international bond maarket

TYFM INTERNATIONAL BOND MARKET

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INTERNATIONAL BOND MARKET

Bachelor of Commerce Financial Market

Semester V

(2015-2016)

Submitted By, JUI VINAYAK GAWADE

Roll No. -11

Under Guidance, PROF.Shakti Chavan.

MAHARSHI DAYANAND COLLEGE OF ARTS, SCIENCE & COMMERCE PAREL, MUMBAI 400 012


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INTERNATIONAL BOND MARKET Bachelor of Commerce

Financial Market

Semester V

(2015-2016)

Submitted In partial Fulfillment of the requirement for the

Award of Degree of Bachelor of Commerce Financial Market

Submitted By, JUI VINAYAK GAWADE

Roll No. - 11

Under Guidance, PROF.Shakti Chavan.

MAHARSHI DAYANAND COLLEGE OF ARTS, SCIENCE & COMMERCE PAREL, MUMBAI 400 012.


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MAHARSHI DAYANAND COLLEGE OF ARTS, SCIENCE & COMMERCE

PAREL, MUMBAI 400 012.

CERTIFICATE

This is to certify that MISS. JUI VINAYAK GAWADE of B.Com (Financial Market) Semester V (2015-2016) has successfully completed the project on INTERNATIONAL BOND MARKET under the guidance of PROF.SHAKTI CHAVAN.

Course Coordinator Principal

Project Guide/Internal Examiner External Examiner


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DECLARATION

I am MISS.JUI VINAYAK GAWADE. The student of B. com (Financial Market) Semester V (2015-2016) hereby declares that I have completed the Project on INTERNATIONAL BOND MARKET. The information submitted is true and original to the best of my knowledge.

Signature of Student

Name of Student

Miss. JUI VINAYAK GAWADE

Roll No.11


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ACKNOWLEDGEMENT

The college, the faculty, the classmates & the atmosphere, in the

college were all the favorable contributory factors right from the point

when the topic was to be selected till the final copy was prepared. It was a very enriching experience throughout the contribution from the following individuals in the form in which it appears today. We feel privileged to take this opportunity to put on record my gratitude towards them.

PROF. SHAKTI CHAVAN made sure that the resource was made available in time & also for immediate advice & guidance throughout making this project. Coordinator of our course PROF. KUNAL SONI has always been inspiring & driving force. The principal of our college DR. T.P.GHULE and our Vice-Principal Mrs. SANJEEVANI PHATAK has always been inspiring & driving force. We are thankful to Mr. SANTOSH SHINDE associated with administration part of Banking & Insurance section has been very helpful in making the infrastructure available for data entry.


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INDEX

Chapter No. Content Page No. Chapter.1 Introduction to Bond

market

8-17

Chapter.2 Features of bonds 18-21

Chapter.3 Types of bonds 22-29

Chapter.4 Investing in bonds 30-34

Chapter.5 How are the bond issued 35-39 Chapter.6 International Bond

Market

40-46

Chapter.7 The problem with an underdeveloped corporate Bond Market

47-50

Chapter.8 Returns 51-56 Chapter.9 Conclusion 57 Chapter.10 Bibliography 58


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INTERNATIONAL BOND MARKET

Executive Summary

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. Also called external bond; neither external bonds which, strictly, are neither Eurobonds nor foreign bonds would also include: foreign currency denominated domestic bonds. It can be categorised according to the currency in which it is issued. London is one of the center of the Eurobond market, with Luxembourg being the primary listing center for these instruments. Eurobonds may be traded throughout the world - for example in Singapore or Tokyo.

The first Eurobonds were issued in 1963 by Italian motorway network Autos trade who issued 60,000 bearer bonds at a value of USD250 each for a fifteen-year loan of USD15m, paying an annual coupon of 5.5%. The issue was arranged by London bankers S. G. Warburg.[5][6] and listed on the Luxembourg Stock Exchange. Their conception was largely a reaction against the imposition of the Interest Equalization Tax in the United States.[7] The goal of the tax was to reduce the US balance-of-payment deficit by reducing American demand for foreign securities. If foreign securities were denominated in dollars and not foreign currency, however, then they would not affect the US balance-of-payment deficit because Americans would not need to exchange dollars to acquire them. Clever financiers (initially based in London) realized this and the Eurobond was born. Americans could bypass the costly tax and Europeans could keep open access to US capital.


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CHAPTER 1

INTRODUCTION

Bond market

A bond is a financial security that promises to pay a fixed (known) income stream in the future Issued by governments, state agencies (municipal bonds), and corporations

Bonds are characterized by Maturity date Face, par or principal value (i.e., the notional amount typically 1000) Coupon rate number of coupon payments/ year (typically 2) Bjorn Eraker Introduction to Bond Markets Repayment types Pure discount or zero coupon bonds: Bonds that pay no interest (coupon). They sell at a discount (price below par) to provide investor with positive return.

Coupon bonds pays fixed coupon at known times. For example, A November 2021 maturity, 8% government bond will pay its owner 40 = 8% 1000=2 every April 15th and

November 15th in addition to 1000 at expiration on November 15th, 2021.

