Capital Markets Flashcards
Commercial papers
Very short unsecured debt instruments issued by companies to meet working capital needs.
Preferred debt
Paid first
Subordinate debt
Paid last, high interest rates, more risky
Debenture. Types.
Debt sought by new ventures/ companies.
Convertible- converted into equity
Non convertible
Call option
Buyer of the call has the right but not an obligation to buy the stock at the strike price by the future date. They can forgo the amt paid to obtain the call option.
Put option
Buyer of the put has the right but not an obligation to sell the stock at the strike price by the future date.
The buyer can not sell the stock and forgo the fee paid to retain the stock if they want.
Types of depository receipts
DR is a negotiable certificate, issued by a bank, representing shares, in a foreign company, traded on a local exchange.
They are not derivative instruments, since value not based on any other asset/ financial product. Their value is based on the shares of that company only.
OFU: helps shares trade in a foreign exchange without directly listing in that foreign exchange.
ADRs allow companies from other countries to have their shares traded on U.S. exchanges without directly listing there. This approach helps them bypass some of the regulatory challenges and expenses of direct listing, while still giving U.S. investors the opportunity to invest in their shares.
ADR- American Depository Receipts, a type of negotiable security instrument that is issued by a US bank on behalf of a non-US company, which is trading on the US stock exchange.
GDR- Global Depository Receipts, a type of negotiable instruments that are issued by a foreign depository bank for trading of shares of a company in an international market
Define forward and futures contract
A forward contract is a private agreement between two parties to buy or sell an asset at a set price in the future.
A futures contract is a standardized agreement to buy or sell an asset at a set price in the future, and is traded on an exchange
P Notes
Participatory notes are Offshore Derivative Instruments (ODIs) issued by registered Foreign Portfolio Investors (FPIs) to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly.
P-notes have Indian stocks as their underlying assets.
FPIs are non-residents who invest in Indian securities like shares, government bonds, corporate bonds, etc.
Eg of
1. lagging indicator
2. leading indicator
- GDP
- Markets
How much time required to carry out Indian stock exchange
settlement
T + 1 days
Earlier
T + 30 days
Two depositories/ depository companies of India
NSDL- National Securities Depository Limited.
CDSL- Central Depository Services Limited.
Derivatives
Derivatives are financial contracts, set between two or more parties, that derive their value from an underlying asset, a group of assets, or a benchmark.
It can be traded on an exchange or over the counter (OTC).
Prices for derivatives derive from fluctuations in the prices of underlying assets.
Common derivatives include futures contracts, forwards, options, and swaps.
Name of the thing companies give to SEBI to share their info before an IPO
Draft Red Herring Prospectus
Later stage,
Red Herring Prospectus (RHP)
Name
Instrument of loan
Instrument of ownership
Loan
Equity
EBITDA
Earnings before interest taxes depreciation amortisation
Amortisation
- Loss of value of Intangible assets like IPR, Brand recognition, etc over time.
- In lending it means restructuring of loans over time
- Loans are intangible as value depends on trust.
Whereas depreciation is the loss of value of a tangible asset.
G secs are issued against
CFI Consolidated Fund of India.
Name some debt instruments
Bond
Debentures
Commercial papers
Mezzanine Financing
It exists in a company’s capital structure between its senior debt (common loan) and its common stock in terms of risk as subordinated debt or preferred equity, or some combination of these two. The most common structure for mezzanine financing is unsecured subordinated debt.
It’s unsecured, so it’s riskier for lenders. If the borrower defaults, mezzanine lenders usually convert their debt into an ownership stake in the company. This type of debt is often used in business acquisitions or expansions.
Mezzanine loans are most commonly utilized in the expansion of established companies rather than as startup or early-phase financing
Second/ follow on offerings
Second offerings, also known as secondary offerings or follow-on offerings, refer to the sale of additional shares by a company after its initial public offering (IPO).
