1. Who participates in the Capital Markets? Define capital market instruments an
ID: 2731835 • Letter: 1
Question
1. Who participates in the Capital Markets? Define capital market instruments and list the major instruments. What is a STRIP and what is it used for?
2. There are plenty of reasons to consider investing in emerging markets, which include the ability to diversify a portfolio, take advantage of asset allocation models, potentially higher expected returns and yields. U.S corporations often find diversifying their revenue streams as a key strategy to remaining profitable, with foreign territories offsetting domestic losses.
There are some valid risks which exists even in established markets, such as geo-political events. Liquidity could also be an issue.
Which of the emerging countries do you feel merit investment?
Explanation / Answer
PARTICIPANTS OF CAPITAL MARKET
Capital Market is the market from where individuals, companies and govt. can long term financing by engaging in buying and selling of securities. Capital Market comprises of Primary Market and Secondary Market. In primary market, newly issued stocks and bonds are exchanged and in the secondary market trade of existing stocks and bonds take place.
Capital Market can be divided into Bond Market and Stock Market. In Bond Market, buying and selling of newly issued and existing bonds takes place. In Stock Market, exchange of newly issued and existing shares or stocks is carried out.
The participants of capital market are mainly those who have a surplus of funds and those who have a deficit of funds. The persons having surplus money want to invest in capital market in hope of getting high returns on their investment. On the other hand, people with fund deficit try to get financing from the capital market by selling stocks and bonds. These two kinds of activities keep the capital market going.
Capital Market is characterized as the provider of long-term financing. The instruments used for this long-term financing are equity instruments, insurance instruments, derivative instruments and especially bonds.
Capital market instruments are essentially classified into
a. Primary market instruments;
b. Secondary market instruments; and
c. Derivatives.
Following are the modes of approaching capital markets:
a. Equity shares;
b. Preference shares;
c. Debentures / Bonds;
d. GDRs;
e. ADRs;
f. Derivatives, etc
STRIPS were first introduced by investment dealers in the U.S. in the 1960s. They were initially created by physically stripping the paper coupons from bearer bonds and selling them as separate securities. The disadvantages of bearer bonds, such as the investor being unable to receive an interest payment if the coupon was lost or stolen, led to issuing STRIPS in electronic book-entry form.
STRIPS are simply bonds that have had the interest payments stripped away and sold separately, while the principal amount is still paid out at maturity. However, STRIPS are still backed by the full faith and credit of the U.S. government, even though they have been disassembled
2.Any investment in stocks or bonds comes with the following types of risks:
Market risk
Industry Risk
Regulatory Risk
Business Risk
The market risk defines the overall risk involved in the capital market investment. The stock market rises and falls depending on a number of issues. The collective view of the investors to invest in a particular stock or bond plays a significant role in the stock market rise and fall. Even if the company is going through a bad phase, the stock price may go up due to a rising stock market. While conversely, the stock price may fall because the market is not steady even if the investor’s company is doing well. Hence, these are the market risks that the stocks investors generally face.
The industry risk affects all the companies of a certain industry. Hence the stocks within an industry fall under the industry risk. The regulatory risk may affect the investors if the investor’s company comes under the obligation of government implemented new regulations and laws. The business risk may affect the investors if the company goes through some convulsion depending on management, strategies, market share and labor force.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.