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Finance
> Finance is the art and the science of managing money.
Associates with the process institutions and instruments that facilitate the
transfer of money.
>The part of finance that deals with decisions as to hoe
to rise and use money to maximize the firm value is
financial management. Financial management often termed as
corporate finance.
1. What are the three different attitudes towards
risk?
 In finance, attitudes towards risk refer to individuals' or
investors' different approaches to handling risk and
uncertainty in their investment decisions. The three
primary attitudes towards risk are:
Risk-Averse: These people are cautious and prefer safer
investments, even if it means lower potential returns. They
want to protect their money.
Risk-Neutral: These people are indifferent to risk and
focus solely on maximizing potential returns. They
don't let risk influence their decisions.
Risk-Seeking (risk lover): These people are willing to
take on more risk for the chance of higher returns.
They are comfortable with uncertainty and potential losses.
2. Who’s the banks’ liability?
> Banks' liabilities are the money they owe to their customers
and others. They include deposits and borrowings from other
sources. Liabilities must be balanced by the bank's assets to
ensure it can fulfill its financial obligations.
>> Banks' liabilities are the debts and obligations they owe to
various parties. These parties include the bank's customers who
have deposited money (such as savings or checking accounts),
as well as other financial institutions or entities from which the
bank has borrowed money. These liabilities need to be balanced
by the assets that the bank holds, which typically include loans
given out to borrowers and other investments. The goal is to
ensure that the bank can meet its financial commitments and
remain financially stable.
3. Who are stakeholders?
> Stakeholders are individuals or groups who have an interest or
"stake" in a company or organization. They can be affected by
the company's actions and decisions, and their interests may
vary depending on their relationship with the entity. Common
stakeholders include:
Shareholders/Investors: People who own shares or stocks of
the company and expect financial returns (profits or dividends).
Employees: Workers and staff who depend on the company
for their jobs and livelihood.
Customers: People who buy products or services from the
company and expect value and quality.
Suppliers: Businesses that provide goods or services to the
company.
Creditors: Entities that have lent money or extended credit to
the company.
Government: Authorities responsible for regulating the
company and ensuring compliance with laws.
Local Communities: People living near the company's
operations, who may be impacted by its activities.
NGOs and Activists: Non-governmental organizations and
activists concerned with the company's social and
environmental impact.
Stakeholders have different interests, and companies often
need to balance their needs and expectations to operate
successfully and sustainably.
4. Who are stockholders?
 Stockholders, also known as shareholders, are individuals
or entities that own shares or stocks in a company. When
you buy a company's stock, you become a stockholder or
shareholder of that company. Being a stockholder means
you have ownership in the company to the extent of the
number of shares you hold.
As a stockholder, you have certain rights and benefits:
Ownership: You have a partial ownership stake in the company
proportional to the number of shares you hold.
Dividends: You may receive a share of the company's profits in
the form of dividends, typically paid out regularly to
shareholders.
Voting Rights: In some cases, you may have the right to vote
on certain company matters, such as electing the board of
directors or approving major decisions.
Capital Gains: If the value of the company's stock increases,
you can sell your shares at a higher price and make a profit.
Stockholders' interests align with the company's performance,
and they hope for the company's success and growth to see
their investments appreciate in value.
BUSINESS ORGANIZATION FROM STARTUP TO
MAJOR CORPORATION
Business organizations can undergo significant changes and
transformations as they grow from a startup to a major
corporation. Let's outline the typical stages and characteristics
of a business as it progresses:
Startup:
# This is the initial phase of a business, often founded by one or
a few entrepreneurs.
# Limited resources and small-scale operations are common.
#Focus is on developing a viable product or service, finding
customers, and establishing a market presence.
# Funding may come from personal savings, loans, or early-stage
investors.
Small Business:
# As the startup gains traction, it may evolve into a small
business.
# The company starts to hire more employees and expands its
customer base.
# Business processes become more defined, and initial revenue
streams are established.
# The business may seek additional funding from angel investors
or venture capitalists.
Medium-Sized Business:
# The company continues to grow, and its operations become
more structured.
# The customer base expands, and revenue increases.
# The business may diversify its product or service offerings and
enter new markets.
