This document provides an overview of financial markets and instruments. It defines a financial market as a place where securities are created and traded, facilitating buying and selling. Financial markets are classified by the nature of claims (debt, equity), maturity (money market, capital market), and how transactions occur (primary, secondary markets). Money market instruments discussed include treasury bills, certificates of deposit, commercial paper, and repurchase agreements. Capital market instruments include stocks, bonds issued by corporations, governments, and agencies. The document also discusses stock and bond indexes, and characteristics of different financial claims.

1. MUSLIM UNIVERSITY OF
MOROGORO
FINANCIAL MARKETS AND
INSTITUTIONS
(DIBF 06204)

2. Outline
Overview of Financial Markets
Functions of Financial Markets
Classification of the financial Markets
Financial Markets Instruments
Characteristics of the financial Instruments
Stock and Bond Indixes

3. What is a financial
market?
• A financial market is a designated place
or system where securities are created
and transferred (traded)
• The market facilitates buying and selling
of financial securities or instruments
• Simply, they are market in which funds
are transferred from SSUs to DSUs.

4. What is a financial
market?
• A financial market does not have to
have a physical location
• A good example of a market that does
not necessarily need a physical location
is a foreign exchange market

5. Functions of Financial
Markets
• Mechanism for raising funds
• Done in primary financial
markets (e.g., IPOs ) with the
assistance of investment
banking firms.
• Mechanism for converting financial
assets into cash before maturity.
• Done in secondary financial
markets (e.g., DSE, NYSE)

6. Functions of Financial
Markets
• Provides the means for entities to
protect (hedge) their
financial/commercial positions.
• Done in derivatives markets
(futures, forwards)
• Mechanism for generating a return
on surplus funds (Investing).
• Return occurs through interest,
dividends, capital appreciation

7. Functions of Financial
Markets
• Financial markets facilitate price
discovery: The continual interaction
of numerous buyers and sellers
helps in establishing the prices of
financial assets.
• Financial markets reduce cost of
transaction: The major costs
include search and information
costs.

8. Key players
Institutional Investors (Insurance
Companies, Pension Funds)
Exchanges and Market Dealers
(Brokers, Dealers)
Investment Companies (Fund Managers,
Mutual Funds, Hedge funds)
Commercial Banks

9. The Classification of
Financial Markets
• Nature of the claim
 Debt market
 Equity market
• Maturity of the claim
 Money market
 Capital market

10. The Classification of
Financial Markets
• Seasoning of claim
 Primary market
 Secondary market
• Timing of delivery
 Spot market
 Forward market
•

11. The Classification of
Financial Markets
•Organisation structure
Exchange traded market
Over-the counter market

12. Money Market
Instruments
• Treasury bills: Short-term government securities
issued at a discount from face value and returning
the face amount at maturity. In Tz Typical maturities
are 35-day, 91-day, 182-day and 364-day T/bills
• T/bills are the most marketable money market
instruments i.e.They are highly liquid
• Government raise funds by selling T/bills to the
public
• The difference between the purchase price and the
ultimate maturity value represents the investor’s
earnings

13. Money Market
Instruments
• Certificate of deposit (CDs): It represents a
time deposit with a bank
 Debt instrument sold by depository
institutions
 Can be resold in secondary market
 In USA -CDs issued in
denominations larger than $100,000
are usually negotiable

14. Money Market
Instruments
• Commercial Paper: it is short-term unsecured debt issued by
large corporations
• They are issued by Large well known corporations
• They are short-term unsecured debt notes issued directly to the
public by corporations instead of borrowing from banks.
• The CP maturities range up to 270 days
• CP are fairly safe as they are short term instrument, hence its
condition can be predicted and monitored.
• CP trades in secondary markets and so it is quite liquid

15. Money Market
Instruments
• Bankers’ Acceptances: It is order to a bank by a customer to pay a
sum of money at a future date.
• They become bankers 'acceptance once endorsed by banks as accepted
• The acceptance may be traded in secondary markets Like other
financial instruments
• Banks assume responsibility for ultimate payment to the holder of the
acceptance
• Thus, bankers’ acceptances are considered very safe assets
• BAs are commonly used international trade transactions financing
• BAs are traded at discount

