IIFCL EXAM PREPARATION
Class Notes – Module 1
Financial Markets & Instruments
India Infrastructure Finance Company Limited
Detailed Study Notes | 2024–25
These notes cover core concepts of Financial Markets & Instruments as per the IIFCL exam syllabus. Focus
areas include money markets, capital markets, debt instruments, and regulatory frameworks.
1. Overview of Financial Markets
Introduction
Financial markets are platforms where buyers and sellers participate in the trade of financial assets such
as equities, bonds, currencies, and derivatives. They facilitate the efficient allocation of capital in an
economy and are critical to economic growth and development.
Classification of Financial Markets
Market Type Instruments Traded Maturity Key Participants
Money Market T-Bills, CPs, CDs, Repo Up to 1 year RBI, Banks, MFs
Equities, Bonds,
Capital Market Long-term SEBI, FIIs, Retail investors
Debentures
Forex Market Currencies, Futures Spot & Forward RBI, Banks, Corporates
Derivatives Market Options, Futures, Swaps Variable Hedgers, Speculators
Debt Market G-Secs, Corporate bonds Medium to Long Banks, Insurance, FIs
Key Points:
■ Primary markets issue new securities; secondary markets trade existing ones.
■ SEBI regulates capital markets; RBI regulates money markets in India.
■ NSE and BSE are the two major stock exchanges in India.
2. Money Market Instruments
Treasury Bills (T-Bills)
T-Bills are short-term government securities issued by the RBI on behalf of the Government of India. They
are zero-coupon instruments, issued at a discount and redeemed at face value.
Types: 91-day, 182-day, and 364-day T-Bills. They are issued through auctions conducted by RBI and are
considered risk-free instruments.
Commercial Paper (CP)
CPs are unsecured short-term debt instruments issued by corporations to raise funds for working capital
needs. Maturity ranges from 7 days to 1 year. Eligible issuers must have a minimum credit rating of A2+
from a SEBI-registered rating agency.
Certificates of Deposit (CD)
CDs are negotiable money market instruments issued by scheduled commercial banks and select FIs
(SIDBI, NHB, NABARD, EXIM Bank). They carry a fixed maturity period ranging from 7 days to 1 year for
banks.
Repo and Reverse Repo
A Repurchase Agreement (Repo) is a transaction in which a party sells securities with an agreement to
repurchase them at a future date at a predetermined price. It serves as a collateralized short-term
borrowing mechanism.
Instrument Issuer Maturity Nature
T-Bills Government of India 91/182/364 days Sovereign, risk-free
Commercial Paper Corporates/FIs 7 days – 1 year Unsecured
Certificate of Deposit Banks/Select FIs 7 days – 1 year Negotiable
Repos Banks/RBI/Corporates Overnight to 1 year Collateralised
Call Money Banks 1 day (overnight) Interbank
3. Capital Market Instruments
Equity Instruments
■ Equity Shares: Represent ownership in a company. Shareholders have voting rights and receive
dividends after debt obligations are met.
■ Preference Shares: Hybrid instruments with preferential rights over dividends and capital
repayment. Can be cumulative, non-cumulative, redeemable, or irredeemable.
■ Rights Issue: Additional shares offered to existing shareholders at a discount.
■ Bonus Shares: Free shares issued to existing shareholders from accumulated reserves.
Debt Instruments – Bonds and Debentures
Bonds are fixed-income instruments that represent a loan from the investor to the issuer. Key parameters
include face value, coupon rate, maturity period, and yield to maturity (YTM).
Bond Type Description Example
Sovereign bonds issued by Central
Government Securities (G-Secs) GOI 7.26% 2033
Govt.
State Development Loans (SDLs) Bonds issued by State Governments Maharashtra SDL
Issued by companies; may be
Corporate Bonds Infra companies, PSUs
secured/unsecured
Infrastructure Bonds Issued for infra financing, tax benefits IIFCL, IRFC, NHB
Tax-Free Bonds Interest exempt from income tax NHAI, PFC, REC
IIFCL Relevance: IIFCL issues long-term bonds and debentures to finance infrastructure projects. It borrows
from the market through bonds guaranteed by the Government of India and lends to infrastructure
SPVs/companies at competitive rates. Understanding bond pricing, yield curves, and duration is critical.
4. Derivatives & Structured Products
Types of Derivatives
■ Forwards: OTC contracts to buy/sell an asset at a future date at a fixed price. Not standardised.
■ Futures: Exchange-traded, standardised contracts. Marked to market daily.
■ Options: Give the holder the right (not obligation) to buy (call) or sell (put) an asset.
■ Swaps: Agreement to exchange cash flows – Interest Rate Swaps (IRS) and Currency Swaps are
common in infrastructure finance.
Interest Rate Swaps in Infrastructure Finance
IRS allows one party to exchange fixed-rate interest payments for floating-rate payments (or vice versa).
Infrastructure developers often use IRS to hedge against interest rate fluctuations on long-tenor project
loans. IIFCL and other financial institutions actively manage interest rate risk through swaps.
Key Points:
■ YTM = (Annual Coupon + (Face Value – Price)/n) / ((Face Value + Price)/2)
■ Duration measures price sensitivity of a bond to interest rate changes.
■ Convexity adjusts for the non-linear relationship between bond price and yield.
■ Modified Duration = Macaulay Duration / (1 + YTM/m)
5. Regulatory Framework
Regulator Jurisdiction Key Functions
Monetary policy, bank regulation,
RBI Money markets, banking, forex
repo rate
SEBI Capital markets, securities IPO regulation, mutual funds, FPIs
IRDAI Insurance sector Investment norms for insurers
NPS regulation, investment
PFRDA Pension funds
guidelines
Budget, fiscal policy, debt
Ministry of Finance Overall financial policy
management
Key RBI Instruments: Repo Rate, Reverse Repo Rate, CRR (Cash Reserve Ratio), SLR (Statutory
Liquidity Ratio), Open Market Operations (OMOs), Market Stabilisation Scheme (MSS). These tools regulate
liquidity and money supply in the economy.
Key Points:
■ SLR: Banks must maintain a % of NDTL in liquid assets (currently ~18%).
■ CRR: Cash maintained with RBI as % of NDTL (currently ~4%).
■ Repo Rate: Rate at which RBI lends to banks (key policy rate).
■ SEBI (Issue of Capital) Regulations govern public issuances of securities.