# Funding may come from venture capital firms or private
equity.
Large Corporation:
# At this stage, the company has become a major corporation
with a significant market presence.
# Operations are well-established, and the company may have
multiple locations or international offices.
# There is a large workforce and various departments or
divisions within the organization.
# The Company may be publicly traded on stock exchanges, and
ownership is spread among shareholders.
# Financing options include issuing bonds or issuing additional
stocks.
Multinational Corporation (MNC):
# Some large corporations expand their operations globally,
becoming multinational corporations.
# They have a presence in multiple countries and cater to
diverse markets.
# MNCs face complex challenges related to international
regulations, cultural differences, and global supply chains.
Throughout this journey, the business organization may undergo
structural changes, such as adopting new legal structures (e.g.,
from sole proprietorship to corporation), changes in
management, and alterations in ownership. The goal of every
business is to grow, adapt to market demands, and create value
for its stakeholders.
Solo proprietorship
A sole proprietorship is a simple business structure where a
single individual owns and operates the business. The owner is
personally responsible for all aspects of the business and its
liabilities. It's easy to set up, offers full control, but doesn't
provide liability protection. Income is reported on the owner's
personal tax return. It's a common choice for small businesses
and startups due to its simplicity.
Partnership
A partnership is a business where two or more people share
ownership, responsibilities, and profits. Partners may have
unlimited liability for the business's debts. It's easy to set up,
and profits are taxed on partners' individual tax returns. A
partnership agreement clarifies roles and responsibilities.
Advantage and the disadvantages are roughly some as Solo
proprietorship.
Corporation
A corporation is a separate legal entity from its owners
(shareholders) that provides limited liability protection. It is
managed by a board of directors, and ownership is through
shares. Corporations have perpetual existence and may be
subject to double taxation. They are often chosen for growthoriented businesses seeking limited liability and access to capital
markets.
FINANCE WITHIN THE CORPORATION
5. What is Cash Flow and why do we care about it?
 Cash flow is the movement of money in and out of a
business. We care about it because it shows if the company
has enough cash to pay its bills, invest, and grow. Positive
cash flow is essential for financial stability and business
success.
Cash flow refers to the movement of money into and out of
a business over a specific period, typically measured
monthly, quarterly, or annually. It represents the net
amount of cash and cash equivalents generated or used by
a company's operating, investing, and financing activities.
Cash flow is a crucial financial metric as it provides valuable
insights into a company's financial health and its ability to
meet its financial obligations.
There are three main components of cash flow:
Operating Cash Flow: This represents the cash generated or
used from a company's core business activities, such as sales
and expenses. Positive operating cash flow indicates that the
company is generating enough cash from its operations to
sustain and grow the business.
Investing Cash Flow: This shows the cash flow resulting from
a company's investments in assets or divestitures of assets. It
includes capital expenditures, acquisitions, and proceeds from
selling assets. Positive investing cash flow may indicate that the
company is investing in its growth and expansion.
Financing Cash Flow: This reflects the cash flow resulting
from the company's financing activities, such as issuing or
repurchasing stock, borrowing, or repaying loans. Positive
financing cash flow could suggest that the company is raising
capital or paying off its debts.
Why do we care about cash flow?
Cash flow is a critical metric for several reasons:
Liquidity and Solvency: Positive cash flow ensures that a
company has enough cash to meet its short-term obligations,
such as paying suppliers, employees, and creditors. It is vital for
a company's liquidity and solvency.
Business Viability: Sustainable positive cash flow is an
essential indicator of a company's long-term viability. It
demonstrates that the company's core operations are
generating enough cash to support ongoing activities and
investments.
Investor Confidence: Investors and stakeholders closely
monitor a company's cash flow as it provides insights into the
company's financial performance and the ability to generate
returns on investments.
Creditworthiness: Lenders and creditors use cash flow analysis
to assess a company's ability to repay loans. A strong cash flow
history can improve a company's creditworthiness and
borrowing capacity.
Capital Budgeting: Cash flow analysis helps in making
informed decisions regarding capital investments, expansion
plans, and financing options.