These offerings can take two main forms:
1. Dilutive Second Offering: In this case, the company issues new shares, which increases the total number of outstanding shares. The proceeds from the sale go to the company, which can use them for expansion, paying off debt, or other purposes. However, since new shares are created, the value of each existing share may be slightly diluted.
2. Non-Dilutive Second Offering: Here, existing shareholders (like company insiders, private equity investors, or other stakeholders) sell their shares in the market. No new shares are created, so it doesn’t dilute the ownership stakes of other shareholders. The proceeds go to the selling shareholders, not the company itself.
These offerings typically occur when a company wants to raise more capital or when early investors want to liquidate some of their holdings.
Seed capital
Earliest stage of investment
Angels investors
FFF
- Angels (Angel Investors): These are high-net-worth individuals who provide financial backing to startups in exchange for equity or convertible debt. Angel investors often bring not only money but also valuable industry experience, mentorship, and networks to help the startup grow. They typically invest during the seed or early stages of a company’s development when the risk is high, but they believe in the potential for growth.
- FFF (Friends, Family, and Fools): This refers to the informal group of people who might invest in a startup because they trust the founder personally, rather than purely evaluating the business potential.
Stages of investment in a startup
Angels -> VCs -> Pvt Equity firms -> Investment Bank -> IPO -> Second offerings
What does SEBI do
Regulate capital market
Offer for sale OFS
• An Offer for Sale (OFS) is a mechanism where existing shareholders (usually promoters, large shareholders, or the government) sell their shares to the public through the stock exchange.
• It does not involve the issuance of new shares, so the ownership of the company does not get diluted.
• The proceeds from the sale go to the selling shareholders rather than the company itself
Underwriter is
An underwriter is a financial intermediary or institution, typically an investment bank, that assesses and assumes the risk of a financial transaction, such as issuing new securities (stocks or bonds) to the public. Act as intermediaries between the issuing company and the public investors.
In context of IPO
1. Risk Assessment: The underwriter evaluates the risk of the offering and determines the appropriate price at which the securities should be sold.
2. Guaranteeing the Sale: The underwriter often buys the securities from the issuing company and resells them to the public. In some cases, they commit to purchasing all the securities if there is not enough demand (this is called firm commitment underwriting).
3. Price Stabilization: Underwriters help maintain the stability of the stock price immediately after the offering by buying or selling shares if necessary to prevent excessive volatility.
In addition to IPOs, underwriters are also involved in bond issuances, insurance policies, and various financial deals, ensuring that all risks are properly assessed and that the transaction goes smoothly.
Primary market
The primary market is the financial market where new securities (such as stocks and bonds) are issued and sold to investors for the first time. In the primary market, companies, governments, or public sector institutions raise capital by selling new shares or bonds directly to investors
Secondary market
After the securities are issued in the primary market, they are traded among investors in the secondary market (such as stock exchanges), where the issuing company no longer receives funds from the sale.
Which office set up under Companies Act 2013 for checking regulatory misgovernance of secondary markets
Under Min of Corporate Affairs - Serious Fraud Investigation Office
NBFCs
Non-Banking Financial Companies are financial institutions that provide various banking services like loans, asset financing, and investment without holding a banking license. Unlike banks, NBFCs cannot accept demand deposits (such as savings or current accounts) and are not part of the payment and settlement system.
NBFCs -ND -ND
an NBFC-ND-ND is a smaller NBFC that does not accept public deposits and is not considered large enough to significantly impact the stability of the financial system.
1. ND (Non-Deposit Taking): This means the NBFC does not accept public deposits. They rely on other sources of funds, such as issuing debt instruments, borrowing from banks, or equity capital, to finance their operations. 2. ND (Non-Systemically Important): A non-systemically important NBFC is one whose asset size is below ₹500 crore (as per Reserve Bank of India (RBI) regulations). Such NBFCs are smaller and pose less risk to the overall financial system compared to systemically important NBFCs (those with assets above ₹500 crore).
