Some Redundant Information…..
First of all I’m grateful to almighty Allah for allowing me to finish this note.
I’m also sincerely grateful to those friends who helped me to complete this after tolerating
my extremely rude behavior. Accept my apology, please. Special thanks to Al-Jaber Monshi
who was helpful in the crucial times when my nerves were about to torn apart. Here are the
name of those persons who voluntarily contributed to it.
1. Tusar Ahmed (Investment Analysis)
2. Al-Jaber Monshi (Financial Statement Analysis)
3. Mohammad Mamun (Business Finance)
4. Mohammad Rasel (Public Finance)
5. Naznin Nahar Lima (Macroeconomics, Organizational Behaviour)
6. Shimo Akter (Taxation, Auditing, General Banking)
7. Naznin Sultana Sumaiya (Financial services And Microfinance)
8. Atiq Shahriar Bhuiyan (Introduction to Business, Marketing, Management)
9. Rajib Khan (Statistics-II)
10. Tazlul Haque (Development Finance, Treasury Management)
11. Md. Hamidur Rahman (Corporate Finance)
12. Jarna Akter (International Financial Management)
13. Liza akter (Microeconomics)
14. Mahsin Khan (Managerial Finance)
15. Abul Khair (Financial Institution & Money Market)
16. Imtiaz Ahmad (Statistics-I>file lost)
17. Md. Emon (Working Capital Management>file lost)
Unfortunately, two file named “Working Capital Management” and “Statistics-I” are lost. We
are sorry for that. Next time we will try to make up for those. Whatever, we all make
mistakes because we are mortal. This note is no exception. It may contain some mistakes. So
please, overlook them (of course, including grammatical mistakes). If you wish to read it,
then it’s your choice and responsibility is yours too.
Tusar Ahmed
On behalf of
Finance and Banking, 3rd Batch
Comilla University, 10th batch
Date: 17th Jun 2020
Page 1 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Investment Analysis
Financial Derivatives
A derivative is a contract between two or more parties whose
value is based on an agreed-upon underlying financial asset (like
a security) or set of assets (like an index).
Debenture:
A debenture is a medium- to long-term debt instrument used by
large companies to borrow money, at a fixed rate of interest.
Speculation is the purchase of an asset (a commodity, goods, or
real estate) with the hope that it will become more valuable in
the near future.
Individual investor OR Retail investor
A retail investor, also known as an individual investor, is a nonprofessional investor who buys and sells securities, mutual
funds, or exchange traded funds (ETFs) through traditional or
online brokerage firms or other types of investment accounts.
Institutional investor
Convertible debentures
A convertible debenture is a type of long-term debt issued by a
company that can be converted into stock after a specified
period.
An institutional investor is a nonbank person or organization
that trades securities in large enough share quantities or dollar
amounts that it qualifies for preferential treatment and lower
commissions
Bond:
Provident fund
A bond is a fixed income instrument that represents a loan made
by an investor to a borrower. There is a printed coupon rate on
the face of the bond. It is generally long term instrument.
Provident fund is another name for pension fund. Its purpose is
to provide employees with lump sum payments at the time of
exit from their place of employment.
Deep Discount Bond
Recognized provident fund
A deep discount bond is a bond that sells at a price which is
20% or more below the face value of the bond, and carries a low
rate of interest during the term of the bond. The bond may be
purchased at a significant discount because the coupon rate is
significantly less than the market rate, or because of perceived
instability of the issuing firm.
Recognized provident fund means a provident fund which has
been and continues to be recognized by the Commissioner of
Income Tax
Zero-Coupon Bond
A zero-coupon bond is a debt security that does not pay interest
but instead trades at a discount.
Floating rate bond
Bond whose interest amount fluctuates in step with the market
interest rates, or some other external measure.
Unrecognized Provident fund
Such schemes are those that are started by employer and
employees in an establishment, but are not approved by The
Commissioner of Income Tax.
Book building
Book building is the process by which an underwriter attempts
to determine the price at which an initial public offering (IPO)
will be offered.
Public issue
•
Global Depository Receipts (GDR)
Global Depository Receipts are securities certificates issued by
intermediaries such as banks for facilitating investments in
foreign companies.
Eurobond
A Euro- bond is a bond that is sold by a government, institution
or company in a currency that is different from the country
where the bond is issued...
Fundamental Analysis
Analysis of EPS, DPS,P/E etc. Followed by active investor
Technical Analysis
Price movement, trend, pattern etc. Followed by passive
investor
Hedge
A hedge is an investment to reduce the risk of adverse price
movements in an asset.
Capital gain
•
Initial Public Offer (IPO): An initial public
offering (IPO) refers to the process of offering shares
of a private corporation to the public in a new stock
issuance
Follow on Public Offer (FPO): When an already
listed company makes a fresh issue of securities to
the public is called a Follow on Public Offer (FPO).
Underwriting
In the securities market, underwriting involves determining the
risk and price of a particular security.
Right Issue
A rights issue is an invitation to existing shareholders to
purchase additional new shares in the company
Private placement
A private placement is a sale of stock shares or bonds to preselected investors and institutions rather than on the open
market.
Merchant Bank
Capital gain is a rise in the value of a capital asset (investment
or real estate) that gives it a higher worth than the purchase price
A merchant bank is a company that conducts underwriting, loan
services, financial advising, and fundraising services for large
corporations and high net worth individuals.
Speculation
Prospectus
Page 2 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
A prospectus, in finance, is a disclosure document that describes
a financial security for potential buyers.
Day order: A day order is an order to buy or sell a security by
the end of the day.
OTC Market
Limit order: A type of limit order to buy or sell that remains
open until the end of the week or until the order is executed.
The OTC is a market where financial instruments such as
currencies, stocks and commodities are traded directly between
two parties. OTC trading has no physical location — trading is
done electronically.
Month order
A type of limit order to buy or sell that remains open until the
end of the month or until the order is executed.
Permitted securities
A stock exchange sometimes permits trading in certain
securities which are not listed at the exchange but are actively
traded in other stock exchange. Such securities are known as
permitted securities.
Trading Floor
Trading floor refers to an area where trading activities in
financial instruments, such as equities, fixed income, futures
etc., takes place. Trading floors sit in the buildings of various
exchanges, such as the New York Stock Exchange (NYSE) and
the Chicago Board of Trade (CBOT).
Screen based trading
Form of trading that uses modern telecommunication and
computer technology to combine information transmission with
trading in financial markets.
Quote-driven market
A quote-driven market is an electronic stock exchange system in
which prices are determined from bid and ask quotations made
by market makers, dealers, or specialists.
Order-Driven Market
An order-driven market is one in which all of the orders of both
buyers and sellers are displayed, detailing the price at which
they are willing to buy or sell a security, and the amount of the
security that they are willing to buy or sell at that price.
So, if you place an order for 100 shares of ABC stock at $30 per
share, your order will be displayed in the market and can be
seen by people with access to this level of information (most
exchanges charge fees for such access)
Market order
A market order is a buy or sale order to be executed
immediately at the current market prices. For example, an
investor enters an order to purchase 100 shares of a company
XYZ Inc. at market price. Since the investor opts for whatever
price XYZ shares are going for, his trade will be filled rather
quickly—at, say, $87.50 per share.
Open order
Open orders are orders that remain valid till they are executed
by brokers or specifically cancelled by investors. They are also
known as good till cancel (GTC) orders
Fill or kill order
A fill or kill order is "an order to buy or sell a stock that must be
executed immediately"—a few seconds, customarily—in its
entirety; otherwise, the entire order is cancelled; no partial
fulfillments are allowed.
Short sale
A short sale is the sale of a stock that an investor does not own
or a sale which is consummated by the delivery of a stock
borrowed by, or for the account of, the investor.
Long buy
A long buy or long position—also known as simply long—is the
buying of a stock, commodity, or currency with the expectation
that it will rise in value
Bear
A bear is an investor who believes that a particular security or
market is headed downward and attempts to profit from a
decline in stock prices.
Lame duck
Lame duck is an out-of-use term used with reference to a trader
who has defaulted on a debt or gone bankrupt due to an inability
to cover trading losses. The phrase can be traced to the early
years of commodity trading and development of the London
Stock Exchange during the mid-1700s.
Stag
An investor or speculator who subscribes to a new issue,
expecting the price of the stock to rise immediately upon the
start of trading is known as a stag.
Margin trading
Borrowing money from the bank or the broker for purchasing
securities is known as margin trading
Limit order
Systematic risk (β)
A limit order is an order to buy or sell a stock at a specific price
or better.
Systematic risk refers to the risk inherent to the entire market or
market segment. Systematic risk, also known as “undiversifiable
risk,” “volatility” or “market risk,” affects the overall market,
not just a particular stock or industry. Interest rate risk, Market
risk, Purchasing power risk etc.
Stop order,
A stop order, also referred to as a stop-loss order, is an order to
buy or sell a stock once the price of the stock reaches a specified
price, known as the stop price
Stop-limit orders
Stop-limit orders are a conditional trade that combines the
features of a stop loss with those of a limit order to mitigate risk.
Market risk
The chance that the value of an investment will decline because
of market factors that are independent of the investment (such as
economic, political & social events).
Unsystematic risk ( σ )
Page 3 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Unsystematic risk is unique to a specific company or industry.
Also known as “nonsystematic risk,” "specific risk,"
"diversifiable risk" or "residual risk," in the context of an
investment portfolio, unsystematic risk can be reduced through
diversification. Business risk, Financial risk etc.
A zero-coupon bond is a debt security that does not pay interest
but instead trades at a deep discount, rendering a profit at
maturity, when the bond is redeemed for its full face value.
Spot Interest rate
Business risk
The return received from a zero coupon bond or a pure discount
bond expressed on an annualized basis is the spot interest rate
Business risk implies uncertainty in profits or danger of loss and
the events that could pose a risk due to some unforeseen events
in future, which causes business to fail.
Yield to maturity (YTM)
Yield to maturity (YTM) is the total return anticipated on a bond
if the bond is held until it matures.
Financial risk
Financial risk is the risk that a company won't be able to meet its
obligations to pay back its debts.
Expected return
The expected return is the profit or loss an investor anticipates
on an investment that has known or anticipated rates of return
(RoR)
Value at risk (VaR)
Value at risk (VaR) is a statistic that measures and quantifies the
level of financial risk within a firm, portfolio or position over a
specific time frame.
Yield to call (YTC)
Yield to call (YTC) is a financial term that refers to the return a
bondholder receives if the security is held until the call date,
before the debt instrument reaches maturity.
Six biggest bond risks
1.
2.
3.
4.
5.
6.
Interest Rate Risk and Bond Prices
Reinvestment Risk and Callable Bonds
Inflation Risk and Bond Duration
Credit/Default Risk of Bonds
Rating Downgrades of Bonds
Liquidity Risk of Bonds
Monte Carlo simulation method
Bull market
The method is based on the historical data of investment returns.
The Monte Carlo simulation procedure is used to develop a
model for future investment returns by running multiple
hypothetical trials or simulations with the historical data.
A bull market is the condition of a financial market of a group
of securities in which prices are rising or are expected to rise
Intrinsic value
The intrinsic value of a share is the present value of all the
future benefits expected to be received from that share. The
intrinsic value of a stock is a price for the stock based solely on
factors inside the company. It eliminates the external noise
involved in market prices.
Bear market
A bear market is a condition in which securities prices fall 20%
or more from recent highs amid widespread pessimism and
negative investor sentiment.
Feasible Set of Portfolio
The feasible, or attainable, set represents all portfolios that can
be constructed from a given set of stocks
Gordon Growth Model or Constant Growth Rate Model
Efficient set of portfolio
The Gordon Growth Model is used to determine the intrinsic
value of a stock based on a future series of dividends that grow
at a constant rate.
The collection of all efficient portfolios, which can be graphed
as the Markowitz efficient frontier.
1. Offer maximum expected return for varying
levels of risk, and.
2. Offer minimum risk for varying levels of
expected return.
Multistage Growth Model
Multistage Growth Model Formula When dividends are not
expected to grow at a constant rate, the investor must evaluate
each year's dividends separately, incorporating each year's
expected dividend growth rate.
Global minimum variance portfolio
Coupon rate
The global minimum variance portfolio is the portfolio that
provides you with the lowest possible portfolio volatility (risk),
for a number of underlying assets
Coupon rate is the rate of interest paid by bond issuers on the
bond’s face value. It is the periodic rate of interest paid by bond
issuers to its purchasers.
Maximum return portfolio: Maximum return portfolio
consists 100% of the highest returning asset
Current yield
Efficient frontier (Harry Markowitz)
Current yield is an investment's annual income (interest or
dividends) divided by the current price of the security. This
measure examines the current price of a bond, rather than
looking at its face value.
The efficient frontier is the set of optimal portfolios that offer
the highest expected return for a defined level of risk or the
lowest risk for a given level of expected return
Optimal portfolio (Harry Markowitz)
Zero-coupon bond /Deep discount bond/ Pure discount bond
The optimal portfolio for an investor would be the one at the
point of tangency between the efficient frontier and his risk
return utility or indifference curve.
Page 4 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Single Index Model/ Sharpe Index Model (William Sharpe)
Relates returns on each security to the returns on a common
index, such as the S&P 500 Stock Index
Multi-index model (Cohen and Pogue's)
Cohen and Pogue's Multi-index model provides a means of
incorporating non-market or extra market factors, with the
market factor considered in single index model, into a portfolio
analysis
Capital market line (CML)
The line formed by the action of all investors mixing the
portfolio with the risk free asset is known as the Capital
market line (CML). All efficient portfolios of all investors will
lie along this capital market line.
Managerial Finance
Financial Management:
Financial management is concerned with the acquisition,
financing, & management of assets with some overall goal in
mind.
Functions of Financial management:
1.Financial planning, 2. Identification of sources, 3. Raising
Fund, 4 .Investment of fund, 5. Protection of fund, 6.
Distribution of profits, 7. Management of assets, 8. Cost
control. 9. Pricing
Stockholder:
A stockholder or shareholder is the owner of shares of a
corporation's common or preferred stock.
Security Market Line (SML)
The security market line (SML) that serves as a graphical
representation of the capital asset pricing model (CAPM), which
shows different levels of systematic, or market, risk of various
marketable securities plotted against the expected return of the
entire market at a given point in time.
Stock option
A stock option gives an investor the right, but not the obligation,
to buy or sell a stock at an agreed upon price and date.
Preference shares:
Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) describes the
relationship between systematic risk and expected return for
assets, particularly stocks. It is also known as Sharpe-LintnerMossinCapital Asset Pricing Model
Preference shares are those shares which carry certain special or
priority rights. Dividend at a fixed rate is payable on these
shares before any dividend is paid on equity shares.
A financial market is a market in which people trade financial
securities and derivatives at low transaction costs.
Arbitrage Pricing Theory (APT)
As per assumptions under Arbitrage Pricing Theory, return on
an asset is dependent on various macroeconomic factors like
inflation, exchange rates, market indices, production measures,
market sentiments, changes in interest rates, movement of yield
curves etc.Arbitrage Pricing Theory (APT) is an alternate
version of the Capital Asset Pricing Model (CAPM). This
theory, like CAPM, provides investors with an estimated
required rate of return on risky securities
Earnings per share (EPS)
Earnings per share is the portion of a company's profit allocated
to each outstanding share of common stock.
Dividend per share (DPS)
Dividend per share is the sum of declared dividends issued by a
company for every ordinary share outstanding.
Cross-sectional analysis
Sharpe ratio
It is defined as the difference between the returns of the
investment and the risk-free return, divided by the standard
deviation of the investment (i.e., its volatility). It represents the
additional amount of return that an investor receives per unit of
increase in risk
Cross-sectional analysis looks at data collected at a single point
in time, rather than over a period of time.
Benchmarking:
Benchmarking is the practice of comparing business processes
and performance metrics to industry bests and best practices
from other companies.
Treynor Ratio
The Treynor Ratio is a portfolio performance measure that
adjusts for systematic risk. In contrast to the Sharpe Ratio,
which adjusts return with the standard deviation of the portfolio,
the Treynor Ratio uses the Portfolio Beta, which is a measure of
systematic risk.
Time series analysis:
It is the evaluation of the firm's financial performance over time
using financial ratio analysis.
Liquidity:
It is the ability to satisfy its short-term obligations as they come
due.
Liquidity ratio:
A liquidity ratio is a financial ratio that indicates whether a
company's current assets will be sufficient to meet the
company's obligations when they become due.
Current Ratio:
Page 5 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
The current ratio is a liquidity ratio that measures a company's
ability to pay short-term obligations or those due within one
year.
Quick ratio:
P/E ratio:
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a
company that measures its current share price relative to its pershare earnings (EPS)
The quick ratio or acid test ratio is a liquidity ratio that measures
the ability of a company to pay its current liabilities when they
come due with only quick assets.
Dividend policy:
Activity ratio:
Cash dividend:
Activity ratios are a category of financial ratios that measure a
firm's ability to convert different accounts within its balance
sheets into cash or sales.
A cash dividend is a payment made by a company out of its
earnings to investors in the form of cash.
Dividend policy is the policy a company uses to structure its
dividend payout to shareholders.
Stock dividend:
Inventory Turnover:
The form of additional shares rather than a cash payout.
The Inventory turnover is a measure of the number of times
inventory is sold or used in a time period such as a year.
Stock split:
A stock split or stock divide increases the number of shares in a
company.
Average Collection period:
The average amount of time needed to collect accounts
receivable.
Stock repurchase:
A share repurchase is a transaction whereby a company buys
back its own shares from the marketplace.
Average payment period:
Average amount of time needed to pay accounts payable.
Date of record:
Total asset turnover:
Total asset turnover is an activity ratio measuring the ability of a
firm to effectively use its assets for the generation of sales.
Set by the firm's directors the date on which all persons whose
names are record as stockholders receive a declared dividend at
a specified future time.
Debt ratio:
Ex-Dividend:
The debt ratio for a given company reveals whether or not it has
loans and, if so, how its credit financing compares to its assets.
The period, beginning two (2) business days prior to the date of
record, during which a stock is sold without the right to receive
the current dividend.
Times interest earned ratio:
Times interest earned or interest coverage ratio is a measure of a
company's ability to honor its debt payments.
Profitability ratio:
Residual dividend policy:
Amount of dividend pay to the shareholders after all acceptable
investment opportunities have been undertaken.
Profitability ratios are a class of financial metrics that are used
to assess a business's ability to generate earnings relative to its
revenue, operating costs, balance sheet assets, and shareholders'
equity over time, using data from a specific point in time.
Cum-dividend:
Gross profit margin:
Dividend irrelevance theory:
Gross profit margin is a profitability ratio that calculates the
percentage of sales that exceed the cost of goods sold.
The dividend irrelevance theory indicates that a company’s
declaration and payment of dividends should have little or no
impact on the stock price.
Net profit margin:
The net profit margin is equal to how much net income or profit
is generated as a percentage of revenue.
A stock is cum dividend, which means "with dividend," when a
company has declared that there will be a dividend in the future
but has not yet paid it out.
Blue chip stocks:
Return on assets is a profitability ratio that provides how much
profit a company is able to generate from its assets.
Blue chip stocks are shares of very large and well-recognized
companies with a long history of sound financial performance.
These stocks are known to have capabilities to endure tough
market conditions and give high returns in good market
conditions.
Return on equity:
Bird in the hand theory:
Return on equity (ROE) is a measure of financial performance
calculated by dividing net income by shareholders' equity.
The bird-in-hand theory for dividends or dividend preference
theory argues that investors prefer stocks that pay high and
stable dividends.