Profitability vs. Cash Flow: Cash flow is different from profit.
A company can be profitable (generate positive net income) but
still face cash flow issues if customers delay payments or if there
are large upfront expenses.
In summary, cash flow is a vital indicator of a company's
financial health, its ability to pay its bills, and its potential for
growth and investment. For businesses and investors,
understanding and managing cash flow is crucial for making
informed financial decisions and ensuring the long-term success
of the company.
What’s Liquidity?
 Liquidity is the ease of converting an asset into cash quickly
without losing its value. It's crucial because it allows for
financial flexibility and the ability to meet immediate
obligations. Liquid assets are easily accessible and valuable
in emergencies or investment opportunities. In financial
markets, liquidity refers to active trading and smooth
transaction execution.
What is free flow of cash?
 Free cash flow is a financial metric that measures the
amount of cash generated by a business after accounting
for all necessary capital expenditures and operating
expenses. In simpler terms, it represents the cash a
company has left over from its operations after paying for
its day-to-day expenses and investments in its business.
Again if we want to understand it in very easy terms it is
like money a company has "left in its pocket" after
paying for all its bills and necessary expenses, like
salaries and bills. This money is essential because it can
be used for various purposes, such as:
Investments: The company can use the free cash flow to
invest in new projects, expand its operations, or upgrade its
equipment.
Debt Reduction: If the company has loans or debts, it can
use the free cash flow to pay them off, reducing its financial
obligations.
Shareholder Returns: The Company can choose to reward its
shareholders by paying dividends or buying back its own shares.
Financial Flexibility: Having a healthy free cash flow provides
financial flexibility and a safety net during challenging times.
In summary, free cash flow is crucial because it represents the actual
cash a company can use to grow the business, reduce debts, reward
shareholders, or weather economic uncertainties. It gives insight into
the company's financial strength and its ability to generate cash beyond
its day-to-day operations.
What is accrual and cash basis?
 Accrual Basis Accounting: Records transactions when they
occur, regardless of cash exchange. Provides a
comprehensive view of financial health.(Accountants work
on accrual basis)
 Cash Basis Accounting: Records transactions when cash is
exchanged. Simple, suitable for small businesses, but may
not show full financial picture.(Financial managers who
need to make decisions for the company work on cash
basis.).
Accrual Basis Accounting focuses on when transactions are earned or incurred
and provides a more comprehensive view of a company's financial health.
Cash Basis Accounting focuses on actual cash movements and is simpler to
understand, making it suitable for small businesses and individuals
What are the Legal Forms of Business Organizations?
>There are several legal forms of business organizations, each
with its unique characteristics, advantages, and disadvantages.
The main forms of business organizations include:
Sole Proprietorship: A business owned and operated by a
single individual. The owner is personally responsible for all
business liabilities. It is the simplest and most common form of
business.
Partnership: A business owned by two or more individuals who
share responsibilities, profits, and liabilities. There are different
types of partnerships, including general partnerships and limited
partnerships.
Corporation: A legal entity separate from its owners
(shareholders) that provides limited liability protection.
Corporations can issue stock and have perpetual existence.
Limited Liability Company (LLC): A hybrid business structure
that combines the limited liability protection of a corporation
with the flexibility and tax benefits of a partnership. Owners are
called members.
Cooperative (Co-op): Owned and operated by its members,
who might be customers, employees, or suppliers. They work
together to achieve common goals and share profits.
Nonprofit Organization: Organized for purposes other than
making a profit, such as charities, religious organizations, and
educational institutions.
Joint Venture: A temporary partnership between two or more
parties for a specific project or business activity.
Franchise: A business model where an individual or group
(franchisee) buys the right to operate a business using the
branding and support of an existing company (franchisor).
Each form of business organization has its legal and tax implications,
as well as varying levels of personal liability protection, management
structure, and regulatory requirements. The choice of business
organization depends on factors such as the number of owners, liability
concerns, tax considerations, funding requirements, and the overall
business objectives. It's essential to carefully consider these factors
and seek professional advice before deciding on the most suitable legal
form for a business.
What is marginal cost benefit analysis?