Floating rate pays variable rate coupons linked to some benchmark rate. Example: Inflation indexed bonds (I-bonds) coupon rate is determined by the level of inflation (as measured by the relative change in the CPI)

The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. Traditionally, the bond market was largely dominated by the United States, but today the US is about 44% of the market.[1] As of 2009,


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the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to Bank for International Settlements (BIS), or alternatively $35.2 trillion as of Q2 2011 according to Securities Industry and Financial Markets Association (SIFMA).

Nearly all of the $822 billion average daily trading volume in the U.S. bond market[3] takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.

An important part of the bond market is the government bond market, because of its size and liquidity. Government bonds are often used to compare other bonds to measure credit risk. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. The yield curve is the measure of "cost of funding".

Bjorn Eraker Introduction to Bond Markets Government Bonds

US government bonds are interesting because The default risk is thought of as zero (although it may not be) They are highly liquid They provide a basic benchmark for other fixed income securities

including other sovereign bonds, corporate, munis, etc.

Despite the complexity associated with the bond market, a bond is simple and it might be consider a bit boring when compared with a stock. After all, a stock represents a piece of a company's wealth. An evaluation of a stock requires an

evaluation of the entire company's worth. An ordinary bond is an agreement that merely entitles one party to make and another to receive a series of cash flows.


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While differences among forms of equity are small, there is a wide range of bonds; innovative financial engineers are creating new fixed-income securities almost continuously.

Equity markets

According to the Securities Contracts (Regulation) Act, 1956, an exchange is defined as, anybody of individuals, whether incorporated or not,

constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The SCR Act stipulates

that a stock exchange must be recognized by the government of India.

Thus, Stock Exchanges are a structured market place for the proper conduct of trading in company stocks and other securities. The stock exchanges provide services to the investors and facilitate the issue and redemption of securities and other financial instruments.

The Financial system constitutes of the money market and capital market. The capital market facilitates the transfer of small and scattered savings of the household sector into productive investment. It helps in financing the activities of corporate entities. Government and Public Sector organization. The capital market provides liquidity, marketability and the safety of investments to the investors. Properly organized and regulated capital market provides scope for substantial development for an economy, through the availability of long term funds, in exchange of financial securities.

Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock). A stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption


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of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock a market is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).

In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet.

A stock exchange is also known as the share market or the bourse is mutual organization or a corporation which mainly provides facilities for stock brokers and for various traders. A stock exchange helps traders or members to trade company stocks and various other securities. Stock exchange also provides various facilities for the issue and redemption of different securities. Stock Exchange is a place where anyone with money in his pockets can trade for shares. The Basic way of trading on the stock exchange is to open an account with a broker who has a ticket to trade on behalf of her customers on stock exchange. You can open your account with the broker either by submitting the required amount of money or shares or stocks whatever you call


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it. Every broker has different requirements for opening an account with different requirements for amounts of money that can be deposited into the account.

A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.

MAIN MARKET PLAYERS

If one is interested in investing it is valuable to know who the main players in the stock market game are. The main players in the stock market are

the exchanges. Exchanges are where the sellers are matched with buyers to both facilitate trading and to help set the price of the stock shares. As mentioned in the history section, the primary exchanges are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and several other regional exchanges like the American Stock Exchange and the Pacific Stock Exchange. Not too long ago, all of the trading was done through the traditional exchanges (like the NYSE, American and Pacific Exchanges), but today most of the stock market trading is done through the NASDAQ, which uses ECNs and other firms with access to the NASDAQ to facilitate trading.


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One of the foremost and most prominent exchanges for investing in the stock market is the New York Stock Exchange (NYSE). It is also is one of the largest stock market exchanges in the world. The NYSE is operated by the not-for-profit corporation New York Stock Exchange, Inc, with its main building located at 18 Broad Street, at the corner of Wall Street, in New York City, New York, U.S.A. It is home to some 2,800 companies whose stock is valued at nearly $15 trillion in global market capitalization. Investing your money on NYSE, unlike those on some other more "virtual" exchanges (e.g. NASDAQ); always involve face-to-face communication in a particular physical location.

There is a podium/desk on the trading floor for each of the members of the stock exchange. Exchange members interested in buying and selling a particular stock on behalf of investors meet in a predetermined spot, where a NYSE employee facilitates the stock price negotiations between buyers and sellers.

A different kind of stock market exchange arose in the later part of the 20th century and has changed the landscape of the stock market. NASDAQ, which is an acronym for National Association of Securities Dealers Automated Quotations, is a stock market run by the National Association of Securities Dealers. The Nasdaq National Market consists of over 3000 companies that have a national or international shareholder base, meet stringent financial requirements, and agree to specific corporate governance standards. It began trading on February 8, 1971 as the world's first electronic stock market. Fueled by the growth of internet stock trading, NASDAQ became the largest American stock exchange by 1999, with over half the companies traded in the United States listed. NASDAQ is made up of the NASDAQ National Market and the NASDAQ Small Cap Market. Although the market is based primarily in the United States, NASDAQ has many alliances worldwide, so that today investing in the stock market is a global activity. NASDAQ allows multiple stock market participants to trade through its electronic communications networks (ECNs)


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structure. To ensure that in chaotic stock market conditions, those placing small market orders are not ignored NASDAQ created a feature known as The Small Order Execution System (SOES).