Return on assets:
Market value ratios:
Market value ratios are used to evaluate the current share price
of a publicly-held company's stock.
Tax preference theory:
Page 6 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
This theory claims that investors prefer lower payout companies
for tax reasons.
A merger is an agreement that unites two existing companies
into one new company.
Dividend signaling theory:
Acquisition:
Dividend signaling is a theory that suggests that a company
announcement of an increase in dividend payouts is an
indication of positive future prospects.
An acquisition is when one company purchases most or all of
another company's shares to gain control of that company.
Consolidation:
Leverage:
Leverage refers to the use of the debt to acquire additional
assets. When, it increase >> Risk & return also increase.
The combination of two or more firms to form a completely new
corporation.
Holding company:
Capital structure:
Capital structure is the mix of long term debt & equity
maintained by the firm.
Under the companies Act, 1956, a holding company is any
company which holds more than half of the equity share capital
of other companies or controls the composition of the board of
directors of other companies.
Operating leverage:
Operating leverage measures a company's fixed costs as a
percentage of its total costs.
Subsidiary company:
A subsidiary company is a corporation controlled by another
corporation through a parent-child relationship.
Financial leverage:
The use of borrowed money rather than equity to increase
production volume, and thus sales and earnings. It is measured
as the ratio of total debt to total assets. The greater the amount
of debt, the greater the financial leverage.
Target company:
A target firm is a company that has been chosen as an attractive
merger or acquisition option by a potential acquirer.
Types of mergers:
Degree of total leverage
Degree of total leverage is the ratio of percentage change in
earnings per share to percentage change in sales revenue.
Conglomerate:
A merger between firms that are involved in totally unrelated
business activities.
Break even analysis:
It is the analysis where the total sales revenue is equal to the
Horizontal Merger
operating cost.
A merger occurring between companies in the same industry.
It is used to indicate the level of operations necessary to cover
all costs & to evaluate the profitably associated with various
levels of sales also called cost volume profit analysis.
Market Extension Mergers
A market extension merger takes place between two companies
that deal in the same products but in separate markets.
Operating breakeven point:
The level of sales necessary to cover all operating costs. The
point at which EBIT=0.
Financial breakeven point :
Financial break even point is the level of EBIT for which the
firms EPS equal to zero.
Product Extension Mergers
A product extension merger takes place between two business
organizations that deal in products that are related to each other
and operate in the same market.
Vertical Merger
A merger between two companies producing different goods or
services for one specific finished product.
Indifference point:
It is the level of EBIT that produces the same level of EPS for
two(more alternative capital structures).
Synergy:
Optimal capital structure:
The idea that the value and performance of two companies
combined will be greater than the sum of the separate individual
parts is one of the reasons companies’ merger.
It may be defined as the capital structure or combination of debt
& equity that has the lowest cost of capital & lead to the
maximum value of the firm.
Merger, acquisitions, LBOs & Business
Friendly merger:
A merger transaction endorsed by the target firm's management,
approved by its stockholders & easily consummated.
Corporate restructuring:
Hostile merger/ Hostile Takeover
Corporate restructuring is a corporate action taken to
significantly modify the structure or the operations of the
company.
A merger transaction that the target firm's management doesn't
support, forcing the acquiring company to try to gain control of
the firm by buying share in the marketplace.
Merger:
Strategic merger:
Page 7 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
A transaction undertaken to achieve economic scale.
Financial Merger:
A merger transaction undertaken with the goal of restructuring
the acquired company to improve its cash flow & unlock its
hidden value.
Exchange rate risk:
Exchange rate risk, also known as currency risk, is the financial
risk arising from fluctuations in the value of a base currency
against a foreign currency in which a company or individual has
assets or obligations.
Purchasing power risk:
Tax loss carry forward:
Tax Loss Carry forward is a mechanism firms can use to carry
forward losses from prior years to offset future profits and
therefore lower future income taxes.
Inflation risk, also called purchasing power risk, is the chance
that the cash flows from an investment won't be worth as much
in the future because of changes in purchasing power due to
inflation.
Leverage Buyout (LBOs):
Tax risk: The chance that unfavorable changes in tax laws will
A leveraged buyout (LBO) is the acquisition of another
company using a significant amount of borrowed money to meet
the cost of acquisition.
occur.
Divestitures:
A divestiture or divestment is the reduction of an asset or
business through sale, liquidation, exchange, closure, or any
other means for financial or ethical reasons.
Business failure:
Business failure refers to a company ceasing operations
following its inability to make a profit or to bring in enough
revenue to cover its expenses.
Technical insolvency:
The state of a person or company that has defaulted on a liability
and lacks the ability to pay it, but has not yet filed for
bankruptcy or been declared bankrupt by a court
Bankruptcy:
Bankruptcy is a court proceeding in which a judge and court
trustee examine the assets and liabilities of individuals and
businesses who can’t pay their bills and decide whether to
discharge those debts so they are no longer legally required to
pay them
Risk:
Risk is the deviation between the actual return & the expected
return. Risk implies future uncertainty about deviation from
expected earnings or expected outcome.
Return :
A return, also known as a financial return, in its simplest terms,
is the money made or lost on an investment over some period of
time.
Source of risks:
Firm specific risks
Risk preference:
In economics and finance, risk preference commonly refers to
the tendency to choose an action that involves higher variance in
potential monetary outcomes, relative to another option with a
lower variance of outcomes (but equal expected value).
Risk indifference:
The attitude toward risk in which no change in return would be
required for an increase in risk.
Risk averse:
The attitude toward risk in which an increased in return would
be required for an increase in risk.
Risk seeking:
The attitude toward risk in which a decreased in return would be
accepted for an increase in risk.
Standard deviation:
The most common statistical indicator of an asset's risk. In
statistics, the standard deviation is a measure of the amount of
variation or dispersion of a set of values. A low standard
deviation indicates that the values tend to be close to the mean
(also called the expected value) of the set, while a high standard
deviation indicates that the values are spread out over a wider
range.
Coefficient of variance:
A measure of relative dispersion that is useful in comparing the
risks of assets with differing expected returns.
Correlation:
Correlation is a statistical technique that can show whether and
how strongly pairs of variables are related. For example, height
and weight are related; taller people tend to be heavier than
shorter people.
Correlation coefficient:
Firm-specific risk is the unsystematic risk associated with a firm
and is fully diversifiable according to the theory of finance.
Liquidity risk:
Liquidity risk is the risk that a company or bank may be unable
to meet short term financial demands.
Event risk: The chance that a totally unexpected event will
have a significant effect on the value of firm or specific
investment.
The correlation coefficient is a statistical measure that calculates
the strength of the relationship between the relative movements
of two variables. The values range between -1.0 and 1.0. A
calculated number greater than 1.0 or less than -1.0 means that
there was an error in the correlation measurement. A correlation
of -1.0 shows a perfect negative correlation, while a correlation
of 1.0 shows a perfect positive correlation. A correlation of 0.0
shows no relationship between the movement of the two
variables.
Beta coefficient:
Page 8 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
A measure of the movement in price of a security relative to the
stock market as a whole, used to indicate possible risk.
Business Finance
Chapter-Time value of money (TVM)
Lease.
An agreement between two parties whereby one party allows the
other to use his/her property for a certain period of time in
exchange for a periodic fee.
Financial Lease
Financial leasing is a contract involving payment over a longer
period. It is a long-term lease and the lessee will be paying
much more than the cost of the property or equipment to the
lessor in the form of lease charges. It is irrevocable. In this type
of leasing the lessee has to bear all costs and the lessor does not
render any service.
Operating Lease
In an operating lease, the lessee uses the asset for a specific
period. The lessor bears the risk of obsolescence and incidental
risks. There is an option to either party to terminate the lease
after giving notice.
TVM is the idea that money that is available at the present time
is worth more than the same amount in the future.
There are five (5) variables that you need to
know:
Present value (PV):
This is your current starting amount. It is the money you have
in your hand at the present time, your initial investment for your
future.
Future value (FV) –
This is your ending amount at a point in time in the future. It
should be worth more than the present value, provided it is
earning interest and growing over time.
Leveraged and non-leveraged leases
The number of periods (N) –
This is the timeline for your investment (or debts). It is usually
measured in years, but it could be any scale of time such as
quarterly, monthly, or even daily.
In leveraged and non-leveraged leases, the value of the asset
leased may be of a huge amount which may not be possible for
the lessor to finance. So, the lessor involves one more financier
who will have charge over the leased asset.
Interest rate (I) –
This is the growth rate of your money over the lifetime of the
investment. It is stated in a percentage value, such as 8% or .08.
Conveyance type lease
In Conveyance type lease, the lease will be for a long-period
with a clear intention of conveying the ownership of title on the
lessee.
Sale and leaseback
Leaseback, short for “sale-and-leaseback”, is a financial
transaction in which one sells an asset and lease it back for the
long term; therefore, one continues to be able to use the asset
but no longer owns it.
Payment amount (PMT) –
These are a series of equal, evenly-spaced cash flows.
Simple interest
It is calculated using only the principal balance of the loan.
Compound interest
The interest per period is based on the principal balance plus
any outstanding interest already accrued. Interest compounds
over time.
Discount rate
Is the rate of return used to discount future cash flows back to
their present value.
An annuity
An annuity is a series of equal payments made at equal intervals
during a period of time.
Types of annuity
Ordinary annuity
It refers to the sequence of steady cash flow, whose payment is
to be made or received at the end of each period.
Annuity due
Implies the stream of payments or receipts which fall due at the
beginning of each period.
Cost of capital
It is the minimum rate of return that must be earn to satisfy the
creditor.
Sources of Capital(long term fund)
•
Long term debt
•
Preferred stock
•
Common stock
•
Retained earnings
Page 9 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Difference Between Book Value and Market Value
Book Value
It is the real worth of the assets of the company. It is the actual
worth of the asset of the company. Book value is calculated by
taking the difference between assets and liabilities in the balance
sheet.
3 – Internal Rate of Return (IRR)
IRR is defined as the rate at which NPV is zero. At this rate, the
present value of cash inflow is equal to the cash outflow. If IRR
is greater than the weighted average cost of capital then the
project is accepted otherwise it is rejected.
4 – Profitability Index
Market value
Market value is defined as the maximum price at which an asset
or security can be bought or sold in the market. The market
value of a company is calculated by multiplying the market
price per share of the company with the number of outstanding
shares.
Weighted average cost of capital
The weighted average cost of capital (WACC) is the rate that a
company is expected to pay on average to all its security holders
to finance its assets.
Working capital
The cash available for day-to-day operations of an organization.
Working capital represents a company's ability to pay its current
liabilities with its current assets.
Cash conversion cycle (CCC)
The Cash conversion cycle measures how long a firm will be
deprived of cash if it increases its investment in inventory in
order to expand customer sales.
Operating cycle (OC)
An Operating Cycle (OC) refers to the days required for a
business to receive inventory, sell the inventory, and collect
cash from the sale
ACP
The average collection period is the average number of days
required to collect invoiced amounts from customers.
APP
Average payment period means the average period taken by the
company in making payments to its creditors
Master the 5 C’s of Credit
Collateral: Assets that are used to guarantee or secure a loan.
Credit scoring : It is a statistical analysis performed by lenders
and financial institutions to access a person's creditworthiness.
Capital budgeting
Capital budgeting is a process of evaluating investments and
huge expenses in order to obtain the best returns on.In other
sense, capital budgeting is the long term investment decision
wherein the firm decides in which projects they have to invest.
Top 4 Capital Budgeting Methods
1 – Payback Period Method
It refers to the period in which the proposed project generates
enough cash so that the initial investment is recovered. The
project with the shorter payback period is selected
Profitability Index is the ratio of the present value of future cash
inflows discounted at the required rate of return to the cash
outflow at the investment stage.
The formula of Profitability Index is represented as follows,
Profitability Index = Present Value of cash inflows / Initial
investment
Key Difference between Mutually Exclusive and
Independent Events
Mutually exclusive events are those events when their
occurrence is not simultaneous. When the occurrence of one
event cannot control the occurrence of other, such events are
called independent event.
Sunk cost: It is a cost that has already been incurred and cannot
be recovered.
Opportunity cost
Opportunity cost refers to what you have to give up to buy what
you want in terms of other goods or services.
Types of Financial Decisions
1. Investment Decision:
A financial decision which is concerned with how the firm’s
funds are invested in different assets is known as investment
decision. Investment decision can be long-term or short-term.
2. Financing Decision:
A financial decision which is concerned with the amount of
finance to be raised from various long term sources of funds
like, equity shares, preference shares, debentures, bank loans etc
is called financing decision. Capital Structure Owner’s Fund +
Borrowed Fund
3. Dividend Decision:
A financial decision which is concerned with deciding how
much of the profit earned by the company should be distributed
among shareholders (dividend) and how much should be
retained for the future contingencies (retained earnings) is called
dividend decision.
Dividend
Dividend refers to that part of the profit which is distributed to
shareholders
Key Differences Between Profit Maximization and
Wealth Maximization
̶ Profit maximization is a short term objective of the firm while
the long-term objective is Wealth Maximization.
2- Net present value
The formula of Net Present Value (NPV) is represented as
below,
Net Present Value (NPV) = Present value (PV) of Inflows –
Present value (PV) of outflows
̶ Profit Maximization is necessary for the survival and growth of
the enterprise. Conversely, Wealth Maximization accelerates the
growth rate of the enterprise and aims at attaining the maximum
market share of the economy.
Page 10 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Rivalry:
Public Finance
Public Finance: Public Finance implies a branch of economics,
which is concerned with government activities and the various
sources of financing expenditure.
A good is said to be rivalrous or a rival if its consumption by
one consumer prevents simultaneous consumption by other
consumers, or if consumption by one party reduces the ability of
another party to consume it.
Private Finance: Private Finance branches of economics that
Externalities:
studies income and expenditure activities of the private
Effects which flow from an economic activity to nonparticipants in that activity.
individuals and private entities.
•
•
Personal Finance: It deals with the optimization of
finances in the individual level subjected to budget
constraint.
Business Finance: Business Finance includes those
activities that are concerned with the acquisition and
conservation of capital funds in meeting the financial
needs and overall objectives of a business enterprise.
Branches of Public sector:
1. Public Revenue.
2. Public Expenditure.
3. Public Debt.
4. Budgetary Policy.
5. Fiscal Policy.
Impure public goods:
Goods in between the pure public goods and pure private goods,
with some features of each variety.
Local public goods:
Public goods provided by a state authority within a defined
geographical area constituting its territorial jurisdiction.
Tiebout Oates model:
Budgetary policy: Budgetary policy refers to government
attempts to run a budget in equilibrium or in surplus.
Fiscal Policy: Fiscal policy refers to the use of government
spending and revenue to influence economic conditions,
including demand for goods and services, employment,
inflation, and economic growth.
It’s an expanded version of Tiebout model of provision and
financing of local public goods. The model holds that if
municipalities offered varying baskets of goods (government
services) at a variety of prices (tax rates), that people with
different personal valuations of these services and prices would
move from one local community to another which maximizes
their personal utility. It will reduce free-rider problem by
making individual compulsory rider.
Assumptions:
Subsidies:
1.
2.
3.
4.
Subsidies are the benefit given to an individual, business, or
institution, usually by the government with the aim of promoting
economic and social policy.
5.
6.
7.
Complete information.
Many communities to choose from.
Commuting is not an issue.
Public goods do not spill over in terms of
benefits/costs from one community to the next.
An optimal city size exists: economies of scale.
Communities try to achieve "optimal size".
Communities are rational and try to keep the public
"bad" consumers away.
Grant:
A grant is a financial assistance given by a government,
organization, or person for a specific purpose.
Free Rider: Consumers who are able to consume a good
without paying for it.
Market Failure:
Compulsory Rider:
Market failure refers to the inefficient distribution of goods and
services in the free market. It takes place when the quantity of
goods or services supplied is not equal to the quantity of goods
or services demanded.
Consumer of a public goods who have no right to refuse its
consumption and must share the cost of financing its provision.
Public goods:
Migration of users of local public goods from one municipal
area to another in search of those municipal areas where the
provision of local public goods and their compulsory financing
is acceptable to them.
A public good is a good that is both non-excludable and nonrivalries. A public good is a product that one individual can
consume without reducing its availability to others and from
which no one is deprived.
Private goods:
Private
goods are
excludable
and
rival.
Private
goods are goods that must be bought in order to be consumed
and whose ownership is restricted to the group or individual that
purchased the good
Excludability:
A good or service is called excludable if it is possible to prevent
people (consumers) who have not paid for it from having access
to it.
Voting with feet:
Club goods:
A subset of local public goods and are characterized by an
artificially created scarcity.
Musgrave & Musgrave’s view:
It is from the 1939 paper "Voluntary Exchange Theory of Public
Economy" that 'The Musgrave Three-Function Framework'
originates. This framework is the suggestion that government
activity should be separated into three functions or "branches,"
macroeconomic stabilization, income redistribution and resource
allocation.
Page 11 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Government Failure:
Inability of government to rectify market failure and its own
inefficient performance
Merit goods:
The Laffer curve is typically represented as a graph that starts at
0% tax with zero revenue, rises to a maximum rate of revenue at
an intermediate rate of taxation, and then falls again to zero
revenue at a 100% tax rate. However, the shape of the curve is
uncertain and disputed among economists.
Those goods the consumption of which benefit non-consumer as
well.
Sin goods:
Goods consumption of which harms the consumer or nonconsumer.
Types of goods:
1.
2.
3.
4.
Public goods
Private goods
Natural monopoly
Common resources.
Tax Burden:
Tax incidence or tax burden is the effect of a particular tax on
the distribution of economic welfare.
Natural monopoly:
Goods those are excludable but non-rival. For example: fish in
the pond.
Taxable capacity:
Taxable capacity is the ability of individuals and businesses to
pay taxes.
Common resources:
Goods those are non-excludable but rival. For example:
CableTV
Revenue Receipt: Revenue receipts are money received by a
business as a result of its normal business operations.
Excess burden:
The excess burden refers to the net gains from units of the
product that were produced when there was no tax, but which
are not produced now because of the tax
Hidden tax:
Capital receipt:
Capital receipts are a non-recurring incoming cash flow into
your business, which leads to the creation of a liability (a debt to
be paid in the future) and a decrease in company assets
(resources that lead to capital gain)
Tax:
A compulsory levy which is paid to the govt for living in a
civilized society.
Reduction in disposable income of people on account of
externality of some phenomenon, such as inflation, negative
externality like pollution.
Crowding out of private investment:
The crowding out effect is an economic theory arguing that
rising public sector spending drives down or even eliminates
private sector spending.
Double taxation:
Base of tax:
A tax base is a total amount of assets or income that can be
taxed by a taxing authority, usually by the government.
Double taxation is a tax principle referring to income taxes paid
twice on the same source of income.
Deficit Financing:
Buoyancy of tax:
Tax buoyancy is an indicator to measure efficiency and
responsiveness of revenue mobilization in response to growth in
the Gross domestic product or National income. A tax is said to
be buoyant if
the tax revenues
increase
more
than
proportionately in response to a rise in national income or
output.
Deficit spending is the amount by which spending exceeds
revenue over a particular period of time, also called simply
deficit, or budget deficit; the opposite of budget surplus.
Direct money burden:
Direct money burden refers to the amount of tax being paid by
the taxpayers to the tax authorities.
Elasticity of tax:
Indirect money burden
Tax elasticity refers to changes in tax revenue in response to
changes in tax rate.
Indirect money burden refers to the additional money expenses
incurred by the taxpayers for tax payment.
