CAPITAL MARKET

INSTRUMENTS
AND
MORTAGES AND
LINES OF CREDIT
INTRODUCTION:
 The capital market is the market for securities
where companies and the government can rise
long term fond.
 It is a place where buyers and sellers of securities
can enter into transactions to purchase and sell
shares, bonds and debentures.
EQUITY SHARES
According to the Companies Act 1956 equity shares
are that part of the share capital of the company,
which are not preference shares.
They are called as ordinary shares or common stock
or voting share.
These shareholder are the real owner of the
company.
The return on equity shares depends on the
performance profitability of the company.
Merits of Equity Shares

 A permanent source of finance to the company.

 No fixed rate of dividend.
 Easy liquidity and marketability.

Limitations of Equity Shares

 No guarantee on returns to shareholders.
 Loss of managerial control.
PREFERENCE SHARES
Preference shares are known as preferred stock.
Preference share capital has two priorities i.e.,, in the
repayment of capital and payment of dividend.
Preferred stock usually carry no voting rights.
Merits of Preference Share Capital:
company's point of view:
 Hybrid security
 Absence of voting rights
 No dilution of control
 Fixed return.
investor's point of view:
 Not secured
 Not an attractive investment
 No right to participate in management

DEBENTURES
When a corporation is in need of fund in addition to
share capital it borrows money by issuing
debentures.
The debenture holder gets interest which is fixed at
the time of issue.
Merits of Debentures
 No loss of managerial control
 A flexible source of finance
 Reduces burden of tax of the company
Limitation of Debentures
  Fixed rate on interest
 Companion may have to mortgage their assets
 Not an attractive investment from company's point of
view

BONDS
Bonds are issued by public authorities, credit
institutions, companies and super national
institutions in the primary market.
A bond is a negotiable certificate which entitles the
holder of repayment of the principal sum plus
interest.
The most common process of issuing bonds is
through underwriting.
TYPES OF BONDS

 Bearer Bonds
 Registered Bonds
 Callable Bonds
 Convertible Bonds
 Zero coupon bonds
 Fixed rate bonds
Difference between
EQUITY SECURITY DEBT SECURITY
Owner of the company Creditor of the company
Get dividend only when Provides steady income to
company earns sufficient the investors
profits
Have voting rights No voting rights
Not secured Secured in nature
Share capital of the Borrowed capital of the
company company

MORTGAGES AND LINES OF CREDIT

MORTGAGE is a transfer of an interest in specific
immovable property for the purpose of securing the
payment of money advanced or to be advanced by
way of loan, an existing or future debt, or the
performance of an engagement which may give rise
to a pecuniary liability.
The transfer is called a mortgagor, the transferee a
mortgagee; the principal money and interest of
which payment is secured for the time being are
called the mortgage-money, and the instrument by
which the transfer is affected is called a mortgage-
deed.
TYPES OF MORTGAGES

 Simple Mortgage
In a simple mortgage, the possession of the
mortgaged property is not transferred from
mortgagor to the mortgagee. If the mortgagor fails
to repay the loan, the mortgagee has the right to
sell the property and recover the loan from the
sale amount.
 Mortgage by Conditional Sale
 Under such mortgage, the mortgagor apparently
sells the property of mortgagee on certain
conditions-
 On failure to repay the mortgage money before
a certain date the sale shall become absolut, or
 On condition that on such repayment of
mortgage money the sale shall become invalid,
or
 On condition that on such repayment the
mortgagee shall retransfer the property.
In such case, the mortgagee is a "mortgagee by
conditional sale".
 Usufructuary Mortgage
In a Usufructuary Mortgage, the possession of the
mortgaged property is transferred to the
mortgagee. The mortgagee receives the income
from the property (rent, profit, interest, etc.) until
the repayment of the loan. The title deeds remain
with the owner.
 English Mortgage
In an English Mortgage-
 The mortgagor binds himself to repay the
borrowed money on a certain date.
 The mortgagor transfers the property absolutely
to the mortgagee.
 But such transfer is subject to the condition that
the mortgagee will transfer the property on
repayment before the agreed date.
  Mortgage by Deposit of title of deeds
In such Mortgage, the mortgagor delivers the title
document of the property to the mortgagee with an
intention to create a security thereon. Such
mortgage is valid in towns of Kolkatta, Mumbai and
any other town as the State Government may notify
by Publication of Official Gazette.
 Anomalous Mortgage
Anomalous Mortgage is a combination of different
types of mortgages. A mortgage which does not fall
strictly into any of the above mortgages is an
anomalous mortgage.
CREDIT
Credit means someone is willing to loan you money
called principal in exchange for your promise to
repay it, usually with interest.
Interest is the amount you pay to use someone
else's money.
 The money higher the interest rate, the higher the
total amount you pay to buy something on credit.