PLAYERS IN THE CAPITAL MARKET

Basically whenever one has more than the disposable income, then individuals would either lock their savings in safe avenues like Postal savings or Term Deposit of a bank or put their money in the capital market. However, one must remember that- NO RISK, NO GAIN and MORE RISK, MORE GAIN

There are two main players:

INVESTORS:

They always do a fundamental study of the market, and invest for a longer time frame say between 3months to a year. They would like to hold the shares for some time before they would sell and make capital gains.

TRADERS: They do a technical study of the market and invest for less than a

trading session or a day. They buy in the morning and before the closing bell sell the shares.

Apart from these players some of the other players are:

1. BULL 2. BEAR 3. STAG 4. PIG 5. CHICKEN.


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Methods of issuing securities in the primary market are:

Initial public offering; Rights issue (for existing companies); Preferential issue.

INITIAL PUBLIC OFFERING

An initial public stock offering (IPO) referred to simply as an "offering" or "flotation," is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.

An IPO can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

IPOs generally involve one or more investment bank(s) s as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.


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The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include:

Best efforts contract

Firm commitment contract

All-or-none contract

Bought deal Dutch auction

Self distribution of stock

Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups.

Public offerings are primarily sold to institutional investors, but some shares are also allocated to the underwriters' retail investors. A broker selling shares of a public offering to his clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering; the purchase price simply includes the built-in sales credit.

SECONDARY MARKET

The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold.. The term "secondary market" is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the


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second market (for example, corn has been traditionally used primarily for food production and feedstock, but a second- or third- market has developed for use in ethanol production).

The secondary market for a variety of assets can vary from fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange, NASDAQ and the American Stock Exchange provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade over the counter, or by phoning the bond desk of ones broker-deale


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CHAPTER 2

FEATURES

The most important features of a bond are:

Nominal, Principal or Face Amount 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 such as a stock or commodity index, foreign exchange rate or a fund. This can result in an investor receiving less or more than his original investment at maturity.

Issue Price the price at which investors buy the bonds when they are first issued, which will typically be approximately equal to the nominal amount. The net proceeds that the issuer receives are thus the issue price, less issuance fees.

Maturity Date the date on which the issuer has to repay the nominal amount. As long as all payments have been made, the issuer has no more obligation 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 thirty years. Some bonds have been issued with maturities of up to one hundred years, and some do not mature at all. In the market for U.S. Treasury securities, there are three groups of bond maturities:

Short term (bills): maturities between one to five year; (instruments with maturities less than one year are called Money Market Instruments)


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Medium term (notes): maturities between six to twelve years; Long term (bonds): maturities greater than twelve years.

Coupon the interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout the life of the bond. It can also vary with a money market index, such asLIBOR, or it can be even more exotic. The name coupon originates from the fact that in the past, physical

bonds were issued which had coupons attached to them. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment.

Equity markets

The stock market serves as a reliable indicator the actual value of the companies that issue stocks. Stock values are based on verifiable financial data such as growth, assets, and sales figures. The stock market is considered to be a good choice for long term investments since this reliability that well-run companies should continue to grow and provide dividends for their stockholders.

Short-term investors are also given opportunities in the stock market.

Market skittishness, even without a financial basis, can cause the rapid fluctuation of prices. Investor psychology, on the other hand, can also cause the prices of the stocks to either fall or rise.

The suspicions of investors about a companys value increase can be ignited by news reports, economic conditions, and rumors. When the price of a stock either rise or fall, some investors will quickly jump on the bandwagon to cause an even faster price acceleration. Eventually though, the market will

correct itself. Savvy short-term investors who watch the market closely see these kinds of situations as great opportunities for profitable trading.


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Short-term trading is divided into 3 categories:

Position Trading Swing Trading Day Trading

(1) Position Trading:

The longest term trading style among the three is position trading? Compared with the other styles, the stocks in position trading can be held for a relatively longer period of time. Position traders are expected to hold on to their stocks for anywhere from 5 days to 6 months because they watch out for the fundamental changes in the value of the stocks. Position trading doesnt require a great deal of time since the time needed to study the stock market can be as little as 30 minutes a day and it can be done after regular work hours. A quick examination of daily reports is enough to plan trading strategies. This type of trading is ideal for those who invest in the stock market for the purpose of supplementing their income.

(2) Swing Trading:

Swing traders, when compared with position traders; hold their stocks for a shorter period of time that generally lasts only for about one to five days. In looking for stock market changes, the swing trader is more driven by the emotion rather than the fundamental value. This type of trading requires more time in researching stocks and conceptualizing strategies because the swing traders need to identify the trends in order to pick out the best trading opportunities. They tend to rely on daily and intra-day charts to plot the movements of the stocks. This type of trading usually generates a greater payback.


