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Feb drive 2011

Master of Business Administration - MBA Semester IV

MF0008 –Merchant Banking and Financial Services –2 Credits

(Book ID: B0857)

Assignment Set- 1 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Differentiate between capital market and money market instruments.

Q.2. Compare the marketing strategy of any financial services company with another.

Q.3 Explain the mechanism of securitization and the benefits for a company.


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Q.3 Explain the mechanism of securitization and the benefits for a company.
Securitisation has been one of the most exciting developments in fixed income markets and illustrates perfectly the dynamic and flexible nature of the market itself.Securitization of debt or asset securitization as is more often referred to, is a process by which identified pools of receivables, which are usually illiquid on their own, are transformed into marketable securities through suitable repackaging of cash flows that they generate. Securitization, in effect, is a credit arbitrage transaction that permits for more efficient management of risks by isolating a specific pool of assets from the originator’s balance sheet. Further, unlike the case of conventional debt financing, where the interest and principal obligations of a borrowing entity are serviced out of its own general cash flows, debt servicing with Asset Backed Securities (ABS) is from the cash flows originating from its underlying assets.Securitisation, as a financing technique, is concerned with trading in securities, backed by pools of mortgage loans. The securities so created are known as mortgages. Mortgages facilitate investors to purchase a fractional undivided interest in a pool of mortgage loans. Securitisation provides for a share in the income and principal payments generated by the underlying mortgages.
In securitisation, the originator sells receivables to a Special Purpose Vehicle (SPV) established to isolate the receivables and to perform other functions (e.g. restructuring of cash flows and provision of credit enhancement and liquidity support). The SPV is usually structured as a bankruptcy-remote trust or incorporated entity. The SPV finances the purchase of receivables by issuing securities (usually notes, commercial paper, bills, bonds, or preferred stock) to investors. Legal agreements delineate the rights and obligations of all parties to the transaction, including the appointment of an administrator to manage the receivables where necessary.
One or more financial institutions are usually involved in structuring and marketing the securities issued by the SPV. To facilitate investor demand, credit rating agencies assess the likelihood that the SPV will default on its obligations and assign an appropriate credit rating. Credit enhancement and liquidity support is usually obtained by the SPV to ensure a high rating for the securities.


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Q.2. Compare the marketing strategy of any financial services company with another.
Marketing strategies refer to the plan of action that the organization will have to adopt as regards its marketing mix elements are concerned. Marketing mix is defined as the elements an organization controls that can be used to satisfy or communicate with customers. The traditional marketing mix is composed of the four P’s: product, price, place (distribution) and promotion. These elements appear as are decision variables in any marketing text or marketing plan. The marketing mix philosophy implies that there is an optional mix of the four factors for a given market segment at a given point of time.
The concept of four P’s is very essential to the successful marketing of services. However, the strategies for the four P’s require some modifications when applied to services. In case of marketing of products, the 4th P i.e., Promotion include advertising, sales promotion, publicity No doubt, the promotion is important in services too, but as the employees are also involved in the ‘real time marketing’ in addition to their regulars operational roles, the promotion includes training the service delivery people, their dress, appearance etc. Moreover, in the absence of a physical product, convincing the customer about the features of the service is more challenging. At the same time, fixing the right price for the intangible $ service is a very difficult task.
Now let us try to understand the decisions that the marketer has to take regarding the Product, Price, Place and Promotion. The following sections deal with the important decisions that the manager has to take to satisfy the customer in a better way.


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Q.1 Differentiate between capital market and money market instruments.
Meaning of Money Market
Money market is a market for short term funds. We define the short term as a period of 364 days or less. In other words, the borrowing and repayment take place in 364 days or less. The manufacturers need two types of finance: finance to meet daily expenses like purchase of raw material, payment of wages, excise duty, electricity charges etc., and finance to meet capital expenditure like purchase of machinery, installation of pollution control equipment. The first category of finance is invested in the production process for a short period of time. The market where such short time finance is borrowed and lent is called money market.
Players in Money Market
A large number of borrowers and lenders make up the money market. Some of the important players are listed below.
(1) Central Government: Central Government is a borrower in the money market through the issue of Treasury Bills (T-Bills).
(2) Public Sector Undertakings: Many government companies have their shares listed on stock exchanges. As listed companies, they can issue commercial paper in order to obtain its working capital finance. The PSUs are only borrowers in the money market.
(3) Insurance Companies: Both general and life insurance companies are usual lenders in the money market. Being cash surplus entities, they do not borrow in the money market.
(4) Mutual Funds: Naturally, mutual funds invest the corpus of such schemes only in money market. They do not borrow, but only lend or invest in the money market.
(5) Banks: Scheduled Commercial Banks are very big borrowers and lenders in the money market. They borrow and lend in call money market, short-notice market, repo and reverse repo market.
(6) Corporates: Corporates borrow by issuing commercial papers which are nothing but short-term promissory notes.

Meaning of Capital Market
Capital market is a market for long-term funds. Corporates need long term funds (with a tenure of 365 days or more) for the purpose of meeting capital expenditure like buying technology, machinery, undertaking capacity expansion, installation of pollution control equipment, strategic take over of other companies etc, period of repayment may be either a very long period as much as 30 years in case of government bonds or funds raised are repayable only on the liquidation of companies as in the case of equity shares. Capital market is important for the economic development of the country. Apart from enabling corporates and government in raising huge funds, a well-developed capital market attracts foreign investors both in Foreign Direct Investment (FDI) and for portfolio investment (Foreign Institutional Investment).
Players in Capital Market
All the players in the money market are also the players in the Capital market. There are many more players in the capital market because most of the institutions have longer investment horizons or longer periods of borrowing. As the development of the capital market is directly connected to the economic development of the country, it has far more visibility than money market. The players in the capital market can be classified into A) Pure Borrowers B) Pure Investors (Lenders) C) Both Borrower and Lender.

A) Pure Borrowers: This category includes those institutions which only borrow or raise funds in the capital market by issuing securities. There are two categories of such borrowers
1) Governments:
2) Public Sector Undertakings (PSUs):

B) Pure Lenders (Investors): There is a large body of investors who pump in giant sized funds into the capital market. They come to the market seeking profitable avenues of investments. They do not raise funds from the market. Most important categories of investors are given below.
1) Insurance Companies:
2) Mutual Funds:
3) Non-Banking Financial Companies (NBFCs):
4) Provident Funds and Pension Funds:

C) Both Borrowers and Lenders: This category represents institutions that borrow whenever there are surplus investible funds. Therefore, the same category of institutions raises funds while other institutions belonging to the same category invests.
1) Commercial Banks:
2) Financial Institutions:
3) Corporates:


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