by a bank's

customer to pay money at a future date, typically within six months, analogous to a
post-dated cheque. Next, the bank accepts (guarantees) payment to the holder of
the draft, analogous to a post-dated check drawn on a deposit with over-draft
protection.
The party that holds the banker's acceptance may keep the acceptance until it
matures, and thereby allow the bank to make the promised payment or it may sell
the acceptance at a discount today to any party willing to wait for the face value
payment of the deposit on the maturity date. The rates at which they trade,
calculated from the discount prices relative to their face values are called banker's
acceptance rates or simply discount rates. The banker's acceptance rate with a
financial institution's commission added is called the all-in rate.
Banker's acceptances make a transaction between two parties who do not know
each other safer because they allow the parties to substitute the bank's credit
worthiness for that who owes the payment. They are used widely in international
trade for payments that are due for a future shipment of goods and services. For
example, an importer may draft a banker's acceptance when it does not have a
close relationship with and cannot obtain credit from an exporter. Once the
importer and bank have completed an acceptance agreement, whereby the bank
accepts liabilities of the importer and the importer deposits funds at the bank
(enough for the future payment plus fees), the importer can issue a time draft to the
exporter for a future payment with the bank's guarantee. Bankers acceptances are
typically sold in multiples of US $100,000." Banker's acceptances smaller than this
amount are referred to as odd lots.
Benefits of Bankers acceptance

• Considered very safe assets because it allows trader to substitute a banks credit
standing for its own.
• Used widely in international trade where the creditworthiness of one trader is
unknown to the trading partner
• Beneficial as both an asset and a liability
ITQ 3: What are the other forms of financial instruments.
In this study session we have discussed other forms of financial instruments
where we looked at other forms of financial instruments like treasury bills,
commercial papers and banker’s acceptance and we were able to discuss each
of this instruments respectively.

1. What is treasury bills, what are the features of treasury bills?
2. Differentiate between a commercial paper and a banker's acceptance
3. Explain the features of a commercial paper
4. What is the differences between a treasury bill and a commercial paper?
a. Visit U-tube: https://goo.gl/b5KbXU & https://goo.gl/LykeD4 . Watch the
b. View the animation on: https://goo.gl/uicBSh and critique it in the discussion

forum

ITA 1: Treasury bills are discounted short-term instruments used by the national or federal governments to re
ITA 2: Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to m
ITA 3: They are Treasury bills, Commercial papers & Banker's acceptance.

Graham Bum,).
ltd,)
Nig).
STUDY SESSION 4
Economic Growth and Economic Development
Introduction
2.0 Main Content
2.1 Economic Growth
2.2 Characteristics of Developing Economies
i. Underutilisation of Natural Resources
ii. Unemployment and Underemployment.
iii. Dependence on Agriculture.
iv. Rapid Population Growth
v. Low Level of Technology.
vi. Poverty and Low Income Per Capita
vii. Poor Infrastructural Facilities
viii. Low Level of Manpower Development
ix. Reliance on Foreign Trade
2.3 Economic Development
2.4 Economic Growth vs. Development
2.5 Measurement of Economic Growth
i. Nominal Measurement of Growth
ii. Real Output Growth Rate as a measure of Economic Growth
iii. Growth Measured in Per Capita Values
2.6 Sources of Growth
2.7 Theories of Economic Growth
i. The Classical Theory of Growth
ii. Marxian Theory of Growth
iii. Rostow’s Stages of Growth Theory
iv. The Harro-domar Growth Theory
v. The Neo-Classical Growth Model
6.0 Additional Activities (Videos, Animations & Out of Class activities)
Introduction:
I welcome you to the last study session of this course. In this study session we are
going to discuss economic growth and economic development.

1. The meaning of economic growth is
2. The meaning of economic development
3. Understand economic growth vs economic development
4. Understand some theories of economic growth.
2.0 Main Content