 Marginal cost-benefit analysis is a decision-making tool
used to evaluate the additional costs and benefits of taking
one more unit of action or producing one more unit of a
product. It helps determine if the benefits outweigh the
costs and whether the action is worth pursuing.
We can say
Marginal Cost: This refers to the extra cost incurred by producing
one more unit of a product or taking one more action.
Marginal Benefit: This represents the additional benefit gained
from producing one more unit or taking one more action.
By comparing the marginal cost to the marginal benefit,
businesses or individuals can assess whether the extra effort or
production is worthwhile. If the marginal benefit exceeds the
marginal cost, it suggests that taking that additional step or
producing more units is a good idea because the benefits
outweigh the added expenses. Conversely, if the marginal cost is
higher than the marginal benefit, it may be better to avoid that
extra action or production.
Marginal cost-benefit analysis is a valuable tool for making
efficient decisions and optimizing resource allocation, whether
in business, government projects, or personal choices. By
focusing on the marginal changes, it helps to maximize the
overall benefit and avoid unnecessary costs.
What’s cost of equity, cost of capital, and cost of debt?
>Cost of Equity: The cost of equity is the return expected by
shareholders or investors for owning a company's stock. It
represents the cost of financing the business with equity and is
often calculated using the dividend growth model or the capital
asset pricing model (CAPM).
Cost of Capital: The cost of capital is the overall rate of return
required by investors or creditors to provide funds for a
company's operations. It considers both the cost of equity and
the cost of debt in proportion to their respective weights in the
capital structure.
Cost of Debt: The cost of debt is the interest rate or return paid
by a company to its creditors or lenders for borrowing money. It
is the cost of financing the business with debt, such as loans or
bonds.
What is cost of money? What are the fundamental factors
that affect it and how? Think about international conditions
too.
>Cost of money refers to the overall cost or rate of return
associated with borrowing or investing capital. In other words, it
represents the expense or return required to use or lend money.
The cost of money is a crucial aspect for both borrowers and
investors, as it influences borrowing decisions, investment
choices, and economic growth.
The fundamental factors that affect the cost of money include:
Interest Rates: Interest rates are a significant component of
the cost of money. When interest rates are high, the cost of
borrowing increases, making it more expensive for businesses
and individuals to take out loans. Conversely, low-interest rates
reduce the cost of borrowing and encourage borrowing and
investment.
Inflation: Inflation erodes the purchasing power of money over
time. Higher inflation rates lead to a decrease in the real value
of money, which affects lenders and investors. To compensate
for the loss in purchasing power, lenders may demand higher
interest rates, increasing the cost of borrowing.
Economic Conditions: The overall health of the economy
impacts the cost of money. During economic growth periods,
demand for capital increases, leading to higher interest rates
and a higher cost of money. In contrast, during economic
downturns, interest rates tend to be lower to stimulate
borrowing and spending.
Risk Profile: Borrowers' and investors' risk profiles influence
the cost of money. Higher-risk borrowers, such as those with
weaker credit histories, may face higher interest rates and, thus,
a higher cost of borrowing. Similarly, riskier investments may
require higher returns to compensate for the uncertainty.
Government Policies: Government monetary policies, such as
central bank interest rate decisions and currency exchange rate
controls, can impact the cost of money in a country. Changes in
these policies can directly affect borrowing and investment
costs.
In the international context and specifically in the context of
Bangladesh:
Exchange Rates: In countries like Bangladesh, where foreign
borrowings and investments play a significant role, exchange
rates are crucial. Fluctuations in the exchange rate can affect the
cost of money for foreign loans and investments.
Political Stability: Political stability or instability can influence
investor confidence, affecting the flow of foreign capital and,
consequently, the cost of money.
Credit Ratings: Bangladesh's sovereign credit rating affects the
country's borrowing costs in international markets. Higher credit
ratings result in lower borrowing costs for the government and
businesses.
Inflation and Monetary Policies: Local inflation rates and the
country's central bank monetary policies impact the domestic
interest rates, which, in turn, influence the cost of money for
both domestic and foreign borrowers.
Foreign Direct Investment (FDI) and Capital Flows: The
level of foreign direct investment and other capital flows into
Bangladesh can affect the availability and cost of money in the
domestic market.