NBFC- BL
NBFC- ND-ND, threshold of asset size at 1000 cr.
NBFC- ML
NBFC- ND- SI
NBFC- Dhanke
4 tier NBFC regulatory structure of RBI
- Top layer- supervisory discretion.
- Upper layer- NBFCs-UL — 25-30 top layer
- Middle Layer-NBFCs-ML —NBFC-ND-SI, NBFC-D
- Base Layer- NBFC-BL — NBFC-ND-ND—asset size limit 1000 cr.
NBFC-ND-SI
NBFC-ND-SI stands for Non-Banking Financial Company - Non-Deposit Taking - Systemically Important.
ND (Non-Deposit Taking): This refers to NBFCs that do not accept public deposits. They raise funds through alternative means such as equity capital, issuing debt instruments, or borrowing from banks and other financial institutions.
SI (Systemically Important): This classification is given to NBFCs whose asset size is ₹500 crore or more. These NBFCs are considered large and important enough that their operations and potential failure could pose a risk to the overall financial system. Hence, they are subject to stricter regulatory oversight by the Reserve Bank of India (RBI).
Clearing house
A clearing house is a financial institution or intermediary that facilitates the settlement of transactions in financial markets, particularly in trading of securities (like stocks, bonds), derivatives (futures and options), and other financial instruments. It plays a critical role in ensuring that trades between buyers and sellers are completed smoothly, accurately, and efficiently.
Role: Facilitates the settlement of financial transactions (securities, derivatives).
• Functions:
1. Trade Validation: Ensures trade details are accurate.
2. Settlement: Guarantees exchange of securities and payments.
3. Risk Management: Acts as an intermediary, reducing counterparty risk.
4. Netting: Consolidates trades to reduce the number of transactions.
5. Margin: Requires collateral to cover potential losses.
Key Example: Clearing Corporation of India Ltd. (CCIL).
Depositories
A depository is a financial institution that holds securities (such as stocks, bonds, and other financial assets) in electronic form on behalf of investors. It acts as a custodian, providing a safe and efficient way to manage and transfer securities without the need for physical certificates.
By maintaining these securities in a dematerialized (digital) form, depositories streamline the process of trading, transferring, and settling securities.
Key Functions of a Depository:
1. Dematerialization: Depositories convert physical securities (certificates) into electronic form, making it easier to manage and transfer ownership.
2. Holding Securities: Depositories store securities electronically for investors. Investors’ holdings are recorded in their depository accounts (similar to a bank account but for securities).
3. Transfer of Securities: When a trade is made on the stock exchange, the depository facilitates the electronic transfer of securities from the seller’s account to the buyer’s account, ensuring a seamless transaction.
4. Settlement: Depositories ensure that once a transaction occurs, the settlement of securities (delivery of shares) and funds happens smoothly within the specified time frame.
5. Corporate Actions: Depositories handle corporate actions such as dividend payments, interest payments, rights issues, bonus issues, and voting in shareholders’ meetings, ensuring that investors receive benefits due to them.
6. Pledging and Hypothecation: Investors can pledge their securities held with the depository to secure loans, making it easier to use these assets as collateral.
Examples of Depositories:
• NSDL (National Securities Depository Limited): India’s first and largest depository, established in 1996 to facilitate the dematerialization and transfer of securities.
• CDSL (Central Depository Services Limited): The second major depository in India, providing similar services for holding and transferring securities electronically.
In summary, depositories play a crucial role in modern financial markets by reducing the risks and inefficiencies associated with physical securities and ensuring secure, transparent, and efficient trading and settlement processes.