Laffer curve:
Direct real burden: Direct gross loss of welfare of the tax
The Laffer Curve is a theory developed by supply-side
economist Arthur Laffer to show the relationship between tax
rates and the amount of tax revenue collected by governments.
The curve is used to illustrate Laffer’s argument that sometimes
cutting tax rates can increase total tax revenue.
payer attributable to the tax.
Backward shifting of tax:
Shifting of tax incidence from the buyers to the seller is known
as backward shifting.
Page 12 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Forward shifting of tax:
Debt trap:
Shifting of tax incidence from the seller to the buyers is known
as forward shifting.
Money burden: Monetary cost borne by the taxpayers.
“Debt-trap”, broadly defined, is where a creditor country
intentionally lends excessive credit to a smaller debtor country,
with the intention of extracting economic or political
concessions when the smaller country cannot service the loan.
Real burden: Total of direct and indirect gross burden of a tax.
Floating debt:
VAT: A value-added tax (VAT) is a consumption tax levied on
products at every point of sale where value has been added,
starting from raw materials and going all the way to the final
retail purchase.
Consumption expenditure tax:
A consumption tax is a tax levied on consumption spending on
goods and services.
Lorenz curve:
In economics, the Lorenz curve is a graphical representation of
the distribution of income or of wealth. It was developed by
Max O. Lorenz in 1905 for representing inequality of the wealth
distribution. The extent to which the curve sags below a straight
diagonal line indicates the degree of inequality of distribution.
Diagram of Lorenz curve
In this Lorenz curve, the poorest 20% of households have 5% of
the nation’s total income.
The poorest 90% of the population holds 55% of the total
income. That means the richest 10% of income earners gain
45% of total income.
Floating or unfunded loans are those which are repayable within
a short period, usually less than a year.
Functional finance:
This refers to an economic theory which hopes to put an end to
business cycles through appropriate government policy.
Inside money:
In monetary economics, inside money is money issued by
private intermediaries in the form of debt. This money is
typically in the form of demand deposits or other deposits, and
hence is part of the money supply.
Outside money:
Outside money is money that is not a liability for anyone
"inside" the economy. It is held in an economy in net positive
amounts. Examples are money that is backed by gold, and assets
denominated in foreign currency or otherwise backed up by
foreign debt, like foreign cash, stocks or bonds.
Sinking fund:
A sinking fund is a fund containing money set aside or saved to
pay off a debt or bond. A company that issues debt will need to
pay that debt off in the future, and the sinking fund helps to
soften the hardship of a large outlay of revenue.
Sliding maturity: Approaching redemption date of a nonterminable loan.
X-inefficiency:
Gini coefficient:
The Gini
coefficient
(Gini
index or Gini ratio) is a statistical measure of economic
inequality in a population. The coefficient measures the
dispersion of income or distribution of wealth among the
members of a population. The Gini coefficient is one of the most
frequently used measures of economic inequality. The
coefficient can take any values between 0 to 1 (or 0% to 100%).
A coefficient of zero indicates a perfectly equal distribution of
income or wealth within a population. A coefficient of one
represents a perfect inequality when one person in a population
receives all the income, while other people earn nothing. In
addition, in some rare cases, the coefficient can exceed 100%.
This may theoretically occur when the income or wealth of a
population is negative.
However, the abovementioned scenarios are extremely rare in
the real world. The data shows that the coefficient generally
ranges from 24% to 63%.
Difference between technical efficiency level and actually
achieved level. X Inefficiency - when a firm lacks the incentive
to control costs.
Gestation period:
The period between the start of an investment project and the
time when production using it can start.
Marginal efficiency of capital:
The marginal efficiency of capital is equal to that rate of
discount which would make the present value of the series of
annuities given by the returns expected from the capital asset
during its life just equal to its supply price.
Budget: A budget is a financial plan for a defined period, often
one year.
Zero based budget:
Zero-based budgeting (ZBB) is a method of budgeting in which
all expenses must be justified and approved for each new period.
Public debt and inflation:
The estimated results show that in the direction from public debt
to inflation, public debt has a significantly positive effect on
inflation while in the opposite direction, inflation has a
significantly negative effect on public debt.
Supplementary budget:
Supplementary Budget is the request for additional funds by
Ministries and Departments during the course of the year.
Externalities:
Page 13 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
In economics, an externality is the cost or benefit that affects a
third party who did not choose to incur that cost or benefit
Negative externality: A negative externality (also called
"external cost" or "external diseconomy") is an economic
activity that imposes a negative effect on an unrelated third
party.
Social cost
Social costs include both the private costs and any other external
costs to society arising from the production or consumption of a
good or service.
Negative production externality
Positive Externality:
Corporate Finance
Corporate finance
Corporate finance is the division of finance that deals with
financing, capital structuring, and investment decisions.
Corporate finance is primarily concerned with maximizing
shareholder value through long and short-term financial
planning and the implementation of various strategies.
Corporate finance function
1.
2.
3.
Capital budgeting
Capital Structure
Working Capital Management
Capital budgeting
This occurs when the consumption or production of a good
causes a benefit to a third party.
Social Benefit
Social benefit is the total benefit to society from producing
or consuming a good/service. Social benefit includes all
the private benefits plus any external benefits of
production/consumption. If a good has significant external
benefits, then the social benefit will be greater than the
private benefit.
Pigouvian subsidy: A pigouvian subsidy is a subsidy that is
used to encourage behavior that have positive effects on others
who are not involved or society at large.
Capital budgeting is the process by which investors determine
the value of a potential investment project. The three most
common approaches to project selection are
Capital structure
The capital structure is the particular combination of debt and
equity used by a company to finance its overall operations and
growth
Working capital management
Working capital management is a business strategy designed to
ensure that a company operates efficiently by monitoring and
using its current assets and liabilities to the best effect
Why agency problem arise
1.
2.
3.
When shareholder wealth is increasing but managers
wealth is decreasing
When manager’s wealth is increasing but
shareholders wealth is decreasing
Shareholders wealth is increasing but utility value is
increasing.
Auction market
An auction market is one where buyers and sellers enter
competitive bids simultaneously.
OTC market
OTC markets do not have physical locations or market-makers
Sensitivity Analysis
Sensitivity Analysis is a tool used in financial modeling to
analyze how the different values of a set of independent
variables affect a specific dependent variable under certain
specific conditions.
Scenario analysis
Scenario analysis is a process of analyzing future events by
considering alternative possible outcomes
NPV and IRR conflicts
➢
➢
When NPV>0 =positive, but IRR< cost of capital,
The project will be rejected
When NPV<0 =positive, but IRR> cost of capital,
The project will be accepted
Optimal Capital structure
Page 14 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
An optimal capital structure is the best mix of debt, preferred
stock, and common stock that maximizes a company's market
value while minimizing its cost of capital.
Sustainable development is development that meets the needs of
the present, without compromising the ability of future
generations to meet their own needs
Hybrid financing
Big push theory
It is the financial security that possesses the characteristics of
both the debt and equity.
The idea behind this theory is this that a big push or a big and
comprehensive investment package can be helpful to bring
economic development
Types of Hybrid financing
Preferred stock, Options, Warrants,
debenture, Put option, Call option etc.
Convertible
bond/
Speculator
A speculator utilizes strategies and typically a shorter time
frame in an attempt to outperform traditional longer-term
investors.
D/P ratio
The amount of cash paid out to shareholders dividend by :
Flotation cost
Cash paid out
net income =
Net income
Retention ratio
Flotation cost is the total cost incurred by a company in offering
its securities to the public.
Types of underwriting
Retention ratio indicates the percentage of a company's earnings
that are not paid out in dividends but credited to retained
earnings.
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛 𝑡𝑜 𝑟𝑒𝑡𝑎𝑖𝑛 𝑒𝑎𝑟𝑛𝑖𝑛𝑔
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
1.
2.
3.
Firm commitment
Best effort
Stand by
Formulas
NPV= TPV-NCO
IPO
An initial public offering (IPO) refers to the process of offering
shares of a private corporation to the public in a new stock
issuance.
𝑃𝐵𝑃 = 𝐴 +
𝐼𝑅𝑅 = 𝐿𝑅 +
IPO under-pricing
IPO under-pricing is the increase in stock value from the initial
offering price to the first-day closing price.
𝑃𝑉 =
𝑁𝐶𝑂 − 𝐶
𝐷
𝑁𝑃𝑉𝐿𝑅
𝑁𝑃𝑉𝐿𝑅− 𝑁𝑃𝑉𝐻𝑅
𝑇𝑉
(1 + 𝑀𝐼𝑅𝑅)𝑛
Components of capital
1.
2.
3.
4.
Equity share
Preference share
Retained earning
Borrowed capital
Financial distress
Financial distress is a condition in which a company or
individual cannot generate revenue or income because it is
unable to meet or cannot pay its financial obligations
Direct Bankruptcy cost
Direct costs of bankruptcy are those that involve the actual filing
of bankruptcy, such as court costs, lawyers' fees, and
administrative fees.
Indirect Bankruptcy cost
Indirect costs are related to lost opportunities and a company's
decisions in light of the bankruptcy
Financial distress costs
There are several financial distress costs – bankruptcy costs,
distressed asset sales, higher cost of capital, & conflicts of
interest.
Sustainable development
Page 15 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Micro economics
Free Market Economy
The free market is an economic system based on supply and
demand with little or no government control.
what is economics
Economics is the study of how society manage its scarce
resources to produce valuable goods and services and distribute
them among different individuals.
What is Scarcity?
Scarcity refers to that society has limited resources and therefore
cannot produce all the goods and services people wish to have.
What is efficiency?
Capitalist economy
Capitalist economy is an economic system in which private
individuals or business own capital goods. The production of
goods and services is based on supply and demand in the
general market- known as market economy-rather than through
central planning – known as planned economy or command
economy.
Socialist Economy
Efficiency means that society is getting maximum benefits from
its scarce resources.
What is micro economics?
Micro economics is the study of decision that people, individual
firms and business make regarding the allocation of resources
and prices of goods and services
What is demand?
Demand refers to the willingness and ability of consumer to
purchase a given quantity of goods and services at a given point
in time.
What is demand curve?
The demand curve is a representation of correlation between the
prices of goods and services and the amount demanded for a
given period of time.
What is supply?
The total amount of goods and services available for purchase at
any specified price.
Socialist economy is an economic system in which the
economic system is controlled and regulated by the government
so as to welfare and equal opportunity to the people in a society.
Mixed economy
A mixed economic system is a system that combines aspect of
both capitalism and socialism. It is a system in which
government and private individuals exercise economic control
Islamic economy
Islamic economy is a comprehensive and independent economic
system in which economics principles is defined in accordance
with Islamic law and takes into account the material, spiritual,
social and political aspect of human life.
Equilibrium
Equilibrium is the state in which market supply and demand
cross each other i.e. demand = supply. As a result, price become
stable.
Fixed cost
Supply curve
A fixed cost is a cost that does not change with an increase or
decrease in the amount of goods and services produced or sold.
The supply curve is a graphical representation of the
relationship between the cost of a good or service and the
quantity supply for a given period.
Variable cost
Central Problems of economics
1.
2.
3.
What to produce
How to produce
For whom to produce
A variable cost is a cost that changes with an increase or
decrease in the amount of goods and services produced or sold.
Total cost
The sum of all cost incurred by a firm in producing a certain
level of output.
Indifference curve
An indifference curve is a graph that shows a combination of
two goods that give a consumer equal satisfaction and utility,
thereby making the consumer indifferent.
Marginal Cost
Engel curve
Inferior goods
Engel curve describes how household expenditure on a
particular good or service varies with household income.
Inferior goods are goods that decreases in demand when
consumer income rises.
Marginal utility
Normal goods
In economics, utility is the satisfaction or benefit derived by
consuming a product; thus the marginal utility of a good or
service is the change in the utility from an increase in the
consumption of that good or service.
A normal good are the goods in which increase in income
causes an increase in demand.
Marginal Cost is the additional cost for the production of an
additional unit of output.
Superior goods
Market
Superior goods are the goods for which demand for goods
increases as income increases.
Market is the institutional set up where buyer and seller meet
together to purchase goods and services at a price.
Geffen goods
Page 16 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Geffen goods are the goods for which demand for goods
increases as the price increases and falls when the prices
decreases
Revenue expenditure
Oligopoly
Price elasticity of supply
A market structure in which only a few sellers offers similar or
identical product
Price elasticity measures how much the supply or demand of a
product changes based on a given change in price
Market failure
Factors of production
Market failure is a situation in which the allocation of goods and
services by a free market is not efficient, often leading to a net
social welfare loss.
Revenue expenditures are typically referred to as ongoing
operating expenses.
1.
2.
3.
4.
Land
Labor
Capital
Entrepreneur
Elasticity
It is a measurement which shows us the one variable changes in
response to another variable.
Veblen goods
Veblen goods are types of luxury goods for which the quantity
demanded increases as the price increases, an apparent
contradiction of the law of demand, resulting in an upwardsloping demand curve.
Geffen goods vs. Veblen goods
Normal goods can become Geffen goods and but Veblen goods
are always luxurious goods which doesn’t change from its
position
Yield curve
In finance, the yield curve is a curve showing several yields to
maturity or interest rates across different contract lengths (2
month, 2 year, 20 year, etc. ...) for a similar debt contract.
Capital expenditure
Money spent by a business or organization on acquiring or
maintaining fixed assets, such as land, buildings, and equipment.
Industrialization
The development of industries in a country or region on a wide
scale.
Price theory
The theory of price is an economic theory that states that the
price for any specific good or service is based on the
relationship between its supply and demand.
Price elasticity of demand
Price elasticity of demand is an economic measure of the change
in the quantity demanded or purchased of a product in relation
to its price change. Expressed mathematically, it is
Price Elasticity of Demand
% Change in Quantity Demanded
=
% Change in Price
Control economy
A type of economic system in which a government controls its
country's industries and decides what goods should be produced
and in what amounts.
Zone Pricing
Zone Pricing is a pricing method in which all customers within a
defined zone or region are charged the same price.
Page 17 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
General Banking
Bank
Short term credit is called loan and long term credit is called
advance.
Credit crunch and NPL
A bank is an institution of which the principle function is to
collect the unutilized money of the people and to lend it to
others.
Banking
Reducing the lending capacity of a bank is called credit crunch.
After taking credit if it is not paid then it is called NPL (Non
Performing Loan)
Classified loan
Whatever a bank does, it is banking. Banking is the business of
a banker the keeping or management of a bank.
Banker
A banker is dealer in debts of his own and other people
Money: Money is any goods and services that is widely
accepted in exchange of goods and services as well as payments
of debts.
Four Function of Money
1. A measure, 2. A medium, 3. A standard, 4. Store of value,
Branch banking
It is a system of banking in which one bank carries on its
business through a network of branches all over the country.
Unit banking
Operations of this bank are limited in general to a single office
situated in a particular place.
When loan is unpaid or due over date is called classified loan.
KYC
KYC means “Know Your Customer”. It is a process by which
banks obtain information about the identity and address of the
customers.
CRM (customer relationship management)
A CRM system helps companies stay connected to customers,
streamline processes, and improve profitability.
Crowding effect
If government takes huge amount of loan from the commercial
bank then individual customers borrowing capacity will be
reduced then it’s called crowding effect
Bank customers and client
Those who have account in the bank and make transactions with
the bank regularly is called bank customer.
Those who have no account in the bank and do not make
transaction regularly is called client.
Chain banking
Chain Banking is a form of banking when a small group of
individuals control three or more banks which are independently
chartered
Group Banking/ Holding company
It is a system in which a holding company controls the
operations of two or more banks
Whether all customers are client?
The exception is that fixed account holders are not customer
because they do not make transactions with the bank regularly.
So it is said that all customers are client but all clients are not
customers.
Bank rate
Bank rate is the rate of interest which a central bank charges on
the loans and advances to commercial bank.
Primary Reserve
The reserve which is kept in a bank vault and on deposit with
central bank for the purpose of meeting cash requirements and
to avoid liquidity crisis
Deposit rate
Deposit rate is the rate paid by commercial banks for demand,
time or saving deposits
Secondary Reserve
Repo rate
Repo rate is the rate at which central bank lends short-term
money to the banks against securities
Secondary reserves are near money financial instrument that
have no formal regulatory requirements and provide an
additional reserve of liquid assets to meet cash needs
Commercial Bank
The bank deals with money and money’s worth with a view to
earning profit is known as commercial bank.
I-Banking
Internet banking enables a customer to perform basic banking
transactions through PC or laptop. Such as Online shopping
PLR
The interest rate at which bank gives loan to its best, largest,
secure and most credit worthy customers is called Prime lending
rate.
Current Deposit Account
From which account money can be drawn and deposited at any
time in the banking hour is called current account.
Savings Deposit Account
A saving account is a basic type of bank account that allows you
to deposit money, keep it safe and withdraw funds, all while
earning interest
Credit
Any kind of loan is called credit
Loan vs Advance
CRR
Page 18 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
It is a percentage of bank deposits that Banks are supposed to
maintain with central bank. At present, the required CRR is
13%.
Letter of credit is a kind of promissory debt instrument which is
issued by bank on behalf of importer and to the favor of
exporter. It is used in foreign trade.
SLR
Statutory liquidity ratio (SLR) is the Government term for the
reserve requirement that commercial banks are required to
maintain in the form of cash, gold reserves. At present the
required SLR is 5.5%.
Bank draft
A written order to a bank by any bank to pay money to someone
is called draft.
Foreign bank
Refers to commercial bank that’s headquarter is in a foreign
country but operate branches in different countries like. EX:
SCB, HBL, etc.
Monetary policy
Monetary policy is a central bank's actions and communications
that manage the money supply.
Contractionary monetary policy
Central banks use contractionary monetary policy to reduce
inflation. They reduce the money supply by restricting the
amount of money banks can lend.
Expansionary monetary policy
Central banks use expansionary monetary policy to lower
unemployment and avoid recession. They increase liquidity by
giving banks more money to lend.
Monetary policy vs. Fiscal policy
Monetary policy involves changing the interest rate and
influencing the money supply. Fiscal policy involves the
government changing tax rates and levels of government
spending to influence aggregate demand in the economy.
Overdraft
A deficit in a bank account caused by drawing more money than
the account holds.
Plastic money
Plastic money is the generic term for all types of bank cards,
credit cards, debit cards, smartcards, etc.
Methods of operation of Islamic Bank
Mudaraba
Mudaraba is a partnership in profit whereby bank party provides
capital and the other party provides skill and labour.
Musharaka
Musharakah is a joint enterprise or partnership structure in
Islamic finance in which partners share in the profits and losses
of an enterprise
Murabaha
A concept found in Islamic finance that governs a contract
between a bank and its client, by which the bank purchases
goods and then sells them to the client at a cost that includes a
profit margin.
Cheque
It is a written order to the bank to pay on demand
Functions of central bank
1. Issue of notes and coins, 2. Banker of the bank,3. Bank of
government,4. Controller of foreign exchange,5. Government’s
agent and adviser,6. Lender of the last resort
Bearer Cheque
Anybody can collect money by bearer cheque. In this cheque the
words “or bearer” is described after the name of the payer.
Role of bank
Creation of credit, Proper utilization of resources, Finance the
government, Bank rate policy etc.
Order cheque
When the word "or bearer" printed on the cheque is cancelled
and and the word 'order' may be written on the cheque, the
cheque is called an order cheque.
