Final Version of Short Note

6/16/2019
A short note of
major courses of
Finance &
Banking
Prepared by 2nd Batch of
Finance & Banking
2nd Batch of Finance & Banking

UNIVERSITY OF BARISHAL
Index:
Course Code Course Title Page Number
F-101 Business English and Communication

F-102 Computer Application in Business
F-103 Financial Accounting - I 1
F-104 Business Mathematics - I
F-105 Bangladesh Studies
F-106 Business Finance & F-206 Financial Management 11
F-107 Business Statistics - I 53
F-108 Business Mathematics - II
F-109 Principles of Management 57
F-110 General Science and Environment
F-201 Financial Accounting - II 62
F-202 Microeconomics 63
F-203 Management Information System
F-204 Principles of Marketing
F-205 Legal Environment of Business
F-206 Financial Management 11
F-207 Business Statistics - II 88
F-208 Macroeconomics 90
F-209 Law and Practice of Banking
F-210 Insurance and Risk Management 95
F-301 Organizational Behavior 97
F-302 Cost Accounting 99
F-303 Working Capital Management 116
F-304 Financial Markets and Institutions 120
F-305 International Business 132
F-306 Real Estate Finance 137
F-307 Security Analysis and Portfolio Management 157
F-308 Monetary and Fiscal policy 168
F-309 Strategic Management 172
F-310 Managerial Accounting 99
F-401 Financial Statement Analysis and Valuation 176
F-402 Commercial Bank Management 182
F-403 Merchant Banking and Investment Banking 203
F-404 Financial Derivatives 208
F-405 Capital Investment Decisions 212
F-406 Corporate Finance 216
F-407 Investment Analysis 223
F-408 Project Appraisal and Management 239
F-409 Business Taxation 253
F-410 International Finance 260
*Yellow highlight color shows that these courses are included as short note without these color are not included.
Course Code: 103
Course Title: Financial Accounting - I
Accounting: Accounting is the art of analyzing, recording, summarizing, reporting, reviewing,
and interpreting financial information.
Accountant: A person formally trained to prepare, maintain, and analyze financial information.
Users of Accounting Data:

 Internal users of accounting information are managers who plan, organize, and run the
business. These include marketing managers, production supervisors, finance directors,
and company officers.
 External users are individuals and organizations outside a company who want financial
information about the company. The two most common types of external users are
investors and creditors.
Monetary unit assumption: The monetary unit assumption requires that companies include in
the accounting records only transaction data that can be expressed in money terms.
Economic entity assumption: The economic entity assumption requires that the activities of the
entity be kept separate and distinct from the activities of its owner and all other economic entities.
Assets: Resources a business owns.
Balance sheet: A financial statement that reports the assets, liabilities, and owner’s equity at a
specific date.
Basic accounting equation: Assets= Liabilities + Owner’s Equity.
Bookkeeping: A part of accounting that involves only the recording of economic events.
Convergence: The process of reducing the differences between U.S. GAAP and IFRS
Drawings: Withdrawal of cash or other assets from an unincorporated business for the personal
use of the owner(s).
Ethics: The standards of conduct by which one’s actions are judged as right or wrong, honest or
dishonest, fair or not fair.
Expanded accounting equation: Asset= Liabilities+ Owner’s Capital-Owner’s Drawings+

Revenues-Expenses.
Expenses: The cost of assets consumed or services used in the process of earning revenue.
Fair value principle: An accounting principle stating that assets and liabilities should be reported
at fair value (the price received to sell an asset or settle a liability).
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Prepared by Finance & Banking, 2nd Batch, BU
Financial Accounting Standards Board (FASB): A private organization that establishes
generally accepted accounting principles in the United States (GAAP).
Generally accepted accounting principles (GAAP): Common standards that indicate how to
report economic events.
Income statement: A financial statement that presents the revenues and expenses and resulting
net income or net loss of a company for a specific period of time.
International Accounting Standards Board (IASB): An accounting standard-setting body that

issues standards adopted by many countries outside of the United States.
International Financial Reporting Standards (IFRS): International accounting standards set by