S&P 500
DOW (DJIA)
NASDAQ
belong to
USA
They belong to
DAX
CAC 40
FTSE 100
CSI 300
IPC
Nikkei 225
Hang Seng Index HSI
SSE
SZSE
DAX- Germany
CAC 40- France
FTSE 100- UK
CSI 300- China
IPC- Mexico
Nikkei 225- Japan
HSI- Hong Kong
Shanghai Stock Exchange’s —->Shanghai Composite Index- China
Shenzhen Stock Exchange’s (SZSE)— >Shenzhen Component Index- China.
Depository Participants
• Role: Intermediary between investors and a depository (like NSDL or CDSL).
• Function: Facilitates the holding and trading of securities in electronic form through a Demat account. • Examples of DPs: Banks (ICICI, HDFC), Stockbrokers (Zerodha, Angel Broking).
Services:
• Open and manage Demat accounts.
• Convert physical shares to electronic form (dematerialization).
• Process corporate actions (dividends, stock splits, etc.).
• Ensure electronic settlement of trades.
Stock market incides are derivatives of
Share price of companies
List some derivative instruments
P notes
ADR, GDR
FNO- futures and options
Forwards
What are p notes and how do they work?
P-Notes (Participatory Notes) are financial instruments used by foreign investors to invest in Indian securities without having to register directly with the Securities and Exchange Board of India (SEBI).
How P-Notes Work:
1. Issued by Foreign Institutional Investors (FIIs): Registered foreign institutional investors (FIIs) and their sub-accounts issue P-Notes to foreign investors who want exposure to Indian markets but do not want to go through the complex registration process.
2. Underlying Securities: These P-Notes are based on Indian securities such as stocks, bonds, or derivatives. The value of the P-Note tracks the performance of these underlying assets.
3. Trading: The foreign investors pay the FIIs for these notes, and in return, they gain exposure to the performance of the specific securities without directly owning them.
4. Anonymous Participation: P-Notes allow investors to anonymously participate in Indian stock markets, as the ownership details of the investors using P-Notes are not disclosed directly to Indian regulators.
5. Settlement: Any gains or losses on the P-Notes reflect the movements in the underlying Indian securities. The FIIs handle the settlements and transactions for the foreign investors.
Why Use P-Notes?
• Ease of Access: Investors don’t need to register with SEBI.
• Anonymity: Investors can remain anonymous.
• Lower Costs: No need for direct compliance with Indian regulations.
Can NRIs and overseas corporate bodies access P notes?
No
Derivatives of futures contracts are
Call and put options
Can Mutual funds be traded on stock exchanges
No
Are Mutual funds derivatives
No
ETF
An ETF (Exchange-Traded Fund) is a type of investment fund that holds a collection of assets, such as stocks, bonds, or commodities, and is traded on stock exchanges, similar to individual stocks.
Key Features of ETFs:
1. Diversification:
• ETFs offer investors exposure to a wide range of assets within a single fund, providing diversification, similar to mutual funds.
• Common ETFs track indexes like the S&P 500, NIFTY 50, or sectors like technology, energy, or healthcare.
2. Traded on Exchanges: • Unlike mutual funds, ETFs can be bought and sold throughout the trading day on stock exchanges, just like regular stocks. • Their price fluctuates throughout the day based on market supply and demand. 3. Lower Costs: • ETFs typically have lower fees than mutual funds because most ETFs are passively managed, meaning they aim to replicate the performance of a specific index rather than actively picking stocks. 4. Flexibility: • Investors can buy and sell ETFs anytime during market hours, giving them the flexibility to respond to price changes in real-time. • ETFs can also be shorted or bought on margin. 5. Types of ETFs: • Equity ETFs: Track stock market indexes or sectors. • Bond ETFs: Focus on government or corporate bonds. • Commodity ETFs: Invest in commodities like gold or oil. • International ETFs: Provide exposure to foreign markets. • Sector ETFs: Focus on specific sectors such as technology or healthcare. 6. Transparency: • Most ETFs disclose their holdings daily, providing transparency about the assets in the fund.
