25/04/2024

JAIBB
MAFS

E Financial Markets

Functions of Financial Markets

Classifications: Money Market and

Capital Market

Banking, Security and Insurance

Market
MONETARY AND FINANCIAL SYSTEM (MAFS)
Primary Market and Secondary
MD. MIZANUR RAHMAN Market including OTC market
ACMA, DAIBB, DIB, CDCS
Cell: 01870478713 Micro-finance and micro-credit
E-mail: [email protected] market

International Financial Market.

Md. Mizanur Rahman, Cell: 01870478713 1

E Financial Markets JAIBB

MAFS
where financial instruments Financial Financial evidences of financial claims of
are traded or bought and sold. markets Instruments one party against another party.
used to facilitate the transfer
of short-term funds from
Money Different form coins, currency
individuals, corporates or
government with excess funds markets of money notes and cheques
to those with deficits funds.
market places for securities
(bonds, stocks, mortgages) Capital Other than share, debenture, sanchay
with an original maturity that markets money patra, LC, BE, PN etc
is greater than one year

Different forms of money (coins, currency notes and cheques) are financial instruments as they
show the evidence of financial claims.

Other financial instruments (other than different forms of money) are only evidencing financial
claims, but unable to be used as medium of exchange and therefore, are not money (such as share,
debenture, sanchay patra, letter of credit, bill of exchange, promissory notes etc.).

That’s why, it is said, “all forms of money are financial instruments but all financial instruments are
not money”.

Md. Mizanur Rahman, Cell: 01870478713 2

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E Financial Markets JAIBB

Interest Rate Determination
MAFS
T-bill, maturity – 90 days, Market Value – 970, Rate – Compound or non compound
Face Value – 1,000 Year – 365 / 360
Base – investment value / Face Value
30 𝐹−𝑃
Holding period yield = 3.09%
970 𝑃

Yield to maturity
Effective annual yield (1 + .0309) / = 13.13% (1 + 𝐻𝑃𝑌)
𝐹−𝑃
𝐶+
365 365 𝑛
Bond Equivalent Yield 3.09% × = 12.53% 𝐻𝑃𝑌 × 𝐹+𝑃
90 𝑑 2
360 360
Money market yield 3.09% × = 12.36% 𝐻𝑃𝑌 × Simple loan
90 𝑑
Fixed payment loan
30 360 𝐹−𝑃 360
Bank Discount yield × ×
1000 90 𝑃 𝑑 Coupon bonds

Discount bonds

Md. Mizanur Rahman, Cell: 01870478713 3

E Financial Markets JAIBB

MAFS

Money market short-term, low-risk, and very liquid. Because of the high degree of
securities safety and liquidity these securities exhibit, they are close to money.

1 usually sold in large denominations

2 very liquid and have low default risk

3 mature in one year or less from their original issue date

Md. Mizanur Rahman, Cell: 01870478713 4

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E Financial Markets JAIBB

Participants in the Money Market
MAFS
Treasury
Sells Treasury Bills (T-Bills) to finance government debt.
Department

Central Buys and sells treasury securities for the purpose of

Bank controlling money supply.

Commercial Buy T-Secs, sell certificate of Deposit, avail Repo, make

Banks short-term loans; offer money market services to individuals.

Business / Buy and sell various money market securities as a part of

Corporates cash management.

Individuals Buy and sell various money market securities

Investment
Trade on behalf of commercial accounts
companies

Finance
Raising funds and lending funds to small business
companies

Md. Mizanur Rahman, Cell: 01870478713 5

E Financial Markets JAIBB

Money Market Instruments
MAFS

Issued with a bank-issued security that

Certificate
full guarantee by Treasury documents a deposit and
of Deposits
the Bangladesh Bills specifies the interest rate
Government
(CD) and the maturity date

one financial institution

unsecured promissory notes,
sells securities to another
issued by corporations, that Commercial Repurchase
with an agreement to
mature in no more than 270 Paper Agreement
repurchase the securities at
days
a specified date and price

Short-term finance
repayable on demand,
with a maturity Call and Banker’s a bank accepts responsibility
period of 1 day to 15 Notice Money Acceptance for a future payment
days, used for inter-
bank transactions

Md. Mizanur Rahman, Cell: 01870478713 6

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E Financial Markets JAIBB

Money Market Instruments
MAFS
The Government of the People’s Republic of Bangladesh issues through auction the
Treasury Bills of 91-day,182-day & 364-day maturity. They are issued at a discount and
redeemed at the face value at maturity.

