Topic 1.pptx - An Overview of Financial System Components...

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An Overview of Financial System
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Components of Financial System Money Financial Instruments Financial (market) instruments are written legal obligations of one party to transfer something of value, usually money, to another party at some future date, under certain conditions. Stocks, loans, insurance all are examples of financial instruments. The marketable financial instruments are called securities. Financial Institutions Financial institutions are business organizations that mobilise and act as depositories of savings, purveyors of credit or finance, and provide various financial services like providing loans and advances, acquisition of shares/bonds, leasing, hire-purchase, and insurance business Financial Markets Financial markets are the centres or arrangements that provide facilities for buying and selling of financial products, like stocks and bonds. The Central Bank
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Functions-financial system Mobilizes and allocates resources Monitors project performance Provides payment and settlement systems Optimum risk allocation – portfolio adjustment facility, screening of borrowers, governing operations Disseminates price related information reduces information asymmetry Helps in financial deepening and broadening
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Financial Instruments They perform three functions: i) A means of payment ii) Store of value and iii) Transfer of risk
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Characteristics that define Financial Instruments i) Liquidity, transaction costs ii) Risk of default iii) Maturity period iv) Tax status v) Volatility of prices, and vi) The rate of return
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Money Market Instruments Treasury Bills Cash Management Bills Commercial Paper Commercial Bills Certificates of Deposits Call/Notice Money Market Collateralized Borrowing & Lending Obligations
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Treasury Bills Issued by RBI to finance short term financial requirements of the Government of India Types: 91-day, 182-day and 364-day Issued at a discount and redeemed at par Participants: individuals, any banks, other financial institutions, corporate bodies, mutual funds, foreign institutional investors, state governments, provident funds, primary dealers, and foreign banks
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Treasury Bills Selling process Competitive bids Multiple price/French auction – 91, 182 and 364 Day T-bills Uniform price/Dutch auction – 91-Day T-bills Non-competitive bids Advantages highly liquid negotiable securities offer risk free investment provide assured reasonable yield, and eligible for inclusion in the securities for SLR.
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Example: Auction Announcement
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Example: Auction Result
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Cash Management Bills CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
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