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CHAPTER 1

Securities traded in financial markets


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Learning Objectives

Describe the characteristic of a financial market.

Describe various types of government securities.

Differentiate between corporate debt and equity


securities.

Describe ways of evaluating corporate equity and debt


securities.

Explain what is meant by market efficiency and its


types.

Describe the main features of Malaysian financial


markets.

Explain the importance of global financial market.


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Chapter Outline

Financial Market -definition


Government and corporate securities
Evaluation of corporate securities
Market efficiency
Malaysian financial market
Islamic capital market

What is a financial market?


A financial market is a market where financial instruments
(or claims) are exchanged or traded.

The financial instruments are issued by entities to raise


funds with a promise to make future cash payments.
The entity that issues financial instrument and makes
promise of future payments is called the issuer.
The holder or person in possession of these instruments
is called the investor.

Characteristics of financial
markets

Meeting different investors needs


Short-term, medium, and long-term securities

Providing source of finance


Governments, municipals, and private firms

Allocation of financial resourcesHigher production and economic growth

Lenders/savers/investors
Household, firms, government, foreigner
By selling securities/ instruments ( claims on
borrowers future income or asset)

Has surplus of funds but lack of productive


opportunity

FUNDS

Financial Market
Financial exchange
and instruments are
traded

Essential to promote economic efficiency. Allow funds to move from those


who lack productive investment opportunity to those who have it
FUNDS

Borrower/issuer
Household, firms, government, foreigner
Issue securities in order to raise funds. ( promise to make future payment.)

Various types of government securities:

Federal government securities


Treasury bills
Local currency Bonds
Foreign currency bonds

Municipal government securities


General obligation Bonds
Revenue Bonds

Corporate debt and equity securities


Corporate debt securities are debt
obligation of a company.
These include:

commercial paper,
medium-term notes,
long-term bonds and
asset-backed securities

Corporate debt securities (1)


Commercial paper

It is a money market instrument .


It is a short-term unsecured financial instrument issued
by well-known high-rated companies.

Medium-term notes

It is a medium-term financial instrument.


It is an unsecured , fixed interest rate, and investment
grade debt security of well-known companies.
These notes are offered continuously to investors by a
sole agent of an issuer.

Corporate debt securities (2)


Long-term bonds
It is a long-term corporate (government) debt security.
It has a fixed or variable interest rate and maturity
ranging from 5 to 30 years.
Asset-backed securities
Asset-backed securities are long-term debt securities
that are based on underlying pools of assets.
The pool of assets might consists of current
receivables such as mortgage payment or future
receivables such as export payments.

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Corporate equity securities (1)

Common stocks (or shares) are corporate equity


securities.

Holders of equity securities are entitled to the earnings


of the companies. These earnings are distributed in the
form of dividends.

A Preference stock is another type of a corporate equity


security that pays a fixed percentage of dividend.

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Valuation of debt and equity securities

Investors seeking higher returns


continuously, use valuation models to
value corporate equity and debt securities.
These are:

Dividends Growth Model


Capital Asset Pricing Model
Arbitrage Pricing Model
Bonds Yield to Maturity

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Market efficiency and its types

An efficient market is one where the


market price of a security reflects all
available and relevant information about
the security.

Weak form
The current price reflects the information contained in all past
prices.
Semi-strong form
The current price reflects the information contained not only in
past prices but all public information (including financial statements
and news reports)
Strong form
The current price reflects all information public as well as private.

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Malaysian Financial Market

Money market which comprises of :


Inter-bank market (Islamic Inter-bank market) &
Government securities market
Capital market which comprises of :
Stock market & Corporate bond market
Islamic capital market and derivative market
which comprises of:
Islamic funds, Sukuk, Islamic forward contracts

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Capital market (1)

Capital markets are sources of long-term finance


for the Malaysian companies and government.

Capital markets refers to stock market and bond


market.
When a company issue shares for the first time to
investors, it is called an initial public offering (IPO)
on the primary market.
Investors can buy and sell already issued shares (such
as ordinary shares) in the stock exchange, which is
also called secondary market.

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Capital market (2)

Companies raise share capital from the


stock market which are in the form of
ordinary share capital or long-term loan
capital in the form of bonds or debenture
from bond market.

International capital markets are


Eurocurrency markets such as Euro
bonds, Euro loans and Euro deposits.

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Islamic capital market

Islamic financial market in Malaysia


follows Shari'ah principles in all financial
dealings.
Investors follow Shari'ah principles to
invest in Islamic funds.
Malaysian Islamic capital market has
become an important source of short-and
long-term finance for the companies and
government such as Sukuk.
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