2.1 Economic Growth
As a concept, growth has a larger meaning and a more restricted meaning. Strictly,
it refers to sustained increase in productivity over a relatively long period,
each measuring at least 10 years. An index of such growth at the national level is
net increase in national product in real terms. In concrete terms, growth modifies
structure, attitudes and techniques and where it is sustained, its economic effects
are considerable.
The literal meaning of the word 'growth' increase is in size, height, length,
progress, etc. In general, definitions of economic growth can be framed either in
terms of actual output or in terms of potential output. To Rostow (1987), economic
growth refers to a sustained secular increase in total national income or in national
income per head of population. Kuznet (1921) on his part refers to growth of a
nation as "a long term rise in capacity to supply increasingly diverse economic
goods to its population. This growing capacity is based on advancing technology
and the institutional and ideological adjustment that it demands". Three
components of Kuznet's definition have to be noted here. In the first place the
sustained rise in national output is a manifestation of
economic growth. Secondly, the ability to provide, wide
range of goods is also a significance of economic
maturity. Thirdly, advanced technology provides the
basis or preconditioning for continuous economic
growth and this has to be followed by constant
institutional, attitudinal and ideological adjustment.
Economic growth is, therefore, a quantitative improvement or increase in the

wealth or resource of a society over time. Such improvement may result from
introduction of new technology which may lead to higher productivity, discovery
of new resources, or in a predominantly agricultural society, good harvest from
favorable climate. The rate of growth can however fluctuate over the years but not
reverse. Thus, in any growing economy, the fluctuations in G.N.P take place
around a rising long-run trend in gross National product.
ITQ 1: What is an economic growth?
In the large sense growth includes three variables - (1) An upward trend in G.N.P.
and Revenue over a long period, (2) A self-sustained character of the growth are
which is largely irreversible. (3) Growth also as a movement of structure
transformation.
2.2 Characteristics of Developing Economies

The following are some characteristics of developing or economically
underdeveloped country.
i. Underutilisation of Natural Resources
Natural resources include land, waterways, flora and fauna of land and sea, and
minerals. All these are underutilised, or not fully tapped and exploited.
ii. Unemployment and Underemployment
"Unemployment" is defined as a situation where a person is available, willing and
able to work but unable to find a job in any sector. The rate of unemployment is
the percentage of the total labour force that is unemployed. "Underemployment" is
defined as a situation in which there is low productivity of employment or where
an employee is given a job that is below his ability and capacity. Both
unemployment and underemployment exist in Nigeria, and have become very
serious problems indeed. Together, they are an unwholesome characteristic of an
underdeveloped economy.
iii. Dependence on Agriculture
Agriculture is the primary sector of the economy. The ratio of the contribution of
agriculture to the total level of output is significantly higher in developing
countries than in developed countries. Developing countries are primarily agrarian.
Most of the people in such countries cultivate the land on small plots, using
traditional methods that are inefficient.
iv. Rapid Population Growth
Birth rates are very high in developing countries, and the fear is that population
growth may offset or distort plans for economic development. Any progress
recorded in the economic area may only allow a greater number of people to
survive.
v. Low Level of Technology
The term "technology" refers to the use of scientific knowledge to produce the
material necessities of society. The large increase in the productivity of workers
that has. Taken place in developed industrial societies is due mainly to improved
methods of production. Discoveries in chemistry, for example, have led to the
production of a large variety of new products that are made of plastics or synthetic
fibers. In developing countries, however, there is a lower level of technology.
Tools developed centuries ago are still in use, including the hoes and matchets
employed in agriculture. This technological backwardness is one of the main
causes of poor economic development.
vi. Poverty and Low Income Per Capita
These are characteristics of developing countries. They make saving difficult and
thus hinder capital accumulation, which is vital for economic development.
vii. Poor Infrastructural Facilities
Infrastructural facilities include access roads, railways, communications network,
electricity and water supplies. These have been inadequately provided in
developing countries.
viii. Low Level of Manpower Development
The term "manpower" refers to the human resources which constitute the labour
force of the economy. Developing countries have inadequate supply of skilled
workers and business leaders (entrepreneurs). The lack of these people retards
economic development.
ix. Reliance on Foreign Trade
Another characteristic of a developing economy is the reliance or dependence on
foreign trade. This is understandable. Since its exports are
mainly agricultural products, it has to export these products
in order to acquire the foreign exchange for the purchase of
machinery and other things needed to maintain its
industries.
2.3 Economic Development