Overall, the cost of money is a complex and dynamic concept
that is influenced by a wide range of factors. It has significant
implications for investment decisions, economic growth, and
the overall financial well-being of individuals, businesses, and
countries. Understanding these factors is essential for making
informed financial decisions and formulating appropriate
monetary policies at both national and international levels.
What’s corporate governance?
 Corporate governance is the system that oversees how a
company is managed, ensuring accountability, ethics, and
transparency for the benefit of shareholders and
stakeholders.
Corporate governance is like a set of guidelines and checks in
place to make sure companies are run responsibly, fairly, and
with the interests of all stakeholders in mind. It helps prevent
abuse of power and ensures the company is managed ethically
and transparently. This is important to gain trust from investors,
customers, and the public, which ultimately contributes to the
company's success and sustainability.
What’s conflict of interest?
 A conflict of interest occurs when an individual or entity
has competing interests that could potentially influence
their ability to make impartial decisions or act in the best
interest of another party.
In simple terms:
A conflict of interest arises when someone has personal
interests or relationships that could interfere with their duty to
act fairly and honestly for others. It can lead to biased decisions
or actions that prioritize personal gain over the welfare of others
involved. Conflicts of interest should be disclosed and managed
appropriately to maintain trust and integrity in professional or
business settings.
What’s the Agency Problem? What are the things typically
done to minimize it?
 The agency problem is a situation where the people
running a company (managers) might not always make
decisions that benefit the owners of the company
(shareholders). Instead, they may prioritize their own
interests, potentially leading to conflicts and inefficiencies.
To minimize the agency problem, several measures can be
taken:
Aligning Incentives: Design compensation packages for
managers that tie their rewards and bonuses to the company's
long-term performance and shareholder value. This aligns their
interests with the owners and encourages actions that promote
company growth and profitability.
Monitoring and Oversight: Implement robust monitoring and
oversight mechanisms to track managerial actions and decisions.
This includes the board of directors, independent auditors, and
external consultants who can provide unbiased assessments.
Transparent Reporting: Ensure transparent and accurate
financial reporting, providing shareholders with timely and
reliable information about the company's performance.
Transparency reduces information asymmetry and helps build
trust.
Board Independence: Have an independent board of directors
that can make unbiased decisions, including evaluating
management performance and making executive compensation
decisions.
Shareholder Activism: Encourage active engagement by
shareholders to voice concerns, ask questions, and hold
management accountable for their actions.
Stakeholder Engagement: Consider the interests of other
stakeholders, such as employees, customers, and the
community, to create a more balanced and sustainable decisionmaking process.
Ethical Standards: Establish and enforce a strong code of
ethics and corporate governance principles to promote
responsible behavior and discourage conflicts of interest.
By implementing these measures, companies can help
reduce the agency problem and ensure that managerial
actions are aligned with the long-term interests of the
shareholders and the overall well-being of the
organization.
What are Compensation Plans?
>Compensation plans are ways companies decide how to pay
their employees. These plans aim to attract and retain talented
workers by offering fair and competitive rewards, such as
salaries, bonuses, stock options, benefits, and other incentives.
The goal is to ensure that employees feel valued and motivated
to contribute to the company's success. Compensation plans can
vary based on factors like job role, performance, and industry
standards.
What is Capital Structure? What are the factors that affect
Capital Structure?
> Capital Structure: Capital structure refers to the composition
of a company's long-term financing sources, including debt,
equity, and other financial instruments. It represents how a
company finances its operations and investments by combining
different types of capital.
Capital structure is like the financial makeup of a company. It
shows how the company is funded—whether it relies more on
debt (loans, bonds) or equity (stockholders' investments) to run
its business.
Factors Affecting Capital Structure:
Several factors influence a company's capital structure
decisions, including:
Business Risk: Companies with higher business risk may
choose to rely more on equity financing to reduce the financial
burden of debt payments in uncertain times.
Tax Considerations: Debt interest payments are taxdeductible, making debt financing attractive from a tax
perspective. This can influence a company to use more debt in
its capital structure.
