• Money market instruments.

• Capital market instruments.

• Hybrid instruments.
• The money market can be defined as a market for
short-term money and financial assets that are near
substitutes for money. The term short-term means
generally a period upto one year and near substitutes
to money is used to denote any financial asset which
can be quickly converted into money with minimum
transaction cost.
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
• Call/Notice money is the money borrowed or lent on
demand for a very short period.
• When money is borrowed or lent for a day, it is known as
Call (Overnight) Money.
• Intervening holidays and/or Sunday are excluded for this
purpose.
• Thus money, borrowed on a day and repaid on the next
working day, (irrespective of the number of intervening
holidays) is "Call Money". When money is borrowed or lent
for more than a day and up to 14 days, it is "Notice Money".
No collateral security is required to cover these transactions.
• Inter-bank market for deposits of maturity beyond
14 days is referred to as the term money market.
• The entry restrictions are the same as those for
Call/Notice Money except that, as per existing
regulations, the specified entities are not allowed to
lend beyond 14 days.
• Treasury Bills are short term (up to one year)
borrowing instruments of the union government.
• It is an IOU of the Government.
• It is a promise by the Government to pay a stated
sum after expiry of the stated period from the date of
issue (14/91/182/364 days i.e. less than one year).
• They are issued at a discount to the face value, and
on maturity the face value is paid to the holder.
• The rate of discount and the corresponding issue
price are determined at each auction.
• Certificates of Deposit (CDs) is a negotiable money
market instrument and issued in dematerialized
form or as a Usance Promissory Note, for funds
deposited at a bank or other eligible financial
institution for a specified time period.
• Guidelines for issue of CDs are presently governed
by various directives issued by the Reserve Bank of
India, as amended from time to time.
• CDs can be issued by (i) scheduled commercial banks
excluding Regional Rural Banks (RRBs) and Local Area
Banks (LABs); and (ii) select all-India Financial Institutions
that have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.
• Banks have the freedom to issue CDs depending on their
requirements. An FI may issue CDs within the overall
umbrella limit fixed by RBI, i.e., issue of CD together with
other instruments viz., term money, term deposits,
commercial papers and intercorporate deposits should not
exceed 100 per cent of its net owned funds, as per the latest
audited balance sheet.
• CP is a note in evidence of the debt obligation
of the issuer.
• On issuing commercial paper the debt
obligation is transformed into an instrument.
• CP is thus an unsecured promissory note
privately placed with investors at a discount
rate to face value determined by market forces.
• CP is freely negotiable by endorsement and
delivery.
• A company shall be eligible to issue CP provided –
a. the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore;
b. the working capital (fund-based) limit of the company
from the banking system is not less than Rs.4 crore and
c. the borrowal account of the company is classified as a
Standard Asset by the financing bank/s.
• The minimum maturity period of CP is 7 days. The
minimum credit rating shall be P-2 of CRISIL or such
equivalent rating by other agencies. (for more details visit
www.indianmba.com faculty column)
• The capital market generally consists of the
following long term period i.e., more than one year
period, financial instruments;
• In the equity segment Equity shares, preference
shares, convertible preference shares, non-
convertible preference shares etc and in the debt
segment debentures, zero coupon bonds, deep
discount bonds etc.
TYPES OF CAPITAL: EQUITY CAPITAL
• Equity capital represents ownership capital, as equity
shareholders collectively own the company. They enjoy the
rewards and bear the risks of ownership. Their liability is
limited to their capital contribution.
• Rights and Positions of Equity Shareholders:
- Right to Income
- Right to Control
- Pre-emptive Right
- Right in Liquidation
 Shareholder Voting:
- Majority Rule Voting
- Proportionate Rule Voting
ADVANTAGES AND DISADVANTAGES OF EQUITY CAPITAL
• ADVANTAGES:
- There is no compulsion to pay dividends. If the firm has insufficiency of cash it can
skip equity dividends without suffering any legal consequences.
- Equity capital has no maturity date and hence the firm has no obligation to
redeem.
- Because equity capital provides a cushion to lenders, it enhances the
creditworthiness of the company. In general, other things being equal, the larger
the equity base, the greater the ability of the firm to raise debt finance on
favourable terms.
- Presently, dividends are tax-exempt in the hands of investors. The company paying
equity dividend, however, is required to pay a dividend distribution tax of 12.5
percent.
 DISADVANTAGES:
- Sale of equity shares to outsiders dilutes the control of existing owners.
- The cost of equity capital is high, usually the highest. The rate of return required by
equity shareholders is generally higher than the rate of return required by other
investors.
- Equity dividends are paid out of profits after tax, whereas interest payments are
tax-deductible expenses. This makes the relative cost of equity more.
- The cost of issuing equity shares is generally higher than the cost of issuing other
types of securities.
 INTERNAL ACCRUALS
• The internal accruals of a firm consist of
depreciation charges and retained earnings.
• Retained earnings are that portion of equity
earnings (profit after tax less preference dividend)
which are ploughed back in the firm.
• Because retained earnings are the sacrifice made by
the equity shareholders, they are referred to as
internal equity.
ADVANTAGES AND DISADVANTAGES OF INTERNAL
ACCRUALS
• ADVANTAGES:
- Retained earnings are readily available internally. They do not require
talking to outsiders.
- Retained earnings effectively represent infusion of additional equity in
the form. Use of retained earnings, in contrast to external equity,
eliminates issue costs and losses on account of underpricing.
- There is no dilution of control when a firm relies on retained earnings.
- The stock market generally views an equity issue with skepticism.
Retained earnings, however, do not carry any negative connotation.
 DISADVANTAGES:
- The amount that can be raised by way of retained earnings may be
limited. Quantam of retained earnings tends to be highly variable
because companies typically pursue a stable dividend policy.
- The opportunity cost of retained earnings is quite high.
 PREFERENCE CAPITAL
• Preference capital represents a hybrid form of financing – it
partakes some characteristics of equity and some attributes
of debentures.
• It resembles equity in the following way:
- Preference dividend is payable only out of distributable
profits.
- Preference dividend is not an obligatory payment.
- Preference dividend is not tax-deductible payment.
 It resembles debentures in several ways:
- The dividend rate of preference capital is fixed.
- Preference capital is redeemable in nature.
- Preference shareholders do not normally enjoy the right to
vote.
ADVANTAGES AND DISADVANTAGES OF PREFERENCE
CAPITAL
• ADVANTAGES:
- There is no legal obligation to pay preference dividend. A company does not face bankruptcy
or legal action if it skips preference dividend.
- Financial distress on account of redemption obligation is not high because periodic sinking
fund payments are not required and redemption can be delayed without significant
penalties.
- Preferential capital is generally regarded as part of net worth. Hence, it enhances the
creditworthiness of the firm.
- Preference shares do not, under normal circumstances, carry voting right. Hence, there is no
dilution of control.
- No assets are pledged in favour of preference shareholders. Hence, the mortgageable assets
of the firm are conserved.

