DEVELOPMENT OF DEBENTURE MARKET IN

NEPAL

A THESIS

Submitted to:

Shanker Dev Campus

Faculty of Management
Tribhuvan University
Putali Sadak, Kathmandu

For the Partial Fulfillment of the Requirements of the

Masters Degree in Business Studies (M.B.S.)

Submitted by:
Durga Prasad Dhakal
Roll No: 1606 (2059/60)
T.U. Regd: 7-1-202-0048-96
Shanker Dev Campus
Putalisadak, Kathmandu
2008
 RECOMMENDATION

This is to Certify that the Thesis

Submitted by
Durga Prasad Dhakal

Entitled

Development of Debenture Market in Nepal

Has been prepared as approved by this Department in the prescribed format of

Faculty of Management. This Thesis is forwarded for Examination.

Dr. Kamal Deep Dhakal

Mr. Kishor Maharjan
(Thesis Supervisor) (Campus Chief )

Date:
 VIVA- VOCE SHEET

We have conducted the Viva–Voce Examination of the Thesis presented by

Submitted by
Durga Prasad Dhakal

Entitled
Development of Debenture Market in Nepal

And found the thesis to be the original work of the student and written according to the
prescribed format. We recommend the thesis to be accepted as the partial fulfillment of the

requirement for the

Master's Degree in Business Studies (M.B.S.)

VIVA-VOCE COMMITTEE

Head of Research Department : -------------------------------

Member (Thesis Supervisor) : -------------------------------

Member (thesis Supervisor) : -------------------------------

Member (External Expert) : -------------------------------

Date:
 DECLARATION

I hereby declare that the work reported in this thesis entitled

"Development of Debenture Market in Nepal", submitted to Shanker
Dev Campus Faculty of Management, Tribhvan University, is my original
work done for the partial fulfillment of the requirement for the Degree of
Master of Business Studies (M.B.S.) under the guidance and supervision of
Mr. Kishor Maharjan and Mrs. Indira Rijal lecturer of Shanker Dev Campus

………………………..
Durga Prasad Dhakal
(Researcher)
Date:
 ACKNOWLEDGEMENT

This thesis "Development of Debenture Market in Nepal" has been prepared in

partial fulfillment for the degree of MBS under the supervision of Mrs. Indira
Rijal and Kishor Maharjan.

It is my privilege of getting helps and co-operation from different persons. It is

not possible to enumerate the names of all. However, it will be matter of
injustice if I forgot the names of those personalities whose valuable suggestion
and co-operation escorted to complete this thesis.

First and fore most, I would like to offer special thanks to my respected
advisors Mrs. Indira Rijal, Lecturer of Shanker Dev campus and Mr. Kishor
Maharjan lecturer of Shanker Dev Campus for their proper supervision and
suggestion. I would like to thanks Mr. Kamal Prakesh Kalathoki for their
immense co-operation during the research work of this thesis. Also I would like
to thank Dr. Mahendra Pathak professor of Tribhuvan University, Kirtipur who
helped me for the data analysis and appropriate formatting I would like to offer
my profound to all my honorable teachers and well as all the staffs of Shanker
Dev. Campus for their support at various stage of the study. I am also thankful
to the staffs of SEBO/NEPSE for providing me the related data and
information.

Finally, I would like to thank my friends, Raju and Kumar who have regularly
helped me to complete my study

Durga Prasad Dhakal

Date:
 TABLE OF CONTENTS
Page No
LETTER OF RECOMMENDATION
VIVA VOCE SHEET
DECLARATION
ACKNOWLEDGEMENT
TABLE OF CONTENTS
LIST OF TABLES
LIST OF FIGURES
ABBREVIATION
CHAPTER-I
INTRODUCTION 1-11
1.1 General background of the study 1
1.2 Introduction of Debt Securities Market of Nepal 2
1.3 Statement of the Problem 7
1.4 Research Question 8
1.5 Objectives 9
1.6 Significance of the Study 9
1.7 Limitation of the Study 9
1.8 Organization of the Study 10
CHAPTER–II
REVIEW OF LITERATURE 12-32
2.1 Conceptual Framework 12
2.1.1 Meaning of Debenture 13
2.1.2 Classification of Debentures 13
2.1.3 Meaning of Bonds 14
2.1.3.1 Classification of Bonds 15
2.1.3.2 Parties to Bond Issue 16
2.1.3.3 Document of Bond Issue 17
2.1.4 Valuation of Bond 19
2.1.4.1 Valuation of Perpetual Bond 20
2.1.4.2 Valuation of Callable Bond or Non
Zero-coupon Bond 21
2.1.4.3 Zero Coupon Bonds 21
 2.1.4.4 Yield to Maturity (YTM) 22
2.2 Review of Related Studies 23
2.2.1 Review from Journals. 23
2.2.2 Review of thesis 28
CHAPTER –III
RESEARCH METHODOLOGY 33-38
3.1 Research Design 33
3.2 Population and Sample 33
3.2.1 Rationale of Sampling 34
3.3 Sources of Data 34
3.3.1 Data Collection Techniques 34
3.4 Data Analysis Tools and Techniques 35
3.4.1 Non Parametric Statistical Tools 35
CHAPTER -IV
PRESENTATION AND DATA ANALYSIS 39-87
4.1 Analysis of Secondary Data 39
4.1.1 Position of debt securities market in the structure of Nepalese 39
4.1.2 Market scenario of corporate securities 42
4.1.3 Ownership pattern of government securities and T Bills 44
4.1.4 Trend and amount of government securities issued in Nepal. 44
4.1.4.1 Trend of Treasury Bills 48
4.1.4.2 Trend of Development Bond 51
4.1.4.3 Trend of National Saving Bonds 53
4.1.4.4 Trend of Citizen Saving Certificate 54
4.1.4.5 Trend of Special Bond 58
4.1.5 Key Characteristics and Investors of Nepalese
Corporate Debt Securities 62
4.2 Primary Data Analyses 65
4.2.1 Preference over Major Investment Alternative 67
4.2.1.1 Preference as per Size of Investor 70
4.2.2 Preference over Financial Instruments. 71
 4.2.2.1 Preferences as per size of Investors 74
4.2.2.2 Preference over Investment Sectors 75
4.2.2.3 Preferences as per size of Investors 77
4.2.3 Preferences over Investment Objectives 78
4.2.3.1 Awareness of Financial Instruments 79
4.2.3.2 Education and market information 80
4.2.3.3 Consideration for Corporate Security Investment 81
4.2.3.4 Attitude toward Government Securities 81
4.2.3.5 Attitude Toward varying risk-return Alternatives 82
4.2.3.6 Attitude towards the Development of Financial
Market Properly 83
4.3 Major Findings 83
4.3.1 Major Findings through Secondary Data 83
4.3.2 Major Findings through Primary Data 85
CHAPTER-V
SUMMARY, CONCLUSION AND RECOMMENDATIONS 88-94
5.1 Summary 88
5.2 Conclusion 89
5.3 Recommendation 90

BIBLIOGRAPHY
APPENDIXES
 LIST OF TABLES
Page No
Table:1 Position of debt Securities Market in the Structure
of Nepalese Securities Market 40

Table:2 Trend of total Government Securities from 1987 to 2006. 45

Table:3 Trend of Treasury Bills 48

Table:4 Development Bond Issued by the Government from

1987-2006 51

Table:5 Trend of National Saving Bonds 53

Table:6 Trend of Citizen Saving Certificate 55

Table:7 Trend of Special Bond 58

Table:8 Key Characteristic of Nepalese Corporate Debt. 63

Table:9 Ranks of Investment Alternatives 67

Table:10 Ranks given by size of Investors 70

Table:11 Calculation of Spearman Rank Correlation 71

Table:12 Ranks of Financial Instruments 72

Table:13 Rank made by size of Investors 74

Table:14 Ranks of Investment Sectors 75

Table:15 Ranks made by size of Investors 77

Table:16 Ranks of Investment Objectives 78

Table:17 Consideration for Corporate Security Investment 81

Table:18 Investment on Government Securities 81

Table:19 Varying Risk-Return and Preferences of Investors 82

Table:20 Attitude Towards the Development of Financial Market 83

 LIST OF FIGURES

Page No

Figure:1 Market Scenario of Corporate Securities 42

Figure:2 Instruments Wise 43

Figure:3 Trend Line of Total Government Securities 46

Figure:4 Ownership pattern of total Bonds and Treasury Bills 47

Figure:5 Trend of Treasury Bills 49

Figure:6 Ownership Pattern of Treasury Bills 50

Figure:7 Trend Line of Development Bond 52

Figure:8 Trend of National Saving Bonds 54

Figure:9 Trend Line of Citizen Saving Certificate 56

Figure:10 Ownership Pattern of Citizen Saving Certificate 57

Figure:11 Trend Line of Special 59

Figure:12 Ownership Pattern of Special Bond 61

 ABBREVIATION
BOK = Bank of Kathmandu

CB = Commercial Bank

EBL = Everest Bank Limited

HBL = Himalayan Bank Limited

IPO = Initial Primary Offering

NEPSE = Nepal Stock Exchange

NIBL = Nepal Investment Bank Limited

NICBL = Nepal Industrial and Commercial Bank Limited

NIDC = Nepal Industrial Development Corporation

NRB = Nepal Rastra Bank

SEBO = Security Exchange Board

SRSM = Shree Ram Sugar Mill

YTM = Yield to Maturity

 CHAPTER-I
INTRODUCTION

1.1 General Background of the Study

The term 'market' is place or centre where selling and buying transaction
take place or it may be just the buying and selling transaction without any
physical facility. Financial markets are centers where the people with
surplus funds interact with the business firm. These markets also provide
financial risk hedging facilities and speculative opportunities. They not
only facilitate to channelize funds systematically into various productive
operation but also provide many other services including assets pricing,
trading of derivatives such as option and futures underwriting of
securities etc.

One of the main sectors of financial market is the capital market, where
stocks, bonds and other long term securities are traded. Capital market
plays a crucial role in mobilizing a continuous flow of saving and
channeling these financial resource for expanding productive capacity in
the economy. Among these, debt securities market is crucial one because
it provides strong base for implementing monetary and debt management
process.

A debt instrument is a long term contract under which a borrower agrees

to make payments of interest and principal on specific date to the holders
of the bond. It means that debt securities represent a piece of paper as
financial claim. Debt contract such as bond and mortgage are the most
common fixed income securities although preferred stocks are also of this
type. But debt holders get interest before the stock holders get dividends.
They are no any restriction to get interest by debt holders whether the
issuing agencies suffer loss. The debt securities are of collateral based or
non collateral based, perpetual or redeemable, convertible or non
convertible types.

Now our concern are mainly about debt securities market. The debt
securities market is that types of market in which financial instruments
(mainly bond) dealing in outstanding debts are bought and sold. In other
words debts markets simply refers to the demand and supply pattern as
well a trading mechanism of debt securities. Basically the issuing
agencies and debt securities are also divided into two segments, the
primary market and secondary market. New issues are made in primary
market whereas outstanding issues are traded in the secondary market.
Again secondary market can be divided into wholesale and retail part.
The wholesale market is the market in which profession including
institutional investors trade with one another and transactions are usually
large. The retail market is the market in which the individual investors
buy and sell the debt securities.

1.2 Introduction of Debt Securities Market of Nepal

Nepal is developing country in which financial market is also at

developing stage. Nepalese capital market as well as debt securities
market has not reached its maturity stage. There is not proper exercise of
debt securities till now. We can say the history of debt securities market
started from the year 1962 A.D. when the government issued debt
securities for the first time. After that period the government has been
issued the debt securities regularly to meet is financing needs. Presently,
the public debt Act 2059 and its laws and bye laws are active in
regulating Nepalese government debt securities. While talking about the
corporate debt securities, the debt of NIDC and the debt of Bottlers Nepal
Limited are the early debt securities. The security exchange centre
involved for transaction later, when it was converted into Nepal Stock
Exchange. The transaction of government debt securities has not been
done through Nepal stock exchange. As government and corporate bodies
should go into debt securities market for required debt capital. So we can
categorize the Nepalese debt securities market as
a) Government debt securities market
b) Corporate debt securities market

a. Government Debt Securities Market

The market that deals on securities issued by the government in order to

collect fund to meet its financial needs with promises to pay a certain
percent of interest at certain period of time with predetermined maturity
period is known as government debt securities market. Government raises
fund from market to conduct the regular activities, to conduct
development programs, to recover the deficit budget etc. these securities
are as follows: -

i) Treasury Bills: Treasury bills are the short-term money market

instrument of the government. It normally matures in 91 days while
some mature in 364 days. Thus, treasury bills are issued to meet short
term financial requirement of the government. Treasury bills are sold
to the bidders in the order that one who bids with the expectation of
low interest rate. Government of Nepal initiated the process of selling
treasury bills to bank, financial institutions and individuals since
2018 and through an auction process since 2045 till, Poush 2062
government has 25,57,140 million liability on treasury bills.

ii) Development Bond: by definition, it is issued to perform the

development works it is a kind of long term government bond. It
 matures normally in five years or more. It can be used as collateral if
holder's need to take loan. It has fixed and minimum interest rate.
The payments of the interest are paid on semi-annual basis. The
income from these bonds is taxable. It is purchased by individual and
institutions. Government of Nepal initiated the process of selling
development bond since 2020. NRB issued the development bond
through the auction process first at 2062, Jestha, 19. After listing in
the security board, its transaction will be made in the NEPSE through
the brokers. Till 2062 Poush government has Rs. 19999. 214 million
liability on development bond.

iii) National Saving Bond: it is also long term bond. It has fixed
interest rate payable Simi-annually. The main holders of these bonds
are general public. Government initiated the process of selling NSB
since 2040. till 2062 Poush, government has Rs. 5576.759 million
liability on national saving bond. (Rastra Rin Khabar Patra, 2062
Chaitra)

iv) Public Saving Card: it is also a long term debt instrument of

government. The main holders of these bonds are general public as
well as organization and financial institutions. It has also fixed
interest rate and payable semiannually. It is also taxable government
bond. Government initiated the process of selling public saving card
since 2059. Till 2062 Poush, Government of Nepal has Rs. 1428.879
million liabilities on public saving card.

v) Special Bond: By definition, it is issued on special occasion when

government falls sort of funds. The government issues special bonds
to these parties to whom the government has to make payments.
Instead of paying cash, the government issues special bonds as a
 substitute of cash repayment and extends the period of payments. The
holders of this bond can be issued it a collateral to fulfill their funds
need. Normally its maturity period is 1 year and more than one years.
The main holders of these bonds are organizations and financial
institutions and interest rate is fixed. Government of Nepal initiated
the process of selling special bond since 2023. Till 2062 Poush,
Government of Nepal has Rs. 3465.627 million liability on special
bond. (Rastra Rin Khabar Patra, 2062 Chaitra)

b. Corporate Debt Securities Market:

The market deals on the debt securities issued by the corporation is

known as the corporate debt securities market. Corporate debt securities
market is very new and initial stage in Nepal. Firstly, Bottlers Nepal
issued debenture of Rs. 5 million in fiscal year 1986/87 and was
redeemed at maturity. Similarly, Shree Ram Sugar Mills Ltd has issued
debenture worth Rs. 93 million in the fiscal year 1997/98 A.D. it was
convertible in nature and having 14% coupon rate annually. But due to
insufficient public response it failed in its target. The whole money was
refunded before maturity.