ETF Example:
An investor can buy a S&P 500 ETF, which holds stocks of the 500 companies in the S&P 500 Index, giving them exposure to the overall U.S. stock market in a single purchase.
Money and Capital market differences
Money market
- money traded for less than 1 year
-asset class : debt
- eg: T bill market, Call money market.
Capital market
- money traded for more than 1 year
- asset class: equity.
- eg: Stock market, Govt bond market.
Hedge funds
Hedge Funds are private investment funds that pool capital from accredited or institutional investors and use a wide range of strategies to generate high returns. Hedge funds often employ sophisticated strategies, including leveraging, short selling, derivatives, and arbitrage, to maximize gains and minimize risk.
Hedge Funds
• Purpose: Private investment funds aiming for high returns using diverse strategies.
• Key Features:
• Flexible investment in stocks, bonds, currencies, commodities, and derivatives.
• Uses short selling, leverage, and derivatives.
• Typically reserved for accredited investors (high net-worth individuals/institutions).
• Fee Structure:
• 2% management fee and 20% performance fee (“2 and 20” model).
• Risks: High risk due to complex strategies, potentially high rewards.
• Liquidity: Often has lock-up periods with restricted withdrawals.
• Regulation: Less regulated than mutual funds, allowing for more aggressive strategies.
They are high-risk, high-reward investment vehicles that use a wide array of strategies to maximize returns. They are less regulated and have high fees, and are accessible only to wealthy or institutional investors.
List short term debt instruments of Banks, Companies and govt
Banks
- Repo
-Call money
-Notice money
-Certificates of Deposits
-CBLO- Collateralised Borrowing and Lending Obligation
Companies
-Commercial papers
-Promissory notes
Govt
-T bills
-Cash Management Bills
-Ways and Means Advances.
Call money and notice money
- Call Money:
• Definition: Short-term borrowing in the money market, where loans are lent and borrowed for 1 day.
• Purpose: Banks use call money to manage their short-term liquidity needs.
• Interest Rate: The rate at which these transactions occur is called the call money rate and fluctuates based on demand and supply. - Notice Money:
• Definition: Similar to call money, but with a slightly longer maturity period, typically ranging from 2 to 14 days.
• Purpose: Banks borrow and lend notice money to manage liquidity for a period longer than one day but less than two weeks.
.
Summary of Differences:
• Call Money: Loans for 1 day.
• Notice Money: Loans for 2 to 14 days.
• CBLO: Collateralized short-term borrowing, backed by government securities.
• Certificates of Deposit: Fixed-term deposit, tradable in the market, used by banks for raising funds.
CBLO
Collateralized Borrowing and Lending Obligation a money market instrument where the borrowing and lending of funds are collateralized, typically through government securities.
• Purpose: CBLO is used by banks, financial institutions, and mutual funds to meet short-term liquidity needs, secured against government securities. • Tenure: Can range from overnight to one year. • Advantage: Offers a secured way to borrow or lend money, reducing the risk compared to unsecured borrowing like call money.
Summary of Differences:
• Call Money: Loans for 1 day.
• Notice Money: Loans for 2 to 14 days.
• CBLO: Collateralized short-term borrowing, backed by government securities.
• Certificates of Deposit: Fixed-term deposit, tradable in the market, used by banks for raising funds.
Certificates of Deposit
A negotiable, time-bound deposit issued by banks and financial institutions, representing a deposit made for a fixed period at a specified interest rate.
• Purpose: CDs are used by banks to raise funds from the public for a period of time, typically ranging from 7 days to one year. • Issued By: Commercial banks and financial institutions. • Negotiability: Can be traded in the secondary market, making them a flexible and liquid investment instrument
Summary of Differences:
• Call Money: Loans for 1 day.
• Notice Money: Loans for 2 to 14 days.
• CBLO: Collateralized short-term borrowing, backed by government securities.
• Certificates of Deposit: Fixed-term deposit, tradable in the market, used by banks for raising funds.
