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DEPARTEMENT OF ACCOUNTING AND FINANCE

FINANCIAL INSTITIUTION AND MARKETING


GROUP ASSIGNMENT

SECTION -3

GEARED UP BY ID NO

SAMUEL DEBEBE------------------------------------------4620

NETSANET GEMECHU---------------------------------- 4369

MIHIRET TAKELE----------------------------------------4938

MISRAKE TESHAYE -------------------------------------4873

ALEMZEWED SEBA---------------------------------------6590

RAHMET ESHETU-----------------------------------------5033

NETSANET ASEFA-----------------------------------------4446

TINSAE TEFERA------------------------------------------- 6959

SELAMAWIT TESEMA-----------------------------------4630

MERON TAMIRU-------------------------------------------6414

REDEIT SEYUOM------------------------------------------5836

PFOFFER TO INST. TIBEBU YACOB

CONTENT
1.1 FOREGN MARKET AND LOCAL MARKET
1.2 MONEYMARKET,EQUITY MARKET,CAPITAL MARKET, AND BOND
MARKET
1.3 CREDITOR, PREFERNCE SHRE HOLDER AND ORDINARY SHARE
HOLDER WITH EXAMPLES
1.4 NEGOTIABLE INSTRUMENT REPRESENTING EQUITY
1.5 SAMPLE OF PREFERNCE SHRE CERTIFICATE AND ORDINARY
SHARE CERTIFICATE
1.6 RISKS FACEDIN HOLDING FINANCIAL ASSETS
1.7 RELATION SHIP BETWEEN RISK AND RETURN

1.1 Foreign market and local market

Foreign market: is an internal or national market where the


securities of issuers not domiciled in the country the security are sold
and traded.
Local market: is an internal or national market where
securities are issued by firms and government in the
issuers home country. It is also a market where by
issuer domiciled in a country issue security and where
the securities are subsequently traded.

1.2 Money market, equity market, capital


market, and bond market.
Money market: a market through which the holder of
temporary cash surplus meet the economic unit that face
temporary cash deficit. Security traded Have low
default risk and sold in large denomination. They are
also very liquid. This market is less restricted which
allowed to compete effectively. Security traded here
Due their low risk require low interste rate payment
.security trade are also short term and highly liquid.

Equity market: A market that exist for the issuing


of investing in and the trading of equity investment.
It is also a part of capital market. In this market a
bulk of trading activity involves the buying and
selling of securities already issued rather than the
exchange of financial claim for new capitals. It is
market were equity or stock traded. It is also
largest part of capital market. it can be traded in an
organized exchange and over the counter.
Capital market: are a financial market where by longterm
debt and equity instrument are traded. Security trade
in this market have higher interest rate, this arise
due to their high risk. It can also carried out in
primary and secondary market. In secondary market in
the form of organized exchange and over the counter
(over the telephone).

Bond Markets:
Bond markets are markets in which bonds are issued and
traded. They are used to assist in the transfer of
funds from individuals, corporations, and government
units with excess funds to corporations and government
units in need of long–term debt funding. Bond markets
are traditionally classified in to three types: (1)
Treasury notes and bonds, (2) Municipal bonds, and (3)
corporate bonds.

1.3 Creditor,
preference share holders, and
ordinary share holders with examples.
Creditor: people or instituition that buy debt
security or lend money to the firm. forexample if I
borrow money from nib international bank, the bank
termed as creditor.

The main concern of creditor is to protect their


investement.
Preference shareholder:
Preference shares are those shares which carry with
them preferential rights for their holders, i.e,
preferential right as to fixed rate of dividend & as to
repayment of capital at the time of winding up of the
Company.

 Fixed rate of dividend.

 Priority as to payment of dividend.

 Preference as to repayment of capital during


liquidation of the Company. Generally preference
shareholders do not have voting right.

Ordinary shareholder:
Ordinary shares are those shares on which the payment
of dividend and capital (at the time of winding up of a
company) is made after money is paid in full on
preference shares and equity shares

 Rate of dividend is not fixed. It depends upon the


availability of profits & the discretion of the
Board of the Directors.