the International Accounting Standards Board (IASB).
Investments by owner: The assets an owner puts into the business.
Liabilities: Creditor claims against total assets.
Net income: The amount by which revenues exceed expenses.
Net loss: The amount by which expenses exceed revenues.
Owner’s equity statement: A financial statement that summarizes the changes in owner’s equity
for a specific period of time.
Partnership: A business owned by two or more persons associated as partners.
Owner’s equity: The ownership claims on total assets.
Partnership: A business owned by two or more persons associated as partners.
Proprietorship: A business owned by one person.
Revenues: The gross increase in owner’s equity resulting from business activities entered into for
the purpose of earning income.
Statement of cash flow: A financial statement that summarizes information about the cash inflows
(receipts) and cash outflows (payments) for a specific period of time.
Transactions: The economic events of a business that are recorded by accountants.
Steps in the Recording Process: Practically every business uses three basic steps in the recording
process:
 Analyze each transaction for its effects on the accounts.
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 Enter the transaction information in a journal.
 Transfer the journal information to the appropriate accounts in the ledger.
Journal: the journal is referred to as the book of original entry. For each transaction, the journal
shows the debit and credit effects on specific accounts.
Account: A record of increases and decreases in specific asset, liability, or owner’s equity items.
Chart of accounts: A list of accounts and the account numbers that identify their location in the
ledger.
Compound entry: A journal entry that involves three or more accounts.
Credit: The right side of an account.
Debit: The left side of an account.
Double-entry system: A system that records in appropriate accounts the dual effect of each
transaction.
General journal: The most basic form of journal.
General ledger: A ledger that contains all assets, liability, and owner’s equity accounts.
Journal: An accounting record in which transactions are initially recorded in chronological order.
Journalizing: The entering of transaction data in the journal.
Ledger: The entire group of accounts maintained by a company.
Posting: The procedure of transferring journal entries to the ledger accounts.
Simple entry: A journal entry that involves only two accounts.
T-account: The basic form of an account.
Three-column form of account: A form with columns for debit, credit, and balance amounts in
an account.
Trial balance: A list of accounts and their balances at a given time.
Accrual-basis accounting: accounting basis in which companies record transactions that change
a company’s financial statements in the periods in which the events occur.
Accruals: Adjusting entries for either accrued revenues or accrued expenses.
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Accrued expenses: Expenses incurred but not yet paid in cash or recorded.
Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
Adjusted trial balance: A list of accounts and their balances after the company has made all
adjustments.
Adjusting entries: Entries made at the end of an accounting period to ensure that companies
follow the revenue recognition and expense recognition principles.
Book value: The difference between the cost of a depreciable asset and its related accumulated
depreciation.
Calendar year: An accounting period that extends from January 1 to December 31.
Cash-basis accounting: Accounting basis in which companies record revenue when they receive
cash and an expense when they pay cash.
Deferrals: Adjusting entries for either prepaid expenses or unearned revenues.
Depreciation: The process of allocating the cost of an asset to expense over its useful life.
Fiscal year: An accounting period that is one year in length.
Interim periods: Monthly or quarterly accounting time periods.
Prepaid expenses (prepayments): Expenses paid in cash before they are used or consumed.
Time period assumption: An assumption that accountants can divide the economic life of a
business into artificial time periods.
Unearned revenues: A liability recorded for cash received before services are performed.
Useful life: The length of service of a long-lived asset.
Comparability: Ability to compare the accounting information of different companies because