Economic development is concerned with the promotion and establishment of an
economic system that would improve the standard of living through the effective
utilisation of resources for the provision of basic infrastructure higher productivity,
higher per capita income and net capital investment in productive sectors of the
economy which will in turn lead to a higher Gross National Output.
In economic development, agriculture is boosted through the use of modem

technological implement, thus reducing the percentage of the manual labour force
while diverting the excess labour force to other sectors of the economy such as
manufacturing industry e.t.c. Economic development implies a qualitative
improvement in the overall superstructure through the eradication of poverty,
unemployment and in-equality, provision of a good standard of living and effective
manpower utilisation.
Thus, economic development is generally defined to include improvements in

material welfare, especially for persons with the lowest incomes the eradication of
mass poverty with its effects on literacy, disease and early death; changes in the
composition of input and output that generally include shift in the underlying
structure of production away from agriculture towards industrial activities. The
organisation of the economy in such a way that producing employment is general
among working age population rather than the situation of a privileged minority;
the corresponding greater participation of broadly based groups in making about
the directions, economic and otherwise, making in which move to improve their
welfare.
It can be deduced from the above that the basic requirements of economic
development include:
1. The productive forces that lead to the production of goods and services are
effectively used and mobilised for the people welfare.
2. The use of technology is improved for proper exploitation of resources.
3. The use of skilled and unskilled manpower through formal and informal
institution.
4. The structural changes are expected within the various productive sector of the
economy i.e. agriculture, industries, service sectors e.t.c.
5. Proportion of labour and output to employment GDP to the national economy
increases overtime.
When analysing the concept of economic development, a vital distinction should

always be made between it and economic growth. The latter refers to the
quantitative improvement in the wealth or resources of society overtime. Such
increase may result from introduction of new technology which may foster high
productivity. Discovery of new resources or in predominantly agricultural society,
good harvest from favorable climate, etc. enhance economic growth. However, in
addition to quantitative growth, Economic development has distributive and moral
connotations. In economic development, resources are expected to be used in such
a manner that its benefits spread as evenly as possible to members of the society.
Accordingly, Adam Smith (1776) (An inquiry into the nature and causes of the
wealth of nations), strongly emphasised that saving is a necessary condition for
economic development. "Every increase or diminution of capital, therefore,
naturally tends to increase or diminish the real quantity of industry, the number of
productive hands, and consequently the real quantity of the annual produce of the
land and labour of the country, the real wealth and revenues of all its inhabitants".
According to Smith, once development sorts, it tends to become cumulative. First,

given adequate market possibilities and the basis for capital accumulation, division
of labour takes place and raises the level of productivity. The resultant increase in
national income and the probable growth of population associated with the rise in
income only increases the extent of the market but permits a larger saving out of
the increased income stream. Moreover, as labour becomes
more specialized and market expands, the ability and
incentive to introduce improvements of arts" increase.
Those improvements lead to still further specialisation and
productivity gains.
ITQ 2: What is economic development?
2.4 Economic Growth vs. Development

Growth vs. Development
It is useful to distinguish carefully between the concepts of; economic growth and
economic development. Although both concepts are often used interchangeably,
they do not necessarily refer to the same thing. Growth refers to the increase,
overtime, of an economy’s output of goods and services. This definition does not
take cognizance of desirable structural changes m the society's economic
arrangement. Thus, while growth refers to the volume of output in the current year
vis-a-vis the volume of output of a chosen previous year, it overlooks the
distribution to and hence the wellbeing of the citizens in the economy. In contrast,
the concept of economic development is more embracing for it not only concerns
itself with issues of growth but also focuses on the distribution of proceeds of
growth. Thus, economic development is generally defined to include
improvements in material welfare especially for persons with lowest incomes,
the eradication of mass poverty with its correlates of illiteracy, disease and
early death, changes in the composition of inputs and outputs that generally
include shifts in the-underlying structure of production away from
agricultural towards industrial activities (Kindleberger and Herrick 1977).
Thus, the concept of economic development connotes an entire formation of an
economy from a less desirable to a more desirable one, that transformation,
bringing in its wake an overall improvement in the wellbeing of the entire
citizenry.
It is a multidimensional process involving the provision of basic needs,