 Dividend is paid after payment of dividend on


equity & preference shares.

Example for preferred and ordinary share :


If preferred shares carry a Br. 100 par value with 8%
dividend rate, then each preferred shareholder is
entitled to dividend of Br 8 per year on each share
owned, provided the company declares dividend. Common
stockholders receive whatever dividends remain after
the preferred shareholders receive their stated annual
dividend.

1.4 Negotiable instrument representing equity

Negotiable instrument : are document which entitle person a sum of


money and which is transferable from one person to another by
endorsement . Are instrument that stands for or official the right to
equities . They are vendable instrument in their own right. They are
listed as follows :

 Letter of allocation: are form of option


on specific equity( ordinary share) that
offer to existing common share holder when
the firm need to raise capital in mode of
issuing common share.

 Certified transfer deeds: an instrument


of negotiation that allow us or record the
transfer of owner ship of securities or
share from one name to another or seller to
buyer. It is also a legal document that
certified the transfer of owner ship

 Share transfer receipts: is substiute to


share certificates that is given when it is
difficult to furnish cerftficate of shares.

 Balance receipts: a receipt showing the


balance of shares.

 Warrants: is a call option that give the


holder of the option the right to buy share
of the issuing company at pre-determined
price. It deviate from other option by
being issued for longer than a year. Its
also attached with bond as sweetness so as
to attract the investor .
1.5 Please try to show sample of preference share
certificate and ordinary share certificate.

 Certificate number
 transfer agent
 par value
 directors
 secretary of company
 seal
 directory of company
 witness
 authorized signature
 Name of the company
 Share class
 Name of share holder
 Date of issuance
 registerd address

Sample of preference share certificates

 share class
 authorized signature
 company name
 seal
 certificate number
 witness
 number of share
 name of share holder
 vignette
 par value
 date
 registerd address of company
 authorized signature
 1. 6 Risks faced holding financial assets
Market Risk : It is the risk that the market price
(value) of an asset will decline, resulting in a
capital loss when sold. (It is sometimes referred to as
interest rate risk.)

Reinvestment Risk: It is the risk that an investor will


be forced to place earnings from a loan or security in
to a low-yielding investment because interest rates
have subsequently fallen.

Default Risk: It is the probability that a borrower will


fail to meet one or more promised principal or interest
payments on a loan or security.

Inflation Risk : It is the risk that increases in the


general price level will reduce the purchasing power of
investor earnings from a loan or security

Currency Risk : The risk that adverse movements in the


price of one national currency vis-à-vis another will
reduce the net rate of return from a foreign
investment. (It is sometimes called exchange-rate
risk.)

Political Risk : It is the probability that changes in


government laws or regulations will reduce the
investor’s expected return from an investment.

1.7 Relationship between risk and return


Risk: is the chance of financial loss or the
variability of return associated with a given asset.

Return: is the total gain or loss experienced on an


investment over a given period of time.

 Risk and return have a trade-off relationship.


 In other word , Risk and return have a positive relationship, this
relation represented by capital market line as follows

 higher return entail higher risk. Ex. Stocks

 Lower return entail lower risk. Ex . fixed deposit like bonds


SOURCE:
 BOND MARKET: AN INTRODUCTION BY PROF. DR AP
FAURE
 FINANCIAL MARKET AND INSTITUTION FREDERIC S.
MISHIKIN STANEL G EAKINS 7EDITION
 EQUITY MARKET: AN INTRODUCTION BY PROF. DR
AP FAURE
 BANKING: AN INTRODUCTION BY PROF. DR AP
FAURE
 THE ECONOMICS OF MONEY, BANKING, AND
FINANCIAL MARKET BY FERDRIC S. MISHIKIN 7TH
EDITION
 MONEY MARKET : AN INTRODUCTION BY PROF. DR
AP FAURE
 FINANCIAL MARKET AND INSTITUTION BY JEFF
MANDURA 9TH EDITION
 HTTP//: WWW. FINANCIAL MARKET FOR
DUMMIES.COM