Elements of Primary reserve
1. Cash in hand, 1.Balance with central bank, 3.Demand
deposits with other bank
Crossed cheque
A crossed cheque is a cheque that has been marked specifying
an instruction on the way it is to be redeemed
Stale check
If any cheque exceeds 6 months then it is called stale cheque
Dishonoring of a cheque
If the bank does not pay the money of cheque for any special
reason and back the cheque to the depositor then it is called
dishonoring of a cheque.
Endorsement of cheque
In order to transfer the ownership of the cheque, when signature
is to be given to the back side of the cheque or to the attested
paper of the cheque is called endorsement of cheque.
L/C
Agent Banking
Conducting activities covering a small area such as Bkash, OKcash etc.
Bangladesh Automated Clearing House (BACH):
BACH, the first ever electronic clearing house of Bangladesh,
has two components - the Automated Cheque Processing
System (ACPS) and the Electronic Funds Transfer (EFT).
Secured loan
A secured loan is a loan in which the borrower pledges some
asset (e.g. a car or property) as collateral for the loan, which
then becomes a secured debt owed to the creditor who gives the
loan.
Unsecured loan
An unsecured loan is a loan that is issued and supported only by
the borrower's creditworthiness, rather than by any type of
collateral.
Page 19 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Time loan
A loan that must be repaid by a certain, stated date. For
example, a time loan's terms may state that all interest and
principal must be repaid within six months.
Demand Loan: The entire amount is paid to the debtor at one
time
Bill of exchange
A bill of exchange is a written order once used primarily in
international trade that binds one party to pay a fixed sum of
money to another party on demand or at a predetermined date.
Ante dated cheque
A cheque which bears a date earlier to the date on which the
check is drawn is called ante dated cheque.
Post datedcheque
It is one which bears a date subsequent to the one on which it is
drawn.
Retail Banking
It is a banking service focused mainly on individual customers.
Drawer: Person who draw the cheque i.e. the depositor
Drawee: On whom the cheque has been drawn
Payee: The person who is entitled to receive the payment.
Money laundering
The concealment of the origins of illegally obtained moneyby
transferring to the foreign banks or legitimate businesses.
Collecting Banker
The banker when collects negotiable instruments on behalf of a
customer is termed as the “collecting bankers”.
Negotiability
Characteristic of a document (such as a check, draft, bill of
exchange) that allows it to be legally and freely
(unconditionally) assignable, saleable, or transferable.
E-cash: Electronic
networks.
financial
transactions
via
computer
Offshore bank
An offshore bank is a bank located outside the country of
residence of the depositor, typically in a low tax jurisdiction (or
tax haven) that provides financial and legal advantages.
Both debit card and credit card is called smart card
Debit card vs. credit card
Debit cards allow bank customers to spend money by drawing
on funds they have deposited at the bank. Credit cards allow
consumers to borrow money from the card issuer up to a certain
limit in order to purchase items or withdraw cash.
Master card
Which card is used Mastercard Incorporated is an American
multinational financial services corporation headquartered in the
Mastercard International Global Headquarters in Purchase, New
York, United States. It is used in the worldwide.
Wholesale banking
Wholesale banking refers to banking services sold to large
clients, such as other banks, other financial institutions,
government agencies, large corporations, and real estate
developers.
EFTPOS
EFTPOS is actually an abbreviation. It stands for Electronic
Funds Transfer at Point Of Sale. EFTPOS is used as a method of
payment for goods and services.
EFT
Electronic Funds Transfer (EFT) is a system of transferring
money from one bank account directly to another without any
paper money changing hands.
SWIFT
The
Society
for
Worldwide
Interbank
Financial
Telecommunication (SWIFT), legally S.W.I.F.T. SCRL,
provides a network that enables financial institutions worldwide
to send and receive information about financial transactions in a
secure, standardized and reliable environment.
Dormant Account
When current and saving account remain in-operative for six
months or more, than the account is called dormant account.
Margin restriction
Set the level up to which the bank would provide finance for the
underlying goods, services or the project.
Selective credit control
It involves directional control to influence the flow of credit in
particular channels.
Specialized banks
The specialized banks are defined as those banks that are
banking operations that serve a specific type of economic
activity
Merchant bank
A merchant bank is historically a bank dealing in commercial
loans and investment
Payment card
A payment card is a plastic card which we use like a credit card
in order to pay for things, but which takes the money directly
from the bank account.
Smart card
Page 20 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Treasury Management
ii.
Treasury:
A place where the funds of the government, of a corporation, or
the like are deposited, kept, and disbursed. The treasury acts as
the custodian of cash & other liquid assets.
iii.
Bank Treasuries may have the following departments:
•
A Fixed Income or Money Market desk that is devoted to
buying and selling interest bearing securities
•
A Foreign exchange or "FX" desk that buys and sells
currencies
•
A Capital Markets or Equities desk that deals in shares
listed on the stock market.
•
In addition the Treasury function may also have an Asset
liability management (ALM) desk that manages the risk of
interest rate mismatch and liquidity; and a Transfer pricing
or Pooling function that prices liquidity for business lines (
asset sales teams) within the bank.
Functions:
1. Cash and Liquidity Management: Cash and liquidity
management is a sub-function of treasury management that aims
to convert sales to available cash as soon as possible and at the
lowest processing cost.
2. Risk Management: Risk management is the discipline of
managing financial risks to allow the company to meet its
financial obligations and ensure predictable business
performance. The aim of Risk Management is to identify,
measure, and manage risks that could have a significant impact
on the business.
Treasurers are typically responsible for managing:
Credit Risk is the risk that a counter party default causes loss to
the business;
Operational Risk is the risk that fraud or error cause losses to
the business.
3. Corporate Finance: Looking after contacts with banks and
rating agencies, as well as discussions with credit insurers and,
if applicable, suppliers concerning periods allowed for payment,
in conjunction with the procurement of finance, also form part
of the treasurer’s core business.
Meaning of Integrated Treasury:
Integrated treasury is a holistic approach to funding the balance
sheet and deployment of funds across the domestic as well as
global money and forex markets. This approach enables the
bank to optimize its asset-liability management and also
capitalize on arbitrage opportunities.
Functions of Integrated Treasury:
a. Reserve Management and Investment:
i.
Meeting CRR/SLR obligations,
ii.
Having an approximate mix of investment portfolio to
optimize yield and duration.
b. Liquidity and Funds Management:
i.
Analysing of major cash flows arising out of assetliability transactions,
Providing a balanced and well-diversified liability
base to fund the various assets in the balance sheet of
the bank, and
Providing policy inputs to the strategic planning
group of the bank on funding mix (currency, tenor
and cost) and yield expected in credit and
investment.
c. Asset Liability Management:: ALM calls for determining
the optimal size and growth rate of the balance sheet and also
price the assets and liabilities in accordance with prescribed
guidelines.
d. Risk Management:: Integrated treasury manages all market
risks associated with a bank’s liabilities and assets. The market
risk of liabilities pertains to floating interest rate risks and asset
and liability mismatches.
(e) Transfer Pricing: The treasury has to ensure that the funds
of the bank are deployed optimally, without sacrificing yield or
liquidity. An integrated treasury unit has an idea of the bank/s
overall funding needs as well as direct access to various markets
(like money market, capital market, forex market, credit
market).
Hence, ideally the treasury should provide benchmark rates,
after assuming market risk, to various business groups and
product categories about the correct business strategy to adopt.
(f) Derivative Products:
The treasury can develop Interest Rate Swap (IRS) and other
rupee based/cross-currency derivative products for hedging
bank’s own exposures and also sell such products to
customers/other banks.
(g) Arbitrage:
Treasury units of banks undertake arbitrage by simultaneous
buying and selling of the same type of assets in two different
markets in order to make profit less risk/y.
(h) Capital Adequacy:
This function focuses on quality of assets, with Return on Assets
(ROA) being a key criterion for measuring the efficiency of
deployed fund.
An integrated treasury is a major profit center. It has its own P
and L measurement. It undertakes exposures through proprietary
trading (deals done to make profits out of movements in market
interest/exchange rates) that may not be required for general
banking.
Treasury Products
Various Treasury Products Dealt with by Banks:
(A) Domestic Treasury:
1. Asset Products:
i.
Call/Notice Money Lending
ii.
Term Money Lending/Inter-Bank Deposits
iii.
Investment in Certificate of Deposits (CDs)
iv.
Investment in Commercial Papers
v.
Inter-bank Participation Certificates
vi.
Dealing in Derivatives of Asset Nature
vii.
Deployment of funds in Reverse Repos
viii.
Investment in various SLR Bonds issued or
guaranteed by the Central/State Government
ix.
Investment in non-SLR Bonds
x.
Private Placements and
Page 21 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
xi.
Investment in Floating Rate Bonds, Tax-free Bonds,
Preference Shares, Listed/Unlisted Equity Shares,
Mutual Funds, etc.
2. Liability Products:
i.
Call/Notice Money Borrowing.
ii.
Term Money Borrowing.
iii.
Acceptance of funds by issuing Certificate of
Deposits (CDs).
iv.
Inter-bank Participation Certificates.
v.
Borrowing under Repos.
vi.
Borrowing under Refinance from different financial
institutions and the Central Bank of the country.
vii.
Borrowing under Tier-II bonds issued by the bank.
(B) Foreign Exchange Operations:
1. Inter-bank:
(a) Buying and selling of currencies on Cash, Tom, Spot and
Forward basis
It is an instrument, the value of which depends on the values
of other underlying variables that include:
(a) Stock Prices (b) Foreign Exchange Rates (c) Interest Rates
(d) Values of Underlying Assets in Securitization and (e) Credit
Risk Perception.
3. Futures:
Futures Contract is an agreement to buy or sell an asset for a
certain price at a certain time in the future. The asset may be
financial or even commodities.
4. Swaps:
SWAP literally means a transaction to exchange one thing for
another. In financial markets, two parties to a SWAP transaction
make a contract to exchange cash flows at a later date. The cash
flows are determined by applying a pre-arranged parameter on a
notionally fixed principal.
Swaps are generally of the following three types:
(b) Forward SWAPS (simultaneous purchase and sale of a
currency for two different forward maturities) and
(i) Currency SWAP — Cash flows in one currency are
exchanged for cash flows in another currency.
(c) Foreign currency placements, investments and borrowings
(ii) Interest Rate SWAP — Cash flows at a fixed rate of
interest are exchanged for a floating rate of interest.
2. Cover for various merchant transactions undertaken by the
branches. These transactions include pre-shipment foreign
credit, foreign currency bills purchased, foreign currency loans,
post-shipment foreign credit, retirement of import bills, etc.
The treasury also manages the foreign exchange transactions
emanating from foreign currency loan (FCL) business,
remittances handled by the branches for their customers.
(C) Dealing in Derivatives as under:
i.
Interest rate SWAPS
ii.
Forward rate agreement
iii.
Interest rate futures
iv.
Interest rate options and
v.
Currency options
Terminologies frequently used in Treasury Operations:
1. Yield: Yield is a measure of the overall return to the investor
on his investment.
Yield can be calculated in the following three ways:
(a) Nominal Yield:
This is the annual rate of interest specified on a security. This is
also known as Coupon Rate.
(b) Current Yield:
This is the effective yield that an investor earns based on the
current market price of the security instrument, viz., bond,
debenture, etc.
(c) Yield to Maturity (YTM):
YTM indicates the yield on a security instrument if it is held up
to maturity of redemption.
2. Derivatives:
Derivative is a financial product (e.g. Futures, Forwards, Swaps,
and Options Credit Derivatives etc.) derived from some other
principal financial products.
(iii) Basis SWAP – Cash flows on both the legs of the SWAP
are dependent on different floating rates.
5. Options:
An option is an instrument evidencing a contract, whereby the
holder (buyer) gets the right to buy or sell a specified quantity of
the underlying assets at a specific price (strike price) on or
before a specified time.
6. Call Options:
A call option is also known as a Buy Option. The call option
entitles the buyer with the right to buy specified quantity of the
underlying asset, at the strike price, on or before expiry date
mentioned in the option. However, it is not obligatory for the
buyer to exercise the option and he may opt to remain inactive
or just allow the option to expire. The seller, on the other hand,
has the obligation to sell the underlying asset if the buyer of the
call option decides to exercise his option to buy.
7. Put Options:
A buyer of a put option gets the right to sell a specified quantity
of the underlying asset at the strike price on or before the expiry
date. However, it is not obligatory for the buyer of the put an
option to sell the underlying asset at the strike price, whereas the
seller of the put option has the obligation to buy the underlying
asset at the strike price if the buyer of the put options decides to
exercise his option to sell.
In the Money, At the Money and Out of the Money in
Options:
An option is said to be ‘At the Money’ when the strike price
mentioned in the option is equal to the underlying asset price.
This is so for both put and call options. A call or put option is
said to be ‘In the Money’ when the strike price of the option is
less or more, respectively, than the underlying asset price. On
the other hand, a call option is ‘Out of the Money’ when the
strike price is greater or less, respectively, than the underlying
asset price.
Interest Rate Risk & Management
Page 22 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Interest rate risk is the risk that arises when the absolute level
of interest rates fluctuate. Interest rate risk directly affects the
values of fixed-income securities.
Basel I is a set of international banking regulations put forth by
the Basel Committee on Bank Supervision (BCBS) that sets out
the minimum capital requirements of financial institutions with
the goal of minimizing credit risk.
Top 12 Factors that Determine Interest Rate risk
1.
CreditScore
The higher your credit score, the lower the rate.
2. Credit History
The less credit history you have, the less knowledge
a lender has of your repayment ability, possibly
making you slightly more risky. The better the
payment history, the better the rate.
3. Employment Type and Income
Self-employed, hourly employed, bonus-based pay –
these all affect the risk factors of whether you’ll be
able to pay back the loan.
4. Loan Size
How much money are you asking for? Often if you
are requesting an amount under a certain level
(i.e.$100,000), there may be a slight increase in rate.
5. Loan-to-Value (LTV)
What percentage is your loan amount to the value of
the property? Typically, the lower the percent, the
lower the rate.
6. Loan Type
Fixed, variable, adjustable, balloon – these all have
varying rates because of the variation of risks.
Depending on the situation, your initial interest rate
may be lower with an adjustable rate than with a
fixed rate but you run the risk of the rate increasing
significantly later on.
7. Length of Term
The shorter the term on your loan, the quicker you’ll
be paying down the debt; possibly resulting in a
better rate. It’s important to note that your payments
will most likely be higher, so you’ll want to make
sure you can afford it.
8. Payment Frequency
Because of the agriculture industry’s unique nature,
if you elect for a payment plan that allows for an
annual or semiannual payment rather than a monthly
one, you can expect a higher rate.
9. Property Type
A residential house will have a lower interest rate
than a commercial farm on 50 acres because of the
increased risk that comes with a farm loan.
Purchasing a farm or land is different because there
aren’t as many properties for value comparison,
buyers or people that can afford to.
10. Co-borrowers
Will there be other people on the loan, and if so,
what does their credit look like? All parties involved
in the loan will be used in determining the rate.
11. Debt Ratio
How much money is made monthly versus the cost
of monthly bills. The typical ratio that lenders looks
at is 42%.
12. Documentation Available
Are you able to produce all documentation (bank
statements, taxes, retirement accounts, etc.) to show
your assets? This will help ease the risk factors for a
lender and help lower the rate.
liquidity adjustment facility
A liquidity adjustment facility (LAF) is a tool used in
monetary policy, primarily by the Reserve Bank of India (RBI),
that allows banks to borrow money through repurchase
agreements (repos) or for banks to make loans to the RBI
through reverse repo agreements.
BASEL ACCORDS & TIER CAPITALS
What Is Basel ?
Basel I
Banks that operate internationally are required to maintain a
minimum amount (8%) of capital based on a percent of riskweighted assets.
Note: Basel I was the BCBS' first accord. It was issued in
1988 and focused mainly on credit risk by creating a bank
asset classification system.
Short Terms for Basel I
Basel I, followed by Basel II and III, laid framework for banks
to mitigate risk as outlined by law.
Basel I is considered too simplified, but was the first of the three
"Basel accords."
According to Basel I, banks are required to keep capital of at
least 8% of their determined risk profile on hand.
Basel II
Basel II is a second international banking regulatory accord that
is based on three main pillars:
1.
2.
3.
Minimal capital requirements,
Regulatory supervision, and
Market discipline.
Key difference between basel I &basel II
The main difference between Basel II and Basel I is that Basel II
incorporates credit risk of assets held by financial institutions to
determine regulatory capital ratios.
Tier (1,2,3)
Tier 1
Tier 1 capital is the most strict definition of regulatory capital
that is subordinate to all other capital instruments, and includes
shareholders' equity, disclosed reserves, retained earnings and
certain innovative capital instruments.
Tier 2
Tier 2 is Tier 1 instruments plus various other bank reserves,
hybrid instruments, and medium- and long-term subordinated
loans.
Tier 3 Capital
Tier 3 capital is tertiary capital, which many banks hold to
support their market risk, commodities risk, and foreign
currency risk. Tier 3 capital includes a greater variety of debt
than tier 1 and tier 2 capitals .
What Is Basel III?
Basel III is an international regulatory accord that introduced a
set of reforms designed to improve the regulation, supervision
and risk management within the banking sector.
Basel III is part of the continuous effort to enhance the banking
regulatory framework. It builds on the Basel I and Basel II
documents, and seeks to improve the banking sector's ability to
deal with financial stress, improve risk management, and
strengthen the banks' transparency.
In comparison to Basel II, Basel III strengthened regulatory
capital ratios, which are computed as a percent of risk-weighted
assets. In particular, Basel III increased minimum Common
Page 23 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Equity Tier 1 capital from 4% to 4.5%, and minimum Tier 1
capital from 4% to 6%. The overall regulatory capital was left
unchanged at 8%.
Financial services and Microfinance
Microfinance:
Microfinance is a category of financial services targeting
individuals
and
businesses who
lack
access
to
conventional banking and related services.
Key Takeaways
Basel III is an international regulatory accord that introduced a
set of reforms designed to improve the regulation, supervision
and risk management within the banking sector.
Basel III is part of the continuous effort to enhance the banking
regulatory framework.
Basel III was published in 2009, largely in response to the credit
crisis associated with the Great Recession.
Countercyclical Measures
Basel III introduced new requirements with respect to regulatory
capital for large banks to cushion against cyclical changes on
their balance sheets. During credit expansion, banks have to set
aside additional capital, while during the credit contraction,
capital requirements can be loosened. The new guidelines also
introduced the bucketing method, in which banks are grouped
according to their size, complexity and importance to the overall
economy.
Leverage and Liquidity Measures
Additionally, Basel III introduced leverage and liquidity
requirements to safeguard against excessive borrowings and
ensure that banks have sufficient liquidity during financial
stress. In particular, the leverage ratio, computed as Tier 1
capital divided by the total of on and off-balance assets less
intangible assets, was capped at 3%.
Microfinance is the provision of savings account loans,
insurance, money transfers and other banking services to
customers that lack access to traditional financial services,
usually because of poverty.
Microcredit:
Microcredit is the small loan facility provided to the people with
less earnings to motivate self-employed.
Unbanked:
Unbanked not having access to the services a bank or financial
organization.
Group lending
Group lending is a lending mechanism which allowed a group of
individuals often called a solidity group to provide collateral or
loan guarantee though a group repayment pledge.
•
•
•
•
•
Established by Grameen bank.
There are 8 group each group controls 5 member
Loans are given to two members of each person’s
group.
It all installments are paid on time, then loans are
given to next two members and then next one
members.
If one group members defaults, the other group
members make up the payment amount.
Grameen Bank:
Grameen Bank is a microfinance organization and community
development bank founded in Bangladesh. Grameen Bank
originated in 1976, in the work of Professor Muhammad
Yunus at University of Chittagongs.In 2006 Grameen and
Yunus were awarded the Nobel Prize for Peace.