Details of Certificates of Deposits
CDs are short-term, negotiable instruments issued by banks or financial institutions to raise funds from individuals, corporations, or other entities. They offer investors a fixed rate of interest over a specified period in exchange for leaving their funds with the issuing institution until maturity.
Key Features:
1. Issuer:
• CDs are issued by commercial banks and financial institutions.
• They are typically offered to institutional investors, but high-net-worth individuals may also invest in them.
2. Tenure:
• CDs have a fixed maturity period that ranges from 7 days to 1 year for commercial banks and 1 year to 3 years for financial institutions.
3. Interest Rate:
• The interest rate on a CD is fixed at the time of issuance and does not change during the tenure of the deposit.
• The interest rate may be influenced by market conditions and is typically higher than the rates offered on savings accounts.
4. Negotiability:
• CDs are negotiable, meaning they can be traded in the secondary market before maturity. This provides liquidity to the holder, who can sell the CD to another investor if they need funds before the term ends.
5. Minimum Investment:
• The minimum deposit required for a CD is typically ₹1 lakh in India. This amount can vary across countries and financial institutions.
6. No Premature Withdrawal:
• Unlike a savings account or a fixed deposit (FD), CDs do not allow premature withdrawal of funds by the investor. However, liquidity can still be achieved by selling it in the secondary market.
7. Risk:
• Low-risk investment since it is backed by a bank, but the risk of default exists if the issuing institution faces financial difficulties.
• CDs are generally considered safe investments due to the stability of banks, but they do not carry any explicit government guarantee.
8. Issuer Rating:
• The risk of a CD depends on the credit rating of the issuing bank or financial institution. Higher-rated banks will offer safer CDs with lower interest rates, while lower-rated institutions might offer higher rates to attract investors.
9. Taxation:
• Interest earned on CDs is taxable as per the income tax laws of the country.
Difference between a promissory note and a loan
• Promissory Note: Simpler, informal, less detailed, used for short-term loans.
• Loan Agreement: More detailed, formal, used for significant or complex loans.
Commercial paper
Unsecured, short-term debt instrument issued by corporations.
• Purpose: Used to finance short-term liabilities like working capital needs. • Tenure: Maturity period ranges from 7 days to 1 year. • Issuer: High-credit-rated corporations. • Interest: Issued at a discount to face value, no interest payments. • Risk: Low, but depends on the creditworthiness of the issuer. • Tradability: Traded in the money market.
Promissory notes
A written promise by one party (the maker) to pay a specific sum to another party (the payee) either on demand or at a specified future date.
• Purpose: Used in loans, credit transactions, or other financial obligations. • Legally Binding: A promissory note is a legal debt instrument. • Interest: Can be with or without interest, depending on terms. • Flexibility: Used in various formal and informal settings, not limited to corporate finance
Cash Management Bills (CMBs)
Cash Management Bills (CMBs) are short-term debt instruments issued by the Government of India (or other sovereign governments) to meet temporary mismatches in the cash flow of the government.
Key Features:
1. Tenure:
• CMBs have an extremely short maturity period, typically less than 91 days. The exact maturity period is decided based on the government’s need for funds at a particular time.
2. Purpose:
• These bills are issued to help the government manage its temporary cash flow requirements, such as meeting short-term liquidity gaps. They are used when the government needs immediate funds but doesn’t want to issue long-term debt.
3. Issuance:
• CMBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are sold via auctions similar to Treasury Bills (T-bills).
4. Interest:
• Like Treasury Bills, CMBs are issued at a discount to their face value. The difference between the issue price and the face value is the interest earned by the investor.
5. Short-term Liquidity:
• CMBs are primarily used to meet the short-term liquidity needs of the government, ensuring the government can fulfill its immediate payment obligations without having to borrow for a longer term.
6. Trading:
• These instruments are typically purchased by large institutional investors such as banks, insurance companies, and mutual funds. CMBs can also be traded in the secondary market.