Cost of Capital: The availability and cost of debt and equity
financing influence the company's choice of capital structure.
Lower interest rates may encourage more borrowing.
Industry Norms: Capital structure decisions often consider
industry-specific norms and practices. Some industries might
rely more on debt financing, while others may prefer equity
financing.
Company Size and Growth: Smaller companies or startups
may rely more on equity financing due to limited access to debt
markets. Larger, more established companies may use a mix of
both debt and equity.
Market Conditions: Favorable market conditions can impact
the cost and availability of debt and equity financing, affecting
capital structure choices.
Flexibility and Control: Equity financing allows for more
ownership control, while debt financing may involve fewer
shareholder dilutions. The company's management preferences
can influence the choice.
Credit Rating: A company's credit rating affects its ability to
raise debt financing at favorable terms.
Dividend Policy: A company's dividend policy can influence
how much is retained for reinvestment, affecting the need for
external financing.
Regulatory Environment: Government regulations and
restrictions on debt or equity issuances can impact capital
structure decisions.
In summary, capital structure decisions are essential for a
company's financial health and growth. The optimal capital
structure seeks to balance the advantages and
disadvantages of debt and equity financing while
considering the company's risk tolerance, market
conditions, and long-term goals.
What’s Capital Structure decision?
>Capital structure decision is about figuring out how a company
will raise money to run its business. It's about finding the right
mix of borrowing (debt) and getting investments (equity) to
ensure financial stability and cost-effectiveness.
What is Weighted Average of Cost of Capital (WACC)?
What are the factors that affect it?
>The Weighted Average Cost of Capital (WACC) is a financial
metric that calculates the average cost of financing for a
company. It takes into account the cost of both debt and equity
capital, weighted by their respective proportions in the
company's capital structure.
WACC is like the overall average cost of money for a company. It
considers how much it pays to borrow money (debt) and what it
gives to investors (equity), based on how much of each type of
funding it uses.
Factors Affecting WACC:
Debt Cost: The interest rate a company pays on its debt affects
its debt cost. Lower interest rates mean lower debt cost.
Equity Cost: The return expected by shareholders influences
the equity cost. Higher return expectations lead to higher equity
cost.
Company Risk Profile: Companies with higher risk may require
higher returns to attract investors, leading to higher WACC.
Market Conditions: Changes in interest rates and market
conditions can affect the cost of debt and equity, influencing
WACC.
Capital Structure: The proportion of debt and equity used to
finance the company impacts WACC. A higher proportion of
debt leads to a lower WACC due to the tax deductibility of
interest payments.
Tax Rate: A lower tax rate benefits the WACC calculation as
interest expense is tax-deductible.
Cost of Preferred Stock: If a company has preferred stock, its
cost is considered in the WACC calculation.
Cost of Retained Earnings: The opportunity cost of using
retained earnings instead of paying dividends is also included in
WACC.
By considering these factors, companies can calculate their
WACC, which is an essential tool for evaluating investment
projects and making financial decisions. It helps companies
determine if a potential investment will generate returns
higher than the cost of capital, thus creating value for
shareholders.
What are the limitations of Profit Maximization as the
primary goal of a firm?
>Limitations of Profit Maximization as the primary goal of a firm
include:
Short-Term Focus: Focusing solely on short-term profit
maximization may lead to neglecting long-term sustainability
and growth strategies.
Ignoring Risk: Pursuing profit at all costs may lead to ignoring
potential risks and not considering the overall risk-return
tradeoff.
Quality Sacrifice: The emphasis on maximizing profits might
compromise product or service quality to reduce costs.
Lack of Stakeholder Consideration: Profit maximization may not
prioritize the interests of other stakeholders, such as employees,
customers, or the community.
Environmental and Social Impact: It might overlook the impact
on the environment or society in the pursuit of higher profits.
Ethical Concerns: Profit maximization without ethical
considerations can lead to unethical practices and damage a
company's reputation.
Market Volatility: Relying solely on profit maximization can
make a firm vulnerable to market fluctuations and economic
downturns.
Overall, profit maximization as the sole goal might not align
with broader corporate responsibilities and long-term
sustainability objectives. Many companies now consider a
broader set of goals, such as stakeholder value, social
responsibility, and environmental impact, to create a more
balanced and sustainable approach to business.
