Calicut University M.Com 3rd Semester -2019 FMI subjects 1 and 2 modules

2. MONEY MARKET
 Money market is the institutional arrangements
facilitating borrowing and lending of short term funds
i.e., less than one year.
 It is an arrangement that brings about a direct or indirect
contact between the lender and the borrower.
 In the words of Geoffrey Crowther, “money market is a
collective name given to the various firms and institutions
that deal with the various grades of near money”.
 RBI describes the money market as “the centre for
dealings, mainly of short term character, in monetary
assets, it meets the short term requirements of the
borrowers and provides liquidity or cash to the lender”.
 The money market instruments are Commercial bills,
treasury bills, Call and short notice, Certificate of
deposits, Commercial paper, etc.

3. CAPITAL MARKET
 It refers to the Institutional arrangement for facilitating the
borrowing and lending of long term funds.
 It defined as “an organised mechanism for effective and
efficient transfer of money-capital or financial resources from
the investing parties i.e., individual or institutional savers to
the entrepreneurs (individual or institutions) engaged in
industry or commerce in the business either be in the private
or public sectors of an economy”.
 It is an important component of financial system, market for
long term funds, helps in raising capital, meets demand and
supply of long term capital, involves intermediaries and deals
in marketable and non-marketable securities.
 The capital market instruments are, equity shares, preference
shares, debentures and bonds.

4. Market for derivatives
Derivatives are one type of securities
whose value is derived from the
underlying assets, such as stocks, bond,
currencies and commodities.
A contract which derives its value from
the prices or index of prices of underlying
securities.
So marketing of derivatives mainly based
on the value of underlying assets.

5. Working of Stock Exchanges in India
•

6. • (The population of India is more than 125 crore but less
than 2% of population actually invest in stock exchanges)
 Stock exchanges also known as stock market or share market.
 One of the main integral part of capital market in India.
 It plays a vital role in growing industries and commerce of a country.
 It is well organised market for purchase and sale of corporate and other securities
which facilitates companies to raise cpital by pooling funds from different investors
as well as act ass an investment intermediary for investors.
 A stock exchanges in India organised in-voluntary, non profit making associations,
e.g., Bombay, Ahamedabad & Indore, Public Limited Companies, e.g., Calcutta,
Delhi,Bangalore and Company Limited by Guarantee, e.g.,Hyderabad and Madras
Stock exchanges.
 A stock exchange is a managed by a governing body-consist of President, Vice-
Preident, Executive Director, elected directors, public representatives and
government nominees.
 In India stock exchanges are under the control of SEBI (Securities Exchange Board of
India).
 London Stock Exchange oldest in the world.
 Bombay Stock Exchange (BSE)oldest in India.
 In India there are 23 SEBI approved stock exchanges out of them BSE&NSE are the
main indices.
 BSE=SENSEX, NSE=NIFTY.

7. Major stock exchanges in India

8. FUNCTIONS OF STOCK
EXCHANGES It provide a critical link between companies that need funds
to set up new business or to expand their current
operations and interested investors.
 Act s a guide for the investors that have excess funds to
invest in such companies.
 Ensure liquidity of capital.
 Continuous market for securities.
 Evaluation of securities.
 Mobilising surplus savings.
 Helpful in raising new capital.
 Safety in dealings.
 Listing of securities.
 Platform for public debt.
 Clearing house of business information.
 Investor protection.

9. NSE (National Stock Exchanges)
 It was incorporated in Nov.1992 at Mumbai as a tax
paying company and was recognised as a stock
exchange in 1993 under the Securities Contracts
(Regulation) Act 1956.
 NSE is the 12th largest stock exchange in the world
and it was the first exchange to provide fully
automated screen based electronic trading system.
 Nifty is the indices to measure overall performance
of the NSE,which comprises of 50 stock index

10. BSE (Bombay Stock Exchange)
 It is the leading and fastest stock exchange in
India as well as in South Asia established in 1875
as a voluntary non profit making association at
Mumbai.
 BSE is the world’s 11th largest stock market.
 More than 5000 companies are listed on BSE.
 The main index f BSE is sensex which comprises
of 30 stocks.
 SEBI has allowed BSE to extend its trading
terminals to outside centres and the Bombay
Online Trading System has enabled it to open
trade working stations all over the country.