Joint Liability:
Joint liability denotes the obligation of two or more partners to
pay back a debt or be responsible for satisfying a liability. A
joint liability allows parties to share the risks associated with
taking on debt and to protect themselves in the event of lawsuits.
BRAC (Bangladesh Rural Advancement Committee):
Established by Sir Fazle Hasan Abed in 1972 after
the independence of Bangladesh.BRAC is present in all
64 districts of Bangladesh as well as 11 other countries in Asia,
Africa, and the Americas.
Developmentprogram:
•
Microfinance
•
Economic development
•
Education
•
Public health
•
Disaster relief
Page 24 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
ASA Bangladesh
ASA started its mission in 1978 with the aims to improve the
life quality of the people living at the bottom of the socioeconomic pyramid and establish a society free from poverty and
economic disparity.It was established by Md. Shafiqual Haque
Choudhury.
Products and services:
•
Microcredit.
•
Small business credit.
•
Regular weekly savings.
•
Life insurance.
TMSS
Development program:
•
Microfinance.
•
Information and communication technology.
•
Education.
•
Public health
Leasing:
Lease is a financial arrangement, wherein one party (lessor)
allows another party (lessee) to use the capital asset or
equipment for a definite period, in return for an adequate
consideration, i.e. lease rental charges.
Lessor: Real owner of the asset, who can be an individual or
firm. The lessor grants the right to use the asset, for a fixed
consideration over the period of lease.
Lessee: The one who legally acquires the right to use the asset
or equipment on the payment of recurring rentals which are to
be paid over the term of the lease.
Lease term:
There are certain terms and conditions in the contract that exists
between the parties, which are written in legal document called
as a lease agreement.
Lease rental:
Lease rental is the combination in which the lessee pays to the
lessor for the lease transaction.
Operating Lease:
When in a lease contract, the lessor has the right to get the
possession of the asset back from the lessee, at the end of the
lease term, then it is called as an operating lease.
Longterm.
Non-cancellable.
Leveraged Lease:
A leveraged lease or leased lender is a lease in which the lessor
puts up some of the money required to purchase the asset and
borrows the rest from a lender.
Domestic lease:
Domestic Lease: When all the parties to the lease agreement
Viz. Lessor, lessee and the equipment supplier are domiciled or
belongs to the same country, is called as a domestic lease.
International Lease:
The international lease refers to the type of lease agreement
where one or more parties to the lease agreement reside or are
domiciled in different countries.
Factoring:
Factoring is a financial service in which the business entity sells
its bill receivables to a third party at a discount in order to raise
funds
Advance factoring:
Advance factoring can be with or without recourse. Under
advance factoring arrangement, money is paid by the factor to
the business in advance.
Maturity factoring:
Maturity factoring, also known as collection factoring is a type
of factoring service in which the client sells his invoice to the
factor and in return, the factor pays the client for such invoices
either on the date of maturity or any date after the date of
maturity.
Full factoring:
It is the most popular form of factoring where the factor
provides the client with all types of facilities like protection
from bad debt, collection, etc.
Recourse factoring:
Recourse factoring is an agreement between the client and the
factor in which the client is required to buy back the unpaid bills
receivable from the factor. Thus, the credit risk stays with the
client in case of non-payment by the debtor.
Non-recourse factoring:
Non-recourse factoring, the client and the factor enter into an
agreement where the factor shall bear the obligation of
absorbing those bills receivable which remain unpaid.
short term
cancellable
express borne by the lessors
there is no purchase option
Finance or Capital Lease:
When in a lease agreement, lessee retains the possession of the
leased asset or equipment even after the period expires then such
a type of lease is called as Finance Lease. This is so because the
lease rental charges are set in a way that the whole price of the
leased equipment or asset along with the return on investment is
recovered to the lessor, within the term, by way of rentals.
•
•
There is a purchase option.
Express borne by the lessee.
Sale and leaseback:
A "sale/leaseback" or "sale and leaseback" is a transaction in
which the owner of a property sells an asset, typically real
estate, and then leases it back from the buyer.
Thengamara Mohila Sabuj Sangha (TMSS) is a micro
credit NGO from Bangladesh. TMSS, founded by Dr Professor
Hosne Ara Begum, Ashoka Fellow, in 1980 in Bogra,
•
•
•
•
•
•
Domestic Lease:
When all the parties to the lease agreement Viz. Lessor, lessee
and the equipment supplier are domiciled or belongs to the same
country, is called as a domestic lease.
Conditional Sales:
A conditional sales agreement is a financing arrangement where
a buyer takes possession of an asset, but its title and right of
repossession remain with the seller until the purchase price is
paid in full.
Page 25 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Hire Purchase:
Hire purchase is an arrangement for buying expensive consumer
goods, where the buyer makes an initial down payment and pays
the balance plus interest in installments.
Economic life:
Economic life is the period over which an entity expects to be
able to use an asset, assuming a normal level of usage and
preventive maintenance.
Useful life:
A useful life is the number of years in which an asset can
reliably produce benefits.
Residual Value:
The residual value, also known as salvage value, is the estimated
value of a fixed asset at the end of its lease term or useful life.
Sublease:
A sublease is the renting of property by a tenant to a third party
for a portion of the tenant’s existing lease contract.
Factoring:
Factoring is a financial service in which the business entity sells
its bill receivables to a third party at a discount in order to raise
funds.
Factor:
A factor is an intermediary agent that finances receivables. A
factor is essentially a funding source that agrees to pay the
company the value of an invoice less a discount
for commission and fees.
Commission:
A commission is a service charge assessed by a broker or
investment advisor for providing investment advice or handling
purchases and sales of securities for a client.
Discount charge:
Discount charge is the difference between the original amount
owed in the present and the amount that has to be paid in the
future to settle the debt.
Forfeiting:
Forfeiting is a means of financing that enables exporters to
receive immediate cash by selling their medium and longterm receivables—the amount an importer owes the exporter—
at a discount through an intermediary.
Formal sector institutions:
Formal financial institution are chartered by the government and
are the subject to banking regulation and supervise on .they I
include public and private banks insurance firm and finance
companies.
Semi-formal sector:
The semi-formal sector includes those institutions which are
regulated otherwise but do not fall under the jurisdiction
of Central Bank, Insurance Authority, Securities and Exchange
Commission or any other enacted financial regulator.
Informal sector:
The informal sector includes private intermediaries which are
completely unregulated.
Minimum capital requirement are set for all organization
entering the financial sector.
Capital adequacy:
Capital adequacy refers to the level of capital in an organization
that is available to cover risks.
Asset quality:
Asset quality represent the risk to earning derived from loan
made by the organization.
.Services are provided to MFIS clients:
•
Financial intermediation
•
Credit providing
1. Individual lending
2. Group lending
•
Savings
1. Compulsory savings
2. Voluntary savings
•
Insurance
•
Credit cards
•
Smart card
•
Payment services
•
Social intimidation
•
Enterprise development services
•
Marketing and technology services
•
Business training
•
Production training
•
Social services
Portfolio diversification:
Portfolio diversification is the risk management strategy of
combining a variety of assets to reduce the overall risk of an
investment portfolio.
Liquidity requirement:
Liquidity is a financial term that describes how easy it is to cash
out of an investment.
Loan loss reserve:
Loan loss reserves are accounting entries banks make to cover
estimated losses on loans due to defaults and nonpayment.
Loan loss provision:
A loan loss provision is an expense set aside as an allowance for
uncollected loans and loan payments. This provision is used to
cover a number of factors associated with potential loan losses,
including bad loans, customer defaults, and renegotiated terms
of a loan that incur lower than previously estimated payments.
Village banking:
Village banking is a microcredit methodology whereby financial
services are administered locally rather than centralized in a
formal bank. Village banking has its roots in ancient cultures
and was most recently adopted for use by micro-finance
institutions (MFIs) as a way to control costs. Early MFI village
banking methods were innovated by Grameen Bank.
Concessional loan:
Concessional loans are loans received by the MFIs with lower
than market rates of interest.
Venture capital:
Minimum capital requirement:
Page 26 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Venture capital is a type of financing that is provided by firms
or funds to small, early stage, emerging firms that are deemed to
have high growth potential.
A conventional mortgage or conventional loan is any type of
home buyer’s loan that is not offered or secured by a
government entity.
Venture capital institutions:
Venture capital institutions is a financial intermediary between
investors looking for high potential return and entrepreneurs
who need institutional capital as they are yet not ready/able to
go to the public.
Performance indications of Microfinance Company:
Management buy-in:
A management buy-in (MBI) occurs when a manager or
a management team from outside the company raises the
necessary finance, buys it, and becomes the company's
new management.
Management Buyout (MBO):
A management buyout (MBO) is a transaction where a
company’s management team purchases the assets and
operations of the business they manage.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Portfolio quality.
Productivity ratios.
Efficiency ratios.
Financial viability.
Financial spread.
Operationalself-sufficiency.
Financialself-sufficiency.
Subsidy dependency index.
Profitabilityratio.
Return on assets ratio.
Capital adequacy.
Insurance.
Insurance agent.
Insurance borrower.
Conditional loan:
Conditional loan is a form of loan finance without any
predetermined repayment schedule or interest rate the charge is
a royalty on sales. The supplier of such loans recovers a
specified percentage of sales towards the recovery of the
principal as well revenue in a predetermined ratio usually 50:50.
Non-convertible debentures:
Non-convertible
debentures (NCD)
are
fixed-income
instruments, usually issued by high-rated companies in the form
of a public issue to accumulate long-term capital appreciation.
Investment Nurturing:
The process by which venture capital companies continue to
involve themselves in the operations of concerns assisted by
them, is called 'investment nurturing'.
Types of investment nurturing:
Hands-on:
Hands on nurturing is basically continuous and constant
involvement in the operation of the investee company by way of
representation on the board of director.
Hands-off:
Hands-off is the passive role played by the venture capital fund
in formulating strategies/policy matters.
Hands-holdings:
This is midway between hands-on and hands-off styles. Likes
the hands-on style the VCI has the right to have a nominee on
the board of directors of the VCU, but actively participants in
the decision making process.
Offshore Investment Company:
An offshore company is often created for use as an offshore
investment company where it can hold and trade any kind of
international investment instrument including listed and unlisted
shares in other companies, bonds, commodities or for the
trading of foreign currencies, futures, options, or any other type
of investment. Income and gains may be accumulated and
reinvested throughout the world with the offshore company
providing an efficient and private vehicle for this purpose.
Conventional Mortgage or Loan:
Page 27 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
International Financial Management
International finance
International finance is a section of financial economics that
deals with the monetary interactions that occur between two or
more countries.
Direct quote
A direct quote is a foreign exchange rate involving a quote in
fixed units of foreign currency against variable amounts of the
domestic currency.
Indirect quote
The term indirect quote is a currency quotation in the foreign
exchange market that expresses the variable amount of foreign
currency required to buy or sell fixed units of the domestic
currency.
Cross currency: The simultaneous buying and selling of two or
more currencies is known as cross currency.
Multinational corporation
A multinational corporation (MNC) is usually a large
corporation incorporated in one country which produces or sells
goods or services in various countries.
Licensing
Licensing is a legal arrangement in which an organization
(licensor) will be selling the intellectual property rights to the
local company (licensee) for a royalty.
Franchising
Franchising is an arrangement where franchisor (one party)
grants or licenses some rights and authorities to franchisee.
Balance of payments (BOP)
The balance of payments (BOP) is a statement of all transactions
made between entities in one country and the rest of the world
over a defined period of time, such as a quarter or a year.
Balance of Trade (BOT)
The balance of trade is the difference between the value of a
country's imports and exports for a given period.
Merger: A merger is an agreement that unites two existing
companies into one new company.
Types of merger
1) Horizontal merger, 2) Vertical mergers, 3) Congeneric, 4)
Conglomerate
Horizontal merger
A horizontal merger occurs between companies operating in the
same industry.
Vertical merger
A vertical merger occurs when two companies operating at
different levels within the same industry's supply chain combine
their operations.
Congeneric
A congeneric merger is also known as a Product Extension
merger. In this type, it is a combining of two or more companies
that operate in the same market or sector with overlapping
factors, such as technology, marketing, production processes,
and research and development (R&D).
Conglomerate
This is a merger between two or more companies engaged in
unrelated business activities. The firms may operate in different
industries or in different geographical regions.
Acquisition
An acquisition is when one company purchases most or all of
another company's shares to gain control of that company.
Foreign direct investment (FDI)
A foreign direct investment (FDI) is an investment in the form
of a controlling ownership in a business in one country by an
entity based in another country.
Currency derivatives
Currency derivatives are financial contracts between the buyer
and seller involving the exchange of two currencies at a future
date, and at a stipulated rate.
Stock price
The term stock price refers to the current price that a share of
stock is trading for on the market
Strike price
A strike price is the set price at which a derivative contract can
be bought or sold when it is exercised.
Interest rate
The interest rate is the amount charged, expressed as a
percentage of the principal, by a lender to a borrower for the use
of assets.
Forward market
A forward market is an over-the-counter marketplace that sets
the price of a financial instrument or asset for future delivery.
Future market
A futures market is a listed auction market in which participants
buy and sell commodity and other futures contracts for delivery
on a specified future date.
Agency Problem
The potential conflict of interest between the MNC manager and
the shareholders are referred to as agency problem.
Mint parity theory
Mint parity theory is a theory to determine the exchange rate
between countries.
Purchasing Power Parity
PPP is an economic theory that compares different countries'
currencies through a "basket of goods" approach.
Basket of goods
A basket of goods refers to a fixed set of consumer products and
services valued on an annual basis. The basket is used to track
inflation in a specific market or country.
Spot Market
The spot market is where financial instruments, such as
commodities, currencies and securities, are traded for immediate
delivery.
Floating exchange rate
A floating exchange rate refers to changes in a currency's value
relative to another currency (or currencies).
Page 28 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Fixed exchange rate: A fixed exchange rate is a exchange rate
set by the govt. which remain fixed.
Money Market & Financial Institution
International Fisher effect
It suggest that currencies with high interest rates will have high
expected inflation and the relatively high inflation will cause the
currencies to depreciate..
Financial Market
Financial Market refers to transfer of fund from surplus unit to
deficit unit with the help of financial intermediaries. A financial
market is a market in which people trade financial securities and
derivatives at low transaction costs.
Interest rate parity
Interest rate parity is a theory that suggests a strong relationship
between interest rates and the movement of currency values. In
fact, you can predict what a future exchange rate will be simply
by looking at the difference in interest rates in two countries.
Country risk
Country risk is the risk that a foreign government will default on
its bonds or other financial commitments.
Spread
The spread is the gap between the bid and the ask prices of a
security or asset, like a stock, bond or commodity.
Ask price: The price at which a seller is willing to sell a
security is called ask price.
Bid price: The price at which a buyer is willing to purchase a
security is called bid price.
Agency cost: The term agency cost refers to the cost of the
conflict of interest between shareholders and management.
Call option: Call option ensure that the buyer has the right to
buy the shares at the predefined price.
Put option: Put option ensures that the buyers has the right to
sell the assets at the predefined price.
Arbitrage: The simultaneous buying and selling of securities,
currency, or commodities in different markets or in derivative
forms in order to take advantage of differing prices for the same
asset.
International arbitrage: The term international arbitrage refers
to the practice of simultaneously buying and selling a foreign
security on two different exchanges.
Locational arbitrage: Location arbitrage can occur when the
spot rate of a given currency varies among locations.
Triangular arbitrage: Triangular arbitrage (also referred to as
cross currency arbitrage or three-point arbitrage) is the act of
exploiting an arbitrage opportunity resulting from a pricing
discrepancy among three different currencies in the foreign
exchange market
Covered interest arbitrage: Covered interest arbitrage is an
investment strategy designed to profit from the differences in
interest rates between two countries, when buying and selling
foreign currencies.
Political risk
Political risk is the risk an investment's returns could suffer as a
result of political changes or instability in a country.
Why do financial intermediaries so important in the
financial intermediaries?
Without financial intermediaries, financial market would not be
able to move funds from people who save to the people who
have productive investment opportunities.
Bank: Bank is financial institutions that accepts deposit and
make loans in order to earn profit.
Money: Money is a medium of exchange.
Monetary policy
Monetary policy is a central bank action and communication
that manage the money supply.
Inflation: Inflation is a general increase in prices and fall in the
purchasing power of money.
Fiscal policy
Fiscal policy is the means by which a government adjust its
spending levels and tax rates to monitor a nation’s economy.
Direct Finance
Direct finance is a finance in which borrowers borrow fund
directly from the lenders.
Indirect Finance
Indirect finance is the transfer of funds with the help of financial
intermediaries.
Semi-direct Finance
Semi-direct finance is when a broker (or 'middleman') is used to
complete a deal between lender and borrower. An example of
this is a mortgage broker.
Primary market: Primary market is a financial market where
newly issued shares are traded.
Secondary market: Secondary market is a financial market
where already issued shares are traded.
OTC Market
The OTC market is a market where trading is done
electronically. It has no physical location.
Money Market
Money market is a market in which short term securities and
debt instruments are traded
Capital market
Capital marketis a market in which long term debt or equity
instruments are traded.
Functions of Financial Intermediaries
1. Transaction cost
2. Risk sharing
3. Asymmetric information
Page 29 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Asymmetric information
It means one party does not know enough about the other party
to make accurate decision is called asymmetric information.
Co-insurance
Co-insurance or coinsurance is the splitting or spreading of risk
among multiple parties.It also means the sharing of risks
between two or more title insurance companies.
Adverse selection
Adverse selection is the problem created by the asymmetric
information before the transaction occurs. Ex: Bad credit risk.
Sales Finance Company
A finance company that purchases, at a discount, installment
contracts from dealers or that finances retail sales.
Moral hazard
Moral hazard is a problem created by asymmetric information
after the transaction occurs. For example, borrower might
engage in activities that are undesirable from the lender’s point
of view.
Consumer Finance Company
It is a non-bank lender. A consumer finance company does not
receive deposits, but does make loans to customers for business
or personal use. It derives its profits from the interest on these
loans. It is also called simply a finance company.
Mutual Fund
Mutual fund is an investment company that sells securities or
shares to investors and uses proceeds to manage the portfolios of
securities.
Economic of scale
A proportionate saving in costs gained by an increased level of
production i.e. cost per unit of output decreasing with increasing
scale of production. Mergers may lead to economies of scale
The principle of bank management
1. Liquidity Management
2. Asset management
3. Liability Management
4. Capital Adequacy management
Credit risk
A credit risk is the risk of default on a debt that may arise from a
borrower failing to make required payments
Foreign-exchange risk
Foreign-exchange risk refers to the potential for loss from
exposure to foreign exchange rate fluctuations.
Country risk
Country risk is the risk that a foreign government will default on
its bonds or other financial commitments
Technology risk
Technology risk refers to the risk that arises when the
company’s technological investments do not produce anticipated
cost savings.
Loan commitment
A loan commitment is a bank commitment to provide a firm
with a loan up to a given amount at an interest rate.
Consumer finance companies
It makes loan to consumer to buy particular items such as
furniture on home appliances.
Bank capital
Bank capital is the difference between Bank’s assets and its
liabilities and it represents the net worth of a bank.
Liquidity Management
The bank has enough reserves on hand to pay for any deposit
outflows (net decreases in deposits) but not so many as to render
the bank unprofitable. This tricky trade-off is called liquidity
management.
Asset management
The bank earns profits. To do so, the bank must own a diverse
portfolio of remunerative assets. This is known as asset
management.