acceleration of economic growth, reduction of inequality and unemployment,
eradication of absolute poverty as well as changes in attitudes, institutions and
structures in the economy. The distinction then enables us to see the concept of
development as being more pervasive and embracing than that of growth. Hence it
is possible to conclude that while development embraces growth, the converse
does not necessarily hold.
2.5 Measurement of Economic Growth
In discussing economic growth, three strands of the measure of growth can be
deciphered. These measures include (1) measurement of growth from the nominal
perspective (2) growth defines: from real magnitudes and (3) growth measured in
terms of per capita values:
1. Nominal Measurement of Growth
Under the first measure of the concept, economic growth is seen as the
increase in current value prices of aggregate product. This measure of growth is
based on an evaluation of the trend behaviour of aggregate expenditure overtime. It
is considered the crudest measure of the concept as it does not take cognizance of
such vital issue as to whether or not the increased expenditure is matched by a
concomitant increase in the real value of output within the reference period. This
defect is accommodated within the framework of second definition of the concept;
2. Real Output Growth Rate as a measure of Economic Growth
Determining whether or not the increased aggregate expenditure is matched
by an increase in real output overtime entails deflating the nominal value of output
by an appropriate price index to obtain the corresponding magnitude. The deflated
value of the nominal output enables us to determine whether or not an economy
has grown in real terms overtime. Thus, an economy is deemed to have grown in
real terms when there is an increase in aggregate output at constant prices
overtime. The process of deflation by an appropriate price index helps to strip the
concept of growth of biases imparted into it by price increases.
3. Growth Measured in Per Capita Values
The third measure of the concept represents a further refinement over the first two
measures. Measured in this way an economy is said to have witnessed economic
growth if there has been an increase in per capita output at constant prices
overtime, the per capita concept connoting that real increase in output is divided by
the number of people among who it is shared. This measure of growth nevertheless
has its defect, the fact that it represent an improvement over the first two
notwithstanding. For example, if does not accommodate the disparity in real
income distribution. Thus where income distribution is highly skewed in favour of
the few in an economy, this measure of economic growth becomes an unreliable
one.
Graphical representation of economic growth takes the form

of an outward shift in an economy's production "-possibility
frontier. Supposing an economy produces two goods, say.
Bread and Butter with all its resources. Growth in this
hypothetical economy would be illustrated as shown below.
ITQ 3: In discussing economic growth, three strands of the measure of growth can be deciphered, what are they?
2.6 Sources of Growth

In accounting for an economy's growth, it is conventional to relate the level of
output to its factor inputs. This permits us to write our production function as
follows:
Y = f (K, L, D, E)
This function states that output (Y) is a function of capital (K), labour (L), land
(D), and entrepreneurship (E). But because of the difficulty of tracking the
contribution of D and E to overall output of growth an economy's production
function is more usually specified by ignoring the role of these factors. Hence,
specification of production function can realistically take the form.
Y = f (K, L)
Thus, an economy's level of output is a function of its labour and capital

endowment. Output growth can be due to a growth in an economy's stock of capital
overtime, assuming the labour force is constant. In other words, an economy can
experience growth if it can accumulate capital overtime. Thus, we can write from
our production function as:
9Y/8t = f(9K/9t)
If our assumption of a constant labour force were to hold, the capital accumulation
would result to an increase in the capital - labour ratio since each man would work
with more capital, hence he can produce more.
Growth can also result from an increase in labour force which again permits us to
write from our production function:
ay/at = fOL/ai)
By adding up these two sources of growth, we can only partially account for an
economy's growth overtime. Indeed apart from these two sources, an economy's
growth also proceeds from technical progress. With technical progress, the labour
force can be equipped with progressively more efficient and more productive
capital goods as time passes. Taken together, the inextricable link between growth
and capital becomes obvious. Quite apart from the accumulation of capital
resulting in capital deepening bringing about increased output, innovation, leading
to efficiency of new capital assets embodying the fruits of innovation is also a vital
determinant of an economy's growth overtime. Moreover, the increase in the
efficiency of labour force overtime (labour productivity) resulting from human
capital development also accounts for growth overtime.
2.7 Theories of Economic Growth

Although economic growth has been identified as one of the key macroeconomic
goals of society issues of growth did not assume a dimension of prominence until
the mid- thirties. Two events largely account for the outburst of interest in issues of
growth. The first was the publication or Keynes' General Theory of Employment
Interest and Money in 1936. Keynes had asserted in this book that a key factor that
could account for an economy's stagnation and unemployment was the deficiency
of aggregate effective demand. His view was that the solution to the problem of
economic stagnation rested on expansion of aggregate demand through massive
increase in government expenditure.
The second was the struggle to overcome the devastating effect of the Second
World War on war ravaged economies. This need prompted these nations' to
design policies aimed at accelerating growth. Indeed, as Sen (1970) had observed,
"interest in growth reviewed as first slowly and then by leaps and bounds. This was
to a considerable extent the result of an immense practical concern with growth
after the second world war.
Interest in growth issues subsequently led to development of various theories of