Main advantage of using credit is that it let's you buy

something like a car or college tuition without having to
pay fort it all at one time.

COMMON TYPES OF CREDIT

Types of Credit Institution
  Credit Card  Banks, credit unions,
stores and gas stations
 Installment Loan  Banks, credit unions,
auto dealers, and other
financial institutions
 Mortgage  Banks and credit unions
 Student Loan  Banks, credit unions,
and the federal
government

Cost of Using Credit

 Using credit comes with a price.

 The biggest part of the proce is the interest rate, so it
definitely pays to shop around.
 Read the fine print of a credit card or load
application, then compare several options before
making a final choice.
 Key credit feature to compare among credit offers is
the Annual Percentage Rate (APR), which tells you
the cost of the loan per year as a percentage of the
amount borrowed.
 A low introductory interest rate advertised on a credit
offer is a "teaser" rate that usually expires in a few
months, then increases a lot.
 So what should you be looking for when you pull out
your magnifying glass:
 Annual Fee a yearly charge you pay for the
privilege of using credit.
  Credit Limit the maximum amount of credit a
lender will extend to a customer.
 Finance Charge represents the actual dollar cost
of using credit to maintain a balance.
 Organizational Fee is a charge for setting up the
loan.
 Loan Term is the length of time you have to pay
off the loan. The longer the loan, the lower your
monthly payment. But the cost of using the credit
increases because you're paying interest over a
longer period of time.
 Grace Period is the length of time you have
before you start accumulating interest. If you plan
to pay off your balance each month, make sure to
get a credit with a grace period of 25 or more
days.
 Over-time-limit-fee for spending more than your
credit limit.
 Late Fee is a penalty for making your payment
after the due date.
A growing number of credit card companies are including
something called a Universal Default clause in their
agreement. This means they can hike up your interest
rate if you make just one late payment even if that late
payment is to a different creditor like for your phone bill.

CREDIT: The Good and the Bad

 On the rewards side:
  Convenience easier and safer to have a credit
card than carry around a large amount of cash.
 Protection buying items with a credit card can
make it easier to get a refund if there's a problem
with an item you purchased.
 Emergencies you always have a way to pay for
emergency expenses like if you car breaks down.
 Opportunity to Build Credit makes it easier to
get more credit when you need it later.
 Bonuses offer bonus points such as frequent-flyer
miles or cash rebates for every peso you spend.
 On the Potential Risks Side:
 Interest automatically makes the item more
expensive than if you had just paid for it with cash.
 Overspending use credit card to live beyond your
means buying items you simply can't afford.
 Debt the amounts you borrow add up to what you
owe to lenders.
 Identity Theft when someone uses your personal
information without your permission to commit
fraud or other crimes.
4 C's of Credit

 Collateral an asset of value that lenders can take

from you if you don't repay the loan as promised.
 Capital lenders will want to know if you have items
they can sell to repay the loan.
 Capacity a pattern of rising income and steady
employment gives lenders more confidence in
offering you credit.
 Character are you trustworthy? They measure that
by looking at your credit record.