they use the same accounting principles.
Consistency: Use of the same accounting principles and methods from year to year within a
company.
Materiality: A company specific aspect of relevance. An item is material when its size makes it
likely to influence the decision of an investor or creditor
Relevance: The quality of information that indicates the information makes a difference in a
decision
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Understandability: Information presented in a clear and concise fashion so that users can interpret
it and comprehend its meaning.
Verifiable: The quality of information that occurs when independent observers, using the same
methods, obtain similar results.
Classified balance sheet: A balance sheet that contains standard classifications or sections.
Closing entries: Entries made at the end of an accounting period to transfer the balances of
temporary accounts to a permanent owner’s equity account, Owner’s Capital.
Correcting entries: Entries to correct errors made in recording transactions.
Current assets: Assets that a company expects to convert to cash or use up within one year.
Current liabilities: Obligations that a company expects to pay within the coming year or its
operating cycle, whichever is longer.
Income Summary: A temporary account used in closing revenue and expense accounts.
Intangible assets: Noncurrent assets that do not have physical substance.
Liquidity: The ability of a company to pay obligations expected to be due within the next year.
Post-closing trial balance: A list of permanent accounts and their balances after a company has
journalized and posted closing entries.
Property, plant, and equipment: Assets with relatively long useful lives and currently being used
in operations.
Worksheet: A multiple-column form that may be used in making adjusting entries and in
preparing financial statements.
Contra revenue account: An account that is offset against a revenue account on the income
statement.
Cost of goods sold: The total cost of merchandise sold during the period.
FOB destination: Freight terms indicating that the seller places the goods free on board to the
buyer’s place of business, and the seller pays the freight
FOB shipping point: Freight terms indicating that the seller places goods free on board the carrier,
and the buyer pays the freight costs.
Gross profit: The excess of net sales over the cost of goods sold.
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Income from operations: Income from a company’s principal operating activity; determined by
subtracting cost of goods sold and operating expenses from net sales.
Multiple-step income statement: An income statement that shows several steps in determining
net income
Operating expenses: Expenses incurred in the process of earning sales revenue
Periodic inventory system: An inventory system under which the company does not keep detailed
inventory records throughout the accounting period but determines the cost of goods sold only at
the end of an accounting period.
Perpetual inventory system: An inventory system under which the company keeps detailed
records of the cost of each inventory purchase and sale, and the records continuously show the
inventory that should be on hand.
Purchase allowance: A deduction made to the selling price of merchandise, granted by the seller
so that the buyer will keep the merchandise.
Purchase discount: A cash discount claimed by a buyer for prompt payment of a balance due.
Purchase discount: A cash discount claimed by a buyer for prompt payment of a balance due.
Purchase invoices: A document that supports each credit purchase.
Purchase returns: A return of goods from the buyer to the seller for a cash or credit refund.
Sales discount: A reduction given by a seller for prompt payment of a credit sale.
Sales invoice: A document that supports each credit sale.
Sales returns and allowances: Purchase returns and allowances from the seller’s perspective.
Single-step income statement: An income statement that shows only one step in determining net
income.
Consigned goods: Goods held for sale by one party although ownership of the goods is retained
by another party.
Consistency concept: Dictates that a company uses the same accounting principles and methods
from year to year.
Current replacement cost: The current cost to replace an inventory item.
Days in inventory: Measure of the average number of days’ inventory is held; calculated as 365
divided by inventory turnover.
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Finished goods inventory: Manufactured items that are completed and ready for sale.
First-in, first-out (FIFO) method: Inventory costing method that assumes that the costs of the
earliest goods purchased are the first to be recognized as cost of goods sold.
Last-in, first-out (LIFO) method: Inventory costing method that assumes the costs of the latest
units purchased are the first to be allocated to cost of goods sold
Average-cost method: Inventory costing method that uses the weighted-average unit cost to
allocate to ending inventory and cost of goods sold the cost of goods available for sale
FOB (free on board) destination: Freight terms indicating that ownership of the goods remains
with the seller until the goods reach the buyer.
FOB (free on board) shipping point: Freight terms indicating that ownership of the goods passes
to the buyer when the public carrier accepts the goods from the seller.
Just-in-time (JIT) inventory: Inventory system in which companies manufacture or purchase

goods just in time for use.
Lower-of-cost-or-market (LCM): A basis whereby inventory is stated at the lower of either its
cost or its market value as determined by current replacement cost.
Work in process: That portion of manufactured inventory that has been placed into the production
process but is not yet complete.
Specific identification method: An actual physical flow costing method in which items still in
inventory are specifically costed to arrive at the total cost of the ending inventory.
Weighted-average unit cost: Average cost that is weighted by the number of units purchased at
each unit cost.
Accounts receivable: Amounts owed by customers on account.
Accounts receivable turnover: A measure of the liquidity of accounts receivable; computed by

dividing net credit sales by average net accounts receivable.
Aging the accounts receivable: The analysis of customer balances by the length of time they have
been unpaid.
Allowance method: A method of accounting for bad debts that involves estimating uncollectible
accounts at the end of each period.
Bad Debt Expense: An expense account to record uncollectible receivables.
Cash (net) realizable value: The net amount a company expects to receive in cash.
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Direct write-off method: A method of accounting for bad debts that involves expensing accounts
at the time they are determined to be uncollectible.
Dishonored (defaulted) note: A note that is not paid in full at maturity.
Factor: A finance company or bank that buys receivables from businesses and then collects the
payments directly from the customers
Notes receivable: Written promise (as evidenced by a formal instrument) for amounts to be
received.
Payee: The party to whom payment of a promissory note is to be made.
Promissory note: A written promise to pay a specified amount of money on demand or at a