While talking about involvement of banking sector in debt securities

market of Nepal, only six banks viz. , Himalayan Bank, Nepal investment
Bank, Everest Bank, Bank of Kathmandu, Nepal industrial and
commercial Bank Ltd, and Nepal SBI Bank Ltd have issued debentures.

The bonds issued by above banks have some similar features which are as
follows:
 .N Company Amounts Rs. Maturity period Coupon
(Million) rate
1 Himalayan Bank Ltd. 360 7 Years 8.5%
2 Nepal Investment Bank 300 7 7.5%
Ltd.
3 Everest Bank Ltd 300 7 6%
4 Bank of Kathmandu 200 7 6%
5 Nepal Investment Bank 250 7 6%
Ltd
6 Nepal Industrial and 200 7 6%
Commercial Bank Ltd.
7 Nepal SBI Bank Ltd. 200 7 6%

Besides this coupon is payable in semi-annual basis, unsecured in nature

and par value of Rs. 1000. The above presented statement of Nepalese
debt securities markets shows Nepalese government is more forward than
corporate sectors in exercising debt instruments. It is clear that in growth
of debt securities market of Nepal, there is great contribution of NRB,
Security Board Nepal, Commercial Banks, Finance Companies, Public-
Government, Private Organization.

There has been made some important legislative provision, which are
directly and indirectly concern on debt securities market of Nepal which
are prevailing securities legislation.

 Security Exchange Act, 1983

 Security Exchange Regulation, 1993

 Security Allotment Guidelines, 1994

 Issues Management Guidelines, 1997

 Membership of stock exchange and transaction bye- laws, 1998

 Securities regulation and issue approval guidelines 2000 etc.

Other Relative Acts:
 Company Act, 1997
 Insurance Act, 1992
 Commercial bank Act, 1994
 Finance Company Act, 1986 etc.

1.3 Statement of the Problem

Debt securities are assumed least risky securities of investment. There is

fixed regular interest income in such securities and very few chances of
loosing principle and interest even in liquidation of company. Debt
securities are means of maximizing value of firm. Funds required in the
process on industrial expansion and growth can be received from issuing
debt securities. Government and other local authorities also can receive
fund required in development of country and local community. So it is
important types securities, but Nepalese debt securities market is not
being able to grow significantly. Even having so many opportunities, only
few concerns aries on it due to which there may be lack of information
about the debt securities market to the investors and even to the issuing
agencies. So it is necessary to study about debt securities market. This
study is mainly related to debt securities market of Nepal.

Nepalese economy is at underdeveloped stage. There is lack of

appropriate investment opportunities due to which investor can not found
suitable sector to invest their fund. On the other side, debt securities are
appropriate investment sector to potential investor. But the investors have
not given much concerned towards debt securities. Most of the
government securities are hold by institutional investors rather than
individual investors.
The investor who invest in debt securities and the deposit holders who
make deposit at commercial bank are the same group of people, both of
them get fixed income (i.e. interest). While studying trend of average
interest rate on deposit of commercial banks, it is gradually decreasing,
but the potential savers are not so interested towards debt securities.

In corporate sector, there is only few issuance of debenture. In each

issuance, there is over subscription from these exercises. It may be due to
few issuances or public concern towards debt securities market is
increasing. Anyway, there are too much confusion for investors and
issuing agencies. Now the question may arise, there may be inadequate
legal provision or absence of large business organization or limited
supply of quality bonds due to which Nepalese debt securities market is
under developed stage.

The general conclusion that the development of debt securities market

influenced not by a single factor but number of factors are responsible
such as legal provisions, quality of bond, investors, issuing agencies,
government, interest rate etc.

1.4 Research Question:

a) What is the position of debt securities market in the structure of

Nepalese securities market?

b) What is the contribution of different types of investors in

government securities?

c) Who are the key investors and what are the key features of
Nepalese corporate debt securities?
d) What are the main problems of existing debt securities market in
Nepal?
e) What should be done for systematic growth of Nepalese debt
securities market?
1.5 Objectives
The specific objectives of this study are as follows
a) To study the position of debt securities market in the structure of
Nepalese security market.
b) To analyze the trend and ownership pattern of government
securities.
c) To examine key investors and characteristics of Nepalese corporate
debt securities.
d) To identify the major problems of debt securities market growth in
Nepal.

1.6 Significance of the Study

This study is concerned with the present status of Nepalese debt securities
market. Debt securities market is the important part of capital market.
This study will make clear about the debt securities market and its present
conditions and problems.

It is indispensable fact that development of the debt securities market is

essential because it is likely to play vital role for the improvement of the
economic status of the nation through industrialization. Therefore, this
study is significant because the debt securities market growth is national
phenomenon and it helps to industrialization. I hope the output of the
study will be helpful for potential bodies, governing bodies, brokers,
researcher, students and market makers.

1.7 Limitation of the Study

Due to various constraints this study is focused to analyze the only certain
aspects of debt securities market in Nepal. Having outlined the objectives,
statement of problem and methodology of the study, now brief note of its
principal limitation which is as following:

The present study is based on pure aspect of debt securities market. The
study, thus, relates to analysis of debt only such as receivable debt, bank
loan, inventory loan, informal borrowing, overdraft etc have not been
covered.

This study is based on both primary and secondary data. Secondary data
has the own limitation (i.e. reporting error) and in case of primary data
the respondent, sometimes may not be willing to give exact opinion. And
some of the questionnaires have been returned by the respondent with
incomplete responses.

In the context of Nepal, data problem is acute in corporate and

government level. Related sector still feel burden to provide required data
of all necessary. There is not only systematic data base which makes it
difficult to carry out on any research in Nepal. This problem is also
incorporated with this study.

1.8 Organization of the Study

This study has been organized into five chapters. The titles of each
chapter are as follows:

Chapter I : Introduction

Chapter II : Literature Review

Chapter III : Research Methodology

Chapter IV : Data Presentation and Analysis

Chapter V : Summary, Conclusion and Recommendation

The rationale behind this kind of organization is to follow a simple
research methodology approach the contents of each of chapters of the
study are briefly mentioned below.

Chapter I: As already mentioned, this chapter describes the major issues

to be investigated on long with the objectives and scope of the study.

Chapter II: Consists of 'Review of Literature'. This chapter is divided

into two sections viz. Theoretical analysis and brief review of related
literature.

Chapter III: Explains the "Research Methodology" used in this research

to find the result for meeting the objectives set in the chapter one.

Chapter IV: Focuses on the "Data Presentation and Analysis". This is

the main and key chapter of the research study.

Chapter V: States the "summary, conclusion and recommendation" of

the study.
 CHAPTER–II

REVIEW OF LITERATURE

Review of literature means reviewing research studies or other relevant

proposition in pass studies. This chapter refers to a glance to the past
studies and progress on the similar field. All those studies related to the
“Development of Nepalese Debt Securities Market” are categories into
three section. The first section is conceptual frame work which covers the
concept of creditorship securities, meaning of debenture, bond and their
classification, which are develop by various scholars and writers. The
second section refers review of related studies. It includes review of
journals and review of dissertation. And third section refers to the
valuation of the bond. All the reviewed literature have been presented
orderly as follows.

2.1 Conceptual Framework

A corporation may raise capital in two ways (i) By taking the person who
furnish it into the enterprises as owners, and (ii) By making them
creditors. Those who become owner’s are known as the shareholders or
stock holder’s and the capital they furnish is known as equity capital. The
money that creditors furnish is known as borrowed capital. The former
serve as the base, while the later in only subsidiary because without the
permanent investment of equity capital by the share or stockholder it
would not be possible for corporation to borrow.

Financially, their seems to be no difference between equity capital and

borrowed capital both the owner and the lender supply the corporation
with funds, both seeks to obtain income from their investment and both
except their principal to be return to them. Legally, the contract between
the lender and borrower provides that the borrower will pay the lender a
specified rate of interest during the life of the loan and repay the principle
at specified time.

2.1.1 Meaning of Debenture

The word “Debenture” is derived from the Latin word Debre which
means “To owe” people who used to supply provisions to royal
household in ancient days, were given vouchers which were paid after
sometimes on presentation. Thus, a debenture is an acknowledgement of
a debt, given under the seal of company sum at a specified date for the
payment of interest “usually half yearly” at a fixed rate percent, until the
principle some is repaid and it may or may not create a charge on the
assets of the company as security for the loan.

2.1.2 Classification of Debentures

Debentures may be classified on basis of

a) Transferability
b) Security, and
c) Redeemability.

a. Transferability:
i) Registered Debenture: They are registered “interred in books
of the company and are payable to the registered holders who
cannot negotiate their holdings, except in the manner laid down
in the law. The interest is also payable to the registered holder
through the interest warrant. The interest coupons are, how
ever, negotiable.
ii) Bearer Debentures: The debenture which are not registered in
the books of the company and payable to the bearer therefore,
 are called bearer debentures. The interest due is paid to the
holder irrespective of identity. Coupons are frequently attached
to such debentures for the payment of interest. They are
transferable by mere delivery.
b. Security
i. Simple, Naked or Unsecured Debentures: On such dentures no
security is given to the lender for the payment of interest and
repayment of capital. Their holders ranks as ordinary creditor for
the company in liquidation. Such debentures are not very popular
since nobody likes to put his capital to risks.
ii. Secured or Mortgage Debentures: These debentures are
secured by a charge on assets of the company. In case of default,
the creditors can make goods his loss from the assets charged.
The charge may be fixed “specific” or floating charge.

c. Redeemability
i. Redeemable Debentures: These are repayable after a stated
period of time.
ii. Irredeemable Debentures: These are not repayable during the
life time of the company issuing them. They are also known as
perpetual debentures. When the company goes into liquidation,
they become repayable. They also become repayable in case of
serious default on the part of the company (Non payment of
interest).

2.1.3 Meaning of Bonds

A corporate bond is a written promise, under seal, to pay a specified sum

of money at a fixed time in the future, usually more than ten years after
the promise is made, with interest at a fixed rate, payable at specified
interest date. The amounts of bond are ordinarily thousands. Usually a
corporate bond is one of a number of similar bond, all of which are
covered by a so called deed of trust that sets forth the obligation of the
corporation and rights of the bond holders. The deed of trust is made out
to a trustee who represents all of the bondholders, however and wherever
they may be at any time.

The more prominent features of a bond are:-

- A definite promised to pay, as to principal amount.
- A definite promised to pay, as to interest.
- A definite life.
- A statement of the tender or medium of payment.
- The place of payment.
- Reference to the bond indenture for other writes and power such as
limitation upon the issuance of additional securities, curtailment
of management prerogative in the event of failure to meet
prescribed conditions, action in the event of default of interest or
principle payment etc.

2.1.3.1 Classification of Bonds

Bonds are by for the must important mode of corporation finance. They
have such a large variety of forms that it is almost impossible to arrive at
an agreed classification. Rigid classification is impossible, tentative
groupings may be presented as an aid to study. Broadly four basis have
been adopted for the classification of bonds.
According to Character of the Security of the Bonds:

1. Unsecured Bonds: Debentures bond, Income bonds, receiver

certificate, Convertible bonds and Short-term notes.

2. Secured or Reinforced:
i) Non property Security: Assumed, Guaranteed and joint bonds

ii) Property Security

a. Personal Property: Collateral trust, Equipment trust, Sinking
funds bonds.
b. Real Property: First Mortgage, General mortgage,
Consolidated mortgage, First and refunding mortgage, First and
consolidated mortgage bonds.

According to Purpose of Issue:

1. Civil, Drainage, School, Street etc.

2. Corporation improvement: Refunding, purchase of equipment or

plant and consolidation etc.

According to Payment of Interest and Principal

1. Payment of interest:- Registered, Coupon and Contingent etc.

2.Payment of Principle:- Collateral, Convertible, Serial, Sinking fund
and maturity etc.

2.1.3.2 Parties to Bond Issue

There are three parties to a bond issue

1. The corporation wishing to borrow the money

2. The Trustee:- Through whom the corporation deals with the

bondholder. Because there may be many bond holders (when
bond are sold to the public) scattered widely, under the
circumstance it is not practical to deal with each of them
 individually, and the corporation appoints a third party as a trustee
to represent the bondholders. The corporation makes an
agreement with the trusty or trust company, which variously call
the deed of trust, trust agreement, trust indenture etc. Setting forth
the obligation assumed by the corporation and the rights to be
acquired by the bondholders.

3. The Bond Holders:- Who participate in the loan and who receive
as evidence of there participations one or more bonds. The
contract between the corporation and the bondholders consists of
the bonds and the deed of trust.

