Glossary of Few Selected Market Terms

  • Financial Market: Markets for trading financial instruments including money, bonds, stocks, and derivative are referred to as Financial Markets.
  • Money Market: Money Market (MM) is a financial market in which only short-term debt instruments (maturity less than one year) are traded. MM is for trading of short term loans & deposits and short term financial instruments. Major players in the money market are:
    • Central Bank And Government
    • Primary Dealers/Market Makers
    • Banks
    • Non-bank financial Institution
    • Money Market Funds & Corporate Entities
    • Money Market Brokers
  • Repurchase/ Repo: A repurchase agreement is the sale of a security with a commitment by the seller to buy the security back from the purchaser at a specified price at a designated future date. A repurchase agreement can be referred as a collateralized loan, where the collateral is a security.
  • Reverse Repurchase/ Reverse Repo: A Reverse Repurchase is an agreement to purchase and resale of a security at a specific price and a specific future date. It is the mirror image of a Repo transaction. Provider of funds does Reverse Repo transaction.
  • Overnight Money Market Repo Rate: The rate at which overnight repo deals are transacted in the money market.
  • Call Money: Funds placed with a financial institution without a fixed maturity date. The money can be “called” (withdrawn) at any time. It is a form of clean borrowing / lending in the MM for short term requirements without collateral.
  • Over The Counter (OTC): A secondary market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities “ over the counter ” to anyone who comes to them and is willing to accept their prices.
  • Interbank market: A market for wholesale loans and deposits traded between banks.
  • Bid: A bid rate is the rate that a bank will wish to pay on any borrowing it makes.
  • Offer: Offer rate is the rate that a bank will want to receive on any lending it makes.
  • Primary Market: The market in which new issues of financial instruments/ securities are sold initially.
  • Secondary Market: A market for buying and selling securities in the period between their issue and maturity. A liquid secondary market enhances the attractiveness of financial instruments/securities to investors.
  • Broker: An entity that acts as an agent or go-between to bring together principals who wish to deal e.g. borrower & lenders in MM at mutually agreed prices. Brokers do not act as principals to any transaction.
  • Investor Portfolio of Securities (IPS) Account: Is a securities account of clients with Banks/FIs.
  • Corporate VS Government Bonds Bonds can be classified by the type of issuer. Corporate Bonds are issued by business entities to finance their business operations. Government or Treasury Bonds are issued by governments to finance public debt and meet the government’s expenditure. Government bonds are risk-free investments, as their payments are backed by the government. Corporate Bonds, however, are not risk-free. To compensate for the extra risk that investors are taking, corporate bonds generally offer higher returns.
  • Short term VS Long term Bonds Short term securities, referred to as Bills, are issued with tenors of up-to one year e.g. 1-month, 3-months, 6-months, 9-months or 12-months. Securities with tenor of more than one year are generally referred to as Bonds. Securities are offered in multiple tenors to cater to the needs of a diverse range of investors. Bills are generally issued at a discount to their face value, and repay the full face value at maturity. Hence, they are also called Zero-Coupon Bonds and do not involve a periodic coupon payment. Bonds, however, offer a periodic coupon payment as well as the payment of face value at maturity.
  • Fixed Rate VS Floating Rate Bonds “Fixed Rate” Bonds offer a periodic coupon payment based on a fixed rate of return e.g. 10% per annum. However, “Floating Rate” Bonds offer a coupon payment that is linked with the movement in key interest rates in the economy. Accordingly, the return on the floating rate bonds moves with the change in the benchmark rate. For example, coupon rate on a floating rate bond may be equal to the 6-month T-Bill rate + 100 bps. Therefore, holders of floating rate bonds are less exposed to market risk that may arise due to change in the interest rates.
  • Bonds / Fixed Income / Debt Securities Bonds, Fixed-income or debt securities promise either a fixed stream of income or a stream of income that is determined according to a specified formula. Floating-rate bonds promise payments that depend on current interest rates. Debt securities come in a tremendous variety of maturities and payment provisions.
    At one extreme, the money market refers to fixed-income securities that are short term, highly marketable, and generally of very low risk. Examples of money market securities are U.S. Treasury Bills.
    In contrast, the fixed-income capital market includes long-term securities/ bonds issued by government and corporations. These bonds range from very safe in terms of default risk (for example, Government securities) to relatively risky (for example, high-yield or “junk” bonds).
  • Equity, in a firm represents an ownership share in the corporation. Equity-holders are not promised any particular payment. They receive any dividends the firm may pay and have prorated ownership in the real assets of the firm. If the firm is successful, the value of equity will increase; if not, it will decrease. The performance of equity investments, therefore, is tied directly to the success of the firm and its real assets. For this reason, equity investments tend to be riskier than investments in debt securities.