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(3) Day Traders:

Day trading is considered to be the riskiest way to play the stock market. This may be true for slightly uneducated traders but not for well experienced ones. Day trading involves the buying and selling of stocks in very short periods of time. It generally takes less than a day but it can be as short as a few minutes. Day traders need to stay rational and analytical to survive this type of trading. They create plots of when to get in and out of a position by relying mostly on the information that can influence the movement of the stock prices. Day

trading has to be a full-time profession since it requires paying a close attention to the different market conditions.


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CHAPTER 3

TYPES

BOND

Fixed rate bonds have a coupon that remains constant throughout the life of the bond.

Floating rate notes (FRNs) 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 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. See IO (Interest Only) and PO (Principal Only).

Inflation linked bonds, 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.


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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 (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.

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


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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.

Treasury bond, also called government bond, is issued by the Federal 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 federal government. For that reason, 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) is a new form of municipal bond authorized by the American Recovery and Reinvestment Act of 2009. Unlike traditional 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 state it is issued. Generally, BABs offer significantly higher yields (over 7 percent) than standard municipal bonds.[6]


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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.[7]

Lottery bond is a bond issued by a state, usually a European state. Interest is paid like 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.

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 programs.

The major reforms in the bond market in India

The system of auction introduced to sell the government securities.

The introduction of delivery versus payment (DvP) system by the Reserve Bank of India to nullify the risk of settlement in securities


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and assure the smooth functioning of the securities delivery and payment.

The computerization of the SGL.

The launch of innovative products such as capital indexed bonds and zero coupon bonds to attract more and more investors from the

wider spectrum of the populace.

Sophistication of the markets for bonds such as inflation indexed bonds.

The development of the more and more primary dealers as creators of the Government of India bonds market.

The establishment of the a powerful regulatory system called the trade for trade system by the Reserve Bank of India which stated that all deals are to be settled with bonds and funds.

A new segment called the Wholesale Debt Market (WDM) was established at the NSE to report the trading volume of the Government of India bonds market.

Issue of ad hoc treasury bills by the Government of India as a funding instrument was abolished with the introduction of the Ways And Means agreement.


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Types of shares

A company may have many different types of shares that come with different conditions and rights.

There are four main types of shares:

Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound up.

Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business' profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.

Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has distributable profits.

Redeemable shares come with an agreement that the company can buy them back at a future date - this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.

There are many different types of stocks which can be invested in based upon your financial position, your risk comfort level, and your investment goals. In order to determine which type to invest in, you have to first determine what you want the stock to do for you. Do you plan to hold the security long-term, or are you a day trader? Are you looking for capital gains in your investments or is


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income your main objective? How you answer these questions will give you a good idea of which type of stock you should be considering for your portfolio.

A companys stock offerings generally fall into one of two categories: common

stock or preferred stock. Common stock represents the basic equity ownership in a corporation. For total return (dividend income and capital gains), no publicly traded investment offers more potential over the long term than common stock. Stockholders are entitled to vote for directors and other important company matters. They also participate in the appreciation of share

values and in any dividends declared from corporate earnings that remain after debt obligations and preferred stock dividends are met.

Preferred stock It is an equity which has characteristics of both bonds and common stock. Because it is not debt, however, it still carries more risk than bonds. The dividends on preferred stock are usually a fixed percentage of the par, or face, value. Thus, like bonds, shares are sensitive to interest rate fluctuations. Prices go up when interest rates go down, and vice versa. Preferred dividends are not a contractual obligation of the issuer, however. Although, as stated previously, they are payable before common stock dividends, they can be skipped altogether if corporate earnings are low. Also, if the issuer goes bankrupt, though the claims of preferred stockholders come before those of common stockholders, neither will share in any liquidated assets until bondholders are paid in full, because bonds are debt. Listed below are several types of stocks which are commonly traded in the securities market. Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have a track record of paying regular dividends, and are valued by investors seeking relative safety and stability. The name comes from the blue-colored chips in the game of poker, which are typically the most valuable.


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Penny stocks are low-priced, speculative and risky securities which are traded over-the-counter (OTC); i.e. outside of one of the major exchanges. Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors who are looking for current income that

will gradually grow over the years as a way to offset inflation.

Growth stocks are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment.

Value stocks are securities which investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company.

This, by far, is not an all-inclusive list of the available classifications of stocks. Research and use all of the resources at your disposal to find the right security to fulfill your needs and meet your goals.


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CHAPTER 4

INVESTING IN BONDS

Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies and banks. 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.

Sometimes, bond markets rise (while yields fall) when stock markets fall. More relevantly, the volatility of bonds (especially short and medium dated bonds) is lower than that of 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 often higher than the general level of dividend payments. Bonds are liquid it is fairly easy to sell one's bond investments, though not nearly as easy as it is to sell stocks and the comparative certainty of a fixed interest payment twice per year 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 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. Note that this drop in the bond's market price does not affect the interest payments to


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the bondholder at all, 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, risk, sovereign and yield curve risk.