2.1.3.3 Document of Bond issue

Bond is a sort of contract between the corporation and the bondholders.

There are several conditions governing the issue. The conditions are laid
down in a document and serve as the basis of the contract an the
protection to the bondholders. In the United states of America, there are
three such documents in use.

a. The Indenture: One of the must important instrument relating to

corporate financing in USA is the indenture. An indenture is a
contract or an contract or an agreement between the company, the
trusty and the bondholders, which covers the terms and conditions
pertaining to the bond issue. It is usually called a mortgage indenture
when used in connection, which securities supported, by a mortgage,
when used with unsecured obligation, it is generally known as trust
indenture. Corporate indenture, or trust agreement. Besides including
the duties of the trusty, it contents complete provisions having a
bearing upon the bond issue as a result, the indenture is commonly as
large as a book covering fifty several hundred pages, the existence
 and contents of which are known to but a few bondholders seldom
would any on the asked read it. Yet it is the source of bondholder’s
rights and the corporation’s obligations. The following summary of
its contents may clear its nature and purpose:

- Preliminary recitals of the parties, authorization of the bonds, and the

form of the bonds, interest coupons, registration and trusty’s
certificate.

- Statement of the mortgage or deed of trust with a detail description of

the property security.

- Covenants of the company issuing the bonds to pay the principle and
interest when due, to carry insurance and pay taxes, and usually to
protect the bonds with such provisions as limitation of additional
securities issues according the term of indenture, limitation on
dividends on common stock in the event of failure to meet prescribed
standards.

- Provisions covering the sinking fund and the redemption of the

bonds.

- Statement of the duties of the trustee.

- Definition of defaults and provisions for action by the trustee in this

event.

- Miscellaneous provisions covering supplemental indentures, status of

bonds in the event of merger or consolidation, bondholder’s meeting
etc.

b. The Bond: The bond instrument itself merely contents of promise to

pay a certain specific amount of total debt with interest and gives a
summary of the main terms of the borrowing. The bondholders most
 look to the indenture for the full details of the issue. The bond is
negotiable instrument executed by the borrower, usually in the name
of bearer. This instrument then passes without registration, though by
election a purchaser may choose to have registered bond in his own
name. Each one of the bonds is a unique part of the whole loan, the
full terms of which are contained in the indenture. A bond issue
without security would be complete with a certain of the two
instrument (Indenture and Bond). Should the issue have and
agreement for mortgage security, the indenture would describe the
full term of the mortgage also.
c. The Mortgage: When it is desire to give security upon the real or
personal property as a grand of priority in payment to a creditor, a
document is special form known as mortgage is made. In the case of
corporate issues, this mortgage will be the signed by the corporations
and made over the trusty of the bond issue part of the indenture. The
trusty becomes the legal holder of the mortgage but on behalf of the
equitable interest of the bondholders. This instrument is placed upon
the public record in the accordance with the feeling requirement of
each jurisdiction where any of the property is located.

2.1.4 Valuation of Bond.

The value of a bond is the sum of the present value of the periodical
interest payments and the par value that is due at the end of bond life. As
a matter of fact, the market value of a bond is affected not only by its par
value and the rate of interest, but also by several other factors, such as the
market price, bond life, and the bond buyer's opportunity rate of return or
the market rate of return on the securities of similar risk. Therefore, the
bond value (Vb) is a function of several factors as presented below.
Vb = f(F, Pm, N, I, K)
Here,

F= face value or par value

N= No. of years of bond life or maturity period.

I= interest rate specified in the bond (coupon interest rate)

Kb= opportunity rate or market rate of return or bond

Pm= market price of bond.

2.1.4.1 Valuation of Perpetual Bond

The perpetual bond pays a specified amount of interest every year forever
and never returns the principal. The return from the bond is just a series
of interest payments for infinite period. Therefore the present value of a
perpetual bond would simply be equal to the capitalized value of on
infinite stream of interest payments. If bond promises on fixed annual
payment of I forever, its present (intrinsic value V1 at the investor's
required rate of return for this debt issue, Kd is

I I I
V=   ................................................
(1  K d ) (1  K d )
1 2
(1  K d ) 

 I
= t1
(1  K d ) t

= I ( PV IFA, Kd, ∞)

I
=
Kd

Thus, the present value of a perpetual bond is simply the periodic interest
payment divided by the appropriate discount rate per period.
2.1.4.2 Valuation of Callable Bond or Non Zero-Coupon Bond:

The value of a bond is the sum of present value of the interest for the
remainder of the bond life and the par value. The equation to calculate the
value of callable bond is as follows.

I I I Mv
V=   ........................ 
(1  K d ) (1  K d )
1 2
(1  Kd ) n
(1  K d ) n

n I Mv
= t1 
(1  K d ) (1  k d ) n
t

= I ( PV IFA, Kd, n)+ Mv ( PVIF kd, n)

Semi-annual Compounding of Interest

The interest on bonds may be paid at different time intervals generally

every six months or once a year. Since the valuation process is based or
time value of money, the interest payment period affects the value of
bond. The equation to calculate the value of bond with semi-annual
interest payment is as follows.

t
 
n2 It  1

V=     Mv( 1 ) n.2
t 1 2  Kd t  kd
 (1  )  1
 2  2

= I/2(PVIF kd, n.2) + Mv(PVIF kd, n.2)

2.1.4.3 Zero Coupon Bonds

A Zero coupon bond makes no periodic interest payments but instead is

sold at a deep discount from its face value.

The valuation equation for zero-coupon bond is as follows.

 Mv
V=
(1  k d ) n

= Mv (PVIF kd, n)

2.1.4.4 Yield to Maturity (YTM)

The yield to maturity (YTM) is the rate that equalizes the price with the
value. To computing the YTM. Some important assumption are.

 The bond will be held to maturity period.

 Coupon receipts will be reinvested at a rate of return equal to

YTM.

 All cash flows will occur as indicated in the indenture (i.e. the
issues will default on the contractual obligation)

 The bond will not be called or redeem by the issuer before the
specified data.

There are several ways the YTM can be calculated, such as

a) Trail and error method which finds the YTM by using a rate that
makes the value of bond equal to the price. Which can be
expressed as follows.

n Interest Maturity Value

Market price of debt (Po) = t1 
(1  YTM ) t
(1  YTM ) n

b) Approximate YTM formula.

face valu  Purchase price

Intrest 
Years to moturity
YTM=
face value  2  purchase price
3
But it should be used with some caution as it is useful for a bond of short
life only.

2.2 Review of Related Studies

2.2.1 Review from Journals.

Shiba Raj Shrestha in his article, "An introduction to Bond Pricing" has
stated that the financial market in Nepal is relatively undeveloped. A
small corporate bond market is in operation. The government bond
market is more developed, but prices are not market oriented. The
activities in the capital market is hampered by following four problem.

 The issuer and investors base in insufficient

 Infrastructure of laws, regulation and institution is weak.

 Nepal Rastra Bank and the Securities Board of Nepal have

overlapping roles, and

 Incentives and private initiative are not strong enough to drive

market developments.

The ability to develop the local corporate bond market is seriously

constrained by a weak supply of and demand, for the product. The
number of potential blue chip issuers and the size of the collective
investors base are insufficient to create an institutionalized market and
too few financial instruments are available in which to invest. An
effective interest rate structure, a fundamental ingredient of an efficient
and deregulated business environment, is absent, as are the credibility,
Accountability and trust that come from solid corporate governance.
In Nepal, the need to develop a domestic bond market received increased
attention with. The introduction of financial sector reforms and
restructuring programmes in recent years. Initiatives have been taken in
regard to providing conducive macro economic policy environment,
strengthening the institutional and legal framework and market
infrastructure including payments and settlements systems. It has enabled
the issue of more long term debt securities and facilitating their trading in
the secondary market, aiming the development of depth of the market and
liquidity of long term debt instruments. The experience thus for indicate
that this has been a process of undertakings of many complexities
involving immune challenges, as some of the problems that inhibit the
market development are deep rooted in the economy. Though the licensed
market markers are active in primary issue of government bonds. They
are, however, effortless in the secondary market as well as in the case of
issue of corporate bonds. The fair pricing is still lagging behind the
normal activities amongst the market makers. Since last fiscal year the
government long term bonds have been listed in NEPSE. However, the
trading activities are almost nil. Thus, the concerning authorities should
effort for development of bond market by assuring fair price dealing.

Nepal has taken a few steps steward becoming a more efficient market
place, but it still has a long way to go several critical foundation for
active financial markets do not exist and there are constraints on the
attributes and abilities of key market participants that would make trying
to build a corporate bond market extremely difficult at this time. At the
regulatory level, clear boundaries are needed between the Nepal Rastra
Bank and the Securities Board of Nepal. The Nepal Rastra Bank could act
as a central bank only with responsibility for areas such as monetary
policy, payment systems and bank supervision. The Securities Board of
Nepal could be the sole regulator of the corporate fixed income securities
market, which will help reduce confusion and help increase its credibility
in the market place.

Shree Prasad Poudel in his article, "Government Securities Markets:

Rational and Development in Nepal" has stated that, security markets are
centre of the financial system. Private corporations and government can
issue debt securities. If securities can not be traded in the secondary
market those are call non marketable securities. Special bonds issued by
NRB are such types of securities. Holders of debt securities receive
interest payment at predetermined dates and principal payment at the
maturity of the debt instruments. Periodic interest payments and capital
gains are the incentives in bond investments. Debt securities market in
Nepal is highly dominated by government debt securities. Corporate debt
securities in Nepal are extremely limited. Government in less developed
country usually borrow at lower rate than the market rate of interest on
the one hand while on the other hand securities are exchanged in the face
value even if their value is appreciated in the market more over,
international loans substitute bonds in emerging markets. In Nepal,
international loan use to substitute the domestic debt securities market of
government. Bond price should be determined competitively in market.
Which is lacking for the government debt so there may be problem of
corporate and severing bond market development. The market paved the
way for debt security market development when market interest rates
goes down price of previously issued bonds at higher coupon rate goes up
and investors receive capital gains. While government borrows at rate
lower then market rate of interest, the government interest rates some
times provide real return on government debt security in negative at a
time when the coupon rate is lower than inflation rate. Risk associated
with bond investment reduces the value of bond. Issuing and exchange of
corporate bonds is virtually absent in Nepal. Market makers facilitate the
secondary market transaction of marketable securities. Settlement of
payments is made through NRB. NEPSE has not started transacting
governments securities in its floor. Buy and sell cannot be placed through
electronics means and exchange of government securities is hindered by
the fixed price of the securing. Securitized government debts, as
percentage of GDP is low marketable government securities are lower
than non marketable securities. All these factors are the impediments of
developing cheep and vibrant debt securities market in Nepal. Further he
has given that NRB and commercial banks are main holders of
government bank. Higher proportion of ownership of government
security needs to be transferred to the house holds sector for secondary
market development

Shiba Raj Shrestha in his article "Effective domestic debt management in

Nepal" has explained consequences of excessive government borrowing.
According to him an excessive government borrowing should have a
number of bad effects as illustrated below.

- If the cost of servicing the debt accounts for a large part of

the government revenue, the scope for public spending on
desirable items suchas health, education and infrastructure is
correspondingly diminished.

- If the government preempts a large part of the saving of its

residents, it may reduce the amount the private sector can borrow
or raise in the capital market, thus crowding-up private investment.

- Excessive borrowing can also increase interest rates deterring

investment by making it more expensive.
 - If government finances its deficit by borrowing to much form
central bank, through money creation. It stakes up inflation.

- The building up of excessive debt today entails higher servicing

cost on future generation who suffer higher taxation.

- Excessive domestic debt can effect a country's credit rating and

therefore increase the cost of its future borrowing.

Elton Grober, Agrawal and Mann in their article "Explaining the rate
spread on corporate bonds." Explain the spread between rate on corporate
and government bonds. The purpose of this article is to examine and
explain the differences in the rates offered on the corporate bonds and
those offered on government bonds (spreads) and in particular to
examine. Whether there is a risk premium in corporate bonds spreads and
if so, why it exist , they have shown that the spread can almost entirely be
explained by three influences, the loss form the expected loss, state and
local takes which must be pain on corporate bonds but not on government
bonds and a premium required for bearing unsystematic risk.

Rabindra Bhattrai in his article, "Debentures are welcome" in 2004 has

started" Bond market in Nepal is very lean. Very few companies have
issued bond in the market. However, since last few years, some positive
signals can be seen in the Nepali capital market. Though the government
bonds are not available in the stock exchange floor, corporate bonds are
being made available. According to him, due to oversubscription in
recently issued corporate bonds, it can be predicted that more of corporate
bonds will be expected to issue in the future, particularly from the banks
to meet their higher capital requirement under NRB directives.
2.2.2 Review of Thesis

Acharaya (1968) studied on "A Case Study on Public Debt in Nepal" has
reached on the conclusion that, public debt is most popular in these days
because of the fact that the repayment of debt on maturity can be adjusted
through the issue of fresh public debt. But the fact is that the habit of the
purchasing bonds issued by government should be developed among the
people so that any of difficulty may not be faced in getting the bonds
purchased by people. He also concluded that investors have full trust on
government bond and subscription of government bond is higher than the
bonds issued by other non government institution.

Joshi (1982) Studied on "Structure of public debt in Nepal", his objective

was to study the role of public debt in Nepalese fiscal system and under
plans. He pictured the poor economic performance of the nation, which is
due to nation's national topography and human behavioral limitation. He
concluded that the internal borrowing is most essential to develop the
money and capital market in the nation. He recommended floating or
introducing the different public borrowing schemes which may suit the
pocket of rich as well as poor people. Finally he concluded that "a public
debt is one of the best ways of financing development expenditure of the
government which helps to control inflation in the country.