Operational risk
Operational risk is the prospect of loss resulting from inadequate
or failed procedures, systems or policies.
Insolvency risk
Insolvency risk is defined as the risk that an individual or
company will not be able to meet its debt obligations.
Refinancing risk
Refinancing risk, in banking and finance, is the possibility that a
borrower cannot refinance by borrowing to repay existing debt.
Reinvestment risk
Reinvestment risk refers to the possibility that an investor will
be unable to reinvest cash flows (e.g., coupon payments) at a
rate comparable to their current rate of return.
Economies of scope
An economy of scope means that the production of one good
reduces the cost of producing another related good
Why do people hold money?
1. Transaction motive
2. Precautionary motive
3. Speculative motive
Liability Management
It must also obtain its funds as cheaply as possible, which is
known as liability management.
Capital Adequacy Management
The bank has sufficient net worth or equity capital to maintain a
cushion against bankruptcy or regulatory attention but not so
much that the bank is unprofitable. This tricky trade-off is called
capital adequacy management.
Off-balance sheet
Off-balance sheet refers to item that are effectively assets or
liabilities of a company but do not appear on company’s balance
sheet.
Page 30 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Statistics-2
Forecasting:
Forecasting is the process of making predictions of the future
based on past and present data and most commonly by analysis
of trends.
Business forecasting:
Business forecasting is an estimate or prediction of future
developments in business such as sales, expenditures, and
profits.
Methods of forecasting:
1. Econometric model: Econometric models are constructed
from economic data with the aid of the techniques of statistical
inference.
2. Lead lag analysis: The lead lag approach attempts to
determine the approximate lapse of time between the movement
of one series and the movements of general business conditions.
3. Exponential smoothing: A weighted average procedure with
weights declining exponentially as data become older
4. Input output analysis:
5. Time series analysis: Time series analysis is a statistical
technique that deals with time series data, or trend analysis.
Component of time series:
There are four components of time series is as
follows:
1. Secular trend (T)
2. Seasonal variations(S)
3. Cyclical variations(C)
4. Irregular variations (I)
1. Secular trend:A secular trend is a long term movements
consisting from one year to ten years. These movements are
smooth, steady & regular. For example
1. The development of education.
2. The change in customs & traditions.
2. Seasonal variations:: Seasonal variations are caused by the
change in season & short term variations containing one year or
ten. A year may be divided in to two, three,four or more
seasons. For example:
1. Increase of prices of shoes near Eid.
2. Increase of prices of umbrella in raining seasons.
Note: The main causes of seasonal variations are the weather
condition the religious festival & social customs.
3. Cyclical variations: These movements are in the form of
waves & like the business cycles.
4. Irregular variation: These movements are due to sudden
causes like floods, strikes, wars etc. These variations are
unsystematic & accidental in nature & cannot be controlled. For
example:
1. The increase in prices due to war.
2. A sudden decrease in supplies due to floods
Straight line trend:
The following methods are used to measure trend.
1. The freehand or graphic method
2. The semi average method.
3. The method of least squares:
Non-linear trend:
1. Freehand or graphic method.
2. Moving average method:
3. Second degree parabola.
Link relatives: The ratio usually expressed in percent of any
value of a statistical variable evaluated at equal intervals of time
(as annual crop yield) to the value for the immediately preceding
interval.
Probability distribution: A probability distribution is a
mathematical function that provides the probabilities of
occurrence of different possible outcomes in an experiment.
Random variable: A random variable is a variable which takes
specified values with specified probabilities.
Probability function: If the function permits us to compute the
probability for any event that is defined in terms of value of the
random variable, then the function is called a
probabilityfunction. It is two types
1. Discrete probability function:
2. Continuous probability function:
Binomial distribution: A binomial distribution can be thought
of as simply the probability of a SUCCESS or FAILURE
outcome in an experiment or survey that is repeated multiple
times.
Poisson distribution: The Poisson distribution is the discrete
probability distribution of the number of events occurring in a
given time period, given the average number of times the event
occurs over that time period. A certain fast-food restaurant gets
an average of 3 visitors to the drive-through per minute.
Multinomial distribution: The multinomial distribution is used
to find probabilities in experiments where there are more than
two outcomes.
Normal distribution: The normal distribution is a probability
function that describes how the values of a variable are
distributed.
Sample: A sample is a representative part of a population.
Sampling: Sampling is defined as the total process involving in
collection from a target population for a particular study.
Sampling distribution: A sampling distribution is a probability
distribution of a statistic obtained through a large number of
samples drawn from a specific population.
Population: Population is the total collection of similar
characteristics.
Infinite population:
When a population consists a huge numbers of elements and
which are not countable easily is called infinite population.
Page 31 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Census:
A census is the procedure of systematically acquiring and
recording information about the numbers of a given population.
Methods of Sampling:
1. Random sampling method:
√ Simple random sampling: Simple random sampling is a
sampling technique where every item in the population has an
equal chance and likelihood of being selected in the sample.
√ Stratified sampling: Stratified sampling is a type of sampling
method in which the total population is divided into smaller
groups or strata to complete the sampling process.
√ Systematic Sampling: Systematic sampling is a statistical
method involving the selection of elements from an ordered
sampling frame
√ Multi- stage Sampling:The Multistage Sampling is the
probability sampling technique wherein the sampling is carried
out in several stages such that the sample size gets reduced at
each stage.
2. Non - random sampling methods
√ Judgment sampling: Judgment sample, or Expert sample, is a
type of random sample that is selected based on the opinion of
an expert.
√ Quota sampling: Quota sampling is a sampling methodology
wherein data is collected from a homogeneous group.
√ Convenience Sampling: Convenience sampling involves the
sample being drawn from that part of the population that is close
to hand.
Sampling error: Sampling error is the error caused by
observing a sample instead of the whole population.
Non sampling error: Non-sampling error is an error arise from
human error, such as error in problem identification, method or
procedure used, etc.
Hypothesis:
A hypothesis is an assumption, an idea that is proposed for the
sake of argument so that it can be tested to see if it might be
true.
Null hypothesis:
Null hypothesis is the hypothesis that there is no significant
difference between estimated and observed values.
Alternative hypothesis:
An alternative hypothesis states that there is statistical
significance between two variables.
Level of significance:
The level of significance is defined as the probability of
rejecting a null hypothesis by the test when it is really true,
which is denoted as α. That is, P (Type I error) = α.
Level of confidence:
The confidence level tells you how sure you can be. It is
expressed as a percentage and represents how often the true
percentage of the population who would pick an answer lies
within the confidence interval. The 95% confidence level means
you can be 95% certain; the 99% confidence level means you
can be 99% certain.
Type 1 error:
Type I error is the rejection of a true null hypothesis (also
known as a "false positive" finding or conclusion),
Type 2 error:
Type II error is the non-rejection of a false null hypothesis (also
known as a "false negative" finding or conclusion).
One tailed test:
A one-tailed test is a statistical test in which the critical area of a
distribution is one-sided
Two tailed test:
A two-tailed test is a method in which the critical area of a
distribution is two-sided and tests whether a sample is greater
than or less than a certain range of values.
Degree of freedom:
Degrees of Freedom refer to the number of values involved in
the calculations that have the freedom to vary.
Chi square test:
A chi-square (χ2) statistic is a test that measures how
expectations compare to actual observed data (or model results).
Analysis of variance (ANOVA)
Analysis of Variance (ANOVA) is a statistical method used to
test differences between two or more means.ANOVA was
developed by statistician and evolutionary biologist Ronald
Fisher.
One-way classification:
One-way Analysis of Variance (ANOVA) is a hypothesis test in
which only one categorical variable or single factor is
considered.
Two-way classification:
Two-way ANOVA as its name signifies, is a hypothesis test
wherein the classification of data is based on two factors.
Index number
An index number is the measure of change in a variable (or
group of variables) over time.
Classification of index number
Price index number:
A price index number(PI) is a measure of how prices changes
over a period of time, or in other words ,it is way to measure
inflation.
Quantity index number: A quantity index number measures
the changes in the level of quantities of items consumed, or
produced or distributed during a yea
𝑄01 =
𝑄1
𝑄0
∗ 100
Value index number: The value index number measures the
changes in the level of value of items (i.e. the product of the
quantity and their price.) consumed during the year.
𝑉01 =
∑𝑃1 𝑄1
∑𝑄0 𝑄0
∗ 100
Page 32 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
∑𝑃1 𝑄1 =total of the values of the items consumed in the current
year
∑𝑄0 𝑄0=Total of the values of the items consumed in the base
year
Special purpose index:
An index number aimed at comparing the prices of particular
items, e.g. cigarettes would be a special purpose index number.
# Uses of index number
✓ In measuring changes in the value if money
✓ In cost of living
✓ In analyzing market for goods and services
✓ In measuring changes in the industrial production
✓ In internal trade
✓ In external trade
✓ In economic policies
✓ In determining the foreign exchange rate
# Methods of constructing index number:
✓ Un-weighted
•
Simple aggregate
•
Simple average of price relative
✓ Weighted
•
Weighted aggregate
•
Weighted average of price relatives
The choice of method depends on availability of data, degree of
accuracy required and the purpose of the study.
Un-weighted/Simple
Simple aggregate method:The total of current year prices for the various commodities is
divided by the total base year prices
∑𝑃1
𝑃01 =
∑𝑃0
Simple average of price relatives
The index number is equal to the price relatives divided by the
number of items
𝑃
∑ ( 1 ∗ 100)
𝑃01 =
𝑃0
𝑁
Weighted: Weighted aggregate index number:
There are 6 types
•
Laspayers method
•
Paasche method
•
Dorbish and Bowleys method
•
Fishers Ideal method
•
Marshal –Edgeworth method
•
Kelly’s method
Laspayers method
In this method, the base year quantities are taken as weights
∑𝑃1 𝑄0
𝑃01 =
∗ 100
∑𝑃0 𝑄0
Paasche method
In this method, the current year quantities are taken as weights
∑𝑃1 𝑄1
𝑃01 =
∗ 100
∑𝑃0 𝑄1
Dorbish and Bowleys method
It is simple arithmetic mean of the two indices (Laspayers and
paasche)
𝑃01 =
𝐿+𝑃
2
Fishers Ideal method: Fishers Ideal model is the geometric
mean of the laspayers and paasche indices.
𝑃01 = √𝐿 ∗ 𝑃
The above formula is known as “Ideal” because of following
reasons:
i) It is based on the geometric mean which is
theoretical considered to be the best average for constructing
index numbers.
ii) It takes into account both current year as well as
base year price and quantities.
iii) It satisfies both the time reversal test as well as
factor reversal test as by Fisher
Marshal –Edgeworth method
In this method,also both the current year as well as
base year price and quantities are taken as weights.
𝑃01 =
∑𝑃0 𝑄0 + ∑𝑃1 𝑄1
∗ 100
∑𝑃0 𝑄0 + ∑𝑃0 𝑄1
# Test for perfection: The following tests are suggested for
choosing an appropriate index:
1) Time reversal test:
Time reversal test is a test to determine whether a given method
will work both ways in time, forward and backward.
Symbolically, the following relation should be satisfied
P01 ∗ P10 = 1
Where,P01 is the index for time ”1” on time “0”as base and P10 is
the index for time ”0” on time “1” as base.
2) Factor reversal test:
It holds that the product of price index and the quality index
should be equal to the corresponding value index. In other
words the test is that change in price is multiplied by change in
quantity should be equal to the total value of given commodity
in a given year( total value=p*q)
∑𝑃1 𝑄1
𝑃01 ∗ 𝑄01 =
∑𝑃0 𝑄0
Chain index number:
A chain index is an index number in which the value of any
given period is related to the value of its immediately preceding
period. This is distinct from the fixed-base index.
Base shifting: Shifting of base period or reference period off the
index is known as base shifting.
Splicing
The problem of combining two or more overlapping series of
index numbers into one continuous series called splicing.
Deflating: It is a tech used to make allowances for the effect of
changing price value. It is used to measure the purchasing power
of money.
Consumer price index / Cost of living indexThe consumer
price index number represent the average change over time in
the prices paid by the ultimate consumer of a specified basket of
goods and services
Page 33 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Fee
If any payment is made to take any special benefit is known as
feel such as court fee, admission fee etc.
Taxation
Tax: Tax is a compulsory payment to government without
expectation of any direct benefit to the taxpayer.
Direct tax
A direct tax is paid directly by an individual or organization to
the imposing entity. A taxpayer, for example, pays direct tax
like income tax, personal property tax, real property tax etc.
Impact of tax
Impact means the first place of tax that pays firstly the imposing
tax to the govt. is called impact of tax on him.
Incidence of tax
Incidence means the final resting place of a tax. That is
incidence is on the man who ultimately bears the money burden
of tax.
Rates
Which tax is imposed by local govt. is called rates. Such as:
Union praised tax, Municipal tax etc.
Tax holiday
A tax holiday is a government incentive program that offers a
tax reduction or elimination to businesses.
Canons of tax
1. Canon of equity
2. Canon of certainty
3. Canon of convenience
4. Canon of economy
Income tax
An income tax is a tax imposed on individuals or entities
income or profits.
Effect of tax: It refers to incidental results of the tax.
Progressive tax: The tax in which the tax rate increases as the
taxable amount increases.
Regressive tax: A tax in which the tax rate decreases as the
taxable income increases
Proportionate tax: A tax in which the tax rate is fixed whether
the taxable income increases or decreases.
Digressive tax:Digressive tax means decrease in tax rate with
increase in income. At a certain level, the tax rate is constant.
Digressive = Regressive + Proportionate
VAT
A value-added tax (VAT) is a consumption tax placed on a
product whenever value is added at each stage of the supply
chain, from production to the point of sale.
Income
Income is money (or some equivalent value) that an individual
or business receives in exchange for providing a good or service
or through investing capital.
Features of income
1. Revenue receipt
2. Money or money’s worth
3. External sources
4. Definite source
5. Actual receipts
Residential status of assesses
Individual residing in Bangladesh for at least 182 days in
income year or 365 days in preceding 4 year including 90 days
in accounting year
Tax rate
General tax rate
On first tk
On first tk
On first tk
On first tk
On first tk
On the Balance
2,50,000
4,00,000
5,00,000
6,00,000
30,00,000
10%
15%
20%
25%
30%
Woman and Senior citizen
On first tk
3,00,000
On first tk
4,00,000
10%
On first tk
5,00,000
15%
On first tk
6,00,000
20%
On first tk
30,00,000
25%
On the Balance
30%
TIN
Tax Identification Number (TIN) is an identifying number used
for the purposes in the united states and other countries under
common reporting standards
Income Year
The financial year preceding the assessment year. Financial year
begins from 1st July every year and ends on 30th June next
Capital receipts
1. Sales of asset
2. Receipts to meet capital expenditure
3. Compensation received from loss of capital asset
Revenue receipts
1. Salary
2. Income from securities
3. Income from business
4. Income from other sources
Assessment/Tax Year: The year in which the tax is paid for
income year.
Non-taxable income
Some items of income are not included in the total income either
fully or partially. These are known as non-taxable income such
as Gift, welfare benefits, pension fund etc.
Taxable income
Taxable income is the amount of income used to calculate how
much tax an individual or a company owes to the government in
a given tax year.
Non-assessable income
Those sources of income which are not included in the
calculation of total income are non-assessable income.
Tax free income
Page 34 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
It is the income received that is not subject to income taxes.
Such as coupons, municipal bonds etc.
Casual income: Casual income is a non recurring income that is
not likely to occur again in a year.
Tax deduction: It is a deduction that lowers a person’s tax
liability by lowering his taxable income.
Tax credit
It is an incentive that lets a taxpayer subtract a set amount from
their local, state or federal tax liability/ (total income)
Development Finance
Economic development:
ED is the process by which the economic well-being and quality
of life of a nation, region or local community are improved.
Assesses: It means a taxpayer i.e. a person who is to pay tax.
Cum dividend: Cum dividend is the status of a security when a
company is preparing to pay out a dividend at a later date.
Ex-dividend: Ex-dividend describes a stock that is trading
without the value of the next dividend payment.
Economic Growth:
A country's economic growth is usually indicated by an increase
in that country's gross domestic product, or GDP.
Bond washing
Bond washing is the practice of selling a bond just before it pays
a coupon payment and then buying it back once the coupon has
been paid.
Indicators of development
The Human Development Index (HDI)
The HDI was introduced in 1990 as part of the United Nations
Development Programme (UNDP) to provide a means of
measuring economic development in three broad areas - per
capita income, heath and education. The HDI tracks changes in
the level of development of countries over time.
Surcharge
A surcharge is an extra fee, charge, or tax that is added on to the
cost of a good or service, beyond the initially quoted price
Life expectancy: A variety of factors may contribute to
differences in life expectancy, including:
1. The stability of food supplies, 2.War,3.The
incidence of disease and natural disasters
Black money
In its simplest form, black money is money on which tax is not
paid to the government
Tax evasion
Tax evasion is an illegal activity in which a person or entity
deliberately avoids paying a true tax liability.
Tax avoidance
This practice differs from tax evasion which uses illegal
methods, such as underreporting income, to avoid paying taxes.
Computation of VAT: VAT rate * Value added- Input value
excluding VAT.
Custom duty: It is a tax imposed on imports and exports of
goods.
Tax planning
It is the protection of future income from taxation to achieve a
greater tax savings than for merely searching’s than for
deductions.
Adult literacy: The percentage of those aged 15 and above
who are able to read and write a simple statement on their
everyday life.
GDP per capita: It is found by measuring Gross Domestic
Product in a year, and dividing it by the population.
Dualistic Development
A dual economy is the existence of two separate economic
sectors within one country, divided by different levels of
development, technology, and different patterns of demand.
Social dualism: According to Prof. Boeke, “Social Dualism is
the clashing of an imported social system with an indigenous
social system of another style.
Cultural dualism
Cultural dualism is a political and cultural program designed to
affirm this cultural duality in a legally symmetrical way, based
on hopes of achieving harmony that are that are well intended
but often largely abstract and illusory.
Surplus labor
It means labor performed in excess of the labor necessary to
produce the means of livelihood of the worker
Lewis Model: It explains the growth of a developing economy
in terms of a labor transition between two sectors, the capitalist
sector and the subsistence sector
Page 35 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Financial Statement Analysis
Financial Statement
Financial statement is a formal record prepared by a company’s
management to present the financial performance and position at
a point in time.
Financial Statement Analysis
It is the process of reviewing and analyzing a company’s
financial statement to make better economic decision. These
statements include1. Income statement ,2. Balance sheet , 3. Statement of cash
flows, 4. Statement of changes in equity
Parties demanding Financial Statement Information
Shareholders, Investors, Security Analyst, Manager, Employees,
Lenders, Customers, Government and regulatory agencies
Conflicts among diverse parties
•
Shareholder
•
Manager
Assets in place
Existing investment generates cash flows today includes long
term (fixed) and short term (working) assets
Growth Assets: Expected value that will be created by future
investment
Classification of Income Statement
1)Operating expenses: It is the cost associated with an
organization’s day to day expenses not directly associated with
production. EX: tax, repair, rent.
2) Financial expenses: Any cost that happens when owning or
renting an asset or property. EX: interest, income taxes
Regulatory forces and the supply of FSI
Level 1: executive, legislative
Level 2: Government regulatory bodies (SEC)
Level 3: Private sector regulatory bodies
Level 4: Lobbying Groups
Ratio analysis
It is the comparison of line items in the financial statements of a
business. It is used to evaluate a number of issues with an entity
such as its liquidity, efficiency of operations and profitability.