definite time.
Receivables: Amounts due from individuals and other companies.
Trade receivables: Notes and accounts receivable that result from sales transactions.
Accelerated-depreciation method: Depreciation method that produces higher depreciation

expense in the early years than in the later years.
Declining-balance method: Depreciation method that applies a constant rate to the declining book
value of the asset and produces a decreasing annual depreciation expense over the useful life of
the asset.
Straight-line method: Depreciation method in which periodic depreciation is the same for each
year of the asset’s useful life.
Units-of-activity method: Depreciation method in which useful life is expressed in terms of the
total units of production or use expected from an asset.
Useful life: An estimate of the expected productive life, also called service life, of an asset.
Salvage value: An estimate of an asset’s value at the end of its useful life.
Amortization: The allocation of the cost of an intangible asset to expense over its useful life in a
systematic and rational manner.
Copyrights: Exclusive grant from the federal government that allows the owner to reproduce and
sell an artistic or published work.
Patent: An exclusive right issued by the U.S. Patent Office that enables the recipient to
manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the
grant.
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Franchise (license): A contractual arrangement under which the franchisor grants the franchisee
the right to sell certain products, perform specific services, or use certain trademarks or trade
names, usually within a designated geographic area.
Depletion: The allocation of the cost of a natural resource to expense in a rational and systematic
manner over the resource’s useful life.
Goodwill: The value of all favorable attributes that relate to a company that is not attributable to
any other specific asset.
Depreciable cost: The cost of a plant asset less its salvage value.
Research and development (R&D) costs: Expenditures that may lead to patents, copyrights, new
processes, or new products.
Partnership: An association of two or more persons to carry on as co-owners of a business for

profit.
Partnership agreement: A written contract expressing the voluntary agreement of two or more
individuals in a partnership.
Partnership dissolution: A change in partners due to withdrawal or admission, which does not
necessarily terminate the business.
Partnership liquidation: An event that ends both the legal and economic life of a partnership.
General partners: Partners who have unlimited liability for the debts of the firm.
Limited liability partnership: A partnership of professionals in which partners are given limited
liability and the public is protected from malpractice by insurance carried by the partnership.
Limited partners: Partners whose liability for the debts of the fi rm is limited to their investment
in the firm.
Capital deficiency: A debit balance in a partner’s capital account after allocation of gain or loss.
No capital deficiency: All partners have credit balances after allocation of gain or loss.
Ratio: An expression of the mathematical relationship between one quantity and another. The
relationship may be expressed either as a percentage, a rate, or a simple proportion.
Ratio analysis: A technique for evaluating financial statements that expresses the relationship
between selected financial statement data.
Vertical analysis: A technique for evaluating financial statement data that expresses each item
within a financial statement as a percentage of a base amount
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Horizontal analysis: A technique for evaluating a series of financial statement data over a period
of time, to determine the increase (decrease) that has taken place, expressed as either an amount
or a percentage.
Acid-test (quick) ratio: A measure of a company’s immediate short-term liquidity; computed by

dividing the sum of cash, short-term investments, and net accounts receivable by current liabilities.
Asset turnover: A measure of how efficiently a company uses its assets to generate sales;
computed by dividing net sales by average total assets.
Comprehensive income: Includes all changes in stockholders’ equity during a period except those
resulting from investments by stockholders and distributions to stockholders.
Current ratio: A measure used to evaluate a company’s liquidity and short-term debt-paying
ability; computed by dividing current assets by current liabilities.
Debt to assets ratio: Measures the percentage of assets provided by creditors; computed by
dividing debt by assets.
Earnings per share (EPS); The net income earned on each share of common stock; computed by
dividing net income minus preferred dividends (if any) by the number of weighted-average
common shares outstanding.
Extraordinary items: Events and transactions that are unusual in nature and infrequent in
occurrence.
Inventory turnover: A measure of the liquidity of inventory; computed by dividing cost of goods
sold by average inventory.
Liquidity ratios: Measures of the short-term ability of the company to pay its maturing obligations
and to meet unexpected needs for cash.
Payout ratio: Measures the percentage of earnings distributed in the form of cash dividends;
computed by dividing cash dividends by net income.
Price-earnings (P-E) ratio: Measures the ratio of the market price of each share of common stock
to the earnings per share; computed by dividing the market price of the stock by earnings per share.
Profit margin: Measures the percentage of each dollar of sales that results in net income;
computed by dividing net income by net sales.
Profitability ratios: Measures of the income or operating success of a company for a given period
of time.
Return on assets: An overall measure of profitability; computed by dividing net income by