Sharma (1988) in his thesis "Burden of public debt in Nepal", has stated
there is similar return on the bonds and securities as well as the rates of
return on the fixed deposits of commercial banks. To attract the investors
toward the debt securities, initially, the tax should be exempted which
will help to increase the return and also will help to attract some more
investors. According to him, the basic function of the debt securities
market is to provide and allocate funds to firm with profitable investment
opportunities and to offer an avenues of liquidity for individuals to invest
current income or borrow against future income there by achieve their
preferred time pattern of consumption. Because investing involves
uncertainty. Capital markets also provide a means of transferring risk
among the parties to these transactions.

Koirala (1997) studied on "Public debt in Nepal", he has concluded that

the internal borrowing mobilization for development purpose has been
fluctuating and the banking sector has dominated the total internal
borrowing. Government should initiates policies to attract maximum
borrowing form non banking sector. It is the most non-inflationary source
of internal borrowing since it is simply transfer of idle saving form people
to government for development purpose

Khanal (2000) studied on "Public debt in Nepal", A study of its structure

and Burden form 1974/75 to 1997/98 has summarized that internal public
debt has played a significant role in financial resources for development
expenditure as well as in growth of money and capital markets, and it
facilitate the effective implementation of monetary policy. He further
concluded that the system of public debt as one of the best ways of
financing development expenditures of government which helps control
inflation and to mobilize inter financial resources in the productive sector
of the country's economy. He recommended that government should try
to maximize the mobilization of internal resources for development
purpose and excessive dependency upon foreign assistance for
development program should be reduced and it should be continued to the
desired extent.

Sharma studied (2001) on "public Debt system and practice in Nepal".

His objective was to overview the system and practice of public debt in
Nepal, to understand the attitude of investors towards the government
securities. The study found that the interest of investors towards
government securities and their educational background is completely
independent to each other both educated and uneducated people are
equally interested on government securities. The study also concluded
that both poor and rich people are interested towards government
securities. These mean that the government is efficacy us to draw the
attention of rich and poor, educated and uneducated people whom the
government sells its securities which are the means of borrowing the loan
internally.

The study verified the general statement that the people in urban area are
more aware to the government securities. The study also draws the
conclusion that the people who have not sufficient time to run the private
enterprise and who are not dexterous to grab the opportunity in the
market interested on government securities. He also concluded that the
person with academic background of economics, finance and
management are more aware to the government securities.

Poudel (2002) in his thesis "A study on government securities practice in

Nepal". Summarized that government securities is issued to meet short
term and long-term financial requirement. The government expenditure
through public debt is quite beneficial to the nation if used productively.
But a large public debt may create problems in the economy in future. He
further given in his findings that, Nepal has beer suffering capital
shortage since the first budget speech. Most people use their idle funds on
government securities rather than behaving as investors. Among them
majority are service holders and very few of them are retired people. The
people of rural area are less aware to the government securities. Both
poor as well as rich, and educated as well as uneducated people are
interested towards government securities. He concluded that Nepalese are
attracted towards government sectors must of the investors of Nepal are
risk averter and they need less risky investment. Lastly he recommended
hat people pride themselves on their financial contribution to the nation,
if there are suitable debt securities to them. Therefore government should
develop various methods to influence the business and private individuals
to buy more and more government securities.

Kafle (2003) in his thesis A Problem and Prospect of Debt Market

Growth in Nepal " has summarized, capital market of Nepal is in infant
stage and debt securities market is growing but it is not growing as
expected. The heavy reliance of government in foreign debt has created
huge problem in debt securities market grow in Nepal. According to him,
in Nepal investments made on impulse rather than through market study
or credit ratings, he found that national saving bond and development
bond were more preferred by investors than other government bonds. He
has also concluded that due to over supply of deposits by customers in
commercial banks, they do not issue debt securities. On the other hand
top-tier corporate bodies could get loan easily form banks at lower cost so
they are not required to issue debt instruments for raising the funds. Low-
tier firm have been facing the problem in raising the fund from bank and
market as well. Tedious and lengthy process of issuing the debt securities
is another problem with debt securities market growth.

Mainali (2003) studies "Problem and Prospects of Debenture Market

Growth in Nepal", has found many problems in Nepalese debenture and
bond market growth. According to him there are many problems such as
insufficient legislative provision regarding Nepalese debenture market,
political instability, poor price sensitivity insufficient information
disclosure, investor's low preference on debenture in Nepalese debenture
market growth. Not only problems, he also found many prospects of
debenture market growth. Additional capital supply, tax saving interest
income, means of meting deficit budget, growth on public debt are some
plus point which signifies the prospects of debt market growth.

In this way there are various studies conducted by different researchers

Nepal as an under-developed nation, industrialization of the nation is the
main thing for the development of the nation. To direct the nation
towards industrialization. It is necessary that capital market should
function well. That means its equally and debt markets are well existed
and functioning well. But in case of Nepal, the debt market of corporate
bodies is limited in its existence. So the reason for its limited existence is
a matter of curiosity. Therefore the present study is focused on the
development of debt securities market in Nepal
 CHAPTER –III

RESEARCH METHODOLOGY

Simply 'research' refers to search again and again. Research means to get
new things, techniques and to verify existing tools, techniques by
hypothesis and other relevant information. Methodology is the research
method used to complete the study systematically and test the hypothesis.
This chapter aims to familiarize the relevant techniques of data collection
analysis of data using statistical tools and techniques required for
preparation of research report and include research design, population and
samples of the study, Sources of data and research methods.

3.1 Research Design

Research design refers to the entire process of planning and carrying out a
research study. It is outline of a good research employed for the
investigation of the required result. This study describes and explores the
scenario of issues of financial instruments as well as tries to analyze the
investor's preference toward the instrument. So descriptive , exploratory
and analytical methods are combined as the study demands for the best
output.

3.2 Population and Sample

The entire number of investors of financial instruments is the population

of this study. The total population of investors is very large, Which
includes very small investors to analyst and professional's investors.
Investors were taken as subjects or random sampling basis. 122 investors
were taken as subjects for this study including all types of investors
randomly like small, large, male, female, less informed, analyst and so
on. Survey was conducted on various points like NEPSE floor, brokers
office, and other several places.

3.2.1 Rationale of Sampling

Investors are surveyed as per the accessibility i.e. those which are in
Kathmandu valley only irrespective to their native place. Only 200
questionnaires were distributed where as Just 122 responses could be
collected. Institutional investors are selected randomly from among those
who have invested in government securities and share of other
companies.

3.3 Sources of Data

To know about the financial instrument the historical data are used for
this the secondary sources like NEPSE reports, SEBON reports, NRB
reports, reports of issue manager etc are used. Various annual reports and
other publication are used to collect the data concerned with institutional
investors on the other hand to know about the preferences of the investors
primary data are collected. Thus, both primary and secondary sources are
used for the data collection.

3.3.1 Data Collection Techniques

To collect the primary data questionnaire survey has been done along
with some interviews and observations. Structured questionnaire are use
in this regard and some unstructured interviews are also taken as per
necessity for the secondary data different publication, reports, journals,
bulletins etc of different relevant source like NRB, NEPSE, SEBON etc
are used.
3.4 Data Analysis Tools and Techniques

Different relevant statistical tools are used to find out the best appropriate
results as per the designated objectives of the study several hypotheses
are also formulated during the course of study and analysis. The study has
used the mix of statistical tools from simple percentage analysis to the
hypothesis testing tools as per the requirements and their suitability. The
statistical tools that are applied in this study are:

3.4.1 Non Parametric Statistical Tools

a) Median Analysis: Median gives the middle value of the numbers

of divides the total observation into halves one half comprising the
various grater than median and other half comprising smaller value
than median. This tool has been selected to find the preferences of
investors. Median has been calculated on the basis of rank sum. So
those observations which have rank sum more than median are the
preferred observation and vice-versa.

b) Chi-Square (  2) : Chi –square test has been used to check

whether there is any association between two independent variables
as well as to check the uniform. Distribution of investors responses
toward various option. Chi- square statistic helps to test the
association as well as uniformity.

Formula of chi-square is given below

r c (nij  Eij ) 2

2
 = Where,
i 1 j 1 Eij

2
 = chi-square statistics
 R= no. of rows

C= no. of columns

nij= observed no. of cases categorized in the ith row of jth column

Eij= no. of case expected in the ith row of jth column

Ri C j
Eij =
N

N= total no. of case

d.f. = (r-1) (c-1)

c) Coefficient of Contingency (c) : Coefficient of contingency has

been used as a supplement to chi-square test what is the degree of
arrangement or association between two variables. Coefficient of
contingency can be calculated by given formula. Higher 'C'
represents the grater degree of association.

X2
C= N  2

Where,

2
 = chi-square

N = total no. of observation

d) Friedman two-way analysis of variance by Rank  r2: During

The analysis the options or the objects are ranked as their rank
sum. Those with highest rank sum are given the first rank to denote
the best one. To test the ranks assigned to turn. Friedman chi-
square has been calculated and tabulated value on the desired level
of significance
 and required degree of freedom. Null hypothesis is accepted if the
calculated value is less than tabulated value.

r2 n(t  1) ss condition
 =
ss people

ss condition= T 2


G2
n tn

G2
ss People =  X  2

tn

Where,  r2 = Friedman's chi-square

X 2
= Summation of square of rank

n = No. of subjects

t = no. of condition

G= T

T = total rank/ rank sum

e) Spearman rank order correlation coefficient (rs) : To check

whether the preferences vary with the size of investments/
investors. Spearman rank order correlation coefficient rs has been
calculated. This rs gives the correlation between the assigned by
two categories.

6 d 2
rs = 1-
N3  N
 Where,

rs = spearman rank order correlation coefficient

d = difference of rank

N = no. of conditions

Graphs: Pie charts are used to show the sector wise and
instrument wise coverage of total corporate securities
issues.

Charts: Line charts are used to show the trend line of

government securities.

Bar diagram: Bar diagram are used to show the ownership pattern of
government securities.
 CHAPTER -IV

PRESENTATION AND DATA ANALYSIS

The main of this chapter is presenting and analyzing data according to

research methodology to attain the objectives of this study. In this
chapter, presentation and analysis are shown as Analysis of secondary
and analysis of primary data.

4.1 Analysis of Secondary Data

4.1.1 Position of Debt Securities Market in the Structure of Nepalese

Securities Market.

Securities market is the back-bone of capital market in both developed

and also developing countries. Securities markets are built on some
elements, a number of issuers with financing needs, investors with need
to place savings or other liquid funds in securities. Intermediaries that
bring together investors and issuer and an infrastructure that provides a
conducive environment for securities and settlement of transactions.
Types of securities available in Nepal are limited as compared to the
developed nations. The development and composition of securities
market in Nepal are presented in table 1.
 Table: 1
Position of debt securities market in the structure of Nepalese securities Market

Year 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06
instrument

Ordinary 227.90 204.21 224.74 57 119.40 148 412.46 268.50 528.76 551.50 657.50 377.48 379.83
shares (0.74%) (0.63%) (0.65%) (0.16%) (0.31%) (0.30%) (0.75%) 0.44% (0.70%) 0.65% 0.379% 0.125% 0.208%
Rights - - 69.00 275.20 249.96 30 124.60 365.79 387.87 162.24 70 949.34 1013.45
shares (0.20%) 10.76% 0.64% 0.06% (0.23%) 0.60% 0.52% 0.19% 0.04% 0.541% 0.556%
Preference 16.50 - - - - 80 - - 140 - - - -
share (0.05%) 0.16% 0.19%
Debentures - - - - 93.00 - - - 360 - 3.. 300 850
0.24% 0.48% 0.173% 0.171% 0.466%
Mutual 100 50 - - - - - - - 100 - - -
fund (0.32%) (0.15%) 0.12%
Governmen 30631.2 32057.9 32241.8 35890.8 38406.5 49669.7 54357 60043.8 7320.7 84645.3 172267. 173848.6 179957.2
t Securities 98.89% (99.15% (99.21% 0 99.81% (99.48 99.02% 98.96% 98.11% 99.05% 4 99.67% 25
) ) 99.08% % 99.05% 98.7687
Total 39975.6 32312.1 34535.5 36223 38868.9 49927.7 54894.0 60678.0 75037.3 85459.0 173294. 175475.4 182200.5
(100%) 1 4 100% 6 100% 6 9 3 4 9 2 05
(100%) 100% 100% 100% 100% 100% 100% 100% 100% 100%

Source: annual report SEBO 2005/06 and NRB quarterly economic bulletin mid July 2006.
Table: 1 shows that the total capitalization of shares. Bonds and
government securities is dominated by government securities. The
government securities represent 98.89% in 1993/94 and 98.7687% in the
year 2005/06. It means corporate bonds and stock market represents only
1.11% in 1993/94 and 1.2312% in 2005/06. It shows that corporate
securities market in Nepal is at initial stage. The equity shares are getting
more and more popular among the corporate securities in the period of
time. The equity issues approved by SEBO in 1993/94 was 227.90
million and it was 657.50 million in 2003/04 which is highest during the
study period and comes to fall to 3.79.83 million in the year 2005/06. The
right shares also issued for Rs. 69 million in 1995/96 which in followed
by 275.20, 249.96, 30, 124.60, 365.79, 387.87, 162.24, 7., 949.34 and
1013.45 in the respective year 1996/97, 1997/98, 998/99, 1999/00,
2000/01, 2001/02, 2002/03, 2003/04, 2004/05, and 2005/06. This shows
that the trends of issuing right share are increasing. However, the
preference shares and debentures are not yet popular in Nepal. So far,
there has been only the issue of preference shares and five issues of
debentures during the period of 1993/94 to 2005/06. as listed in SEBO/N,
the first issuance of debenture was made by Sri Ram Sugar Mill (SRSM)
in 1997/78 and followed by Nepal SBI bank limited has issued
debentures of Rs. 200 Million in 2005/06.

Above table also indicates that, the corporate securities market is

dominated by equity shares. Government securities and corporate equity
share were issued regularly overtime. But other types of securities were
not issued regularly. Limited issuance made as debentures and preference
share.