Outlier observation
An outlier is a data point that differ significantly from other
observations. An outlier may be due to variability in
measurement or it may indicate experimental error.
Normality
It is a rarely used expression which indicates the concentration
of a solution. It is defined as the gram equivalent weight per liter
of solution
Central Tendency
A central tendency ia a central or typical value for a probability
distribution. The most common measures of central tendency
are the arithmetic mean, the median and the mode.
Skewness
It refers to distortion or asymmetry in a symmetrical bell curve,
or normal distribution, in a set of data. If the curve is shifted to
the left or to the right, it is said to be skewed.
Kurtosis
It is a statistical measure that defines how heavily the tails of
distribution differ from the tails of a normal distribution.
Sampling
It is the process of collecting sample. Sample represents the
value of population.
Optimal Capital
Proportion of the debt and equity, which maximize firms value
and minimize cost
Forecasting approaches
1) Mechanical: Expressed by mathematically,2)
mechanical Expressed by descriptively
Non-
Financial Control
Financial controls are the policies and procedures put into place
by a business or organization to track, manage and report its
financial resources and transactions.
Liquidity
Liquidity refers the ability of the firm to cover its immediate
financial obligations.
Solvency
Solvency refers the ability of a business to have sufficient assets
to meet its debt as they fall due for payment. Solvency risk can
lead the company to bankruptcy
Equilibrium
Equilibrium is the state in which market supply and market
demand balance each other and as a result prices become stable.
Financial Break-even
Financial equilibrium is also called financial break-even.
Financial break-even occurs when the NPV of the project is zero
(0).
DuPont Equation (analysis)
DuPont Analysis (also known as the DuPont identity, DuPont
equation, DuPont Model or the DuPont method) is an expression
which breaks ROI (return on investment) into three parts.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸 =
𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦
ANOVA= Analysis of Variance
Analysis of variance (ANOVA) is a collection of statistical
models and their associated estimation procedures (such as the
"variation" among and between groups) used to analyze the
differences among group means in a sample.
Line of business
LOB is a general term that refers to a product or a set of related
products that serve a particular customer transaction
Components of time series analysis are: 1. Secular trend, 2. Cyclical variation, 3. Seasonal variation,
4.Irregular variation
Page 36 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Ex-post vs. Ex-ante analysis
Ex-ante forecasting what will happen where ex post is
understanding what happend
Big bath
A "big bath" is an accounting term that is defined by a
company's management team knowingly manipulating its
income statement to make poor results look even worse in order
to make future results appear better
Abnormal Return
It is the difference between the actual return of a security and
the expected return over a set period of time.
# TVA= Trading volume activity
#SRV=Security return variability
i.
ii.
That capital market misprices assets and
That the investor adopting this style perceives he or
she has the ability to detect and exploit this
mispricing
2) Passive investment style: This assumes either
ii.
Macro Economics
The branch of economics concerned with large-scale or general
economic factors, such as interest rates and national
productivity.
Objectives of micro economics
1. The efficient use of resource 2.Equal distribution of goods
and services
Fiscal policy
Fiscal policy is the means by which a government adjusts its
spending levels and tax rates to monitor and influence a nation's
economy.
GDP
Gross Domestic Product (GDP) is the monetary value of all
finished goods and services made within a country during a
specific period.
Investment style
1) Active: This assumes both
i.
Macro Economics
That the capital market does not misprice securities
or
If it does, that the investor does not have the ability
to detect and exploit.
GNP
Gross national product (GNP) is an estimate of total value of all
the final products and services turned out in a given period by
the means of production owned by a country's residents.
GNP=C+I+G+(X-M) + NIA
NNP
Net national product (NNP) is the monetary value of finished
goods and services produced by a country's citizens, overseas
and domestically, in a given period.
NNP=GNP-Depreciation.
National income (NI)
National income means the value of goods and services
produced by a country during a financial year.
Personal Income (PI)
Personal income is the total compensation from several sources
collectively received by all individuals or households in a
country.
Disposal Income
The income that is available after giving all kinds of taxes
Per capita income: Per capita income is national income
divided by population size.
Nominal GDP
Nominal GDP is an assessment of economic production in an
economy but includes the current prices of goods and services in
its calculation. GDP is typically measured as the monetary value
of goods and services produced.
GDP deflator
The GDP deflator (implicit price deflator for GDP) is a measure
of the level of prices of all new, domestically produced, final
goods and services in an economy.
CPI
The Consumer Price Index (CPI) is a measure of the average
change over time in the prices paid by consumers for a market
basket of consumer goods and services.
PPI
Page 37 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
A producer price index (PPI) is a price index that measures the
average changes in prices received by domestic producers for
their output.
1. Bank rate policy 2. Open market operation 3. Change in
reserve ratio 4. Selective credit control
Types of inflation:
Potential GDP
Potential GDP is the level of production of goods and services
that the economy is capable of if its workforce is fully employed
and its capital stock is fully utilized.
Demand-Pull Effect
Demand-pull inflation occurs when the overall demand for
goods and services in an economy increases more rapidly than
the economy's production capacity.
Output gap
An output gap indicates the difference between the actual output
of an economy and the maximum potential output of an
economy expressed as a percentage of gross domestic product
(GDP).
Cost-Push Effect
Cost-push inflation is a result of the increase in the prices of
production process inputs.
Positive Output Gap: A positive occurs when actual output is
greater than potential output.
Structural Inflation
This part of inflation arises due to the faulty structure and failure
to adopt latest technologies of the developing and under
developing.
Negative output gap
A negative output gap occurs when actual output is less than
what an economy could produce at full capacity.
Types of investment:
Injection
An injection occurs when funds are added to an economy from a
source other than households and businesses.
Autonomous investment
Autonomous investment is the portion of total investment made
by a government or other institution that is done independent of
economic considerations.
Leakage
Leakage refers to capital or income that exits an economy or
system rather than remaining within it.
Induced investment
Induced investment is investment expenditures by the business
sector that are based on the level of income or production.
Circular flow of income
The circular flow model demonstrates how money moves
through society. Money flows from producers to workers as
wages and flows back to producers as payment for products. In
short, an economy is an endless circular flow of money.
Aggregate demand
Aggregate demand is an economic measurement of the total
amount of demand for all finished goods and services produced
in an economy.
Business cycle
Business cycles are fluctuations in economic activity that an
economy experiences over a period of time.
1. Expansion: This is the first stage. When the expansion
occurs, there is an increase in employment, incomes, production,
and sales.
2. Peak: The second stage is a peak when the economy hits a
snag, having reached the maximum level of growth.
3. Recession: These are periods of contraction. During a
recession, unemployment rises, production slows down, sales
start to drop because of a decline in demand, and incomes
become stagnant or decline.
4. Depression: Economic growth continues to drop while
unemployment rises and production plummets.
5. Trough: This period marks the end of the depression, leading
an economy into the next step: recovery.
Aggregate supply
The total supply of goods and services available to a particular
market from producers.
Direct tax
A direct tax is paid directly by an individual or organization to
the imposing entity.
Indirect tax
Indirect taxes can be defined as taxation on an individual or
entity, which is ultimately paid for by another person.
Progressive tax
This is a type of taxation where as you have more income that is
subject to tax, you pay higher average rates.
Regressive taxes
The opposite of a progressive tax is a regressive tax. This is a
method of taxation where as you have more that is subject to
tax, your average tax rate is lower.
6. Recovery: In this stage, the economy starts to turn around.
Employment and production start to rise, and lenders start to
open up their credit coffers.
Proportional tax
A proportional tax is one where the amount you pay is
proportional to how much you have.
APC= Average Propensity to Consumption
APS= Average Propensity to savings
Ways / Tools to control the supply of money in the market
Paradox of thrift
An economic theory that states that the more people save, the
less they spend and thus the less they stimulate the economy.
Page 38 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
MPC: Marginal propensity to consumption is the ratio of the
changes in consumption to changes in income.
Absolute advantage
An entity with an absolute advantage can produce a product or
service at a lower absolute cost per unit than another entity
producing the same good or service.
Comparative advantage
Comparative advantage is an economic term that refers to an
economy's ability to produce goods and services at a lower
opportunity cost than that of trade partners
Real GDP
Real gross domestic product (GDP) is an inflation-adjusted
measure that reflects the value of all goods and services
produced by an economy in a given year (expressed in base-year
prices) and is often referred to as "constant-price," "inflationcorrected", or "constant dollar" GDP.
Unemployment: Unemployment is a term referring to
individuals who are employable and seeking a job but are unable
to find a job.
Three Different Types of Unemployment
1. Structural Unemployment
This form of unemployment that results from perceived value
and skills that an individual brings to a job against the needed,
different skills required by an employer to do the job correctly.
2. Cyclical Unemployment
Cyclical unemployment is the component of overall
unemployment that results from economic upturns and
downturns
3. Frictional Unemployment
Frictional unemployment is a type of unemployment that arises
when workers are searching for new jobs or are transitioning
from one job to another
Public revenue:
Public revenue generally refers to government revenue. Some
important sources consist of taxes, fees, sale of public goods and
services, fines, donations, etc.
Public expenditure
Public expenditure is spending made by the government of a
country on collective needs and wants such as pension,
provision, infrastructure, etc.
Purchasing Power Parity (PPP)
Purchasing power parity (PPP) is a term that measures prices in
different areas using a specific good/goods to contrast the
absolute purchasing power between currencies
Narrow Money:
Narrow money is a category of money supply that It includes
coins and currency, demand deposits and other liquid assets.
Narrow money in the US is known as M1 (M0 + demand
accounts). In the UK, M0 is referred to as narrow money
Exchange Rate
An exchange rate is the value of one nation's currency versus the
currency of another nation or economic zone.
Types of Exchange Rates:
01. Free Floating: A free-floating exchange rate rises and falls
due to changes in the foreign exchange market.
02. Restricted Currencies: Some countries have restricted
currencies, limiting their exchange to within the countries'
borders. Also, a restricted currency can have its value set by the
government.
03. Onshore Vs. Offshore: Exchange rates can also be different
for the same country. In some cases, there is an onshore rate and
an offshore rate. Generally, a more favorable exchange rate can
often be found within a country’s border versus outside its
borders.
04. Spot exchange rate: A spot exchange rate is the current
price level in the market
05. Forward exchange rate: The forward exchange rate is the
exchange rate at which a bank agrees to exchange one currency
for another at a future date
06. Quotation: typically, an exchange rate is quoted using an
acronym for the national currency it represents.
What Is a Floating Interest Rate?
A floating interest rate is an interest rate that moves up and
down with the rest of the market or along with an index.
Deflation
In economics, deflation is a decrease in the general price level of
goods and services.
Stagflation
In economics, stagflation is a situation in which the inflation
rate is high, the economic growth rate slows, and unemployment
remains steadily high.
The Classical Theory
The fundamental principle of the classical theory is that the
economy is self‐regulating. Classical economists maintain that
the economy is always capable of achieving the natural level of
real GDP or output.
Keynesian Economics
Keynesian economics is an economic theory of total spending in
the economy and its effects on output and inflation. Keynesian
economics was developed by the British economist John
Maynard Keynes during the 1930s in an attempt to understand
the Great Depression. Keynes advocated for increased
government expenditures and lower taxes to stimulate demand
and pull the global economy out of the depression.
Broad Money:
Broad money is a category for measuring the amount of money
circulating in an economy. Such as currency, funds in bank
accounts, and anything of value resembling money.
Page 39 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Auditing and Assurance
Evidence mix: The combination of the 5 types of tests to obtain
sufficient competent evidence for a cycle.
Audit: An audit is the process of evaluation or analysis of
something to determine its accuracy and safety. It is done by an
independent and qualified personnel.
Collusion: A cooperative effort among employees to defraud a
business of cash, inventory or other assets.
Audit planning: It includes deciding on the overall audit
strategy and developing the audit plan.
Assurance services: Assurance services are independent
professional services that improve the quality of information for
decision makers.
Attestation services: Attestation service is a type of assurance
service in which a CPA expresses a conclusion about the
reliability of a written statement that is the responsibility of
another party
CPA= Certified Public Accountants
Audit report: Audit report is the communication of the
auditor’s findings to users
Auditing vs. Accounting
Accounting is the recording classifying and summarizing of
economic events for the purpose of providing financial
information used in decision making.
Auditing is determining whether recorded information properly
reflects the economic events that occurred during the accounting
period.
Operational audit
Operational audit is a review of any part of an organization’s
operating procedures and method for the purpose of evaluating
efficiency and effectiveness
Compliance audit
Compliance audit is to determine whether the auditee is
following specific procedures, rules or regulations set by some
higher authority
Internal auditors
Internal auditors are employed by individual companies to audit
for management or board of director’s.
AICPA= American Institute of Certified Public Account
CPA= Certified Public Accountant
GAAS= Generally Accepted Auditing Standards (developed
by AICPA in 1947 )
Evidence: Evidence is the information that the auditor uses in
arriving at a conclusion on the basis of which he forms his
opinion.
Kiting: The transfer of money from one bank account to another
and improperly recording the transfer so that the amount is
recorded as an asset in both accounts.
Purchase order: A document prepared by the purchasing
department indicating the description, quantity and related
information for goods and services.
Payroll master file: A computer files for recording each payroll
transaction for each employee and maintaining total employee
wages paid and related data for the year to date.
Attribute: The characteristics being tested for population
Ethics: It can be defined as a set of moral principles or values
Ethical Dilemma
It is a situation a person faces in which a decision must be made
about the appropriate behavior. Example: ethical dilemma is
finding a diamond ring which necessitates deciding whether to
attempt to find the owner or to keep it.
Effectiveness: The degree to which the organization’s
objectives are accomplished
Efficiency: The degree to which costs are reduced without
reducing effectiveness
Functional Audit: An operational audit that deals with one or
more specific functions within an organization
Yellow book: A publication of the GAO that is widely used as a
reference by govt. auditors and CPAs who do govt. audit work.
The official title is Govt. Auditing Standards.
Audit risk model: A formal model reflecting the relationship
between acceptable audit risk, inherent risk, control risk and
planned detection risk. [PDR=
𝐴𝐴𝑅
(𝐼𝑅∗𝐶𝑅)
]
Inherent Risk: Inherent risk is the probability that in the
absence of internal controls, material errors or fraud could enter
the accounting system used to develop financial statements.
Audit risk: Audit risk is the risk that financial statements are
materially incorrect, even though the audit opinion states that
the financial reports are free of any material misstatements
Detection risk: Detection risk is the risk that the auditors fail to
detect a material misstatement in the financial statements
Control Risk: The risk that the internal control systems in an
organization will not be able to detect an error on material
misstatement.
Materiality: A misstatement of financial information either
individually or in the aggregate that may influence or affect the
decision made by the users of the financial statements.
By-law
A by-law (bylaw, bye-law, byelaw) is a rule or law established
by an organization or community to regulate itself.
Engagement letter
An agreement between CPA firm and the client as to the terms
of the engagement for the conduct of the audit and related
services.
Expectation gap
Expectation gap is the difference between public perception of
an auditor’s role and responsibilities regarding audit
engagements and what the auditor’s legal responsibilities
actually are
Page 40 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
IAASB: The International Auditing and Assurance Standards
Board (IAASB) sets high-quality international standards for
auditing, assurance, and quality control that strengthen public
confidence in the global profession.
IFAC
The International Federation of Accountants (IFAC) is the
global organization for the accountancy profession. Founded in
1977.
Fundamental principles According to IFAC
1. Objectivity
2. Professional behavior
3. Integrity
4. Due care
5. Confidentiality
Safeguard: It is an action or measure that eliminates a threat or
reduces it to an acceptable level.
Physical examination: It is the inspection by the auditor of a
tangible asset.
Confirmation
It describes the receipt of a written or oral response from an
independent third party verifying the accuracy of the
information that was requested by auditor.
Observation: It is the use of senses to assess certain activities.
Re-performance
It involves rechecking a sample of the computation and transfers
of information made by the client during the period under audit.
Fraud: An intentional misstatement of the financial statements
Error: An unintentional misstatement of the financial
statements.
Business failure
The situation when a business is unable to repay its lenders or
meet the expectations of its investors because of business
conditions.
Legal liability
The professional’s obligation under the law to provide a
reasonable level of care while performing work for those she
serves.
Audit failure
A situation in which the auditor issues an erroneous audit
opinion
Marketing
What is marketing?
Marketing refers to activities undertaken by a company to
promote the buying or selling of a product or service. Marketing
includes advertising, selling, and delivering products to
consumers or other businesses.
Needs:
The easiest explanation of the concept “needs” is the basic
human requirements like shelter, clothe, food, water, etc.
Wants:
A want is the desire for products or services that are not
necessary, but which consumers wish for.
Demand:
Demands are human wants backed by ability and willingness
to buy.
Customer vs Consumer
A customer is someone who pays for your services or product.
But a consumer is someone who uses service or product. A
customer can be / cannot be a consume.
Fashion vs Style
Fashion is what is being offered and worn by most at any
particular moment in time. Style on the other hand is unique,
and very personal. It has nothing to do with fashion. Rather it is
an indication of your persona. Fashion is over quickly, whereas
style is forever
What is Marketing Environment?
The Marketing Environment includes the Internal factors
(employees, customers, shareholders, retailers & distributors,
etc.) and the External factors( political, legal, social,
technological, economic) that surround the business and
influence its marketing operations.
Products vs Services
Goods (products) are tangible and can be consumed now or
later, while services are intangible and cannot be produced in
advance.
Consumer products vs Industrial Products
Industrial goods are bought and used for industrial and business
use. Consumer goods are ready for the consumption and
satisfaction of human wants.
What is Market Segmentation?
Market segmentation is the process of dividing a market of
potential customers into groups, or segments, based on different
characteristics.
What is Target Marketing?
A target market refers to a group of customers to whom a
company wants to sell its products and services, and to whom it
directs its marketing efforts.
What is Branding & Co-Branding?
Branding, by definition, is a marketing practice in which a
company creates a name, symbol or design that is easily
identifiable as belonging to the company.
Page 41 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Co-branding is a marketing strategy that utilizes multiple brand
names on a good or service as part of a strategic alliance. Also
known as a brand partnership, co-branding (or "cobranding")
Labeling
Display of information about a product on its container,
packaging, or the product itself.
Licensing: A license is an official document that gives you
permission to do, use, or own something.
Franchising
Franchising is an arrangement in which the franchisor gives the
franchisee the right to distribute and sell the franchisor's goods
or services and use ...
Product life cycle stages
Introduction> Growth> Maturity> Decline.
Pricing
Positioning: Positioning refers to the place that a brand
occupies in the minds of the customers and how it is
distinguished from the products of the competitors.
Warehousing: Warehousing is the act of storing goods that will
be sold or distributed later.
Product Mix: Product mix, also known as product assortment,
refers to the total number of product lines a company offers to
its customers.
Product Line: A product line is a group of related products all
marketed under a single brand name that is sold by the same
company.
Pricing is the method of determining the value a producer will
get in the exchange of goods and services.
Value based pricing
Value-based pricing is a strategy where prices are based mostly
on consumers' perceived value of the product or service.
Cost based pricing
Cost-based pricing involves setting prices based on the costs for
producing, distributing and selling the product.
Marketing Mix: The marketing mix refers to the set of actions,
or tactics, that a company uses to promote its brand or product
in the market.
What are the 4Ps of Marketing?
The 4Ps make up a typical marketing mix - Price, Product,
Promotion and Place.
What are the 7Ps of Marketin?
These seven are: product, price, promotion, place, packaging,
positioning and people.
What is Promotion Mix ?