7. Low Risk:
• CMBs are considered low-risk investments since they are backed by the sovereign guarantee of the government, making them a safe option for short-term investors.
Summary:
Cash Management Bills are short-term government-issued debt instruments used to address temporary cash flow shortages. They are similar to Treasury Bills but have even shorter maturities, providing immediate liquidity to the government while offering a low-risk, interest-earning investment option for buyers.
Call money and notice money issued at which rates
LIBOR
MIBOR
LIBOR and MIBOR
London Interbank Offered Rate
Mumbai Interbank Offered Rate
LIBOR is an international benchmark rate used globally, while MIBOR is its Indian counterpart.
• Both represent the rates at which banks lend to one another in their respective interbank markets.
• LIBOR covers multiple currencies and loan tenures, while MIBOR is specific to the Indian rupee and is primarily focused on the overnight rate.
Name three credit rating agencies
Moody
Fitch
S&P
Credit rating agencies
Collect info about individuals and business debt, assigns them a credit score.
PE Ratio
Market price/ earnings per share.
Earnings per share= net earnings/ no of outstanding shares
Return on capital employed formula
Operating profit/ capital (debt equity)
Leverage ratio
Total debt/ total equity
EBITDA, full form and purpose
Earnings Before Interest, Taxes, Depreciation and Amortisation.
Measures the profitability of company.
Qualified Institutional Placement and Private placement
Company issues shares only to qualified institutional buyers.
Pvt placement- same as above but to small number of selected investors.
Share pledging
Using shares as collateral for borrowing money.
Alpha value of Mutual funds
Compares mutual fund relative to SENSEX.
Beta value of asset
Volatility relative to stock market
Circuit breaker
When there are only buyers and sellers of a particular stock.
Algo trading
Using algorithms for trading at very high volumes.
Co location
Located close to stock exchange so data is received quickly from server.
Short selling
Short selling is a trading strategy where an investor borrows shares of a stock from a broker and sells them in the market, with the intention of buying them back later at a lower price. The investor profits if the stock price falls.
How It Works:
1. Borrow Shares: The investor borrows shares from a broker to sell.
2. Sell the Shares: The investor sells the borrowed shares at the current market price.
3. Repurchase: If the stock price drops, the investor buys back the shares at a lower price.
4. Return: The investor returns the borrowed shares to the broker, keeping the difference between the selling price and the repurchase price as profit.
Goodwill
Intangible assets that arise when a company acquires another company higher than fair value
Goodwill = purchase price - fair value of identifiable assets minus liabilities
Goodwill represents brand reputation, customer relationships and propriety technology.
Other types of bonds
Municipal
Masala
Maharaja
Surety
Sovereign Green Bonds
Long term debt instruments of govt, companies
Govt
- G secs
-bonds
- Sovereign bonds
-Sovereign Green Bonds
Companies
- bonds
-debentures - convertible/ non convertible
-Redeemable
-Irredeemable
Shares types
Preference
- no voting rights
- preferred on liquidation
- fixed dividend rate
-convertible
Ordinary
- have voting rights
Types of shares given to employees
Stock option/ ESOP- Employee Stock Ownership program
-a call option for employees
-No fresh issue, issued by another shareholder
- doesn’t impact existing shareholding
Stock warrants
A stock warrant gives the holder the right (but not the obligation) to purchase shares of the company at a specific price (called the exercise price) before a certain expiration date.
• Issuance: Warrants are often issued by the company directly to investors, either as part of a financing deal or to incentivize long-term commitment.
• Exercise: If the stock price increases above the exercise price, the warrant holder can buy the stock at the lower price, potentially making a profit.
• Expiration: Warrants have an expiration date, after which they become worthless if not exercised.
• Dilution: When a warrant is exercised, new shares are created, which can dilute the ownership percentage of existing shareholders.
- fresh issue by company directly
-impacts existing shareholding.