11. OTCEI (Over The Counter Exchange of India)
OTCEI was established in Oct.1990 at Mumbai with an
objective to provide an alternate market for the
securities of smaller companies.
It is a ring less and electronic national stock exchange.
It caters to the needs of the small business which have
so far not met the requirements for listing on the stock
exchange.
Listing of small and medium sized companies with a
paid up capital between 30 lakh and 25 crores.
OTCEI deals in equity shares, preference shares, bonds,
debentures, warrants, etc.
A company which is listed on any other recognised
stock exchange in India will not simultaneously be
eligible for listing on the OTCEI.

12. O T C E I was promoted by a consortium
of financial institutions including…..
• Unit Trust of India.
• Industrial Credit and Investment Corporation
of India.
• Industrial Development Bank of India.
• Industrial Finance Corporation of India.
• Life Insurance Corporation of India.
• General Insurance Corporation and its
subsidiaries.
• SBI Capital Markets Limited.
• Canbank Financial Services Ltd.

13. SEBI (Securities and Exchange Board of India)
• The capital issues control was introduced in India for the
first time in May 1943 by a rule framed under the Defence
of India Act1939.
• From the changing condition of Indian capital market
gov’t of India bring a resolution for constituting a board
to promote a healthy and growth oriented securities
market in the country. So gov’t constituted Securities &
Exchange Board of India.
• The Gov’t issued an ordinance on Jan 30,1992, for giving
statutory powers to SEBI for regulate, control, monitor the
Indian financial system.
• The management of SEBI- a chairman, 2 members from
central gov’t ministry for dealing with finance and
administration of the Co; Act 1956, one member official
from RBI ,5 other members appointed by central gov’t
amongst at least 3 shall be the whole time members.

14. Functions of SEBI
 Regulating the business in stock exchanges and any other securities
market.
 Registering and regulating the working of intermediaries who may be
associated with securities market.
 Registering and regulating the working of venture capital funds, mutual
funds
 Promoting and regulating self–regultory organisations.
 Prohibiting fraudulent and unfair trade practices in securities market.
 Promoting investor’s education and training of intermediaries of
securities market.
 Prohibiting insider trading in securities.
 Conducting inquiries and audits of the related groups in the securities
market.
 Performing and exercising the powers and provisions of Securities
Contracts(Regulation) Act 1956.
 Levying fees or other charges for carrying out operation in securities
market.
 Conducting research in capital market.
 Performing other functions.

15. Major International stock markets
1- New York Stock Exchange, United States
Founded in 1792, the New York Stock Exchange
has been the world’s largest stock exchange since
the end of World War I, when it overtook the
London Stock Exchange. It has a market
capitalization of $22.9 trillion and about 2,400
listed companies. According to the 2017 data from
Gallup, more than 54% Americans had invested in
stocks listed at the NYSE. The NYSE alone accounts
for roughly 40% of the world’s stock market
capitalization.

16. 2- NASDAQ, United States
The NASDAQ Stock Market was founded in
1971 in New York City. NASDAQ is considered
the Mecca of technology companies because
many of the world’s largest technology
companies such as Apple, Microsoft, Facebook,
Amazon, Alphabet, Tesla, Cisco, and others are
listed here. As of November 2018, NASDAQ had
a market capitalization of $10.8 trillion with an
average monthly trading volume of $1.26
trillion.

17. 3- Tokyo Stock Exchange, Japan
Founded in 1878, the Tokyo Stock Exchange is
among the top 10 largest stock exchanges in
the world. It has close to 2,300 listed
companies with a combined market
capitalization of $5.67 trillion. Trading at the
Tokyo Stock Exchange was suspended for four
years after World War II. It resumed operations
in 1949. The TSE’s benchmark index is Nikkei
225, which consists of the largest companies
including Toyota, Honda, Suzuki, and Sony.

18. 4- Shanghai Stock Exchange, China
The largest stock exchange in China has a
market capitalization of $4.02 trillion. It is a
non-profit organization and has more than
1,000 listed companies. Though its origins date
back to 1866, it was suspended following the
Chinese Revolution in 1949. The Shanghai
Exchange in its modern avatar was founded in
1990. Stocks listed at the Shanghai Stock
Exchange have ‘A’ shares that trade in local
currency and ‘B’ shares that are priced in the
US dollar for foreign investors.