Promotion mix is a set of different marketing approaches which
marketers develop to optimize promotional efforts and reach a
broader audience.
Advertising: Advertising is a marketing tactic involving paying
for space to promote a product, service, or cause.
Direct Marketing
Direct marketing is a form of communicating an offer, where
organizations communicate directly to a pre-selected customer
and supply a method for a direct response.
Brand Equity
Brand equity is a marketing term that describes a brand's value.
That value is determined by consumer perception of and
experiences with the brand. If people think highly of a brand, it
has positive brand equity.
Sustainable Marketing
Sustainable marketing means that meets the present needs of
consumers and businesses while also preserving or enhancing
the ability of future generations to meet their needs
Page 42 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Organizational stakeholders
Customers, suppliers, employees, local government, creditors,
investors, trade association
Management
1. Management
Management is the coordination and administration of tasks to
achieve a goal. Such administration activities include setting the
organization's strategy and coordinating the efforts of staff to
accomplish these objectives through the application of available
resources.
2. Management process
Planning and decision
Motivating, Controlling
making,
Organizing,
Leading,
3. Types of manager
Top level, Middle Level and First line manager
4. Roles of Manager
Interpersonal Roles, Informational Roles, Decisional Roles
5. Skills of Manager
Technical Skills, Interpersonal skills, Conceptual skills,
Diagnostic skills, communication skills, decision making skills,
Time- management skills.
6. Centralized business & Decentralized business
The unification of powers and authorities, in the hands of highlevel management, is known as Centralization.
Decentralization means dispersal of powers and authorities by
the top level to the functional level management.
7.Maslow's needs Hierarchy theory
The needs are: physiological, safety, love and belonging,
esteem, and self-actualization.
Soldering
Employees deliberately working at slow pace
Glass ceiling
The glass ceiling is an artificial barrier that prevents women and
minorities from being elevated to senior-level positions within
an organization.
Ethnicity
Ethnicity denotes groups, such as Irish, Fijian, or Sioux, etc. that
share a common identity-based ancestry, language, or culture.
Mission
A Mission Statement defines the company's business, its
objectives and its approach to reach those objectives
Organizational mission
It is a present business scope of an organization which conveys
the essence of what we are, what we do, where are we now.
Goal
A goal is an idea of the future or desired result that a person or a
group of people envision, plan and commit to achieve.
Strategy
a plan of action designed to achieve a long-term or overall aim.
Strategic Management
Strategic management is the ongoing planning, monitoring,
analysis and assessment of all necessities an organization needs
to meet its goals and objectives.
Distinctive Competence
A distinctive competency is a competency unique to a business
organization,
SWOT analysis
A study undertaken by an organization to identify its internal
strengths and weaknesses, as well as its external opportunities
and threats.
Behavioral management
Emphasizes individual attitudes and behaviors and group
processes
Competitive advantage
Competitive advantages are conditions that allow a company or
country to produce a good or service of equal value at a lower
price or in a more desirable fashion.
Quantitative management
The quantitative approach to management involves the use of
quantitative techniques, such as statistics, information models,
and computer simulations, to improve decision making.
Coalition
An informal alliance of individuals or group formed to achieve a
common goal
Operations Management
Concerned with helping the organization more efficiently
produce its products or services.
Intuition
The ability to understand something instinctively, without the
need for conscious reasoning.
Entropy:
A normal process leading to system decline.
Five competitive forces
1. The threat of new entrants, 2. Competitive rivalry, 3. The
threat of substitute products, 4. The power of buyers and 5.the
power of suppliers
Ethics
Ethics is defined as a moral philosophy or code of morals
practiced by a person or group of people
Managerial ethics
Managerial ethics refers to the moral guidance a supervisor
provides his employees.
Code of ethics
A formal, written statement of the values and ethical standards
that guide a firm’s actions
Total quality Management(TQM)
A system of management based on the principle that every
member of staff must be committed to maintaining high
standards of work in every aspect of a company's operations.
Supply chain management
Supply chain management (SCM), the management of the flow
of goods and services, involves the movement and storage of
raw materials, of work-in-process inventory, and of finished
goods from point of origin to point of consumption.
Just in time method
Just in time (JIT) inventory is a strategy to increase efficiency
and decrease waste by receiving goods only as they are needed
in the production process, thereby reducing inventory costs. Its
origin and development was mainly in Japan, largely in the
1960s and 1970s and particularly at Toyota.
Page 43 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Job rotation:
The practice of moving employees between different tasks to
promote experience and variety.
Job enlargement
It is a job design technique wherein there is an increase in the
number of tasks associated with a certain job.
The Job Enrichment
It is the job design technique used to increase the satisfaction
among the employees by delegating higher authority and
responsibility to them and thereby enabling them to use their
abilities to the fullest.
Chain of command
Chain of command is an official hierarchy of authority that
dictates who is in charge of whom and of whom permission
must be asked.
a non pay-out lease, the lessor leases out the same asset over and
over again.
Tax oriented lease
Where the lease is not a loan on security but qualifies as a lease,
it will be considered a tax oriented lease.
Import Lease
In an Import lease, the company providing equipment for lease
may be located in a foreign country but the lessor and the lessee
may belong to the same country.
International lease
Here, the parties to the lease transactions may belong to
different countries which is almost similar to cross border lease.
Span of management
The Span of Management refers to the number of subordinates
who can be managed efficiently by a superior.
Tall organization
A tall organization, or vertical organization, is one in which the
CEO sits at the top of the chain of command, with various levels
of management underneath.
Flat organization
A flat organization, or horizontal organization, involves fewer
levels of management and more employee autonomy in the
decision-making process.
Delegation
Delegation is the assignment of any authority to another person
to carry out specific activities.
Line position
A line position is a position that has authority and responsibility
for achieving the major goals of the organization.
Matrix organization
Matrix management is an organizational structure in which
some individuals report to more than one supervisor or leader,
relationships described as solid line or dotted line reporting.
Human resource management
Human resource management (HRM) is the practice of
recruiting, hiring, deploying and managing an organization's
employees.
Human capital
Human Capital is a measure of the skills, education, capacity
and attributes of labor which influence their productive capacity
and earning potential.
Types of leadership
1. Autocratic Leadership, 2.Democratic or Participative
Leadership 3.Free-Rein or Liaises-Faire Leadership, and
4.Paternalistic Leadership.
Grapevine
To hear something through the grapevine is to learn about
something. It can also simply refer to an overheard conversation
or anonymous sources of information, e.g. "I heard through the
grapevine that Brad died.In a sale and leaseback, a company
owning the asset sells it to the lessor. The lessor pays
immediately for the asset but leases the asset to the seller.
Full and non pay-out lease
Lease arrangement in which a seller or owner (the lessor) of the
leased asset or property recovers the full cost (original cost plus
profit margin, interest, and other charges) of the item.In case of
Page 44 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Introduction to Business
1.Business vs Barter
The exchange of goods & service, or money for mutual benefit
or profit. Barter means the exchange of goods without using
money.
2.Standard of living
A standard of living is the level of wealth, comfort, material
goods, and necessities available to a certain socioeconomic class
or a certain geographic area.
3.Define the concept of GDP, GNP, NNP, NI, PI, and DI?
GDP(Gross National Product)
It is the market value of all final goods and services produced
within the domestic territory of a country during a year.
GNP(Gross National Income)
It is the market value of all final goods and services produced
within the country in a year plus net factor income abroad is
called gross national product.
NNP(Net National Product)
It is the amount which comes after the minus of depreciation in
the gross national product (GNP). This is known as depression.
NI(National Income)
It is the total earning of all factors of production in the form of
wages, profit, rent, and interest plus net factor income from
abroad.
PI(Personal Income)
It is the total income received by all individuals and household
of a country from all possible sources before payment of direct
taxes.
Stagflation is the situation of persistent high inflation combined
with high unemployment and stagnant demand in a country's
economy.
Demand side economy vs Supply side economy
Supply side theory is aimed at increasing the supply of goods
and services available to consumers. Demand side economics is
all about increasing demand in the consumer.
Whistle Blower
A whistleblower is a person who exposes secretive information
or activity that is deemed illegal, unethical, or not correct within
a private or public organization.
Absolute vs Comparative Advantage
When a country can produce a product more efficiently than any
other nation is called absolute advantage. And when a country
can produce one product more efficiently and at a lower cost
than Other products in comparison to other nations.
BOP VS BOT
A statement recording the imports and exports done in goods
by/from the country with the other countries, during a particular
period is known as the Balance of Trade. The Balance of
Payment captures all the monetary transaction performed
internationally by the country during a course of time.
Joint venture
A joint venture (JV) is a business arrangement in which two or
more parties agree to pool their resources for the purpose of
accomplishing a specific task.
Trading company
Trading companies are businesses working with different kinds
of products which are sold for consumer, business or
government purposes.
DI(Disposable Income)
It is the total income by all individuals and household of a
country from all possible sources after a payment of direct taxes.
Countertrading
Countertrade is a reciprocal form of international trade in which
goods or services are exchanged for other goods or services
rather than for hard currency.
Business Enterprise & Type
An Organization involved in exchanging goods, service, or
money to earn a profit.
The most common forms of business
enterprises are the sole proprietorship, general partnership,
limited liability company (LLC), and corporation.
Dumping
It's when a country or company exports a product at a price that
is lower in the foreign importing market than the price in the
exporter's domestic market.
Economic profit
An economic profit or loss is the difference between the revenue
received from the sale of an output and the costs of all inputs
used and any opportunity costs.
Depression, Inflation, Recession, Stagflation
Depression is commonly defined as an extreme recession that
lasts three or more years or leads to a decline in real gross
domestic product (GDP) of at least 10 percent.
Inflation is the increase in the prices of goods and services over
time.
Recession is a period of temporary economic decline during
which trade and industrial activity are reduced, generally
identified by a fall in GDP in two successive quarters.
Goals vs objective
The goals are the broad targets, which can be achieved through
continuous actions taken in the particular direction. Objectives
are the aims that you want to achieve in a short span of time.
Downsizing
Downsizing is the permanent reduction of a company's labor
force through the elimination of unproductive workers or
divisions.
Departmental Store Vs Supermarket
A departmental store or department store is a large store that
stocks many varieties of goods in different departments.
Supermarket is a large self-service retail market that sells food
and household goods.
Page 45 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Organizational Behavior
Definition:
OB is the study of human behavior in organizational settings,
the interface between human behavior and the organization
itself.
Management Function
i.
Planning
ii.
Organizing
iii.
Leading
iv.
Controlling
4. Emotional stability
A personality dimension describing someone who is calm, self
confident, secure versus nervous, depressed and insecure.
5. Openness to experience
A personality dimension describing someone in terms of
imagination sensitivity and curiosity
Major personality attributes influencing OB
Attitudes:
In psychology, an attitude refers to a set of emotions, beliefs,
and behaviors toward a particular object, person, thing, or event.
Major job attitude
1. Job satisfaction:-A positive feeling about ones job resulting
from an evaluation of its characteristics
2. Job involvement:- the degree to which a person identifies
with a job, activity participates in it, and considers performance
important to self worth.
3. Organizational Commitment:- The degree to which an
employee identifies with a particular organization and its goods
and wishes to maintain membership in the organization.
4. Work modes: - Employee also have feelings about their jobs
that are highly dynamic; they can change within a day, hour or
minute
Outcomes of satisfaction and dissatisfaction
1. Employee performance
2.Turnover
3. Absences and tardiness
4. Theft
5. Violence
2. Machiavellianism
The degree to which an individual is pragmatic, maintain
emotional distance and believes that ends can justify means.
3. Narcissism:
The tendency to be arrogant has a grandiose sense of self
importance, require excessive admiration and have sense of
entitlement.
4. Self esteem
The degree of individual of liking or disliking themselves
5. Self monitoring
A personality traits of that measures an individual’s ability to
adjust his/her behavior to external, situational factors.
6. Type A & B personality
Type A personality are always moving walking and eating
rapidly, feel impatient with the rate at which most events take
place.
Type B personality never suffers from sense of time urgency,
feel no need to display or discuss, play for fun and relaxation,
can relax without guilt.
7. Proactive personality
People who identify opportunities ,show initiative, take action
and preserve until meaningful change occurs.
Affect: A broad range of feelings that people experience
Emotions: Intense feelings that are directed at someone or
something
Modes: Feeling that tend to be less intense than emotions and
that lack a contextual stimulus
Personality: The sum total of ways in which an individual
reacts to and interacts with others.
The Big 5 factors of human personality
1. Extraversion
A personality dimension describing someone who is sociable,
gregarious and assertive.
2. Agreeableness
A personality dimension describing someone who is good
natured , co-operative and trusting.
3. Conscientiousness
A personality dimension describing someone
responsible, dependable, persistent and organized.
1. Locus of control
The degree to which people believe they are masters of their
own fate. Other believe that what happens to them is due to luck
or chance
who
is
Motivation
Motivation is the way which drives or needs direct a person’s
behavior toward a goal. Drives or motives are set up to alleviate
needs.
Maslow’s Hierarchy of need theory
➢
➢
➢
➢
➢
Physiological need
Safety and Security needs include
Social Belonging needs include
Self-esteem
Self-actualization can include
Theory X
•
Dislike their work.
•
Avoid responsibility and need constant direction.
•
Have to be controlled, forced and threatened to deliver
work.
•
Need to be supervised at every step.
•
Have no incentive to work or ambition, and therefore
need to be enticed by rewards to achieve goals.
Page 46 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Theory Y
This style of management assumes that workers are:
•
Happy to work on their own initiative.
•
More involved in decision making.
•
Self-motivated to complete their tasks.
•
Enjoy taking ownership of their work.
•
Seek and accept responsibility, and need little
direction.
•
View work as fulfilling and challenging.
The Carrot and stick theory
According to the theory rewards and punishments are
considered strong motivators. Here, Carrot may be money in the
form of pay or bonuses. The stick may be in the form of fear of
loss of job, income, demotion or some other penalty.
McClelland’s Theory of Needs
It was developed by David McClelland and his associates.
Theory that states three important needs that help explain
motivation.
1. Needs for Achievement
2. Needs for Power
3. Needs for Affiliation
Herzberg's Motivators and Hygiene Factors
1. Hygiene factors: Salary, job security, status, working
condition, etc
2. Motivation factors: Achievement,
recognition,
advancement, responsibility etc
Group
A group is defined as two or more individuals interacting and
interdependence who have come together to achieve particular
objectives.
Types of Group
1. Formal group
2. Informal group
3. Command group
4. Task group
5. Interest group
6. Friendship group
Stages of group development
Forming>Storming>Norming>Performing>Adjourni
ng
Expectancy Theory
It was developed by Victor Vroom. The theory argues that the
strength of our tendency to act a certain way depends on the
strength of our expectation of a given outcome and its
attractiveness. The theory focuses on 3 relationships:
➢
➢
➢
fourth and fifth levels. This includes desires to be creative and
productive, and to complete meaningful tasks.
Effort-performance relationship
Performance-reward relationship
Reward-personal goals relationship
What is Theory Z?
William Ouchi developed Theory Z after making a comparative
study of Japanese and American management practices. Theory
Z is an integrated model of motivation. Theory Z suggests that
large complex organisations are human systems and their
effectiveness depends on the quality of humanism used. A type
Z organisation has three major features—trust, subtlety and
intimacy.
Group decision making techniques
1. Interacting group
2. Brainstorming
3. Nominal group technique
4. Electronic meeting
Team
A team is any group of people organized to work together
interdependently and co-operatively who meet for
accomplishing a specific purpose and goals.
Types of team
1. Problem solving team
2. Self-managed work team
3. Cross-functional team
4. Virtual team
Leadership: The ability to influence a group towards the
achievement of a vision or set of goals
ERG motivation theory Alderfer
Clayton P. Alderfer's ERG theory from 1969 condenses
Maslow's five human needs into three categories: Existence,
Relatedness and Growth.
1. Existence Needs
Include all material and physiological desires (e.g., food, water,
air, clothing, safety, physical love and affection). Maslow's first
two levels.
2. Relatedness Needs
Encompass social and external esteem; relationships with
significant others like family, friends, co-workers and employers
. This also means to be recognized and feel secure as part of a
group or family. Maslow's third and fourth levels.
3. Growth Needs
Internal esteem and self actualization; these impel a person to
make creative or productive effects on himself and the
environment (e.g., to progress toward one's ideal self). Maslow's
Human Resource Management
Human resource management (HRM) is the practice of
recruiting, hiring, deploying and managing an organization's
employees
What is Values?
Values defined in Organizational Behavior as the collective
conceptions of what is considered good, desirable, and proper or
bad, undesirable, and improper in a culture. Some common
business values are fairness, innovations and community
involvement.
Equity theory
Adams' Equity Theory calls for a fair balance to be struck
between an employee's inputs (hard work, skill level,
acceptance, enthusiasm, and so on) and an employee's outputs
(salary, benefits, intangibles such as recognition, and so on).
Page 47 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)
Work Group:
A working group or working party is a group of experts working
together to achieve specified goals. The groups are domainspecific and focus on discussion or activity around a specific
subject area.
Work Team:
A group of employees that works semiautonomously on
recurring tasks. Work teams are most useful where job content
changes frequently and employees with limited skills and a
specific set of duties are unable to cope.
Path-Goal Leadership Theory
The Path-Goal model is a theory based on specifying a leader's
style or behavior that best fits the employee and work
environment in order to achieve a goal (House, Mitchell, 1974).
The goal is to increase your employees' motivation,
empowerment, and satisfaction so they become productive
members of the organization.
1. Determine the employee and environmental
characteristics
2. Select a leadership style
3. Focus on motivational factors that will help the
employee succeed
or unfavorable circumstances. It is an outside force that rules an
individual’s feelings and behavior.
Stress Vulnerability
Degree to which people, property, resources, systems, and
cultural, economic, environmental, and social activity is
susceptible to harm, degradation, or destruction on being
exposed to a hostile agent or factor.
Stress Threshold
Thresholds vary from person to person (e.g., Type A vs. Type
B), situation to situation (e.g., Work vs. Personal), and are based
on individual strengths, challenges, and personal history.
High stress threshold = It takes a lot to stress you out.
LOW stress threshold = It takes LITTLE to stress you out
Conflict
A conflict is a clash of interest. The basis of conflict may vary
but, it is always a part of society. Basis of conflict may be
personal, racial, class, caste, political and international. Conflict
in groups often follows a specific course.
Functional conflict:
Functional conflict is conflict or tension within a group that
leads to positive results. "Conflict" often carries a negative
connotation, but functional conflict means individuals in a group
discuss points of disagreement with a spirit of collaboration.
Dysfunctional conflict:
Dysfunctional conflict is conflict that leads to a decline in
communication or the performance of a group. Dysfunctional
conflict can be an overabundance of conflict or a lack of
sufficient motivating conflict.
Perceived Conflict:
Conflicts may, sometimes, arise even if no conditions of latent
conflict exist. This is the stage when one party perceives the
other to be likely to thwart or frustrate his or her goals.
Felt Conflict:
Felt conflict is the stage when the conflict is not only perceived
but actually felt and cognized
Intention
Intention is a mental state that represents a commitment to
carrying out an action or actions in the future. Intention involves
mental activities such as planning and forethought.
Negotiation
Negotiation is a dialogue between two or more people or parties
intended to reach a beneficial outcome over one or more issues
where a conflict exists with respect to at least one of these
issues.
Stress
In Human Resource Management, Stress is defined as a state of
mental and emotional pressure or strain, caused by challenging
Page 48 of 48
Courtesy By:
Department of Finance & Banking (3rd Batch)