Key Differences:
• Purpose: Warrants are typically used to attract investors, while ESOPs are designed to incentivize and reward employees.
• Issuance: Warrants are usually issued to outside investors or partners; ESOPs are offered to employees.
• Exercise: Warrants involve purchasing stock at a set price, while ESOPs often give stock to employees either for free or at a discounted rate.
• Ownership Effect: Warrants dilute existing shareholders upon exercise, whereas ESOPs are part of employee compensation and often involve gradual vesting.
Surety bonds
A surety bond is a three-party agreement where the surety (usually an insurance company) assures the obligee (usually a government or entity) that the principal (the contractor or individual) will fulfill a contractual obligation or a legal requirement. If the principal fails to meet their obligation, the surety compensates the obligee.
• Purpose: They are primarily used in construction and infrastructure projects to protect against the risk of a contractor defaulting or failing to complete the project.
• Parties Involved:
• Principal: The party required to perform the obligation (e.g., contractor).
• Obligee: The party that requires the obligation to be fulfilled (e.g., government agency).
• Surety: The party guaranteeing the obligation (e.g., insurance company).
Maharaja Bonds
Maharaja Bonds are sovereign bonds issued by the Indian government in foreign currencies to raise capital from non-resident Indians (NRIs).
• Purpose: They are specifically targeted at NRIs to attract investment from the Indian diaspora and raise foreign currency reserves for the country.
• Key Features:
• Issued by the government: This makes them relatively low risk, as they are backed by the Indian government.
• Attract NRI investments: NRIs are incentivized to invest in these bonds as a way to contribute to India’s development while earning returns.
Masala Bonds
Masala bonds are rupee-denominated bonds issued outside India by Indian companies or entities. These bonds allow Indian companies to raise capital from foreign investors while bearing the risk of exchange rate fluctuations.
• Purpose: They help Indian companies tap into foreign investment while issuing debt in their home currency (INR), thereby shifting the currency risk to the foreign investor.
• Benefits:
• Foreign investment: It allows Indian firms to raise funds from global markets.
• No currency risk for the issuer: The currency risk lies with the investor, as the bond is in Indian rupees.
• Infrastructure development: These bonds are often used to fund infrastructure projects and expansion.
Sovereign Green Bonds
Bonds issued by a national government (sovereign entity) to fund projects that have positive environmental or climate-related outcomes. These bonds are part of the broader green bond market, where the funds raised are earmarked for projects that contribute to environmental sustainability.
Working capital and Phy capital
Working capital: gets used up in production, is an ingredient in production.
Phy/Fixed capital is an assistant in production
Coupon Bonds
A coupon bond is a bond that is essentially anonymous, with no name on the bond or sale record. The bond represents semi-annual interest payments.
Coupon bonds are increasingly rare since the advent of electronic payments.
Although coupon bonds—which are sometimes called bearer bonds—are rare, they offer a simple way for an investor to collect on earned interest.
Zero Coupon Bonds
A zero-coupon bond does not pay interest to the holder.
Zero-coupon bonds are purchased at a deep discount to face value but are repaid at full face value (par) at maturity.
The difference between the purchase price of a zero-coupon bond and its par value indicates the investor’s return.
A zero-coupon bond is also known as an accrual bond.
Treasury Bills (T-bills)
Treasury bills are money market instruments issued by the Government of India as a promissory note with guaranteed repayment at a later date. Funds collected through such tools are typically used to meet short term requirements of the government, hence, to reduce the overall fiscal deficit of a country.
short-term borrowing tools
max tenure of 364 days
zero coupons (interest) rate
issued at a discount to the published nominal value of government security (G-sec).
state govts can issue t bills
RBI is a banker to which govt
Both to central and all state govts.
Can state govts raise T bills
No.
Only cent govt can.
Marshall Lerner Condition/ J- curve
When currency devalues, Current Account Balance first decreases then increases.