What’s the intrinsic value of a firm?
>The intrinsic value of a firm is the real or fundamental worth
of the company based on its financials and potential. It is
different from the current market price and is used by investors
to assess if a stock is undervalued or overvalued.
What are financial securities? Do you understand the
three different types of it – debt, equity and derivative
securities?
>Financial securities are tradable instruments that represent
financial value and can be bought or sold in financial markets.
These securities allow individuals, businesses, and governments
to raise capital and investors to invest their money.
Debt Securities: Represent loans made to borrowers.
Examples include bonds and fixed-income instruments.
Equity Securities: Represent ownership in a company.
Examples include stocks or shares.
Derivative Securities: Derive their value from an underlying
asset or financial instrument. Examples include options and
futures contracts.
What is Money Market and Capital Market?
Money Market: The money market is a short-term financial
market where financial instruments with high liquidity and
short maturities are traded. It deals with instruments like
Treasury bills, certificates of deposit, and commercial paper.
Capital Market: The capital market is a long-term financial
market where companies and governments raise funds by
issuing and trading long-term financial instruments like stocks
and bonds. It supports long-term investment and economic
growth.
Who’s a Bondholder and who’s a Stockholder?
Bondholder: A bondholder is an individual or entity that holds
or owns bonds issued by a company or government. As a
bondholder, they are creditors to the issuer and entitled to
receive periodic interest payments and the return of the
principal amount at maturity.
Stockholder: A stockholder, also known as a shareholder, is an
individual or entity that owns shares of a company's stock. As a
stockholder, they have ownership rights in the company and
may participate in the company's profits through dividends and
potential capital appreciation.
When a company issues a security, who can provide the
capital?
When a company issues a security, the capital can be provided
by various entities, including:
Individual Investors: Individual investors can buy the
company's securities, such as stocks or bonds, through
brokerage accounts.
Institutional Investors: Large institutions like mutual funds,
pension funds, insurance companies, and hedge funds can
invest in the company's securities on behalf of their clients or
members.
Banks and Financial Institutions: Banks and other financial
institutions can purchase securities as part of their investment
portfolio or offer them to their clients.
Government Agencies: In some cases, government agencies or
sovereign wealth funds may invest in the company's securities.
Foreign Investors: Investors from other countries may buy the
company's securities as part of their investment strategy.
Overall, the company aims to attract a diverse range of
investors to provide the capital needed to finance its
operations and growth through the issuance of securities in the
financial markets.
Basic idea about financial intermediaries
Financial intermediaries are institutions or entities that act as
middlemen between savers and borrowers in the financial
system. They play a crucial role in channeling funds from those
who have excess money (savers) to those who need it to
finance their activities (borrowers).
Savers: Individuals, households, or businesses with extra
money that they want to invest or save for future needs.
Borrowers: Individuals, businesses, or governments seeking
funds to invest in projects, expand operations, or meet financial
obligations.
Financial intermediaries perform the following functions:
Accepting Deposits: They gather funds from savers through
various deposit products, like savings accounts and certificates
of deposit.
Providing Loans: They use the collected funds to provide
loans and credit to borrowers for various purposes.
Risk Management: They help manage risks by diversifying
their portfolios and performing credit analysis on borrowers.
Maturity Transformation: They match the short-term liabilities
from deposits with longer-term assets like loans.
Financial Intermediation: They facilitate the efficient
allocation of funds, directing money to where it's needed most.
Examples of financial intermediaries include commercial
banks, credit unions, insurance companies, investment
banks, mutual funds, and pension funds. These institutions
play a vital role in the functioning of the financial system,
promoting economic growth, and providing financial
services to the public.
Who may be the financial intermediaries between a saver
and a borrower during a transfer of capital?
>Financial intermediaries act as intermediaries between savers
(lenders) and borrowers during the transfer of capital. They
facilitate the flow of funds from those who have excess capital
(savers) to those who need capital (borrowers). Examples of
financial intermediaries include banks, credit unions, mutual
funds, insurance companies, and pension funds.