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FIM-P06
(PGDM 2006-08 : Term-V)

Financial Institutions & Markets
(Faculty: Prof. Soumya G. Deb)

Course Outline
a) Introduction :

a) Definition of Real and financial assets
b) The distinction between a debt instrument and equity instrument
c) Price and risk of a financial asset – brief idea
d) The principal economic functions of a financial asset
e) Financial market--- what it is and the principal functions it performs
f) Classification of financial markets


2. Equilibrium in financial markets, market participants, Lemon’s problem and intermediaries :

1. Participants in the financial markets --Investors, Issuers or borrowers, regulators and intermediaries, savings being made available from surplus savers to deficit savers through financial system and facilitated by intermediaries
2. Equilibrium in financial markets, determinants of supply and demands of funds, interest rate the equilibrium price of money?
3. Intermediaries --- what are the roles played by intermediaries, Lemon’s problem.
4. Service provided by intermediaries: Production of information, size intermediation, temporal intermediation, risk intermediation, and monitoring facilitation, reducing the cost of contracting and information processing. 3. Equity Markets :

1. Equity or stock : basic concept, debt vs equity claims revisited, principal types of stock : common, preferred
2. Principal characteristics of common stock : discretionary dividend payment, residual claim status, limited liability and voting rights.
3. Preferred stock: hybrid security with features of both bond and common stock, types of preferred stock: non participating, cumulative, participating and non cumulative, drawbacks of issuing preferred stock.
4. Primary Market: issue of shares, overview of principal transactions
5. Secondary Market : process of transaction, trading post, specialists or market makers, floor brokers etc., flow of processes in a trading post
6. A few terms in connection with Secondary Market transaction : market order, limit order, stop loss order, day order, week order, month order, dematerialization, depository, depository participant, advantage of depository service, margin trading, buying on margin, selling on margin, carry forward and badla
7. Indian Stock market—overview and some figures. 4 .Investment vs Speculation, measuring returns and risk of a stock, predicting stock prices--- introduction to basic tenets of fundamental and technical analyses

1. Investment vs Speculation
2. Measuring return and risk of a security, single period and multi period returns,risk(uncertainty)--- ( uncertainty) : systematic vs unsystematic risk( business and finance risk) , measure of systematic risk- beta , how to find beta .
3. Predicting stock prices: Fundamental analysis and technical analyses – what is meant by these two approaches
4. Fundamental analyses:: two components – predict earnings and determine the intrinsic value, different models for finding intrinsic value: two stage growth model , continuous growth model, abnormal/constant growth initially then normal growth till perpetuity., P/ E approach, determining the earnings : EIC analyses.
5. Technical Analyses: What is it? Who are the people interested?
6. Dow Theory – tenets --- average discounts ( reflects all available info) everything except acts of god, three trends—tide, wave, ripples; features of bull markets and bear markets—entry and exit points of various kinds of investors, two averages must confirm, volumes go with trends, only closing prices are important, a trend should be assumed to continue until reversal is confirmed
7. Criticisms of Dow theory
8. Technical analyses : Basics of charting, bar charts and line charts, trend and trend lines--- uptrend, downtrend, support/resistance line, price gaps---- common gaps, breakaway gaps, runaway gaps, exhaustion gaps, Channels, reversal patterns—head and shoulder, double top and bottom, triple top and bottom, rounding top and bottom, spikes, continuation patterns--- triangles, rectangles, oscillators/indicators---AD line, high low index, most active list, mutual fund activity, price ROC, RSI, Moving average, Exponential moving average, MACD, Stochastic oscillator, momentum, Japanese candlesticks.

5. Bond Markets :

1. Interest Rate and Bond valuation : YTM, Bond Value, finding YTM, current yield, Interest rate risk of bonds---variation with time to maturity and coupon payment.
2. More bond features--- Duration (Mcauley & modified,),Indenture, call provision, call protection period etc.
3. Different types of bonds: Govt. , municipal, ZCB, floaters, convertible, put bonds, income bonds etc.
4. Determinants of bond yields– term structure of interest rate, inflation, interest rate risk, Fisher’s effect on interst rate.
5. Bond Markets : Figures