• DISADVANTAGES:
- Compared to debt capital, it is very expensive source of financing because the dividend paid
to preference shareholders is not, unlike debt interest, a tax-deductible expense.
- Though there is no legal obligation to pay preference dividends, skipping them can adversely
affect the image of the firm in the capital market.
- Compared to equity shareholders, preference shareholders have a prior claim on the assets
and earnings of the firm.
- Preference shareholders acquire voting rights if the company skips preference dividend for a
certain period.
 TERM LOANS
• Term loans given by financial institutions and banks have
been the primary source of long-term debt for private firms
and most public firms.
• Term loans, also referred to as term finance, represent a
source of debt finance which is generally repayable in less
than 10 years.
• They are employed to finance acquisition of fixed assets
and working capital margin.
• Features of Term Loans:
- Currency
- Security
- Interest payments and Principal Repayment
- Restrictive Covenants
ADVANTAGES AND DISADVANTAGES OF DEBT FINANCING
• ADVANTAGES:
- Interest on debt is a tax-deductible expense, whereas equity and
preference dividend are paid out of profit after tax.
- Debt financing does not result in dilution of control because debt
holders are not entitled to vote.
- Debt holders do not partake in the value created by the company as
payments to them are limited to interest and principal.
- If there is a precipitous decline in the value of the firm, shareholders
have the option of defaulting on debt obligations and turning over
the firm to debt holders.
- Issue costs of debt are significantly lower than those on equity and
preference capital.
- The burden of servicing debt is generally fixed in nominal terms.
Hence, debt provides protection against high unanticipated inflation.
- Debt has a disciplining effect on the management of the firm.
- It is generally easier for management to communicate their
proprietary information about the firm’s prospects to private lenders
than to public capital markets.
• DISADVANTAGES:
- Debt financing entails fixed interest and principal
repayment obligation. Failure to meet these commitments
can cause a great deal of financial embarrassment and even
lead to bankruptcy.
- Debt financing increases financial leverage which,
according to CAPM, raises the cost of equity to the firm.
- Debt contracts impose restrictions that limits the
borrowing firm’s financial and operating flexibility. These
restrictions may impair the borrowing firm’s ability to
resort to value-maximizing behavior.
- If the rate of inflation turns out to be unexpectedly low, the
real cost of debt will be greater than expected.
 DEBENTURES
• For large publicly traded firms, debentures are a viable
alternative to term loans.
• Debentures are instruments for raising long-term debt.
• Debenture holders are the creditors of company.
• The obligation of a company toward its debenture holders
is similar to that of a borrower who promises to pay
interest and principal at specified times.
• Features of Debentures:
- Trustee
- Security
- Interest rate
- Maturity and Redemption
- Call and Put Feature
- Convertibility
 COMPARISON OF VARIOUS SOURCES OF LONG-
TERM FINANCING
COST DILUTION RISK RESTRAINT
OF ON
CONTROL MANAGERIAL
FREEDOM