Price changes in a bond will also immediately affect mutual funds that hold these bonds. If the value of the bonds held in a trading portfolio has fallen over the day, the value of the portfolio will also have fallen. 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. A 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.


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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.


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Investing in shares

Shares are one of the four main investment types, along with cash, bonds and property. They carry risk, but they can offer the highest returns. This guide explains how they work, and what the risks can be, so you can decide whether shares might be right for you.

Before you make any decision about buying or selling shares or funds, find out as much as you can about the company or fund. Do your own research or get financial advice.

Shares (also known as equities) are like tiny fractions of a company. If you own one, you own a little bit of the company and a proportion of the companys value.

You can own shares yourself, or you can pool your money with other

people in a collective investment often known as a fund. Funds buy a selection of shares, which are chosen and managed by a fund

manager. If you put your money into funds, you dont have to do the work of choosing the individual investments.

When you own shares directly you become a shareholder, which usually means you have the right to vote on some company decisions. This doesnt happen if you invest in a fund.

Shares are bought and sold on the stock exchange. Shares from big companies are traded on the London Stock Exchange (LSE) youll hear these called listed shares and smaller companies are traded on the Alternative Investments Market (AIM).


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How investing in shares works

Investing in share mean buying and keeping them for a while in order to make money. There are two ways of getting money from shares of a company:

if the company grows and becomes more valuable, the share is worth more so your investment is worth more too

some shares pay you part of the companys profits each year, called a dividend

If you buy shares in larger, long-established companies youll probably get dividends, but you may not get rapid growth. Shares that pay regular dividends are good for getting an income or the dividends can be reinvested to grow your capital. Dividend income is taxed at a different rate from savings interest


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CHAPTER 5

HOW ARE SHARES ISSUED?

When you set up a company with share capital, you can decide on the level of share capital and its division into fixed priced shares.

A statement of capital and initial shareholdings must be delivered to Companies House on form IN01 on incorporation of the company.

This will set out:

the amount of share capital the company will have

the division of the share capital

The founders of the company must sign form IN01 and the memorandum of association and state the number of shares they want. These are then issued upon incorporation. Find form IN01 on the Companies House website (link is external).

Family or friends

You may choose to issue shares to family or friends in return for investment in your business, rather than accepting the offer of a loan from them. That way you're not obliged to make repayments. It is important to formalise any agreement with family members or friends as this can help you avoid or resolve any disputes that may arise in future. For more information see our guide on financing from friends and family.


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Employees

Employee share ownership schemes offer employees a stake in the business, encouraging loyalty and helping you to retain key staff. They also provide an incentive or reward for performance and can help recruitment. See our guide on how to set up employee share schemes.

Issued capital

A company need not issue all its capital at once. Issued capital is the nominal - rather than actual - value of the part of the share capital that has been issued to shareholders.

For example, a company that issues 500 shares at 1 each has an issued share capital of 500.

Public limited companies (plcs) must have at least 50,000 worth of issued share capital before they are allowed to trade. Initially they must satisfy this requirement by means of shares in sterling or in euro shares (and not by a combination of the two).

Once a plc has started to trade, the requirement can be satisfied by means of share capital denominated in multiple currencies (including currencies other than sterling or euros). Every share issued by a plc must be paid up at least as to a quarter of its nominal value - plus the whole of any premium from issuing the

shares at a higher price.

Further shares can be issued in the company by the directors, subject to the rules set out in the Articles of Association, but typically by being authorised to do so by ordinary resolution of the company's existing members. An exception to this is that the directors of a private company incorporated under the Companies Act 2006, which will only have one class of shares, do not need any prior


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authorisation from the company to allot shares. The directors set the price of these shares.

How bonds are issued

Introduction

When corporations or government bodies need to raise money, they may sell bonds to the public. Because this is a highly technical and complicated process, the issuing organizations usually hire special parties to do this work for them. We will examine the bond-issuing process in this tutorial.

Once an organization decides to issue bonds, how does it proceed?

How Does the Bond-Buying Process Begin?

When a corporation or government agency is considering issuing bonds--or stocks, for that matter--it usually contacts an investment bank for advice on the marketplace, the possible issuing price, and other factors. An investment bank is a firm that serves as an intermediary between the organization issuing the securities and the investors who purchase them. The bond issuer itself does not sell the bonds.

Investment bankers often begin assisting the corporation or government agency well before the bonds are actually issued. The organization's relationship with the investment banker may continue after the bonds have been issued, and the investment banker may sit on the corporation's board of directors.

Corporations and government units realize that investment banks possess knowledge and expertise they need to reach investors. Investment bankers generally have an excellent understanding of capital markets, relevant government regulations, and other factors affecting a bond issue.


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Many investment bankers also offer broker/dealer services and related financial services.

What is the process for issuing bonds? We will look at that next.

How Do Investment Bankers Issue Bonds?