6. Mutual funds

1. Beginning concepts: Why are common people more vulnerable to lose money in the stock market, what is the alternative( go thru mutual funds), Why should companies set up mutual funds when they earn as low as 0.5%,Advantages of a mutual fund
2. Classification of mutual funds (functional classification), territorial classification, Objective wise classification, by size classification, etc.
3. Risks in funds( risks in equity funds—systematic /unsystematic—business and finance risk), risks in debt funds( price risk/credit risk/liquidity risk/timing risk/cash flow risk/currency risk/tax law risk/event risk etc.)
4. Give some figures – growth rate, organization of mutual funds in India, regulatory framework—mention a few important regulations.
5. Portfolio management—equity portfolio management—active management, passive management, rupee cost averaging, value averaging, bond portfolio management—elements of bond analysis( current yield, YTM, Yield curve, Yield spread, Duration—modified, McCauley’s),investment strategies for bond portfolios—duration management, credit selection/prepayment prediction, types of bond portfolios--- barbell/dumb bell, bullet/ ladder etc.

7 . Indian Money markets—

a) Introduction the need for a money market, money market players, money market instruments and features ---Govt securities—treasury bills, Govt. dated securities/gilt edged securities, banking sector securities—call and notice money market, term money market, certificates of deposits, participation certificates, private sector securities—commercial papers, bills of exchange, intercorporate deposits/Investments, money market mutual funds, bonds/debentures by the corporate, money market mutual funds, repo, reverse repo, Risk exposure in the money market—market risk/interest rate risk, reinvestment risk, default risk, inflation risk, currency risk, political risk, overseas money markets, CDs, Eurodollar, euro dollar CDs.
b) Call money market : meaning, call money markets in US,UK, call money market in India, participation, location, size of call money market – Indian vis a vis- US and UK, variations in demand and supply of call loans, call rates, call rates in India.
c) Treasury Bills market —Introduction, 91 day treasury Bills market, nature and characteristic, types of treasury bills, systems of marketing, size and participants, funding of Treasury bills, bank deposits and monetary policy, treasury bill rate,182 day,364 day and 14 day T- bill markets.
d) Government Gilt Edged Securities market —Introduction, Nature and organization of the market, general features of the securities, volume and composition of issues, ownership and maturity pattern, secondary market transaction, implications for monetary policy
e) Markets for commercial paper and certificates of deposits: -- Introduction, commercial papers, CPs abroad, CPs in India,CDs, CDs abroad, CDs in India, CPs and CDs market—size and interest rates.
f) Commercial Bills Market —Introduction ,bill of exchange, classification, purpose, acceptance, maturity of a bill, efficient system of payment, size of bill market in India, characteristics of a well developed bills market in India, RBI initiatives to develop bill markets

8. Venture capital funds :
1. Need for VC funds
2. Angel funding vs VC funding,
3. VC vs private equity,
4. VC vs Traditional equity,
5. stages of VC funding—seed/blue print, start up, expansion, second round funding, turnaround funding, buyout funding,
6. steps involved in the VC funding procedure,
7. forms of VC investment( equity, debt, pref shares etc), determination of VCs contribution and share,
8. who are VCs
9. Getting out of a VC project.

8. Specialized Services :
1. Factoring – explain concept, advantages, with recourse, without recourse, one problem—solve in class.
2. Forfeiting : briefly explain with the help of a diagram.
3. Lease, hire purchase,-- explain what are they , types of lease, problems on lease—NPV analyses
4. Credit rating : what is it, 5 Cs, what instruments are rated, why should we rate—advantage to issuers, advantage to investors, rating process in India—briefly with a line diagram, parameters looked in a good rating agency. 9.Avenue for raising funds through international markets:
1. GDR issues
2. ADR issues
3. Euro Markets


10. Derivative Markets : Coverage to be decided later


11 : Forex Market : Coverage to be decided later


**Evaluation Pattern :

1. Mid Term = 30%
2. End term = 40%
3. Quiz = 2 x 7.5% = 15%
4. Projects = 2 x 7.5% = 15%


REQUIRED TEXT & READINGS
1) Financial Markets and Institutions, 2nd Edition, by Anthony Saunders and Marcia Cornett, (Tata McGraw Hill 2004).
2) Foundations of Financial Markets and Institutions, 3rd Edition, by Fabozzi, Modigliani, Jones and Ferri (Prentice-Hall, 2003)
3) Financial Institutions and Markets, 3rd Edition, by L. M. Bhole (Tata McGraw Hill)
4) Other relevant readings will be mentioned from time to time in class.
Created By: Bijoy Kar on 09/17/2007 at 06:45 PM
Category: PGP-II Doctype: Document

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