Equity Capital High Yes Nil No

Retained Earnings High No Nil No

Preference Capital High No Negligible No

Term Loans Low No High Moderate

Debentures Low No High Some

• Hybrid instruments have both the features of equity
and debenture.
• This kind of instruments is called as hybrid
instruments. Examples are
convertible debentures, warrants etc.
 WARRANTS
• A derivative security that gives the holder
the right to purchase securities (usually
equity) from the issuer at a specific price
within a certain time frame.
• Warrants are often included in a new
debt issue as a "sweetener" to entice
investors.
 OPTIONS
• A financial derivative that represents a contract sold
by one party (option writer) to another party
(option holder).
• The contract offers the buyer the right, but not the
obligation, to buy (call) or sell (put) a security or
other financial asset at an agreed-upon price (the
strike price) during a certain period of time or on a
specific date (exercise date).
• Call options give the option to buy at certain price,
so the buyer would want the stock to go up.
• Put options give the option to sell at a certain price,
so the buyer would want the stock to go down.
 CONVERTIBLE SECURITIES
• An investment that can be changed into another
form.
• The most common convertible securities are
convertible bonds or convertible preferred stock,
which can be changed into equity or common stock.
• A convertible security pays a periodic fixed amount
as a coupon payment (in the case of convertible
bonds) or a preferred dividend (in the case of
convertible preferred shares), and specifies the
price at which it can be converted into common
stock.
 FIXED DEPOSITS

• A fixed deposit (FD) is a financial

instrument provided by Indian banks which
provides investors with a higher rate
of interest than a regular savings account, until the
given maturity date.
 DERIVATIVES
• A security whose price is dependent upon or
derived from one or more underlying assets.
• The derivative itself is merely a contract between
two or more parties.
• Its value is determined by fluctuations in the
underlying asset.
• The most common underlying assets include stocks,
bonds, commodities, currencies, interest rates and
market indexes.
• Most derivatives are characterized by high leverage.
 DEBT SECURITIZATION
• Debt securitization is loan which is given from
financial institution to borrowers.
• But this debt of loan are given in the form of
security or marketable instrument.
• Suppose, A gives loan to B.
• Loan is an Fixed asset for A and it is fixed liability of
B.
• Now, B gives loan to C.
• But this loan is given in the form of marketable
instrument. Now, it is current asset of B.
 EUROEQUITY OR EURO ISSUES
• Newly public companies that want to raise more money
tend to issue this type of stock.
• Euro equity is a term used to describe an initial public
offer occurring simultaneously in two different
countries.
• The company's shares are listed in various countries
rather than where the company is based.
• This method differs from cross-listing where company
shares are listed in the home market and then listed in
a different country.
• Euro equities are sometimes European securities sold
on several national markets.