In acting as an intermediary between the bond issuer and the bond buyer, the investment banker serves as an underwriter for the bonds. When investment bankers underwrite the bonds, they assume the risk of buying the newly issued bonds from the corporation or government unit; they then resell the bonds to the public or to dealers who sell them to the public. The investment bank earns a profit based on the difference between its purchase price and the selling price. This difference is sometimes called the underwriting spread.

When the investment bank works with a client corporation or government unit, it generally also prepares required documents for filing with the Securities and Exchange Commission (SEC). It also helps set a price for the issue and takes the lead in forming and managing an underwriting group--also known as a purchase group or syndicate. This syndicate spreads the risk of the new issue to a larger number of participating investment bankers and improves the likelihood of selling all of the newly issued bonds.

Sometimes the investment banker markets a new issue but does not underwrite it. The investment bank simply acts as a sales agent under a best efforts agreement, promising to do its utmost to market the bonds. The investment bank has the option to buy the bonds and usually purchases only enough bonds to meet buyer demand, receiving a commission on the bonds sold.


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After the bond issuer and the investment banker have completed and filed all necessary documents, they can begin to sell the bonds. How they locate buyers is our next topic.

How Do Issuers and Investment Bankers Locate Bond Buyers?

Investment bankers generally have a good understanding of where and how to market newly issued bonds. They may decide, for example, that they can successfully market a certain bond through advertisements in the financial press, including The Wall Street Journal and Barron's.

They usually have well-developed investment banking networks and may identify the brokers and sales forces most able to market a particular bond offering. Investment bankers sometimes have established networks with investors who may be interested in the offering; they may encourage the investors to contact brokerage houses, specifying what they want in a bond.

Investment bankers also may sell newly issued bonds through private placements to large, institutional investors like insurance companies or

government unit retirement funds. If the bonds are purchased for investment and not for resale, they do not need to be registered with the SEC. A bond that is not registered and that may not be sold in the public marketplace is called a letter bond, or letter security, since the purchaser signs a letter stating that the bonds are for investment purposes and not for resale.

Regardless of the sales channel, most newly issued bonds are sold through investment bankers


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CHAPTER 6

INTERNATIONAL BOND MARKETS

Despite the complexity associated with the bond market, a bond is simple and it might be consider a bit boring when compared with a stock. After all, a stock represents a piece of a company's wealth. An evaluation of a stock requires an evaluation of the entire company's worth. An ordinary bond is an agreement that merely entitles one party to make and another to receive a series of cash flows. While differences among forms of equity are small, there is a wide range of bonds; innovative financial engineers are creating new fixed-income securities almost continuously.

In this chapter, we will introduce a wide variety of bond types used in international bond markets. Then, we will describe how bond markets are organized around the world. Finally, we will show how tools and concepts used in international bond markets.

Introduction to International Bond Markets

Debt certificates have been traded internationally for several centuries. Kings and emperors borrowed heavily to finance their wars. In the 14th century, for example, Edward I financed his wars through bond issues launched in Italy by the then big banking families. Centuries later, the great coalition against Louis

XIV led by William of Orange was financed by a group of Dutch families operating from The Hague.

Later, the Rothschilds became famous for supporting the British war effort against Napoleon I through their European family network.

Although debt financing has always been international in nature, there is still no unified international bond market. The international bond market is divided into three bond market groups:

i. Domestic bonds. They are issued locally by a domestic borrower and are usually denominated in the local currency.


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ii. Foreign bonds. They are issued on a local market by a foreign borrower and are usually denominated in the local currency. Foreign bond issues and trading are under the supervision of local market authorities.

FUNCTION ON BOND MARKETS

Our conclusion is that credit rating agencies choose jointly a strategy relative to investigation efforts and communication policy. This strategy depends on the level of issuer default risk, as well as the experience of the agency on its market (or segment of market) and its cost structure. The function of the credit rating agency depends, in turn, on the strategy chosen.

On risky financial markets (or risky segments of financial markets), credit rating agencies choose to communicate their rating revisions lately, after any

variation in bond spreads. Their investigation efforts are low and their ratings depend on the informed investor evaluations expressed through bond spreads. Their function on such markets is to confirm (or refute) that the changes in observed spreads do indeed correspond to changes in the issuer default risks, and are not due to market fluctuations.

On low-risk financial markets (or low-risk segments of financial markets), credit rating agency strategy depends on its experience on these markets (or segments of market) and its cost structure.

When an agency wants to enter a new market and begin a new activity, it chooses a high-reliability strategy and communicates its rating revisions prior to any spread variation, in order to increase its credibility vis--vis investors. The function of the credit rating agency is to transmit information to uninformed investors concerning the default risk of the issuers.

By contrast, when its position on these markets (or segments of markets) is well set up, and if the cost discrepancy (K2-K1) is high enough compared to the


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probability of rating accuracy (eA), and if the cost of capital (mainly, the shareholder profitability requirement) is high, the agency has no longer interest to choose a high reliability strategy which appears to be too costly. A low-reliability strategy seems more adequate, provided that the agency communicates its evaluations belatedly or first through watch lists (with a low probability of error) and then through a rating action (most of time after a change in the bond spreads).