19. 5- Hong Kong Stock Exchange, Hong Kong
The Hong Kong Stock Exchange was founded in
1891. It has close to 2,000 listed companies,
about half of which are from mainland China. It
has a monthly trading volume of $182 billion
and a market capitalization of $3.93 trillion. In
2017, the exchange closed its physical trading
floor to shift to electronic trading. Some of the
biggest companies listed at the Hong Kong
Stock Exchange are AIA, Tencent Holdings,
Petro China, China Mobile, and HSBC Holdings

20. 6- Euronext, Eurozone
Headquartered in Amsterdam, the
Netherlands, Euronext is a pan-European
stock exchange with a presence in France,
Belgium, Ireland, and Portugal. It has
approximately 1,300 listed companies
with a combined market capitalization of
$3.92 trillion. Stocks listed at Euronext
trade in euros. Its monthly trading volume
is about $174 billion.

21. 7- London Stock Exchange, United Kingdom
The London Stock Exchange was founded in
1698. It has more than 3,000 listed companies
with a combined market capitalization of $3.76
trillion. It is owned and operated by the London
Stock Exchange Group, which was formed in
2007 following the merger of the LSE with
Borsa Italia. The LSE was the world’s largest
stock exchange until the end of the First World
War, when it lost that title to the New York
Stock Exchange. Some of the biggest companies
listed at the LSE are British Petroleum, Barclays,
and GlaxoSmithKline.

22. 8- Shenzhen Stock Exchange, China
Formally established in 1990, the
Shenzhen Stock Exchange is one of the
only two independently operating stock
exchanges in China. The other one being
the Shanghai Stock Exchange. Its market
capitalization is $2.5 trillion as of
November 2018. Most of the companies
listed here are based in China and it
trades shares in Yuan.

23. 9- Toronto Stock Exchange, Canada
Owned and operated by TMX Group, the Toronto
Stock Exchange (TSX) has 2,207 listed companies
with a combined market capitalization of $2.1
trillion, earning it a place among the world’s top
10 largest stock exchanges. It has an average
monthly trade volume of $97 billion. All of
Canada’s ‘Big Five’ commercial banks are listed at
the Toronto Stock Exchange. It was founded in
1852. Back in 2011, the TMX Group was in talks to
merge with the London Stock Exchange, but it
couldn’t get the approval of shareholders.

24. 10- Bombay Stock Exchange, India
Founded in 1875, the Bombay Stock Exchange
was the first stock exchange in Asia. As of
November 2018, it had a market capitalization
of $2.05 trillion. It is the stock exchange with
the highest number of listed companies on this
list. According to Visual Capitalist, the BSE has
5,749 listed companies. However, most of them
are small-caps. It is located at Dalal Street in
Mumbai.

25. Module II
INTEREST RATES
Meaning and Concept
 The rate of return an investor expected to receive from the
investments whether it is from bank deposits, debentures and
bonds.
 The rate of interest motivate people to save money from their
incomes and provide the same for productive purposes.
 Thus interest rates regulate the flow of investible funds and it is
the measuring tool of RBI to control inflation, deflation and
credit creation etc.
 In the words of Marshall, interest is “the price paid for the use of
capital in any market”.
 Interest is the payment made for borrowed funds or the price
paid for the use of money and it is always expressed as a rate
percent per annum or per month, for e.g., interest on fixed
deposits is always expressed as 10% or 6% p.a. depending upon
the time for which money is deposited.

26. THEORIES OF INTEREST RATE
CLASSICAL
THEORY
LO

27. CLASSICAL THEORY
This theory developed by the classical
economists such as Marshall, Ricardo, Pigou,
Fisher and others.
According to them, interest is a real
phenomenon and is therefore determined by
real factors i.e., the supply of and demand for
capital under conditions of perfect
competition.
This theory also called as the capital theory of
interest.