From the above table, it is clear that corporate debt securities are still
unpopular in Nepal. But debentures of Rs. 1053 million is issued from
1993/94 to 2004/05 plus Rs 850 million in year 2005/06. in other words
0.24% of total securities is issued as debenture in the year 1997/98 which
is followed by 0.48% in the year 2001/02 0.173% in the year 2003/04
0.171% in the year 2004/05 and 0.466% in the year 2005/06.

4.1.2 Market scenario of corporate securities

Figure:1
Market scenario of corporate securities
Fiscal year 1993/94–2005/06.

5.41%
0.03%
9.40%

8.30%

3.18%
55.86%

15.11%

2.71%

Commercial Bank Development Bank

Finance Company Insurance Company
Hotel Manufacturing and processing company
Trading Company others

The above figure shows that the major portion of the issues are made by
commercial bank. Which is followed by finance companies. Which
occupies 15.11% manufacturing and processing companies occupies
9.04%, insurance company occupies 3.18%, development bank occupies
2.71% and Trading companies occupies only 0.03%.
 Figure: 2
Instruments wise

19.83%

39.18%
2.46%

38.53%

Ordinary Share Right Share Preference Share Debenture

The above figure shows the financial instrument issued by the corporate
sector. Which is 39.18% occupies by ordinary share followed by 38.53%
by rights shares, 19.83% by debentures and 2.46% by preference shares.

Hence we concluded that the corporate debt securities are also dominated
by ordinary and rights shares. There are number of reasons for a dismal
state of corporate debt securities market in Nepal. First the population of
corporate bodies which can sell debentures in the market is small.
Second. Listed companies shows that a significant number of them
belong to banking, insurance and finance companies (out of 135, they are
87) which can mobilize public money in their own ways or they prefer
ordinary share or rights shares to raise capital or debenture is less
preferable than the above two instruments. Third out of remaining
companies, most of them are incurring heavy loss and hence are not in a
position to raise funds from the market. Fourth, Nepalese organization
heavily rely on bank loan instead of using loan from debt instruments the
small size of financial requirements of organization also discourage the
use of debentures because of high flotation cost associated with debt
securities.

4.1.3 Ownership Pattern of Government Securities and T-Bills

Total bonds and T-Bills of Nepalese government consists of treasury

bills, development bonds, national saving bonds special bonds and
heavily practiced public saving card. The ownership pattern of
Government bonds and T-Bills deals with the portion of total
governments bonds and T-Bills purchased by different institutions and
individuals.

4.1.4 Trend and Amount of Government Securities Issued in Nepal.

Since 1961, Government of Nepal has started to borrow from the internal
sources to fulfill the resource gap in the budget by means of issuing
various kinds of securities. In the initial year 1961, the government issued
only T-bills for internal borrowing. Now the government mobilizes
internal borrowing by issuing T-bills. Development bonds, special bonds,
national saving bonds and public saving cards. Table 3 shows substantial
increasing occurred in the structure of government securities during the
period of 1987-2006. The total amount of government securities
amounted to Rs. 8997.4 million in 1987. Trend of government securities
shows increasing and growth rate is positive in every years of observation
by the end of 2006 the total amount reached to Rs. 89754.575 million.
Although amount is in increasing trend the growth rate show the
fluctuating trend.
 Table: 2
Trend of total government securities from 1987 to 2006.
(Rs. In million)
Year Total amount of government Growth rate (in %)
securities (Rs)

-
1987 8997.4
1988 11636.0 29.33
1989 12887.9 10.76

1990 14673.1 13.85

1991 20855.9 42.14
1992 23234.9 11.41
1993 25456.0 9.56
1994 30631.5 20.33

1995 32057.9 4.66

1996 34241.8 6.81
1997 35890.8 4.82
1998 38406.6 7.01
1999 49669.7 29.33
2000 54357.0 9.44
2001 60043.8 10.46

2002 73621.0 22.61

2003 81148.3 10.22
2004 86133.7 6.14
2005 87564.3 1.66

2006 89954.9 2.78

Source: NRB Quarterly Economic Bulletin. Mid. July 2007

*Growth rate is calculated by taking previous year as base year
 Figure: 3
Trend line of total government securities

100000

90000

80000

70000

60000

50000

40000

30000

20000

10000

0
87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06
19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20
The above table shows the trend of the total government securities. The
government of the Nepal had issues securities first time in the year 1987
for Rs. 8997.4 million, which is increase every year. In the 2006 it
reached to Rs. 89954.9 million. From the figure also it is clear that the
trend of total government securities is increasing trend. The ownership
partner of total government securities is shown by the following figure.
 Figure: 4
Ownership pattern of total bonds and treasury bills

100000

90000

80000

70000

60000

50000

40000

30000

20000

10000

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NRB C.B others*

* Manufacturing Processing Companies, Trading Companies and Individual Investors

4.1.4.1 Trend of Treasury Bills

The table given below shows the amount of T-bills issued by the
government of collects the required fund in 20 years period.
Table: 3
Trend of Treasury Bills
Year Total amount of government Growth rate (in %)
securities (Rs)
1987 3440 -
1988 1090 18.90
1989 4171 (71.37)
1990 1821 55.51
1991 2351 29.10
1992 3483.2 26.41
1993 4403.2 26.41
1994 5216.3 18.47
1995 6392.5 22.55
1996 7142.5 11.73
1997 8092.5 13.30
1998 9182.5 13.47
1999 17586.9 91.53
2000 21026.9 19.56
2001 27610.8 31.31
2002 41106.6 48.88
2003 46844.9 13.95
2004 49429.6 5.52
2005 51383.1 3.95
2006 62970.3 22.55
Source: NRB Quarterly Economic bulletin. Mid. July 2007
* Growth rate is calculated by taking previous years base year
 Figure: 5
Trend of Treasury Bills

70000

60000
Total amout of treasure bills

50000

40000

30000

20000

10000

0
87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06
19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20
Year

The figure: 5 show that trend of the total amount of treasury bills issued
by the government during the past 20 years. (i.e. 1987-2006). Trend of
borrowing from money market has been increasing sharply as shown in
the figure except in the year 1987). The growth rate column shows the
maximum increment in 91.52% in the year 1999.the ownership pattern of
Treasury Bills are shown in the following figure.
 Figure: 6
Ownership Pattern of Treasury Bills

70000

60000

50000

40000

30000

20000

10000

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NRB C.B others*

* Manufacturing Processing Companies, Trading Companies and Individual Investors

4.1.4.2 Trends of Development Bond
Table: 4
Development Bond Issued by the Government from
1987-2006
(Rs in million)

Year Total amount of government Growth rate (in %)

securities (Rs)
1987 2990.00

1988 4651.7 55.57

1989 5088.6 9.39

1990 5388.6 5.89

1991 5482.3 1.74

1992 5132.2 (6.39)

1993 5132.2 0

1994 4732.2 (7.79)

1995 4122.2 (12.89)

1996 3672.2 (10.92)

1997 3042.2 (17.16)

1998 3302.2 8.55

1999 3872.2 17.26

2000 4262.2 10.07

2001 5962.3 39.89

2002 11090.7 86.01

2003 13090.7 18.03

2004 17549.2 34.05

2005 19999.2 13.96

17959.2 (10.20)
2006
Source: NRB Quarterly Economic Bulletin. Mid. July 2007
 Growth rate is calculated by taking previous years base year
 Figure: 7
Trend line of development Bond

25000

20000
Total amout of treasure bills

15000

10000

5000

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year

The above given table shows the amount of development bond issued by
the government during the past 20 years (1987-2006). Which is in
increasing trend in first five years and reached to Rs. 5482.3 million in
the year 1991. Then after it the trend is decreasing and reached to Rs.
3042.20 million in the year 1997. From 1998, again growth rate shows
the positive trend. Except in the year 2006 (i.e. in 2006, it is negative by
10.20% in comparison to the previous years.
4.1.4.3 Trend of National Saving Bonds
The table given below shows the amount of National Saving Bonds
issued by the government during the 20 years period. (1987-2006)
Table: 5
Trend of National Saving Bonds
(Rs in million)
Year Total national saving bonds (Rs) Growth rate (in %)
1940 -
1987
1988 2196.5 13.22
1989 2196.5 0

1990 2896.5 31.86

1991 3646.5 25.89
1992 4546.3 24.68
1993 4901.5 7.81
1994 5691.5 16.12

1995 6076.4 6.76

1996 7376.5 21.39
1997 8736.5 18.43
1998 9886.4 13.16
1999 10426.4 5.46
2000 11256.5 10.55
2001 12476.4 8.24

2002 11536.3 (7.53)

2003 10659.9 (7.59)
2004 9029.8 (15.29)
2005 6576.8 (27.16)

2006 3876.8 (41.05)

Source: NRB Quarterly Economic Bulletin. Mid. July 2007
* Growth rate is calculated by taking previous years base year.
 Figure: 8

Trend of national Saving Bonds

14000

12000
Total amout of national saving bonds

10000

8000

6000

4000

2000

0
87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06
19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20
Year

The above table and fig. shows the amount and trend of the national
saving Bonds issued by the government during past 20 Years (1987-
2006) . which is increasing trend and reached to Rs. 12476.4 million in
the year 2001 then after it decrease regularly by 7.53% , 7.59% 15.29%,
27.16% and 41.05% in the respective year 2002, 2003, 2004, 2005, and
2006.

4.1.4.4 Trend of Citizen Saving Certificate

The table given below, shows the amount of citizen savings certificate by
the government during 20 years period (1987-2006)
 Table: 6

Trend of Citizen Saving Certificate

(Rs in million)
Year Total national saving bonds (Rs) Growth rate (in %)
1987 0 -
1988 0 -
1989 0 -
1990 0 -
1991 0 -
1992 0 -
1993 0 -
1994 0 -
1995 0 -
1996 0 -
1997 0 -
1998 0 -
1999 0 -
2000 0 -
2001 0 -
2002 628.1 -
2003 931.1 48.24
2004 1178.9 26.61
2005 1428.9 21.20
2006 1678.9 17.49
Source: NRB Quarterly Economic Bulletin. Mid. July 2007
* Growth rate is calculated by taking previous years base year
 Figure: 9
Trend line of citizen saving certificate

1800

1600
total amount of citizen saving certificate

1400

1200

1000

800

600

400

200

0
2002 2003 2004 2005 2006
Year

Form the above table it is clear that the government of Nepal had issued
citizen saving certificate first time in the year 2002 for Rs. 62.8.1 million
which is followed by Rs. 931.1 million Rs. 1178.9 million Rs. 1428.9
million and Rs. 1678.9 million in the year 2003, 2004, 2005 and 2006
respectively and from the figure it is clear that the issued of citizen saving
certificate issued made by government is increasing trend and ownership
pattern of citizen saving certificate is shown by the following figure.
 Figure: 10
Ownership pattern of citizen saving certificate

1800.0

1600.0

1400.0

1200.0

1000.0

800.0

600.0

400.0

200.0

0.0
2002 2003 2004 2005 2006

NRB P.A
From the above fig. the main holders of the citizen saving certificate are
NRB and personal area. In the year 2002 the government issued first
citizen certificate which was totally hold by NRB. In the year 2003 the
NRB holds 0.49% or Rs, 3.1 million and rest by 3.47% or Rs. 49.6
million, 3.38% or Rs. 52.6 Million respectively and rest of by personal
area i.e. 96.11% or. Rs. 1133.1 million in year 2004 which is by 96.53%
or Rs. 1379.3 million and 96.61% or Rs. 1501.3 million in the year 2005
and 2006 repetitively.
4.1.4.5 Trend of Special Bond
The table given below shows the amount of special bonds issued by the
government during 20 years period (1987-2006).

Table: 7
Trend of Special Bond
(Rs in million)
Year Total amount special bond Growth rate (in %)
1987 627.4 -
1988 697.8 11.22
1989 4431.8 53.11
1990 4567 3.05
1991 9376.1 105.30
1992 10073.2 7.43
1993 11019.1 9.39
1994 14991.2 36.05
1995 15466.8 3.17
1996 16050.6 3.77
1997 16019.6 (0.19)
1998 16035.5 0.10
1999 17784.2 10.91
2000 17541.4 (1.37)
2001 13994.3 (20.22)
2002 9259.3 (33.84)
2003 9621.7 3.91
2004 8946.2 (7.02)
2005 8176.3 (8.6)
2006 3469.8 (57.56)
Source: NRB Quarterly Economic Bulletin. Mid. July 2007
* Growth rate is calculated by taking previous years base year
 Figure: 11

Trend line of Special Bond

20000

18000

16000
total amount of citizen saving certificate

14000

12000

10000

8000

6000

4000

2000

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
year
From the above table the amount of special bond issued by government
during past 20 years (1987-2006) which is increasing trend upto the year
1996 then after it falls by 0.19% then after it increase slightly by 0.10%
and 10.91% in the year 1997 and 1998 respectively. From the year 2004
it is continuously decrease by 7.02%, 8.6% and 57.56% in the year 2004.
2005 and 2006 respectively. From the figure also it can concluded that
the amount of special Bond issued by the government is very much
fluctuating during the last 20 years period. (1987-2006) and ownership
pattern of special bonds are show by the following figure.
 Figure: 12
Ownership Pattern of Special Bond.

20000

18000

16000

14000

12000

10000

8000

6000

4000

2000

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NRB C.B others *

* Manufacturing Processing Companies, Trading Companies and Individual Investors

4.1.5 Key Characteristics and Investors of Nepalese Corporate
Debt Securities
Bonds can have many unique and important characteristics. In Nepal,
Corporate debt securities are not very popular. The enterprises depend
upon banks for debt capital that they want to employ in business. Only
seven issuance of debentures are recorded by SEBO. In 1997/98 Sri Ram
Sugar Mill (SRSM) issued debentures for Rs. 93 million follwed by
Nepal SBI bank limited in 2005/06 for Rs. 200 million. Bottlers Nepal
and Jyoti group issued debentures the record of these issues could not be
obtained. Some of most important characteristic of debentures of SRSM,
HBL, NIBL, EBL, BOK, NICBL and Nepal SBI bank Ltd are given as.
 Table: 8
Key characteristic of Nepalese corporate debt.
S.N Characteristics SRSM HBL NIBL EBL BOK NIBL NICBL Nepal SBI.