Annualized Yield on T-Bill (𝒀𝑻 ) 𝒀𝑻 =

𝑺𝑷 𝑷𝑷
×
𝟑𝟔𝟓
𝑷𝑷 𝒏

An investor purchases a T-bill, six-month (182-day) maturity and $10,000

par value for $9,600. If this T-bill is held to maturity, what is its yield?
Treasury
Bills Suppose the investor plans to sell the T-bill after 120 days and forecasts a
selling price of $9,820 at that time. The expected annualized yield based
on this forecasts is

Md. Mizanur Rahman, Cell: 01870478713

E Financial Markets JAIBB

Money Market Instruments
MAFS
Step 1: Sale Step 2: Buy back

Cash BDT 80 Cash BDT 80

Investor Investor
or lender Borrower Borrower
or lender
Asset Collateral Asset Collateral
BDT 100 BDT 100

An investor initially purchased securities at a price (P) of $9,852,217,

Repurchase
with an agreement to sell them back at a price (F) of $10,000,000 at the
Agreement
end of a 60-day period.

, , . , ,
Repo rate = × = ×
. , ,

= 0.09 = 9%

Md. Mizanur Rahman, Cell: 01870478713 8

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E Financial Markets JAIBB

Money Market Instruments
MAFS
If an investor purchases 30-day commercial paper with a par value of
$1,000,000 for a price of $990,000, the yield on commercial paper

, , . , ,
𝑌 = × = × = 0.1212 = 12.12%
. , ,

The price of 182-day commercial paper is $7,840. If the

annualized yield is 4.04%, what will the paper pay at maturity?

Commercial $
Paper 𝑌 = × .0404= ×
$

, ,
.0404= 365F − 2,861,600= 57,012.48
, ,

365F = 57,012.48 + 2,861,600 F= 2,918,612.48/365

= $7,996.2

Md. Mizanur Rahman, Cell: 01870478713 9

E Financial Markets JAIBB

Money Market Instruments
MAFS

The price of $8,000 face value commercial paper is $7,930. If

the annualized discount rate is 4%, when will the paper
mature?

Solution: Let n = when the paper matures

𝑌 = ×

Commercial .04 =
$ $
×
Paper $

$
.04 = ×
$

,
.04=

317.2n= 25550

n= 25550/317.2= 81 days

Md. Mizanur Rahman, Cell: 01870478713 10

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E Financial Markets JAIBB

Capital Market Trading
MAFS

Primary Market Secondary Market

where new issues of stocks where the sale of previously
and bonds are introduced issued securities takes place

Organized exchanges Over the-counter exchanges

Md. Mizanur Rahman, Cell: 01870478713 11

E Financial Markets JAIBB

Capital Market
MAFS

Debt part Equity Part represents

Bond Market Stock Market ownership
securities that represent a debt
owed by the issuer to the investor

Common Stock Preferred stock

Convertible Treasury Bonds

Agency Bonds
Non Convertible
Cumulative Non Cumulative
Municipal Bonds

Corporate Bonds

Secured Bonds Unsecured Bonds Subordinated Variable-rate bonds Junk Bonds

debentures

Md. Mizanur Rahman, Cell: 01870478713 12

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E Financial Markets JAIBB

Bond Terminology
MAFS

Coupon interest rate stated annual interest rate on the bond. usually fixed for the life of bond

Current yield Coupon interest payment divided by the current market price of the bond

Face amount Maturity value of the bond. Face amount is synonymous with par value

Indenture Contract that accompanies a bond and specifies the terms of loan agreement

Market rate Interest rate currently in effect in the market for securities of like risk and maturity