average total assets.
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Return on common stockholder’s equity: Measures the dollars of net income earned for each
dollar invested by the owners; computed by dividing net income minus preferred dividends (if
any) by average common stockholders’ equity.
Solvency ratios: Measures of the ability of the company to survive over a long period of time.
Times interest earned: Measures a company’s ability to meet interest payments as they come
due; computed by dividing income before interest expense and income taxes by interest expense.
Pro forma income: A measure of income that usually excludes items that a company thinks are
unusual or non-recurring.
Course Code: F-106 Course Name: Business Finance

& Course Code: F-206 Course Title: Financial Management
Asset: Any resource that has economic value that an individual or corporation owns provide future
benefit. Assets are generally viewed as resources that produce cash flow or bring added benefit to
the individual or company.
Fixed Assets: Assets of a long-term character that are intended to continue to be held or used.
Examples of fixed assets include items such as land, buildings, machinery, furniture, and other
equipment.
Capital Gain: A capital gain is realized when an investment’s selling price exceeds its purchase
price.
Capital Budgeting: Capital Budgeting is the process of evaluating and selecting long term
investments that are consistent with the firm’s goal of maximizing owner’s wealth.
Capital Expenditure: Capital Expenditure is an outlay of funds by the firm that is expected to
produce benefits over a period of time greater than one year.
Operating expenditure: Operating expenditure is an outlay of funds by the firms resulting in
benefits received within one year.
Capital Budgeting process:
1. Proposal generation
2. Review and analysis
3. Decision making
4. Implementation
5. Follow up
Independent Projects: Projects whose cash flows are unrelated to (or independent of) one
another; the acceptance of one does not eliminate the others from further consideration.
Mutually exclusive projects: Mutually exclusive projects that compete with one another so that
the acceptance of one eliminates from further consideration all other projects that serve a similar
function.
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Capital rationing: Capital rationing is the financial situation in which a firm has only a fixed
number of dollars available for capital expenditures and numerous project compete for these
dollars.
Payback Period: Payback Period is the amount of time required for a firm to recover its initial
investment in a project as calculated from cash inflows.
Payback Period = Initial Investment / Annual cash inflow
When the payback period is used to make accept reject decisions, the following decision
criteria apply:
1. If the payback period is less than the maximum acceptable payback period, accept the
project.
2. If the payback period is greater than the maximum acceptable payback period rejects the
project.
Net present Value: Net present Value is a value found by subtracting a project’s initial investment
from the present value of its cash inflows discounted at a rate equal to the firm’s cost of capital.
NPV = Present value of cash inflows – Initial investment
When NPV is used to make accept-reject decisions, the decision criteria are as follows:
1. If NPV is greater than 0, accept the project
2. If NPV is less than 0, reject the project
Profitability Index: Profitability Index is a variation of the NPV rule is called the profitability
index.
Profitability Index = Present value of cash inflows divided by initial cash outflows.
When PI is used to make accept-reject decisions, the decision criteria are as follows:
1. PI is greater than 1, project is accepted
2. PI is less than 1, project is rejected
IRR: Internal Rate of Return is the discount rate at which net present value is equal to 0.
When IRR is used to make accept-reject decisions, the decision criteria are as follows:
1. If IRR is greater than the cost of capital, accept the project
2. If IRR is less than the cost of capital, reject the project
Cash Flow: One of the main indications of a company’s overall financial health. Calculated by
subtracting cash payments from cash receipts over a period of time (month, quarter, year).
Compound Interest: Interest that is calculated not just on the initial principal but also on the
accumulated interest from previous periods.
Credit Report: A summary of a person’s credit history, showing historical information such as
bankruptcies, loans, late payments, and recent inquiries.
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Credit Score: A measure of credit risk that is based on activities such as credit use and late
payments.
Credit score providing firms in Bangladesh:
1. Credit Rating Agency of Bangladesh Ltd. (CRAB)
2. Credit Rating Information and Services Limited (CRISL)
3. Bangladesh Rating Agency Ltd (BDRAL)
4. ARGUS Credit Rating Services Ltd. (ACRSL)
5. Emerging Credit Rating Limited (ECRL)
6. National Credit Ratings Limited (NCR)
7. Alpha Credit Rating Ltd.
8. WASO Credit Rating Company (BD) Ltd. (WCRCL)
Debt: An amount owed to a person or corporation for funds borrowed.