16. Money Market
Instruments
• Repurchase agreements (repos or RPs): Short-term
sales of government securities with an agreement to
repurchase the securities at a higher price.
• Their maturities are usually less than two weeks
• Repos are considered very safe in terms of credit risk
because the loans are collateralized by the securities
• Reverse repos (RRPs): it is the mirror image of a repo
• Dealer finds an investor holding government securities
and buys them with an agreement to resell them at a
specified higher price on a future date.
Thursday, 02
March 2023
Macha J (Ph.D)

17. Capital Market
Instruments
• Stocks
• Equity claims
• Represent ownership of net income and assets of
corporation
• Common stock
• Pays variable dividend depending on profits left over
after
• preferred stockholders have been paid
• retained earnings set aside
• Preferred stock
• Pays fixed dividend; in event of bankruptcy, preferred
stock owners entitled to be paid first
Thursday, 02
March 2023
Macha J (Ph.D)

18. Capital Market
Instruments
• Bond: A security that obligates the issuer to
make specified payments to the holder over
a period of time
• Corporate Bonds
• Long-term bonds
• Issued by corporations
• Usually have excellent credit
ratings
• Maturities range from 2 – 30 years
Thursday, 02
March 2023
Macha J (Ph.D)

19. Capital Market
Instruments
• Treasury bonds are debt instruments issued by
the Governments in exchange for money borrowed
from the public.
• Treasury Bonds
• Long-term bonds
• Maturities range from 2 – 30 years
• Issued by government to finance
national debt
• Currently, in Tanzania bonds
maturities range from 2 to 25 years
Thursday, 02
March 2023
Macha J (Ph.D)

20. Capital Market
Instruments
• Agency bonds
• Long-term bonds issued by
various government agencies
that support
• Commercial, residential, &
agricultural real estate
lending
• Student loans
Thursday, 02
March 2023
Macha J (Ph.D)

21. Capital Market
Instruments
• Municipal bonds (local government bonds)
Long-term instruments issued by state and
local governments to finance expenditures
on schools, roads, college dorms and the
like.
• Revenue bonds - finance specific
projects
• General obligation bonds - backed by
full faith and credit of issuer
Thursday, 02
March 2023
Macha J (Ph.D)

22. Characteristics of financial claims
• There are many ways to distinguish financial
instruments
• The general characteristics are the riskiness of the
financial claim, the time you have to wait to achieve
the promised return, and the ease with which you can
sell the financial instrument
• For instance, whether or not a financial instrument is
tradable can influence how much you are willing to
pay for it and what kind of return you expect in
compensation for not being able to easily sell it
Thursday, 02
March 2023
Macha J (Ph.D)

23. Characteristics of financial claims (Cont’d)
• Different characteristics of financial claims will influence each
other and jointly determine the desirability of the financial claim
and so ultimately its price
• Some of the characteristics of financial claims are summarised
below:
• Risk
• How certain is the value of the claim?
• Liquidity
• How easily can the claim be converted to cash?
• Real Value Certainty
• What happens to the claim when there is inflation in the economy?
Thursday, 02
March 2023
Macha J (Ph.D)

24. Characteristics of financial claims
(Cont’d)
• Expected Return
• What return does the holder get on his or her initial capital?
• Term to maturity
• When can I get my money back?
• There are many other possible ways in which financial
claims can vary, can you suggest additional characteristics?
E.g the currency the financial instrument is denominated
or whether or not it is divisible?
Thursday, 02
March 2023
Macha J (Ph.D)

25. Primary vs. Secondary Security Sales
• Primary
New issue
Key factor: issuer receives the proceeds from
the sale
• Secondary
Existing owner sells to another party
Issuing firm doesn’t receive proceeds and is
not directly involved
Thursday, 02
March 2023
Macha J (Ph.D)