growth each purporting to explain the mechanics of growth. Some of these theories
include: (1) Rostow's stages of growth theory; (2) Harrod Domar model of
economic growth (3) Neoclassical theory of economic growth, Marxian growth
theory etc.
1. The Classical Theory of Growth
The classical theory of growth assigns to the rate of investment the responsibility
for fostering growth, itself a function of the share of profits in national income. A
positive relationship between both variables is deemed to exist hence higher rates
of profit are deemed to result in higher rates of growth via its positive effect on the
rate of investment.
Classical economists like Adam Smith, David Ricardo, J.S Mill were the
exponents of this theory of growth. In what could be described as a self-limiting
theory, they argued that the increased division of labour and hence specialisation
made possible by increases in the growth rate of capital would result in increases in
both profit and wages. However, an increase in both profit and wages would in
turn trigger off population expansion wh.ch is the course of growth of capital and
labour overtime would result in diminishing returns consequent upon the fixity of
land. The setting in of diminishing returns would lead to a decline in profits while
also bringing about a return wages to subsistence level, leading in turn to a decline
in investment and hence growth, thus bringing about a return of the economy to a
stationary state. Thus, the classical growth models such as the Ricardian growth
model emphasised the limits to growth imposed by the ultimate, scarcity of land.
However, a major defect of this theory of growth is its failure to provide for the
possibility of the role of technical progress in growth. Indeed, the astigmatic nature
of the theory derives from its belief in the Malthusian Population theory and the
possibility of the law of diminishing returns setting in the course of growth.
2. Marxian Theory of Growth

One of the historical theories of economic growth, the Marxian theory of growth is
an admixture of reasoning proceeding from economics and sociological
perspectives. He proceeds by viewing growth as a process of continuous
transformation of a society's socio-cultural and political life. Such transformation
can be traced to the society's mode of production as well as property rights of the
society's economic power and prestige seeking class. Marxian growth theory
asserts that growth is dependent on the rate of accumulation of labour surplus value
by the capitalist class, labour surplus value being the rate of profit in excess of
labour's true remuneration which; has however been expropriated from the workers
by factor owners (capitalists). Thus, the Marxian theory of growth attributes,
growth to labour surplus value which is the difference between the subsistence
wages paid to workers and the :rue value of labour output. It is this difference that
constitute the source of investible fund necessary to foster economic growth.
Therefore, the larger this difference is, the more rapid growth is expected to be.
However, the Marxian theory of growth points at the possibility of the eventual
collapse of capitalism resulting from the intensification of class struggle between
the expropriators and the expropriated.
The Propositions of the Classical and Marxian Growth Models

The classical growth model can be discussed within the framework of a few basic
propositions. These propositions examine the functional relationships between the
key variables in the classical system which were deemed to be related as follows:
(1) There exist a production function in which output is deemed to be a function of
labour (L), capital stock (Q), land (K), and technical knowhow (T).
(2) technical knowhow (T) itself is a function of Investment (I) which, in turn,
(3) is a function of the level of profit, being the change in capital stock.
(4) profit is a function of the extent of technological advancement and the size of
the labour force while
(5) the size of the labour force is dependent on the wage bill which in turn depends'
on (6) the level of investment (I) and finally, for the classical system, output is the
aggregate of profit and wages.
Following Higgins, (1976) these propositions can be stated algebraically as

follows:
(1) O - f(L.K,Q,T)
(2) T = T(L)O
(3) I = dQ=I(R)
(4) R = R(T, L)
(5) L = L(w)
(6) W = w (I)
(7) O = R+ W
The Marxian growth model can similarly be summarized. In fact, except for a few
differences, which are outline below the propositions of the Marxian growth model
are hardly different from those of the classical growth model. These differences
include:
(1) Unlike the classical growth model where L in the system of equations refers to
the total labour force, a variable that is expected to vary directly with the size of
the total population, the same variable in the Marxian framework is restricted to
the size of the labour force actually employed
(2) Unlike in the classical system where investment is a function of the level of
profit, the Marxian growth model specifies investment as a function of the rate
rather than the level of profit. Algebraically stated, I = I(R).
(3) Whereas the classical growth model ignored the role of consumption in
bringing about growth, the same variable is assigned a strategic role. within the
Marxian framework. This gives rise to the equation C = C(W) implying that
consumption depends on the wage bill.
(4) Whereas the classical specified profit as a function of technological
advancement and the size of the labour force. Marx's interest was more in the rate
rather than the level of profit and this he stated as being equal to the ratio of profit
to the aggregate of wages and capital growth rate Algebraically, this can stated as
R = R/W+Q = OW/W+Q
This difference is stress worthy because although both growth models agree on the
point that technological advancement was capable of postponing the tendency of
profit to fall overtime both system however disagree on the factors capable of
generating the down and pressure on profiles. For the classics, this phenomenon
was traceable to the population growth accompanying an increase in citizen’s
welfare resulting from increased wages in the course of growth. Population growth
in turn triggers off diminishing returns owing to pressure on land that is inelastic in
supply, bringing about rising labour costs hence falling profits. For Marx however,
reduction in profit could be traced to the inability, in the long run to maintain
profits by reducing the wage bill relative to total output. Since reduction in wage
bill reduces the purchasing power of workers, a large part of total output end up as
unintended inventory and this impacts adversely on the profit rate.
The differences notwithstanding, the similarities that exist in both analyses of file
process of growth and the interrelationship between the variables contained in that
process with their simultaneous interdependence as the process is proceeds is well
established. In fact, Marx's theory and the, propositions therein "are the same as
those of the classical school-form which Marx derived them in the first Place”
(Higgins, 1976).
3. Rostow’s Stages of Growth Theory