Maturity Periods until the bond matures and the holder is paid the face amount

Yield to maturity The yield at the current market price and held until maturity

Md. Mizanur Rahman, Cell: 01870478713 13

E Financial Markets JAIBB

Bond Yield Calculations
MAFS
Current Yield approximation of the yield 𝟏 𝑭
P=F (𝟏 + 𝒓)𝒏 =
to maturity on coupon bonds (𝟏 𝒓)𝒏 𝑷
𝑪 𝑖 = current yield
𝒊𝒄 = 𝑷 𝑭 𝒏
𝟏 𝟏
𝑭 𝒏
P = price of the coupon bond 1+r = r= -1
𝑷 𝑷

C = yearly coupon payment

What is the discount yield for a five-
What is the current yield for a bond that year bond that was purchased for $60
has a par value of $1000 and a coupon and has a face value of $100?
interest rate of 10.95%? The current 𝟏
𝑭 𝒏
market price for the bond is $921.01. r= -1
𝑷
.
𝑖 = 𝑖 = = 11.89% 𝟏
.
𝟏𝟎𝟎 𝟓
r= -1
𝟔𝟎
Here, P = $921.01
C = $1,000 × 10.95% = 109.50 r = 10.76%

Md. Mizanur Rahman, Cell: 01870478713 14

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E Financial Markets JAIBB

Bond Yield Calculations
MAFS
Bank Discount yield

𝑭 𝑷 𝟑𝟔𝟎
𝒓𝒅 = × it uses the percentage gain on the face
𝑭 𝑫𝒂𝒚𝒔 𝒕𝒐 𝒎𝒂𝒕𝒖𝒓𝒊𝒕𝒚
value of the bill, (F – P)/F, rather than the
𝑖 = Discount yield percent gain on the purchase price of the
F = Face value of the discount bond bill, (F – P)/P, used in calculating the yield
to maturity
P = Purchase price of discount bond
it puts the yield on an annual basis by
What is the discount yield (or yield on taking the year to be 360 days long rather
a discount basis) for a one-year bond than 365 days.
that was purchased for $875 and has
a face value of $1000?
𝟏,𝟎𝟎𝟎 𝟖𝟕𝟓 𝟑𝟔𝟎
𝒓𝒅 = ×
𝟏,𝟎𝟎𝟎 𝟑𝟔𝟓
𝟏𝟐𝟓 𝟑𝟔𝟎
𝒓𝒅 = ×
𝟏,𝟎𝟎𝟎 𝟑𝟔𝟓

𝒓𝒅 = 12.33%

Md. Mizanur Rahman, Cell: 01870478713 15

E Financial Markets JAIBB

Bond Yield Calculations
MAFS
Coupon Bonds
Find the price of a 10% coupon bond with a
𝟏 (𝟏 𝒓) 𝒏 𝑭 face value of $1000, a 12.25% yield to
P= C +
𝒓 (𝟏 𝒓)𝒏 maturity, and eight years to maturity.

𝒓 𝟐𝒏 ( . )
P=
𝑪 𝟏 (𝟏
𝟐
)
+
𝑭 P = 100 +
𝒓 . ( . )
𝟐 (𝟏 𝒓)𝒏
𝟐

( . )
P = 100 +
. ( . )

P = 323.8718 + 396.7429

P = 492.4547 + 396.7429

P = 889.20

Md. Mizanur Rahman, Cell: 01870478713 16

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E Financial Markets JAIBB

Equity
MAFS
𝑫𝒊𝒗𝟏 𝑷 𝑫
One period valuation 𝑷𝟎 = + 𝟏 𝑷𝟎 = Gordon Growth Model
(𝟏 𝒌𝒆) (𝟏 𝒌𝒆)
𝒌𝒆
What is the yield to maturity on a bond 𝑫𝟎 (𝟏 + 𝒈) 𝑫𝟏
that has a price of $2,000 and pays $100 of 𝑷𝟎 = 𝑷𝟎 =
𝒌𝒆 − 𝒈 𝒌𝒆 − 𝒈
interest annually forever?
𝟏𝟎𝟎 Find the current market price of Coca-cola
𝒌𝒆 = = 5% stock assuming dividends grow at a
𝟐,𝟎𝟎𝟎
constant rate of 10.95%, Do = $1.00, and
the required return is 13%.
1.00 (1 + 0.1095)
P =
0.13 − 0.1095
1.1095
P =
0.0205

P = $54.12

Md. Mizanur Rahman, Cell: 01870478713 17

E Financial Markets JAIBB

Equity
MAFS
Price Earnings valuation PE ratio =

A higher than average PE may mean that the market expects earnings to rise in the
future. This would return the PE to more normal level.
A high PE may alternatively indicate that the market feels the firm’s earnings are very
low risk and is therefore willing to pay a premium for them.