Once again, the function of the credit rating agency is actually not to transmit information, but rather to certify that the change in bond spreads do correspond to a change in the issuer default risk.

This certification function is important on bond markets, because, if the agency ratings are trustworthy, they will stop any interrogation stemming from the

uninformed investors after a change in spreads (that is, they will stop any noise trading which may be profitable to the informed investors) and they will stabilize bond prices (at a new level if the change in spreads do correspond to a change in the issuer default risk). Downgradings (or upgrading) being more informative than an inscription on a watch list, we expect the price stabilization effect of downgrading (or upgrading) to be more effective.

FUNCTIONS OF EQUITY MARKET

Although the stock exchange market has multiple functions, its main activities

are two:

To promote the savings and for them to be canalized towards of carrying through investment projects that otherwise wouldnt be possible you need that the issuing institution of the securities to be admitted for quoting. The negotiations will be done on the primary market.


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To provide liquidity to the investors. The investor can recuperate the money invested when needed. For it, he has to go to the stock exchange market to sell the securities previously acquired. This function of the stock market is done on the secondary market.

Other functions of the stock exchange market as an organization are:

To guarantee the legal and economic security of the agreed contracts.

To provide official information about the quantities that are negotiated and of the quoted prices.

To fix the prices of the securities according to the fundamental law of the offer and the demand.

Specifying a bit more and centering on the two main agents that intervene in the market, investors and companies, we could do the following classification:

Functions done by the stock exchange market in favor of the investor:

It permits him the access to the profitable activities of the big companies. It offers liquidity to the security investments, through a place in which to

sell or buy securities. It permits for the investor to have a political power in the companies in

which he invests its savings due that the acquisition of ordinary shares gives him the right (among other things) to vote in the general shareholders meetings of the company in question.

It offers the possibility of diversifying your portfolio by enlarging the field of strategy of investments due to alternative options, as could be the derived market, the money market, etc.

With respect to the function done by the stock exchange market in favor of the companies:


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It supplies them with the obtaining of long-term funds that permits the company to make profitable activities or to do determine projects that otherwise wouldnt be possible to develop for lack of financing. Also, this funding signifies a less cost than if obtained at other channels.

The securities quoted at the stock exchange market usually have more fiscal purpose advantages for the companies.

It offers to the companys free publicity, which in other way would suppose considerable expenses. The institution is objecting of attention of the media (television, radio, etc.) in case any important change in its owners (the shareholders).

Stock exchanges perform multiple functions and contribute to the economic development of the nation. It plays an important role in the economic and financial working of the various activities of enterprises, companies and government functioning. The various other functions of performed by stock market are as follows.

(1) Fund raising for business:

The Stock exchanges provide company with the facility to raise finance / capital for expansion through selling shares to the investing public. More can be raised by companies through the new issue markets i.e., primary markets and trading in financial instruments is facilitated through secondary markets. Government too can float bonds and securities and motivate more investments being channelized into productive activities.

(2) Capital formation through savings and investment:

Stock exchanges also serve as a source of capital formation for listed companies. Business entitles that are listed in a particular stock exchange can issue shares to the public and sell those shares in the market. Stock Markets


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help in accumulating the small savings of individuals and enables investments in shares and securities. This leads to a more rational allocation of resource as funds, which could have been consumed or kept in savings deposit banks, are mobilized and redirected to promote productive business activity with benefits for several economic sectors such as agriculture, commerce and industry. This results in stronger economic growth and higher national income.

(3) Investor protection of corporate governance:

New reforms and systematic regulations of the functioning of the stock exchanges ensure a healthy and transparent working of the stock markets in the country. Due to the wide and varied scope of the owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and hence, more stringent rules are imposed on the stock exchanges and the companies by the government. Thus, it is found that public companies tend to have better management records as compared to privately held companies. Yet, there has been considerable slippage in corporate governance corporate mismanagement in some known,

well documented cases. This information is well publicized by the media for investor awareness. By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on


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the part of some public companies. The dot-com bubble in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media.

(4) Governments capital rising for infrastructure development projects:

Governments, both the centre and / or State may rise bonds and borrow money from the general public in order to finance infrastructure projects. These bonds can be raised through the stock exchanges enabling members of the public to buy them, thus loaning money to the government.

(5) Mobilizing savings for investment:

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to 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.


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CHAPTER 7

THE PROBLEM WITH AN UNDERDEVELOPED CORPORATE BOND MARKET

The absence of a corporate bond market of sufficient size and independence from government interference has two principal effects. First, the effects of

misdirected government credit-allocation preferences will tend to be magnified. Second, the absence of a sizable corporate bond market will aggravate the imperfections present in any financial regulatory system. In the end, the associated inferior risk assessment by the over-sized banking system and that systems other weaknesses will tend to overwhelm, leading to productive over-capacity and non-performing loans and finally economic crisis.

