Capital Markets Overview

Capital markets are financial markets where instruments such as stocks, bonds, currencies, and other financial assets are traded.

Intrinsic Value of Stocks

Intrinsic value of a stock is its true value. This is calculated on the basis of the monetary benefit you expect to receive from it in the future.

A stock is a financial asset that generates cash flows. Thus, intrinsic value of any asset can be defined as the present value of all the distributable cash flows the asset generates during its lifetime.
When using “present value”, all cash flows in the future have to be discounted by an appropriate discount rate or an interest rate.

Benjamin Graham and Warrant Buffett are widely considered the forefathers of value investing, which is based on the intrinsic valuation method. Graham’s book, The Intelligent Investor laid the groundwork for Warren Buffett and the entire school of thought on the topic.

The term intrinsic means the essential nature of something. Synonyms include innate, inherent, native, natural, etc.

There are different variations of the intrinsic value formula, but the most “standard” approach is similar to the net present value formula.

Sensex, BSE, NSE and Nifty Explained

BSE is short for the ‘Bombay Stock Exchange’. Founded in 1875, BSE is the first and one of the largest securities markets based out of Mumbai in India. NSE is short for the ‘National Stock Exchange’. Founded in 1972, it offers a country-wide stock market similar to BSE. While BSE is older, NSE is larger with greater daily trades and a higher turnover rate.

While BSE and NSE are stock Markets, both Sensex and Nifty are stock market indices. A stock market index summarises the movements of the market in real[1]time. A stock market index is created by grouping together similar kinds of stock. Sensex, which stands for ‘Stock Exchange Sensitive Index’, is the stock market index for the Bombay Stock Exchange. Nifty stands for ‘National Stock Exchange Fifty’ and is the index for the National Stock Exchange.

What is a debt buyback?

What is a debt buyback? Why was a program of debt buybacks not sufficient to resolve the Debt Crisis of 1980s?

Debt buyback refers to the repurchase by a debtor of its own debt, usually at a substantial discount, from the secondary market.

Situations like the COVID-19 pandemic affect markets, and in the short term, many loans get priced at a significant discount. As a result, borrowers consider such opportunities to buy back their own outstanding loans at significantly reduced prices.

Debt Crisis of 1980s: In the 1980s, highly indebted Latin American and other developing regions were unable to repay the debt, pushing the world into a debt crisis, because of which financial rescue operations became necessary.

There were several years of rescheduling and restructuring of sovereign and private sector debt, it was hoped that these countries would carry out economic reforms that would lead to economic growth which would help them to pay of their debt. However, it did not happen; on the contrary, these countries cut down spending on infrastructure, health, and education, leading to stagnant or negative growth.

In 1989, the Brady Plan was launched which allowed countries to buy back their own debt at discount in the secondary market. The success of this plan was mixed as some countries still defaulted on its Brady bonds. These bonds also exposed investors to interest rate risk, sovereign risk, and credit risk.

The period is also referred to as the “lost decade”, the crisis required a decade of negotiations and multiple attempts at debt rescheduling to resolve, which came at significant cost to America and other less-developed countries.

Useful Links

Debt Crisis of the 1980s explained.

Academic Questions on Capital Markets

Q) Nishant is a fresh MBA Graduate who got placed in a wealth advisory firm. On his first day of his induction, his manager asks him to prepare assignment any two each from money market and capital market instrument that he would advise his client to invest in. Help Nishant with his assignment.

Q) XYZ Private Limited company wants to raise fresh capital from the primary market. As a financial advisor to the firm advise the various techniques which the company
can use in order to raise fresh capital from the primary market?

Q) “In 2008 the world economy faced its most dangerous Crisis since the Great Depression of the 1930s and brought back to light the role of state intervention in
regulating regulatory market”.
a. In regard to the above statement discuss some of the reasons for state intervention in
regulation of the financial market?
b. Highlight the benefits of state intervention wrt Indian Context

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