Page 75 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes share in the ownership of a firm; they have the lowest-priority claim on earnings and
assets of all securities issued.
2. Money Market Securities: Highly liquid debt securities that have short-term maturity
periods and involve little or no risk of default are known as money market securities. All
money market securities are debts that mature within 364 days or less. Money market
securities are frequently issued instead of longer-term debt securities in order to avoid
long and costly formalities.

Money market securities pay continuously fluctuating rate of interest that over somewhere
between the rate of inflation and the rate paid by the long-term debt instruments.
Money market securities typically pay interest to their investors, as a discount from their
face (or maturity) values. Indian Government Treasury Bills, for instance, with a face
value of ` 1 cr. and a maturity of 90 days can be sold for ` 97 lacs, when issued by the
Treasury Department. The buyer can either hold the security for 90 days or sell it in the
active secondary market before it matures. Upon maturity, whosoever owns the
T-bill can redeem it for its face value of ` 1 cr. The ` 3 lac difference between the discounted
purchase price of ` 97 lac and the maturity value of ` 1 cr. is the interest paid to the T-bill’s
investor (or series of investors).
(i) Certificates of Deposit (CD): One of the money market securities, CD’s were innovated
by Citibank, New York in 1961. A CD is a receipt from a commercial bank for a
deposit of ` 10 lakh or more, with certain provisions attached. One of the provisions
is that the deposit will not be withdrawn from the bank before a specific maturity
date.
(ii) Banker’s Acceptances: Securities that are written when a bank inserts itself between
the borrower and the investor and accepts the responsibility for paying the loan,
thereby shielding the investor from the risk of default.

(iii) Commercial Paper (CP): Refers to the short term promissory notes issued by
”blue-chip” corporations - large, old, safe, well known, national companies like
TISCO, ONGC, SAIL, etc. The maturities vary from 5 to 270 days, and the
denominations are for ` 10 lakh or more - usually more. These notes are backed
only by the high credit ratings of the issuing corporations.
(iv) Bonds Issued by Corporations: A bond is a marketable legal contract that promises to
pay its investors a stated rate of interest and to repay the principal amount at the
maturity date. Bonds differ according to their provisions for repayment, security
pledged and other technical aspects. Bonds are the senior securities of a corporation
in the respect that in the case of bankruptcy of the corporation, the law requires that
the bondholders should be paid off before their stock investors.

3. Hybrid Instruments: A warrant is a long-term call option issued along with a bond or on
a stand-alone basis. Warrants are generally detachable from the bond, and they trade
separately. When warrants are exercised, the firms receive additional equity capital and
the original bonds remain outstanding. Warrants are ‘sweeteners’ that are used to make
the underlying debt or preferred share issue more attractive to investors.
Fully Convertible Debentures (FCDs) are bonds issued by corporations which are
convertible into common stock not too far in to the future. In order to avoid the credit
rating process, these bonds are normally converted into common stock in less than 18
months with 6, 12 and 18 months being the normal converse periods. Rate of conversion
is usually decided at the time of the issue but a price band can also be specified.
Partly convertible debentures are a combination of non-convertible debentures and fully
convertible debentures.

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