Diversification: Spreading risk by investing in a range of investment tools such as securities,
commodities, real estate, CDs, etc.
Garnishment: A legal process whereby a debtor’s personal property is seized in order to satisfy a
debt or court award.
Inflation: The gradual increase or rise in the price of goods of a period of time.
Interest: The fee paid for using other people’s money. For the borrower, it is the cost of using
other people’s money. For the lender, it is the income from renting the good (the money).
Interest Rate: The percentage rate at which a bond bears interest.
Nominal Interest Rate: The interest rate unadjusted for inflation.
Real Interest Rate: The nominal interest rate corrected for changes in the level of prices by
subtracting the expected inflation rate.
Liability: An obligation to repay debt.
Liquidity: The ability of an asset to be converted to cash quickly without sacrificing value or
giving a discount on the price.
Loan-to-value: The ratio of the fair market value of the asset to the value of the loan used to
purchase the asset. This shows the lender that potential losses may be recouped by selling the
asset.
Prime Rate: Determined by the federal funds rate (the overnight rate at which banks lend to one
another) the prime rate is the best rate available to a bank’s most credit-worthy customer.
Principal: The original investment on which interest is generally paid.
Recession: An economic condition defined by a decline in GDP for two or more consecutive
quarters.
Risk Averse: An investors desire to avoid risk; a more conservative approach to investing is
generally upheld by risk averse investors.
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Share: One unit of ownership in a corporation, security, or limited partnership
Stock: A proportional share of ownership of a corporation. A company may offer 100 shares of
stock and if you own 10, you have 10% ownership of the company.
Yield: The annual rate of return for an investment exp9ressed as a percentage.
Accrual Basis: The basis of accounting under which revenues are recorded. when earned and
expenditures are recorded as soon as they result in liabilities for benefits received.
Ad Valorem Tax: A tax based on the value of taxable property. Ad valorem is a Latin term
meaning “according to value.”
Amortization: The gradual reduction of bonded debt according to a specific schedule of payment
times and amounts.
Amortization: The gradual reduction of bonded debt according to a specific schedule of payment
times and amounts.
Arbitrage: With respect to the issuance of municipal bonds, arbitrage usually refers to the
difference between the interest paid on the bonds issued and the interested earned by investing the
bond proceeds in other securities.
Audit: An examination of evidence, including records, facilities, inventories, systems, etc., to
discover or verify desired information.
Balance Sheet: A statement of the financial position of an entity that presents the value of its
assets, liabilities, and equities on a specified date.
Budget: A financial plan, including proposed expenditures and estimated revenues, for a period in
the future, usually for one year.
Callable Bonds: Bonds that are redeemable by the issuer prior to the specified maturity date at the
specified price at or above par.
Capitalization: The process by which a stream of tax liabilities becomes incorporated into the
price of an asset.
Compensation: Payment made to employees in return for services performed. Total compensation
includes salaries, wages, employee benefits (Social Security, employer¬-paid insurance premiums,
disability coverage, and retirement contributions), and other forms of remuneration when these
have a stated value.
Commercial Paper: A form of short-term tax-exempt debt issued by state and local governments
that matures within a short period (less than 365 days) from the date of Issue.
Cost-Benefit Analysis: An analytical technique that compares the costs and benefits of proposed
programs or policy actions.
Deficit: The amount by which expenditures exceed revenues during an accounting period.
Capital Expenditure: Capital expenditures are the funds used to acquire or upgrade a
company's fixed assets, such as expenditures towards property, plant, or equipment (PP&E)
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Expenditure: Expenditure is the spending of money on something, or the money that is spent on
something.
Expenses: An expense or expenditure is an outflow of money to another person or group to pay
for an item or service, or for a category of costs
Cost: A cost is the value of money that has been used up to produce something or deliver a service,
and hence is not available for use anymore
Fiscal Policy: The County’s policies with respect to revenues, expenditures, and debt management
as these relate to county services, programs, and capital investments.
Fiscal Year (FY): A twelve-month period designated as the operating year for accounting and
budgeting purposes in a county. A fiscal year can start on different dates depending upon the
county, including January 1st and July 1st.
Lease-Purchase Agreement: A contractual agreement which is termed “lease,” but is in substance