1 Par values Rs. 1000 1000 1000 Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000
2 No. of 93000 360000 300000 300000 200000 250000 200000 200000
Debenture
3 Coupon rate 14% 8.5% 7.5% 6% 6% 6% 6% 6%
4 Maturity 4 years 7 years 7 years 7 years 7 years 7 years 7 years 7 years
period
5 Nature of Semi annually Semi- Semi- - - - - -
interest annually annually
payment
6 Provision of - Rs. 51.429 Rs 43
sinking fund million each million
year each year
7 Provision of Nepal Bank ltd. - -
trustee
8 Nature of Manufacturing Banking Banking Banking Banking Banking Banking Banking
business and processing

9 Subscription Under Over Over 100% Over 100% 100% over

 subscribed subscribed subscribed
10 Purpose of Expansion of to follow
issuance production NRB's
capacity directives and
to fulfillment
of
supplementary
capacity
11 Nature of Public offering Private
placement placement and
public
offering
12 Convertibility Yes No No No No No No No
i) conversion i) 10 equity
ratio share
ii) conversion ii) Rs. 100 each
price equity share
13 Issue NIDC capital `Nepal Ace CIT NMB AFC AFC CIT
managers market merchant finance
Bank comp. ltd
14 Minimum no. 1 25 or more
of debentures than 25
to be debenture it
purchases. should be
divisible
Par value

The par value or principal of a bond indicates the amount of money that
must be repaid at maturity. All of seven debentures have par value of Rs.
1000.

Minimum no. of debentures to be purchased

In the case of SRSM, minimum no. of debenture to be purchased is 1. but

it is 25 in HBL, NIBL, EBL, BOK, NIBL, NIC and Nepal SBI. Again if
any investors want to purchase more than 25 debenture. The total no. of
purchased debentures should be divisible by 5,

Coupon interest rate

The coupon is established at the time bond is issued and represents the
nominal interest rate that will be paid. The coupon rate were 14%, 8.5%,
7.5%. of SRSM, HBL, NIBL, respectively EBL, BOK,NIBL, NIC and
Nepal SBI offered same as 6% semi annually.

4.2 Primary Data Analyses

Questionnaire survey was made among investors of different nature

randomly. The total number of subjects or cases is 122. Details of the
descriptive statistic are shown in appendix I.

Gender and Age

Among subjects only 19.7% were female investors where as 80.3% were
male investors. As per the age 30.3% are of below 30 years and rest are
of 30 and above group.
Education

On the basis of education investor are categorized in three groups-

undergraduate, graduates and postgraduates and above, among them
majority were graduates 50.8%, 35.2% of respondents were postgraduate
and above and the rest 13.9% were undergraduates.

Employment Status

Majority of investors i.e. 62.3% were found the jobholders. Which means
that they are the regular earners 22.1% of respondents were found to be
self employed they are also the regular earners very few were found
retired (i.e.2.5%) , they have not the current regular income source except
pensions and provident funds. 13.1% were found unemployed. Which
means that they have not the regular source of income beside depending
on other sources.

Category

When they were asked in which category of inviters they belong to a

significant portion of respondents (35.2%) answered they are less
informed investors. Likewise, 12.3% were found to be analyst or
professional investors, and 10.7% said that they are well informed
investors and rest 41.83% were informed investors. During the survey it
was found that these investors which were found in NEPSE, as well as
Brokers offices were mostly well informed and analyst.

Size

On the basis of amount of investment on financial instrument investors

are categorized into two groups-small and medium and large investors.
Exactly 50% of investors were found under the category of medium and
large investors and rest 20% were small investors.
4.2.1 Preference over Major Investment Alternative

For this study, corporate securities, government securities, real estate and
bullion were taken as the major investment alternatives prevailing in
investment environment. Table 9 shows the total of ranks (rank sum) and
ranks assigned.

Table: 9
Ranks of investment alternatives

Alternatives Rank sum Rank

Corporate securities 355 1

Government securities 327 2

Real Estate 300 3

Bullion 238 4

Source: questionnaire survey (Q. 4) Appendix II

N  1
th

Median = value of   item

 2 

= value of 2.5th item

327  300 
=   = 313.5
 2 

As per the median analysis the alternatives which have the rank sum of
more than 313.5 are the preferred alternatives and those with less rank
sum are the less preferred alternatives. From this, we can say that
corporate securities and government securities are the preferred
alternatives where as real estate and bullion are less preferred. In this
case, corporate securities are the most preferred investment alternative,
and bullion is the least preferred investment alternatives.

Taking responses of total cases (122), the investment alternatives are

ranked as per their rank sum. It shows that corporate securities are the
most preferred alternatives, government securities is second preferred
alternative and then comes real estate. The bullion falls in the least
preferred category.

Rank Test

Ranks given in the above table are valid only if the difference of rank
sum is statistically significant. A suitable test that can establish the
significance of the differences of the rank sum is the Friedman test. It
consists of computing a test statistic called Friedman chi-square. Before
computing the test statistics, we have to accept the assumption that each
individual respondent prefer all alternatives. They rank only because of
restriction imposed on them to select one. The hypothesis to be tested is
that all sectors are equally preferred, against the alternative that at least
one instrument is preferred more than the other remaining sectors.

H0= corporate securities, government securities, real estate and bullion all
are equally preferred by the investors.

H1= corporate securities, government securities, real estate and bullion

are not equally preferred by investors and of them is more preferred.
Calculation of Friedman test statistics

Corporate Government Real Bullion Total

securities securities estate

T 355 327 300 238 1220

T2 126025 106929 90000 56644 379598

x2 1145 1005 904 606 3660

Sum of Squares

Between sectors
Ss alternative = T 2

=
G2
= 61.459
t-1=3
n tn

With in subject G2 n (t-1)=366

ss people =  x2  tn
 610

Residual ss res = 548.541 (n-i) (t-1) = 369

Notations:
T=total rank/rank sum X 2
 summation ofsquare of rank

n= no. of subjects t = No. of instruments

G= T
Now,
2 n(t  1) ssalternative
 = = 36.875
ss people

Since the calculated value of chi-square (36.8765) exceeds the tabulated

value (7.815) the null hypothesis is rejected. So it can be said all
alternatives are not equally preferred. The new ranks given to the sectors
valid. It means that the most preferred alternative for investment is the
corporate securities as best alternative because of the reason also,
like bank interest rates are going down, government bonds are rarely
available, there is persistent slump in real estate business and the bullion
market is not systematically organized.

4.2.1.1 Preference as per Size of Investor

To find if the preferences differs with the size of investors, the ranking
made by both size of investors were analyzed.

Table: 10

Ranks given by size of investors

Investment Rank sum Rank

alternatives
Small Corporate securities 164 3
Investors Government securities 152 2
Real estate 178 4
Bullion 124 1

Large Corporate securities 191 4

Investors Government 173 3
Real estate 132 2
Billion 114 1

Source: Questionnaire survey Appendix III

The above table should the rank sums and ranks given to the investment
alternatives by the small and large investors. Highest coefficient means
the best rank. Spearman rank correlation coefficient rho ‘rs’ is calculated
to find if there is any correlation between the ranks given by these two
groups of investors.

H0= there is not any relation between the small and large size of investors
and their preferences. They are totally independent.

H1= size of investment and preferences are not totally independent

 Table: 11

Calculation of spearman rank correlation

X Y d d2
Corporate securities 3 4 -1 1
Government securities 2 3 -1 1
Real Estate 4 2 2 4
Bullion 1 1 0 0

d  0 d 2
6

6 d 2
rs=1-  0 .4
N3  N

Where, x = Ranks given by small investors

Y = Ranks given by large investors

rs= spearman rank order correlation coefficient
d= difference of ranks
N= number of condition

Spearman’s rho in this case is 0.4 which is significant of the ρ=0.60 level
(two tailed test). This result means that correlation in between different
size of investors preferences is very insignificance. Two sizes of investors
are not matching.

4.2.2 Preference over Financial Instruments.

Previously we have seen the preferences of investors over the

major investment alternatives. Now we have dropped the alternatives like
real estate and bullion are focused only on the financial instruments.
Study had considered common stock, preferences shares, government
bonds, debentures mutual funds and treasury bills as the major financial
instruments. Since these are the major instruments that prevail in
Nepalese financial market.

Table:12

Ranks of financial instruments

Instruments Rank sum Rank

Common stock 283 1
Government bonds 180 2
Preference shares 110 3
Debentures 59 4
Mutual funds 55 5
T-bills 45 6

Sources: questionnaire survey 2008, Appendix IV.

The above table lists down these financial instruments, as well as it

presents the rank sums and ranks. Where we can see common stocks have
the highest rank sum and T- bills have got the lowest rank sum

Calculated median=84.5

Median has been calculated on the basis of rank sum. As per median the
stock which has score (rank sum) more than 84.5 are the preferred
instruments in comparison to others with less scores. Scores show that
common stock is the most preferred stock. Since it has the highest score
and T-bill is the least preferred stock since it has the lowest score.
Common stocks, government securities and preference shares are the
preferred instruments in comparison to debentures, mutual fund and
T-Bill.
Rank test

On the basis of rank sum ranks were given to the instruments, as shown
in table12. To test the statistical validity of these ranks, Friedman test is
used. Hypothesis to be tested in this regard are.

H0= common stocks, government bonds, preference shares, debentures,

mutual funds and T-Bills all are not equally preferred instruments.

H1= These financial instruments are not equally preferred, some of them
are more preferred than others.

Friedman test statistics  2 = 225.14 ……….( see Appendix V)

d.f (n-1)=5

Tabulated–critical value of  2 at 0.05 level of significance (5.D.F)

=11.070.

Since the calculated value of  2 225.14 is grater than the tabulated value
(11.670) the null hypothesis is rejected. So, all alternatives are not equally
preferred. The new ranks given to the sectors are statistically valid. The
differences in the rank sum have not occurred only due to the channel. It
means that the most preferred instrument is the common stock and very
least preferred alternative are the mutual fund and T-bill was found very
low, it is also because of the lack of access of general investors to the T-
Bills.
4.2.2.1 Preferences as per size of Investors

Table: 13

Rank made by size of investors

Size Financial instruments Rank sum

Small investors Common stock 143
Preferences shares 56
Debentures 28
T-bill 24
Government bonds 91
Mutual funds 22
Large investors Common stocks 140
Preferences shares 54
Debentures 31
T- bills 21
Government bonds 87
Mutual funds 33

Source: Questionnaire Survey, 2008. Appendix-VI

The above table summarizes the ranks assigned by small investors and
large investors to the six different financial instruments. Spearman rank
correlation coefficient rho 'rs' is calculate to find if there is any correlation
between the ranks given by these two groups of investors. Hypothesis to
be tested in this regard are

H0= There is not any relation between the small and large investors
preferences, they are totally independent.

H1= Size of investment and preferences are not totally independent, their
presences are matching.

In term of instruments the ranks given by small investors and large

investors are almost similar. The preferences of small and large investors
over these financial instruments are almost similar. Common stocks
appear as the most preferred instrument either the investor is large or
small.

4.2.2.2 Preference over Investment Sectors

SEBO and NEPSE have categorized the listed companies, in 8 sectors as

commercial banks. Finance Companies, Insurance Companies,
Development Banks, Manufacturing and Processing, Trading, Hotels and
others. For this study also same sectors of investments are considered to
see which sector the investors prefer more to invest.

Table:14
Ranks of investment sectors
Sectors Rank total Rank
Commercial bank 356 1
Finance companies 191 2
Insurance companies 110 3
Development banks 60 4
Manufacturing & 8 5
processing
Trading companies 4 6
Hotels 3 7
Source: Questionnaire Survey 2008 (Appendix VII)

The above table shows the list of the investment sectors of Nepalese
financial system and summarizes the ranking made by investors.

Calculated Median = 60

As per the median calculated the sectors which have the rank sum more
than 60 are the preferred sectors and the sectors which have less rank sum
than 60 are the less preferred sectors. According to this result commercial
banks finance companies and insurance companies are found to be the
most preferred sectors where as the manufacturing and processing,
trading and hotels are the less preferred sectors. Among them commercial
banks are most preferred hotels are least preferred sectors for investment.
Rank Test

To check the statistical validity of the ranking, Friedman

chi-squire has been calculated. Here we have to accept the assumption
that each individual respondent prefers all sectors. The hypothesis to be
tested is that all sectors are equally preferred against the alternatives that
at least one instrument is preferred more than the other remaining sectors.

H0 = all seven sectors are equally preferred by the investors to make

investments

H1 = all seven sectors are not equally preferred, some are more preferred
than other by the investors to make investments.

Calculated Friedman test statistics  2 = 568.92 ...(See Appendix- VIII)

Tabulated value for  2 at 0.95 (6d.f) = 12.591

Since the calculated value of chi-square exceeds the tabulated value the
null hypothesis is rejected. That is all sectors are not equally preferred.
The new ranks given to the sectors are significantly valid. Commercial
bank is the most preferred sector of investment where as hotels, trading
and manufacturing and processing are least preferred sector.
4.2.2.3 Preferences as per size of Investors:
Table:15
Ranks made by size of investors:
Large investors Rank sum
Commercial banks 177
Finance companies 96
Insurance companies 60
Development banks 32
Others 1
Small investors Rank sum
Commercial banks 179
Finance companies 260
Insurance companies 59
Development banks 28
Others 14

Sources: Questionnaire Survey, 2008, Appendix IX

Note: Here three sectors, manufacturing and processing, trading and hotel
are merged as others because of very low (0) frequency.

The above table presents the totals of ranks generated from the ranking
made by small and large investors preferences of small and large
investors over investment sectors have been studied to explore whether
preferences change with the size of investments or not. Hypothesis to be
tested in this regard are

H0 = there is no significant difference between the ranks given of small

and large investors i.e. there is no difference in the preferences of small
and large investors over those sectors.

H1 = there is significant difference between ranking made by small and

large investors.