𝒑
𝑷= ×E
𝑬

The average industry PE ratio for The average industry PE ratio for Hotels
restaurants similar to Applebee’s pub similar to Shangri-La hotel Chain is 37.
restaurant chain, is 23. What is the What is the current price of Shangri-La’s,
current price of Applebee’s earnings if earnings per share (EPS) are projected
per share are projected to be $1.13? to be Tk. 1.16?

C= ×E C = 23 × 1.13 = $26 C = 37 × 1.16 = $42.92

Md. Mizanur Rahman, Cell: 01870478713 18

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E Financial Markets JAIBB

Yield to Maturity and the Yearly MAFS
Payment on a Fixed-Payment Loan
You decide to purchase a new home and need a $100,000 mortgage. You take out a
loan from the bank that has an interest rate of 7%. What is the yearly payment to
the bank to pay off the loan in twenty years?
𝐴 1
𝑃= 1−
𝑟 (1 + 𝑟)

𝐴 1
=𝑃 ÷ 1−
𝑟 (1 + 𝑟)

𝐴 1
= 100,000 ÷ 1 −
0.07 (1 + 0.07)

= 100,000 ÷ 0.741581
.

= 100,000 ÷ 0.741581
.

𝐴 = 134847.04 × 0.07 = 9, 439.29

Md. Mizanur Rahman, Cell: 01870478713 19

E Financial Markets JAIBB

Real vs nominal interest rate
MAFS

Nominal Nominal Interest rate refers to the interest rate without adjusting inflation. Suppose
interest rate you deposit Tk 10,000 at the rate of 10%. Nominal interest rate is 10%.

Inflation Inflation is an increase in the general price level of goods and services in an
economy. When the general price level rises, each unit of currency buys fewer
goods and services; consequently, inflation corresponds to a reduction in the
purchasing power of money.

Real interest The interest rate that is adjusted by subtracting change in price
rate level(inflation). Real interest rate more accurately reflects the true cost of
borrowing. Real interest rate= Nominal interest rate - inflation

Md. Mizanur Rahman, Cell: 01870478713 20

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E Financial Markets JAIBB

International Financial Market
MAFS

Foreign
a market where exchange between national currencies takes place
Exchange Market

Euro Currency currency of one country deposited, borrowed and traded in

Market another country

Euro Security Security paper floated (for raising fund) in one country, but
Market denominated in the issuing country’s currency.

International security papers floated by the outsiders but denominated in local

Security Market currency

Foreign Exchange a market where FEX derivative products (a special product

Derivative Market created out of a core product) are traded.

Md. Mizanur Rahman, Cell: 01870478713 21

E Financial Markets JAIBB

International Financial Market
MAFS

Exchange Rate price of a national currency

valued as a foreign currency

Fixed Exchange Flexible/floating Managed floating Pegged Exchange

Rate Exchange Rate Exchange Rate Rate
exchange rates are it is dependent on the combination of the home currency’s value
either held constant or market forces of fixed (managed) and is pegged to one
allowed to fluctuate supply and demand. floating exchange rate foreign currency
only within very There is no systems. Under this Although the home
narrow boundaries. A intervention of the system the central currency’s value is
fixed exchange rate central banks or the banks intervene or fixed in terms of the
system requires central government in the participate in the foreign currency to
bank intervention in floating exchange rate purchase or selling of which it is pegged, it
order to maintain a system. the foreign currencies. moves in line with
currency’s value within that currency against
narrow boundaries. other currencies

Md. Mizanur Rahman, Cell: 01870478713 22

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