Attributable to W.W Rostow, this theory of growth is a historical account of the
process of economic growth. Rostow posits that all countries of necessity pass
through five stages in the process of growth. These stages are: (l) the traditional
society characterized by economic decision making on the basis of custom,
tradition and obligations (2) the precondition for takeoff stage, characterized by
advances in agriculture and jettisoning of uneconomic culture as well as the
emergence of an entrepreneurial class (3) the take off stage, characterized by
increased rate of saving emergence of leading sectors which helps to pull along
other sectors, contributing thereby to the realization of sustained growth (4) the
stage of drive to maturity characterized by the consolidation of industrial
revolution. Moreover, within this stage, the other sectors catch up with the leading
sectors of the economy, having attained the “critical minimum speed to be airborne
in the growth process in stages, these actually becomes airborne in this stage of
growth (5) stage of high mass consumption. In this stage of growth, an economy is
deemed to have matured, making it possible for the citizens to enjoy appreciable
levels of living standard. The more developed economies such as the US, the UK,
the Netherlands, Germany, France, Sweden, Norway most likely fall under this
stage of Rostow's
For the emerging nascent economies, the second stage is probably more relevant to
their growth (and development) since it is in this stage that resistance to change in
traditional values and in the social, cultural and economic institutions is finally
overcome and modern industries begin to emerge.
4. The Harro-domar Growth Theory
The Harrod-domar Growth theory derives its name from the analyses of process
advanced by two economist. Sir Roy Harrod of Britain and Evsey Domar of U.S.A
each working independently of the other. A key objective of the Harrod Domar
model (H - P model) is to overcome the limitation inherent in the short-run nature
of the simple Keynesian model. This model takes cognizance of only one of the
dual roles of investment in the economy, its role as a component of aggregate
demand. However, the dual role of investment as (1) a component of aggregate
demand and (2) as an addition to the stock of productive resources must be
accommodated in any long-run analysis for it to be meaningful. This is because net
investment has both a demand and supply effect.
The H.D model is based on a number of simplifying assumption some of which

are:
(1) A closed economy with no foreign sector
(2) Homogeneity of labour that grows at a constant natural rate,
(3) Two factor inputs, labour and capital only exist in the economy with absence of
technical progress
(4) Output increase (decreases) by the same proportion of input increases
(decreases). This is the assumption of constant returns to scale
(5) A fixed proportion of income is saved, this relationship being, expressed as S =
sY. In this relationship, is represent both the average and marginal propensities to
save
(6) The production function is of the Leontieff type characterized by fixed factor
proportions with L shaped isoquants
(7) Labour and capital inputs are proportional to the level of national output i.e K =
kYp and L = LYp. Where k represents constant capital and labour ratios
respectively. From this proportionate relationship derives the Leontieff type
production function A the associated L-shaped isoquant of the H-D model.
The H-D analysis proceeds by assuming that an economy is in an equilibrium stage
given an initial level of investment which equals savings. However, the dual nature
of investment ensures that investment overtime becomes an addition to the capital
stock. The increase in capital-stock in turn increases the economy's potential
output.
From the relationship between the capital stock and the potential –output KYP, the
change in potential output resulting from the effect of investment on capital stock
can be calculated as follows;
Since K = KYP (28.1)
and AK = K. YP (28.2)
and AK = I (28.3)
We can substitute (I) in equation (3) into equation (2) to obtain I = K AYp ...(4)
from which.
Yp = I/K ...(28.5)
By introducing the saving and relation 3 = Y can derive the output growth rate
needed to generate the desired equilibrium as well as ensuring the full utilisation of
the available capital such as follows:
We recall that I = S and S = sY; therefore we can substitute S = sY into equation
(5) to obtain:
Y = sY/K.........(28.7)
From equation (7) we can obtain the output growth as