Test statistic in this regard is one way non-parametric ANOVA.

Calculated H = 0.0982 (d.f = k -1 = 1)

Tabulated value of chi square at 0.05 level of significant with 1 d.f. is
3.841. Since the calculated value is less than the tabulated value null
hypothesis is accepted. So, it can be concluded that both small and large
investors have similar type of preference toward the investment sectors
both types of investors prefer the commercial banks are the best
investment sectors where as the sectors like manufacturing and
processing, trading and hotels are least preferred.

4.2.3 Preferences over Investment Objectives

Every investor has some objective over the investment she/he makes.
Major investment objectives are the price increment or growth, regular
return, liquidity and safety. Different investors might have different
objectives. Here the study had tried to know the preferences of investors
over these objectives.

Table:16
Ranks of investment objectives
Rank sum Rank
Price increment/growth 424 1
Regular return 347 2
Safety 186 4
Liquidity 263 3

Sources: Questionnaire survey, 2008, Appendix X

The above table shows the frequency of ranks provided by respondents to

these objectives, rank sum and ranks.

Calculated median = 305

Calculated median means that the investment objective which has the
rank sum of more than 305 is the preferred objectives and vice versa. It
means growth/ price increment and regular return are the preferred
objectives in compression to liquidity and safety.

Rank test

Friedman test is used to test whether the rank we have assigned is

statistically valid or not. In this regard,

H0 = investors equally prefer the investment objective like growth, return,

safety and liquidity.

H1 = investors do not prefer all the objectives equally.

Calculated Friedman test statistics  2 = 156.639 (d.f = 3)

The tabulated value of chi-square at 0.05 significance limit with 3 d.f. is

7.815. Since calculated value of chi square 156.639 is greater than
tabulated value (7.815) the null hypothesis is rejected so it can be said
that, the investors don’t prefer all the objectives equally. The ranks
assigned in term of rank-sum are valid in this case, from the above
analysis is found that investors prefer the price increment or the growth of
investment as the best objective of investment. In comparison to other
objective risk factor is less considered.

4.2.3.1 Awareness of Financial Instruments

Among the 122 randomly selected investors, only 12.3 percent were
found to be professional investors who are really informed and aware as
well as they do the analysis while making investment. 10.7% said that
they are well informed about financial market. Around 43 (35.2 percent)
of investors said that they are less informed type of investors. A large
segment of investors (rest 41.8 percent) said that they are neither less
informed nor well informed. They are informed just to satisfactory level.
It shows how much aware are the Nepalese investors. Only 28 among 122
said that they are really much informed. This scenario depicts that
majority of investors are not well informed and much aware.

4.2.3.2 Education and Market Information

In the samples taken majority of investors were found informed but not
well informed and also significant portion said they are less informed. A
test has been made to see if the awareness of market information varies
with the level of education. Theoretically it can be said that highly
educated person has much knowledge of market. To test it, chi-square test
has been made for the variables like education and categories of
investors.

H0 = the two variables, level of education and market information has no

association.

H1 = the two variables have significant association.

Chi-square = 6.199

d.f. = 3

Contingency coefficient = 0.220

Tabulated value of chi-square at 0.05 level of significance (3.f.d.) = 7.815

Since the tabulated value exceeds the calculated value null hypothesis is
accepted. It means that there is not any significance association between
level of education and market information.
4.2.3.3 Consideration for Corporate Security Investment
Table: 17
Consideration for corporate security investment
Frequency Percent
Companies goodwill 59 48.4
Forecasted profit 46 37.37
Friend and relatives motivated them 16 13.1
Advertisement appealed them 1 0.8
Total 122 100

Sources: Questionnaire survey, 2008, Q. No. 7

From the above table, most of the investors 48.4 percent said that
company’s goodwill is the most important which guides their investment
decisions. Where as 13.1% of investors said that they just buy the
corporate securities because of the friends and relatives. 37.7 percent
investors consider forecasted profits before investing in corporate
securities. It means that only 37.7 percent analyze the forecasts profits of
companies before making decision.

4.2.3.4 Attitude toward Government Securities

Table: 18
Investment on Government Securities
Frequency Percent
Investors who have invested in government securities 85 69.67
Investors who have not invested in government 37 30.33
securities
Total 122 100
For those who have invested in government securities, what factor made
them invest on government securities.
Marketability 9 10.59
No risk/safety 73 85.88
NRB notices 3 3.53
Friends and relatives 0 0
Just followed the whim 0 0
Total 85 100
Sources: Questionnaire survey, 2008, Q.No. 9
The above table shows that 69.67 percent of investors have invested in
government securities. 85.88 percent of them have invested on
government securities because of safety or no-risk, 10.59 percent have
invested because of the liquidity of the government securities and very
few investors 3.53 percent have invested on government securities just by
studying NRB notices. However, no body said that they were affect by
the whim and their relatives and friends.

4.2.3.5 Attitude toward varying Risk-Return Alternatives

Table: 19
Varying Risk-Return and Preferences of Investors
Frequency Percent
Nominal return/No risk 9 7.38
Small return/ Less risk 17 13.93
Moderate return/ Moderate risk 69 56.56
High return/Higher risk 23 18.85
Super return/ Max risk 4 3.28
Total 122 100

Sources: Questionnaire survey, 2008, Q. No.10

The above table shows that maximum response is toward alternative

which is moderate risky and yields moderate return. Then next comes
alternative with responses of 18.85 percent with high return and high risk.
4.2.3.6 Attitude towards the Development of Financial Market
Properly
Table: 20
Attitude towards the Development of Financial Market
Frequency Percent
Political instability 29 24.16
Small market 47 38.52
Investment awareness 24 19.67
Rules and regulation 22 18.05
Total 122 100

Sources: Questionnaire survey, 2008 (Q. No. 12)

From the above table, most of investors 38.52 percent said that the small
market is the main cause of the development of financial market properly.
Where as 24.16 percent said that the political instability is the main
obstacles. Similarly 19.67 percent respondent said that investment
awareness plays important role for the development of proper financial
market. Likewise 18.05 percent investors believe that the rules and
regulation are insufficient for the proper development of financial market.

4.3 Major Findings

4.3.1 Major Findings through Secondary Data

i. The total volume of securities issued form 1993/94 to 2005/06 are

in increasing trend. The major portion of securities market is
covered by government securities and is also in increasing trend.
Government securities are main dominant securities in sense of
volume. which covered more than 98 percent of total securities
market and which are issuing regularly. The volume of corporate
debt securities occupies nominal percent i.e. less than 0.5 percent
 of total security volume and irregular only seven issuance can be
seen during the twenty years period.

ii. While analyzing the ownership pattern of government bonds and

T-bills it is found that major portion of these securities are hold by
Nepal Rastra Bank in early stage of the issuance which is
dominated by the commercial banks, participation of financial
institutions, insurance companies and other organization in
purchasing government securities is comparatively low on the other
hand, participation of individual investors is increasing but not
sufficiently.

iii. By observing the trend of government debt securities, the amount

of these securities is increased every year. Which is good sign for
debt securities market. If the government maintain this trend in
future, it will be helpful to reduce external debt and to mobilize
internal debt in productive sectors by which nation will be
benefited.

iv. The trend of T-bills issued during the study period seems to be
increasing. It means money market is growing effectively which is
good sign for overall debt securities market also.

v. The trend of development bond was increasing trend in the early

five years which is decreasing upto the early ten years and
increases sharply in recent year of the study period. Which also
shows good prospect of debt securities market. The trend of
national saving bond is increasing sharply in first 15 years but it
decrease sharply in last five years.
 vi. The main holders of national saving bond are individual investors.
Which shows the individual investor are attractive towards the debt
securities.

vii. The trend of special bond is increasing in the first 13 years but it
decrease sharply in last 7 years. The main holders of special bond
are Nepal Rastra Bank and followed by commercial banks and
others respectively.

viii. The characteristics of Nepalese corporate debt securities are quite

worth as necessary to be quality security.

ix. Debenture of SRSM was not fully subscribed. At the time of

issuance company's financial performance was not proper so the
public could not believe on it. So it was undersubscribed. Where as
the debentures of HBL, NIBL and Nepal SBI are oversubscribed.
This shows the future market of banking sector's debt securities is
quite prosperous.

4.3.2 Major Findings Through Primary Data

i. With respect to preference regarding choice of securities, the

majority of respondents prefer the common stock responses to
ward T-bill were found very low. However, government bond
appeared as the second most preferred financial instrument. Those
investors who are more aware and educate have welcoming attitude
toward government bonds also. Preferences of different categories
of investors, as well as different size of investors were also found
similar. Common stock appeared as the most preferred instrument
for all of them. As per the issuance also, Nepalese capital market
 heavily depends upon common stock. The issuance of other
instrument in corporation to common stock is very poor.

ii. With respect to preference regarding the choice of investment

sectors and investors preferences major of respondents prefer
banking and financial sector very much in comparison to other
sectors like manufacturing and processing trading, hotels and other.
Commercial bank, finance companies and insurance were found to
be the most preferred sectors. This preferences did not change with
the change in size of investors. This means, weather small or large
all investors prefer commercial banks as the most preferred sector
to invest where as sectors like hotel and trading are the least
preferred sector to invest.

iii. Investment objectives and investor's Preferences: Growth (capital

gain) was found to be the most preferred investment objective for
all type of investors either they are less informed, informed, small
or large investors. While considering the stock investment only,
then only investors preferred capital gain. Bonus shares appeared
as the second preferred objective of stock investment. Some large
investors preferred voting rights and representation in board as the
objective of stock investment.

iv. Government securities and investor's preferences: More than 30

percent respondents have never invested on government securities.
Majority of those who have invested said that they have invested
because of safety. Those who are aware and have invested in
government securities disagree with the proposition since the yield
of government securities are low, they are not attractive to
 individual investors. But those, who mostly play in corporate
securities and risk taker, they agreed with the proposition.

v. Nepalese financial market is lacking well informed and

professional investors. Most of the investors are educated but
education has not do much with the knowledge of market and
investment opportunities only 37.7 percent were found who
consider the factor like fore-coasted profits of the companies while
investing rests of them follow the whim. Investors said that before
investing the major factors what they should consider are
companies track record, promoters of company forecasted profit
and environment factors.

vi. Commercial banks and finance companies are the major

institutional investors. They are found investing heavily on
government securities in comparison to common stocks. While
comparing these two bodies, it was found that commercial banks
prefer government securities more than the finance companies.
Although there are not any restriction for the government
securities, their investment on shares and debentures are guided by
the directives issued by NRB. So they are not completely free to
decide on this matter. So guidelines matter much rather than their
independent preferences.

To sum up in one line, Nepalese investors are found interested to

investment in common stocks of financial institutions with the
expectations of capital gain.
 CHAPTER-V

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

In Nepal practice of raising capital from publics has started in 1936. In

the corporate sector the share floated by the Biratnagar Jute Mills in 1936
A.D. were the first common stock issued for public. Likewise, the
treasury-bill for the first time was issued four and half decades ago, in
1962 and development bond in 1964. Before the establishment of security
exchange centre, there were no institutional arrangements to undertake
and mange the new issues of securities. IPOS have to be made as per the
provisions of then company acts although they were not adequate and
relevant. With the fled need of facilitating security market. SEC comes
into existence in 1976, in 1983 security exchange act 1983 got enactment.
The act prohibited the exchange of unlisted securities. The first
amendment in security exchange act (enacted in 1993), converted SEC
into Nepal stock exchange limited (NEPSE) and created a separate
body as securities board (SEBO). NEPSE is the only body which handles
the trading of securities of financial market of Nepal. SEBO on the other
hand, works in policy level matters as a regulator to promote the
securities market in Nepal.

The phenomenon started with the Biratnagar Jut Mills get momentum
only after the restoration of democracy and liberalization policy. Between
1984 and 1990, 42 companies were listed. Till now, the companies like
bank, finance, insurance, hotel, manufacturing trade, aviation etc have
entered security market but the companies from construction, information
technology, hydropower etc. have not entered yet. Ordinary shares, right
shares preference shares, debentures, mutual funds and unit schemes are
the major corporate securities of Nepalese capital market. Common
stocks appear as the most widely used corporate securities. To turn
toward the government securities there are T-bill and bonds of several
type like development bonds, national saving bond special bonds and
IMF promissory notes.

Nepalese financial market consist varied types of investors form very

small to large investors. There are those investors who are completely
unaware of market mechanism on the other hand there are professionals
players of security market also. However, the institutional investors seem
very much passive in secondary market although their participations in
IPOs are very significant.

5.2 Conclusion

Although history begins from 1936 with the issues of Jut-Mill, the
scenario of Nepalese financial system has not developed significantly.
First, it looks very long to give financial market a well structured
organized shape. It's only since 1993 that the capital market of Nepal had
got regulated and organized shape. The fifteen years of history might not
be a long history for a capital market. History shows that in Nepal only
four types (common stock, preference share, debentures and mutual
funds) of securities were issued at varying time. Nepali security market is
completely dominated by the equity shares and also debt market is
dominated by government debt securities. Investors have not more choice
so they are pouring their saving on those equity instruments. There are
very less number of professional giant individual investors. We can
almost count them easily. However, there are large numbers of tiny
investors, who just hold 10 to 50 shares of 2-3 companies. A dualism can
be found if we see the scenario of investors, there are very large investors
(although less number and there are small investors too, in very large
number. The awareness level of those large professionals investors is
really good but small investors seldom know about the market
mechanism. Many of them, who have just invested due to the influence of
friends and relatives, even don't know how the transfer of share
ownership takes place and what its process is. The awareness level of
general investors is really poor. They just follow the whim of the market.
Who don't know about the financial market and investment scenario
prefer real estate and bullion where there capital gets stuck for the long
time in a hope of rise in their price. Institutional investors are also very
passive in Nepal. Commercial banks finance companies, insurance,
pension fund, investment trusts are the major institutional investor of any
economy. It seems stock market liquidity needs to be improved seriously.
The efficient services of market intermediaries conducive and realistic
polices of regulating authorities, awareness companions for investors,
better concern toward the investor's psychology and preferences and so
on are the major felt need, in this regard.