26. Public Offerings
• Initial Public offerings (IPO)
It is the first and initial issue of shares and
the sale is made to the general investing
public; e.g TOL, TBL, DAHACO etc.
The issue is registered with the Exchange
• Seasoned Equity Offerings
• The second and subsequent offerings of
stocks are called seasoned equity offerings
Thursday, 02
March 2023
Macha J (Ph.D)

27. Private Placements
• Private placement: sale to a limited
number of sophisticated investors
not requiring the protection of
regulation
• Dominated by financial Institutions
• Very active market for debt securities
• Not active for stock offerings
Thursday, 02
March 2023
Macha J (Ph.D)

28. Organization of Secondary
Markets 1: Organized
Exchanges
• Auction markets with centralized order
flow
• Dealership function: can be
competitive or assigned by the
exchange (Specialists)
• Securities: stock, futures contracts,
options, and to a lesser extent, bonds
• Examples: NYSE, DSE, LSE, Rwanda
Stock Exchange
Thursday, 02
March 2023
Macha J (Ph.D)

29. Organization of Secondary Markets
2: OTC Market
• Dealer market without centralized order flow
• NASDAQ: The National Association of Security
Dealers Automated Quotation system
• It is the largest organized market that provides
information for OTC trading
• Securities: stocks, bonds and some derivatives
Most secondary bonds transactions take
place here
Thursday, 02
March 2023
Macha J (Ph.D)

30. International Market Structures
• London Stock Exchange
Dealer market similar to NASDAQ (the
automated system for quoting the bid
and asked prices of dealers)
Stock Exchange Automated Quotation
Greater Anonymity
• Tokyo Stock Exchange
Feature a floor and electronic trading
Thursday, 02
March 2023
Macha J (Ph.D)

31. Costs of Trading
• Commission: fee paid to broker for
making the transaction
• Spread: cost of trading with a dealer
Bid: price dealer will buy from you
Ask (offer): price dealer will sell to
you
Spread: ask - bid
Thursday, 02
March 2023
Macha J (Ph.D)

32. Stock Indexes
• Composite value of a group of secondary market–traded
stocks.
• Movements in a stock market index provide investors with
information on movements of a broader range of
secondary market securities.
• i.e. measure what happens in the market everyday
• Serve as performance indicators of specific stock
exchanges or of particular subsets of the market
• Allow investors to compare the performance of
individual stocks with more general market indicators
Thursday, 02
March 2023
Macha J (Ph.D)

33. Stock Indexes
• Uses
Calculate benchmark returns to judge
portfolio performance;
Examine factors that influence aggregate
security price movements (indexes are used to
measure aggregate market movements)
Technical analysis, to predict future price
movements
Thursday, 02
March 2023
Macha J (Ph.D)

34. Examples of Indexes
• Dow Jones Industrial Average (30 Stocks)
• Standard & Poor’s 500 Composite
• NASDAQ Composite
• NYSE Composite
• Nikkei 225 & Nikkei 300
• FTSE (Financial Times Stock Exchange 100 Index)
• Dax
• DSE All Share Index
• Tanzania Share Index (TSI)
Thursday, 02
March 2023
Macha J (Ph.D)

35. Bond Indexes
• Lehman Brothers
• Merrill Lynch
• Salomon Brothers
• Specialized Indexes
E.g Merrill Lynch Mortgage
Thursday, 02
March 2023
Macha J (Ph.D)

36. Recommended readings
• Financial Markets and Institutions, 7th
Edition, 2011 - Frederic S. Mishkin & Stanley
Eakins
• Zvi Bodie, Alex Kane and Alan J. Marcus,
2013 – Investments
• Casu, B., Girardone, C., & Molyneux, P. (2006). Introduction
to banking (Vol. 10). Pearson education.
Thursday, 02
March 2023
Macha J (Ph.D)

37. Thank You Very Much for Listening
Thursday, 02
March 2023
Macha J (Ph.D)