follows: K Y == sY (28.8)
Where AY/Y = s/k.......(28.9)
the expression on the left hand Side of equation (9) denotes the growth rate of
output and it is this output growth rate that is needed to keep the economy in
equilibrium at its potential level. It is this necessary growth rate of output that is
known as the warranted growth rate which in the words of Harrod is the growth
rate “at which producers will be contented with what they are doing” being the
entrepreneurial equilibrium, it is the line of advance which if achieved will satisfy
profit takers that they have done the right thing”.
Denoting this growth rate as gw, expression 9 can be written as.

Y/Y = s/k = gw
the Leonieff type production function implied by the Harrod-Domar model and its
implication of fixed factor proportions' means that for output to grow at the
warranted rate (s/k), the growth rate of labour force must be such that sufficient
labour must be available to utilize the existing stock of capital. But recall from the
assumptions underlying this model that the labour; force grows exogenously at the
constant rate n. Thus, if the labour force growth rate exceeds, the warranted growth
rate i.e n> gw the end thereof would be growing unemployment of labour.
Conversely if the labour force growth rate fall, short of the warranted growth rate
ie. n<gw the warranted growth rate will outstrip the actual growth of bringing
about unemployment of capital. The implication is that an equilibrium growth path
along which full employment of labour and capital exist can be achieved only if
there is equality between the natural growth rate of the labour force and the
warranted growth rate i.e s/k = n. However, the constant and unrelated nature of
these vital variables in the model makes the possibility of the desired equality
occurring highly unlikely, making the chances of automatically achieving the
equilibrium growth rate to be slim. Indeed, an inequality between the two
magnitudes, i.e s/k = n would throw the economy into either secular inflation or
secular deflation. Thus, if s/k > n, there will be increasing underutilisation of
capital. Conversely, s/k n implies that there will be growing labour unemployment
and when this divergence between s/k and n is
initially triggered off, being an interruption of the
steady rate of growth, cumulative forces are set in
motion to perpetuate this divergence. The perpetuity
of this divergence has led to the conclusion that the
equilibrium implied by H-D model is an unstable or
"razor edge" equilibrium.
Policy Implications of the H-D Model

One key policy implication of this model is that the growth rate of the economy
can be influenced by policy makers by tinkering with components of the warranted
growth rate. This means that by designing policies to influence the savings rate or
enacting policies to reduce the capital-output ratio say, by investment in human
capital, the productivity of capital can be increased. Hence the growth rate of the
economy can be considered a policy variable.
5. The Neo-Classical Growth Model

The neo-classical growth model attributable essentially to the works of Robert
Solow attempts to correct a major defect of the H-D model, .that defect being the
rigidity of the model imparted to it by the underlying Leontieff type production
function. As earlier noted, this type of production is characterized by fixed capital-
labour proportions. This fixity eliminates the possibility of increasing output by
increasing the supply of one factor alone. In other words, the scope of factor
substitution is zero implying the impossibility of factor substitution. It is this defect
inherent in the H-D model that the neo-classical growth model proceeded to
redress. In doing this, the assumption of a Leontieff type production function was
dropped and replaced by a more realistic production function characterized by well
-behaved negatively sloping isoquants. This production function was considered
more realistic as it recognized the possibility of factor 'substitution although the
implied substitutability between factors was not considered perfect.
The elegance of this production function was its permission of a variation in the
capital output ratio k. Thus, an inequality between s/k and n i.e s/k = n could be
corrected by an alteration in k. Hence for example, s/k>n implies that the capital
stock grows at a slower rate than the labour force. When this happens, the capital
output ratio, k will fall thus raising s/k and restoring the equality of s/k and n in the
process. Conversely s/k > n implies that the capital stock growth rate outstrips the
labour force growth rate as well as the output growth rate. The resulting rise in the
capital-output ratio k will bring about a fall in the s/k ratio thus again restoring the
equality between s/k and n. Thus. The neo-classical growth model as opposed to its
H-D counterpart thrives on. The possibility of correcting any discrepancy between
the warranted and natural growth rates through changes in the capital output ratio,
k.
Policy Implications of the Neoclassical Growth Model