5.3 Recommendation

With the study of findings of research and the literatures reviewed finally
some recommendations can be forwarded to the concerned parties.

i. Nepalese capital market is small, to day any how it is sustaining

with the maximum use of equity stocks. But we cannot rely on this
scenario in long term. Nepal had already entered WTO, and after
restored of political stability, definitely the development pace will
increase. This will increase the demand for capital mobilization. At
the market cannot attract the investors only by equity instruments.
So, financial engineering and innovations are very crucial for
 Nepalese financial market. To later the different investors of
different nature and to attract all the savings toward financial
system new securities of different nature are to be invested. Hybrid
type of instrument, assets backed instruments forward future,
option, swaps etc. can be some of the examples.

The same in with the case of government securities, the holding of

individual is just around 26 percent to increase this new type of bond and
saving cards, municipal bonds etc. should be issued.

ii. The banking sector seems as the only viable sector for investment.
The major cause of this is the possibility of stock dividend as well
as the disclosure practice. The listed companies of other sectors
should also have the effective disclosure practice so as to gain the
trust of investors over them. Institutions should not only focused on
the mandatory disclosure practice other crucial information like
change in management, cash and stock dividend declaration, major
projects and contracts of the institution, expansion and
diversification of business etc. should also be timely made public.

iii. Comments like we don't have wide choice of instruments, so we

are compelled to buy whatever floats in the market do not reflect
the good scenario. Investor's psychology and preferences had
always been a neglected area in Nepalese financial market. Issuers
should consider the investors psychology are preferences while
issuing the securities whether that be money market instruments or
capital market instrument. They should adopt the concepts of
behavioral financing, engineering and securities innovation, to
design new types of securities so as the attract more savers in the
securities investment arena.
 iv. It seems that the investors outside the Kathmandu valley are
neglected as if they are not supposed to participate in security
exchange. These days they can participate in primary market
because of various outlets of the issuers. However, they are
completely deprived from the secondary transactions. So security
exchange centre outside the valley should also be established to
cater the preferences of those investors who are residing outside the
valley.

v. Regulating authorities like SEBO should act for the well beings of
investors with the pro-investor policies. They should not be simply
watching the mal practices of listed companies. Investors are the
main pillar of capital market. Without the trust of investor
regulating authorities should act on the best interest of investors.
While giving the approval to the new issues and types of issues the
inventors preferences should also be taken into account.

vi. The regulating authorities like SEBO/N and NRB should try to
bring the investors in the main streamline so as to increase their
trust and participation in financial system. Representatives from
investors in regulating mechanism can be one strong move in this
regard. Regulating authorities should act as the facilitators rather
interveners.

vii. Study shows that investors are in confusion, or unaware of market

mechanism. Due to this they are investing haphazardly as well as a
big chunk of capital is flowing toward unproductive investments
like real estate and bullion. If awareness level of the investors can
be improved more savings can be pulled toward financial
instruments. Awareness programmes and campaigns should be
 launched for this. This also helps to increase the number of smart
investors who will not just gamble on the basis of rumor and whim.

viii. There are not any body who effectively council and give
investment management information to the current as well as
prospective investors. Specialized firms, consultancy or forums to
provide financial assistance and advice to the investors are really
needed for the betterment of investors investment decisions.

ix. To attract the institutional investors in the market of financial

instruments and to avoid their passiveness in secondary market.
Some flexibility in the directives should be brought. The
limitations imposed currently like 30 percent of core capital for
finance companies and 30 percent of paid up capital for
commercial banks prohibition on the investments over
hybrid-instruments etc. can be loosened to make them invest more
on the financial instruments.

x. Investors should always try to know more about the capital market
mechanism. They should have some knowledge of technical and
fundamental analysis. This will reduce the tendency of taking
security investments as a mere gamble and will create rational
investors with rational judgment.

xi. Investors should try to be well informed of the alternatives

prevailing investment environment. They should not be carried
away by the whim and rumor. They should develop the habits of
studying related publications, periodicals and reports.
xii. Investors should always be clear of their preferences or the
investment objectives. This helps them to choose the investment
alternatives. During the survey, many of the investors were found
in confused state. They say they prefer safety, but were found
neither investing on the government securities nor fixed- income
securities. This is because of the lack of clarity of preference as
well s lack of the knowledge about financial instruments. They
should try to haphazard investment.
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Journal of Finance, Vol 46, No.1.
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Investment Bank Limited.

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Unpublished Master Degree Thesis, Faculty of Humanities and
Social Science. T.U.

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Nepal, An Unpublished Master Degree Thesis, FOM, SDC, T.U.

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Structure and Burden 1974/75 to 1997/98. Kathmandu, An
Unpublished Master Degree Thesis, Faculty of Humanities and
Social Science, T.U.

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Master Degree Thesis. Faculty of Humanities and Social Science.
T.U.

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Thesis. FOM. SDC.

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Thesis. FOM. SDC.

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and Development in Nepal, Nepal Rastra Bank Samachar, 47th
Annual Publication.
Sharma, Birju Prasad, (1988). Burden of Debt in Nepal, Kathmandu, an
Unpublished Master Degree Thesis, Faculty of Humanities and
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Kathmandu, An Unpublished Master Degree Thesis. FOM, SDC.
T.U.

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Nepal, Nepal Rasta Bank Samachar 49th Annual Publication.
 APPENDIX -I

Primary data -Descriptive statistics

Gender Frequencies Percentage

Male 98 80.3
Female 24 19.7

Age
Below 30 37 30.3%
30 and above 85 69.7%

Education
Less than graduate 17 13.9
Graduate 62 50.8
Past graduate and above 43 35.2

Employment status
Unemployed 16 13.1
Job holder 76 62.3
Self employed 27 22.1
Retired 3 2.5

Category
Less in formed 43 35.2
Informed 51 41.8
Well informed 13 10.7
Analyst / professional 15 13.3

Size
Small 61 50
Medium and large 61 50
 APPENDIX- II

Frequency table for the ranking of investment alternatives

Investment Alternatives

Rank Corporate Govt. Real state Bullion

securities securities

1 10 22 32 58

2 32 24 38 28

3 39 47 16 20

4 41 29 36 16

Rank sum 355 327 300 238

APPENDIX-III

Frequency table for rankings made by small and large investors

Small investors

Investment Alternatives

Rank Corporate Govt. Real state Bullion

securities securities

1 6 15 16 24

2 18 16 11 16

3 26 13 6 16

4 11 17 28 5

Rank sum 164 152 178 124

Large investor

Investment Alternatives

Rank Corporate Govt. Real state Bullion

securities securities

1 4 7 16 34

2 14 8 27 12

3 13 34 10 4

4 30 12 8 11

Rank sum 191 173 32 114

APPENDIX -IV

Frequency table for the ranking of financial instruments

Financial instruments

Rank Corporate Preference Debenture T- Govt. Mutual

securities share bill bonds funds

1 15 26 29 10 23 19

2 20 30 12 16 26 18

3 76 8 2 1 35 0

Rank sum 283 110 59 45 180 55

 APPENDIX -V

Calculation of Friedman statistics

Rank Common Government Preference Debentures Mutual T-bill Total

stock bond share fund

T 283 180 110 59 55 43 730

New 1 2 3 4 5 6
rank

R 111 84 64 43 37 27 366

T2 80089 32400 12100 3481 3025 1849 132944

ΣX2 779 218 95 83 442 91 1708

Sum of squares d.f

Between
SS instruments = T 2


G2
= 361.699
t-1 =5
instruments n tn

Within subjects G2 N(t-1)=610

SS people = X2  tn
 979.99

Residual SS res. = 18.291 (n-1) (t-1) = 605

2 N (t  1)SS instrument
 =  225.14
SS people
 APPENDIX -VI

Frequency table for rankings made by small and large investors

Small investors 1 2 3 Rank sum Rank

Common stock 8 12 37 143 6

Preference share 11 15 5 56 4

Debentures 17 4 1 28 3

T- bill 5 8 1 24 2

Government bonds 10 15 17 91 5

Mutual funds 10 6 0 22 1

1 2 3 Rank sum Rank

Large investors

Common stock 7 8 39 140 6

Preference share 15 15 3 54 4

Debentures 12 8 1 31 2

T- bill 5 8 0 21 1

Government bonds 13 10 18 87 5

Mutual funds 9 12 0 33 3
 Calculation of spearman's Rank

X Y d d2

Common stock 6 6 0 0

Preference shares 4 4 0 0

Debentures 3 2 1 1

t-bills 2 1 1 1

Government bond 5 5 0 0

Mutual funds 1 3 -2 4

Total 6

rs= 1- N N
6 d2
3

66
= 1-
63  6
36
= 1-
216  6
= 1-0.171
= 0.829
 APPENDIX -VII

Frequency table for the ranking of investment sectors

1 2 3 Total Freq. Man rank Rank

Commercial bank 2 6 114 358 122 2.92 1

finance company 35 72 4 191 111 1.72 2

Insurance company 57 22 3 110 82 1.34 3

Development banks 23 17 1 60 41 1.46 4

Mfg. and processing 2 3 0 8 5 1.60 5

Trading company 2 1 0 4 3 1.33 6

Hotels 1 1 0 3 2 1.50 7

N  1
th

Median = value of  th
 item = value of 4 item =60
 2 
 APPENDIX -VIII
Calculation of Friedman statistics

Commercial Finance Insurance Dev. Mfg and Trading Hotels Totals

bank comp. comp Banks processing

r 122 111 82 41 5 3 2 366

T 356 191 110 60 8 4 3 732

T2 126736 36481 12100 3600 64 16 9 179006

ΣX2 1052 359 172 100 14 6 5 1708

Sum of squares d.f

Between
SS instruments = T 2


G2
= 839.833
t-1 =6
instruments n tn

Within subjects G2 N(t-1)=732

SS people =  X   1080.57
2

tn

Residual SS res. = 240.737 (n-1) (t-1) = 726

N (t  1)SS instrument
Xr2 =
SS people

732 839.833
=
1080.57

=568.92
 APPENDIX –IX

Frequency table for ranking made by size of investors

Large investors 1 2 3 Rank sum Rank

Commercial bank 1 4 56 177 8

Finance company 19 37 1 96 7

Insurance company 27 12 3 60 6

Development banks 13 8 1 32 4

Other 1 0 0 1 1

Total 26

Small Investors 1 2 3 Rank sum Rank

Commercial bank 1 2 58 179 9

Finance company 16 35 58 260 10

Insurance company 30 10 3 59 5

Development banks 10 9 0 28 3

Other 4 5 0 14 2

Total 29
 APPENDIX –X

Frequency table for the ranking of investment objectives

Investment Alternatives

Rank Price Regular Safety Liquidity

increment / return
gro with

1 6 8 75 33

2 9 32 35 46

3 28 53 7 34

4 79 29 5 9

Rank sum 424 347 186 263

 APPENDIX –XI

Dear Respondent,
This questionnaire is designed to explore the "Development of Debenture
market in Nepal". The data provided by you will be used only for this
research study as partial fulfillment of MBS degree. I assure, your
responses and views will be kept completely confidential. Your correct
information in this regard will help to explore actual scenario in this
context. So, I cordially request you to kindly answer the question below.
Durga Prasad Dhakal
(Researcher)
Shanker Dev Campus
Putali Sadak, Kathmandu

A. Respondent's Profile.
Sex Male Female

Age. a) Below 30 years

b) 30 years and above

Education a) under graduate

b) Graduate

c) Post graduate and above

1. from the investor's points of view in which category you belong.

b) Less informed investor
c) Informed investor
d) Well informed investor
e) Analyst /Professional
2. In which category of investor you belong to regarding the amount
of investment. (Please do not include the investments on real
estate, gold, silver and bank deposit)
a) Small Investor (If less than Rs. 50000)
b) Medium and large Investor (If more than Rs. 50000)

B. Responses towards Financial Instruments.

3. How did you come to know about investment alternatives?

a) Through relatives or friends
b) Through Media
c) Self learning

4. Please rank these alternatives? (Mark 1 to the best, 4 to lowest, and

follow accordingly.)
a) Corporate securities.
b) Government securities
c) Real estate
d) Bullion (Gold, Silver)

5. Among these financial instruments, please mark best three as per

your preference.
(Mark 1 to the best, 2 to just lower, and 3 to lower)
a) Common stock / share
b) Preference share
c) Debentures
d) Treasury bills
e) government bonds
f) Mutual funds
6. Please rank these as per your preference, that your prefer in your
investment?
(Mark 1 to the best, 4 to lowest and follow accordingly)
a) Price increment (Capital gain)
b) Regular return / Dividend
c) Less risk
d) Marketability (easily buying and selling)

7. What made you to buy corporate securities (like share, debentures)

etc?
a) Companies Good Will
b) Companies' forecasted profits
c) Your friends and relatives
d) Advertisements appealed you
e) Because most of people are buying.

8. Which sector do you prefer to invest? (Mark the best three

options) (Mark 1 to best, 2 to just low and 3 to lowest)
a) Commercial banks
b) Finance companies
c) Insurance companies
d) Development banks
e) Manufacturing and processing companies
f) Trading companies
g) Hotels
9. If you have invested in government securities, what made you buy
government securities?
a) Marketability
b) No risk / safety
c) Your friends and relatives
d) NRB notices
e) Because most of people are buying

10. If you have to decide on either of these investment alternatives

which will you prefer to invest?
a) Nominal return / No risk
b) Small return / Less risk
c) Moderate return / Moderate risk
d) High return / higher risk
e) Super return / Maximum risk

11. Are you satisfied with the regulations and provisions of Security
Exchange Board and Nepal Stock Exchange?
a) Yes
b) No
If no please give some reasons.
………………………………………………………..

12. Please rank these, as per your preferences. Why our financial
market could not develop properly? (1 to the best 4 to the lowest)
a) Political instability
b) Small market
c) Investment awareness

d) Rules and regulation