1. Magnified Effects of Misdirected Government Credit-Allocation Policies Governments wishing to exercise a high degree of influence over the direction a nations economic development and growth, sometimes referred to as industrial policy, have discovered that strong control over the banking system is their most effective weapon. Projects viewed as national ambitions can then be readily funded by implementation of appropriate incentives and coercive measures. The natural evolution of an unconstrained corporate bond market can be hindered either by excessive regulation, taxation policy, or other means. This road, sometimes referred to as the Japanese growth model, is the one chosen by many Asian nations in recent decades. According to a recent report, banks hold over 60% of savings in Japan vs. less than 20% in the U.S. for example (Sapsford 1997).

An over-reaching banking system suffers from four serious problems. First, credit decisions are in the hands of relatively few decision-makers compared to the case in a well-developed bond market. In Thailand, for


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example, a large portion of total lending was done by just four banks. Second, bankers are more willing to engage in crony capitalism since bad loans can often be kept from being written down for long periods with the governments tacit or express approval - in contrast to the situation for corporate bond investors, who generally must face the music from the start. Third, bond investors have a better record than bankers in assessing risk witness the savings and loan crisis in the U.S. and the recent generous credit extension to Long Term Capital Management (see e.g. Siconolfi, Raghavan, and Pacelle 1998) to take two examples. The main reason for this is that bond investors have a more direct stake in the outcome and thus a stronger motivation for makiNg the appropriate risk adjustment. Finally, since banks are more highly levered than the typical bond investor, the systemic risk component is far greater than when the relative sizes of the banking system and the corporate bond market are more balanced.

THE ROLE OF STOCK EXCHANGE

Stock exchanges have multiple roles in the economy, this may include the following:

1).Raising capital for businesses

The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.[2]

2).Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as


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agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms.

3).Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its 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.

4).Profit sharing

Both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of

profitable businesses.

5).Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the early 2000s, and


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the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media.

6).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.

7).Government capital-raising for development projects

Governments at various levels may decide to borrow money in order 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 to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.


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CHAPTER 8

RETURNS

DIVIDEND

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of this reinvestment as a dividend to shareholders. Distribution to shareholders can be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase.

A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholders' equity section on the company's balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense.

Cash dividends are the most common form of payment and are paid out in currency, usually via electronic funds transfer or a printed paper check. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. This is the most common method of sharing


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corporate profits with the shareholders of the company. For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is 50 sence per share, the holder of the stock will be paid GBP 50. Dividends paid are not classified as an expense, but rather a deduction of retained earnings. Dividends paid does not show up on an income statement but does appear on the balance sheet.

Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing corporation, or another corporation (such as its subsidiary corporation). They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra shares).

Nothing tangible will be gained if the stock is split because the total number of shares increases, lowering the price of each share, without changing the market

capitalization, or total value, of the shares held. (See also Stock dilution.)

Stock dividend distributions are issues of new shares made to limited partners by a partnership in the form of additional shares. Nothing is split, these shares increase the market capitalization and total value of the company at the same time reducing the original cost basis per share.

Stock dividends are not includable in the gross income of the shareholder for US income tax purposes. Because the shares are issued for proceeds equal to the pre-existing market price of the shares; there is no negative dilution in the amount recoverable.

Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of assets from the issuing corporation or another corporation,

such as a subsidiary corporation. They are relatively rare and most frequently


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are securities of other companies owned by the issuer, however they can take other forms, such as products and services.

Interim dividends are dividend payments made before a company's Annual General Meeting (AGM) and final financial statements. This declared dividend usually accompanies the company's interim financial statements.

Other dividends can be used in structured finance. Financial assets with a known market value can be distributed as dividends; warrants are sometimes distributed in this way. For large companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. The new shares can then be traded independently.

Dividend dates

Any dividend that is declared must be approved by a company's board of directors before it is paid. For public companies, there are four important dates to remember regarding dividends. These are discussed in detail with examples at the Securities and Exchange Commission site

Declaration date is the day the Board of Directors announces its intention to pay a dividend. On this day, a liability is created and the company records that liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.

In-dividend date is the last day, which is one trading day before the ex-dividend date, where the stock is said to be cum dividend ('with [including] dividend'). In other words, existing holders of the stock and anyone who buys it


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on this day will receive the dividend, whereas any holders selling the stock lose their right to the dividend. After this date the stock becomes ex dividend.

Ex-dividend date (typically 2 trading days before the record date for U.S. securities) is the day on which all shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. This is an important date for any company that has many stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be paid the dividend easier. Existing holders of the stock will receive the dividend even if they now sell the stock, whereas anyone who now buys the stock will not receive the dividend. It is relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly equal to the dividend paid. This reflects the decrease in the company's assets resulting from the declaration of the dividend. The company does not take any explicit action to adjust its stock price; in an efficient market, buyers and sellers will automatically price this in.

Book closure Date Whenever a company announces a dividend pay-out, it also announces a date on which the company will ideally temporarily close its books for fresh transfers of stock.

Record date Shareholders registered in the stockholders of record on or before the date of record will receive the dividend. Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.

Payment date is the day when the dividend cheques will actually be mailed to the shareholders of a company or credited to brokerage accounts.


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COUPON

A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.

Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond's face value. For example, if a bond has a face value of $1,000 and a coupon rate of 5%,

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