28. Continue……
 The supply of capital mainly comes from savings
(willingness to save and ability to save) by individual,
households, business houses and government.
 Thus rate of interest is a reward in future given to
suppliers of capital from their savings at present.
 Savings and rate of interest are directly related-higher
the rate of interest more will be the savings and larger
will be supply of capital and vice-versa.
 Demand for investment depends upon the cost of
investment i.e. the rate of interest they have to pay
for using the money.
 Classical theory is based on various assumptions such
as perfect competition, flexibility of interest rate, full
employment of resources, constant income and price
level and rational behaviour of investors.

29. LOANABLE FUNDS THEORY
• Dynamic theory as opposed to the static nature
of the classical theory.
• It combines real and monetary factors of
savings and investment.
• The rate of interest is determined by the
demand for and supply of loanable funds and
interest is the reward/price/payment for the
use of loanable funds.
• The main supporters of this theory are
Wickshell, Myrdal and D.H Robertson.

30. Continue…..
• The supply of loanable funds comes from
savings of the individuals, households,
business or government and dishoarded
money, credit/ loans advanced by banks and
also from disinvestment by firms who supply
funds etc.
• The demand for loanable funds comes from
firms require funds for productive purposes
for purchasing raw material, fixed assets etc.
Individuals need funds for consumption
purposes and hoarding purpose to ensure
liquidity.

31. LIQUIDITY PREFERENCE THEORY
(Keynesian Theory)
• This theory developed by Keynes, a famous economist, in
his book titled , General theory of employment, Interest
and Money.
• His own opinion interest rate is a monetary phenomenon
and interest is a payment for the use of money.
• According to him, rate of interest is determined by the
interaction between the supply of and demand for money.
• The rate of interest is the reward offered to people to
induce them to hold securities or income yielding assets
instead of cash.
• The demand to hold money is called the liquidity
preference.

32. • People have hold money as liquid assets with following
motives.
1. Transaction Motive: people keep some money in cash to
meet day-to- day expenses with depends upon the income
level.
2. Precautionary Motive: people like to hold additional money
in cash to overcome uncertainties such as sudden accident,
sickness etc.
3. Speculative Motive: people hold money in cash to take
benefit from changes in future interest rates and securities
prices.
• The supply of money, according to Keynes, is determined and
controlled by the monetary authorities –RBI and Political
factors.
• If supply of money is more than demand, the rate of interest
declines whereas when demand exceeds supply, the rate of
interest goes up.

33. MODERN THEORY
• Modern theory suggests the consideration of both real
and monetary factors in order to determine the rate of
interest.
• Modern theory suggests four determinants of rate of
interest:
1. The saving function
2. The investment function
3. Liquidity preference function and
4. The quantum of money
• The integration of these four factors and equilibrium
between these four determinants will help in
determining the rate of interest.

40. Term structure of interest rates
• Theories of determination of interest rates are based on one
uniform rate of interest .
• But in practice, a variety of interest rates exists in any
financial system due to number of factors affecting the
interest rates in the market, such as…(i) type/nature of loan,
(ii) tax status, (iii) creditworthiness of the debtor and (iv)
term to maturity.
• The difference in the rates of interest on account of the term
to maturity of debt, other factors remaining constant is
called ‘term structure of interest rates’.
• The term to maturity refers to the time period after the
expiry of which debt/loan becomes payable.
• Term structure of interest rates varies depending upon the
type of loan in the market.

45. Liquidity Premium Theory
 The theory was developed by J R Hicks, something
special than the expectation theory.
 The theory takes place risk- return preferences of the
investors.
 It assumes that investors- do not maximize return
irrespective of risk and do not maximize risk even if it
gives a very low return.
 It assumes that long term securities are more risky than
short term securities.
 The interest rate on long term maturities is always
higher than that on short term maturities.
 The theory focuses that a liquidity premium must be
added to the yields of long term maturities to prevent
investors from avoiding risk.

57. Financial repression and interest rates
 Financial repression is categorized as ‘macro
prudential regulation’ i.e., government efforts to
ensure the health of an entire financial system.
 Financial repression comprises “policies that result
in savers earning returns below the rate of
inflation” in order to allow banks to ‘provide cheap
loans to companies and governments, reducing the
burden of repayments’.
 The term was introduced in 1973 by stanford
economists Edward S Shaw and Ronald I McKinnon.
 Financial repression produces negative real interest
rates (yielding less than the rate of inflation) and
reduces or liquidates existing debts.