Like the H-D growth model, the new classical growth model implies that the path
and speed of an economy's growth are endogenous policy variables that are within
the ambit of policy makers.
ITQ 4: Economic theories are based on some theories, what are they?
In this study session we have discussed the economic growth and economic
development where we tried to look at what economic growth is, as it refers
to sustained increase in productivity over a relatively long period, each
measuring at least 10 years. We also tried to look at characteristics of a
developing economy, we went further to look at what economic
development is, as is concerned with the promotion and establishment of an
economic system that would improve the standard of living through the
effective utilisation of resources for the provision of basic infrastructure
higher productivity, higher per capita income and net capital investment in
productive sectors of the economy which will in turn lead to a higher Gross
National Output. We concluded by looking at some theories of economic
growth.

1. What is economic growth?
2. Discuss the differences between economic growth and economic
development.
3. How do we measure economic growth?
4. What are the characteristics of economic growth?
5. Discuss the sources of economic growth.
6. Explain the theories of economic growth.
a. Visit U-tube: https://goo.gl/FDJVSN & https://goo.gl/39GS62 . Watch
the video & summarise in 1 paragraph
b. View the animation on: https://goo.gl/97eid3 and critique it in the discussion

forum

ITA 1: Economic growth refers to a sustained secular increase in total national income or in national income per
ITA 2: Economic development is generally defined to include improvements in material welfare, especially for p
ITA 3: These measures include (1) measurement of growth from the nominal perspective (2) growth defines: fro

Graham Bum,).
ltd,)
Nig).

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DISTANCE LEARNING CENTRE

AHMADU BELLO UNVERSITY, ZARIA, NIGERIA.

Programme Title: Master in Business Administration

First published 2018 in Nigeria.

Ahmadu Bello University e-Learning project,

Ahmadu Bello University

2.0 Module 2: Financial Institutions

3.0 Module 3: Financial Instruments

ii. COURSE INTRODUCTION AND DESCRIPTION

Finance according to Fabozzi and Drake (2009), is the "application of economic

iii. COURSE PREREQUISITES

iv. COURSE LEARNING RESOURCES

vi. ACTIVITIES TO MEET COURSE OBJECTIVES

Group discussion will be run primarily as a seminar with emphasis on discussing

For a comprehensive understanding of the material, keeping current with the

Specifically, this course shall comprise of the following activities:

vii. TIME (TO COMPLETE SYLABUS/COURSE)

viii. GRADING CRITERIA AND SCALE

B. Summative assessment (Semester examination)

C. Grading Scale (as appropriate for the course):

1 Study Session 1: 1. Read Courseware for the corresponding Study Session.

4 Study Session 4 1. Read Courseware for the corresponding Study Session.

10 Study Session 1 1. Read Courseware for the corresponding Study Session.

11 Study Session 2 1. Read Courseware for the corresponding Study Session.

13 Study Session 4 1. Read Courseware for the corresponding Study Session.

Week 16 & 17 SEMESTER EXAMINATION

MODULE 2: Financial Institutions

MODULE 3: Financial Instruments

1.0 Study Session Learning Outcomes

2.0 Main Content

ITQ 1: What is a financial system?

2.2 Functions of Financial Markets

Other economic functions performed by the financial markets include price

The financial markets can also be classified according to types of instruments:

2.4 Role of Financial Markets

2.5 Players in the Financial Market

ITQ 3: Who are the players in the financial market?

Other benefits of investing in securities include:

ITQ 4: What is Funding?

5.0 Self-Assessment Questions and Answers

b. View the animation on: https://goo.gl/XpbEmA and critique it in the

c. Take a walk and engage any 3 students on: ???????????; In 2 paragraphs

1.0 Study Session Learning Outcomes

ITQ 1: What are Securities?

2.2 Capital Market

ITQ 2: What’s the difference between a Money and Capital market?

Instruments of Capital Markets

Type of Capital Market

Function of Capital Market

3.0 Tutor Marked Assignments (Individual or

5.0 Self-Assessment Questions and Answers

b. View the animation on: https://goo.gl/aHrzbS and critique it in the discussion

c. Take a walk and engage any 3 students on: ???????????; In 2 paragraphs

summarise their opinion of the discussed topic. Etc.

7.0 References/Further Readings

2.0 Main Content

Laws/Codes affecting the Nigerian Capital Market

CODE OF CONDUCT CODE OF GOOD CORPORATE GOVERNANCE

COMPANIES & ALLIEDTHE

SEC RULES THE TRUSTEES INVESTMENT