a purchase contract with payments made over time.
Lease-Purchase Financing: A long-term lease sold publicly to finance capital equipment or real
property acquisitions. A Certificate of Participation is one example.
Municipal Bond: A bond issued by a state or local government
Gross Budget: A total budget amount that includes resources from all funding sources.
Net Budget: Net budgeting is an old form of budgeting, in use when property tax was the only
source of revenues for municipalities.
Operating Budget: An operating budget is a forecast of the revenues and expenses expected for
one or more future periods.
Personal Property Tax: A tax on property that is not real estate, such as cars and boats.
Poverty Line: A fixed level of real income considered enough to provide a minimally adequate
standard of living.
Present Value: The value today of a certain amount of money to be paid or received in the future.
Progressive Tax: A tax with effective rates that is higher for families with higher affluence than
they are for families with lower affluence.
Proportional: A tax system under which an individual’s average tax rate is the same at each level
of income.
Regressive Tax: A tax with effective rates that is lower for families with higher affluence than
they are for families with lower affluence.
Public Finance: The field of economics that analyzes government taxation and spending policies
Resources: Units of input such as workforce, funds, material, equipment, facilities, or other
elements supplied to produce and deliver services required to meet program objectives. Examples
are: librarians (work years), numbers of libraries (facilities), book collections (material). From a
fiscal point of view, resources include revenues, net transfers, and available fund balance.
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Security: A piece of paper that proves ownership of stocks, bonds and other investments.
Sinking Fund: A reserve fund in which money is set aside at regular intervals so that it is sufficient
to retire bonds at or prior to maturity.
Tax: A compulsory payment to a government for the purpose of financing services performed for
the common good.
Value-added Tax (VAT): A percentage tax on value added at each stage of production.
Tax Avoidance: Altering behavior in such a way to reduce your legal tax liability.
Taxable Income: The amount of income subject to tax.
Zero Coupon Bonds: Non-interest bearing bonds sold substantially below par value. The
difference between the discount price and par represents the compound annual interest rate for the
investor.
GDP: Gross domestic product (GDP) is a monetary measure of the market value of all final
goods and services produced in a period (quarterly or yearly) of time
GNP: Gross national product (GNP) is the market value of all the goods and services produced
in one year by labor and property supplied by the citizens of a country.
Inputs: Resources needed to develop and implement projects, programs or policies (e.g. funding
for school education).
Outputs: Products resulting from inputs (e.g. number of teachers). Outputs should facilitate the
meeting of outcomes.
Outcomes: Benefits resulting from outputs. They should correspond to ultimate objectives - the
impact of a policy intervention on the welfare of producers or consumers (e.g. better educated
school students).
Balance of Payment: The balance of payments 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.
Chain Banking: chain banking is a form of bank governance that occurs when a small group of
people control at least three banks, which are independently chartered.
Investment Banking: Investment banking is a specific division of banking related to the creation
of capital for other companies, governments and other entities
Marchant Banking: A merchant bank is a company that deals mostly in international finance,
business loans for companies and underwriting.
Bank rate: A bank rate is the interest rate at which a nation's central bank lends money to domestic
banks, often in the form of very short-term loans.
Bill of Exchange: A bill of exchange is a written order 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.
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SWIFT: The Society for Worldwide Interbank Financial Telecommunication (SWIFT)
provides a network that enables institutions worldwide to send and receive information about
financial transactions in a secure, standardized and reliable environment. SWIFT also
sells software and services to financial institutions, much of it for use on the SWIFT Net Network,
and ISO 9362. Business Identifier Codes (BICs, previously Bank Identifier Codes) are popularly
known as "SWIFT codes".
Profitability: Profitability is the ability of a business to earn a profit.
Opportunity Cost: Opportunity cost refers to a benefit that a person could have received, but gave
up, to take another course of action.
Sunk Cost: A sunk cost is a cost that has already been incurred and thus cannot be recovered.
Just in time: Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency
and decrease waste by receiving goods only as they are needed in the production process, thereby
reducing inventory costs.
Stagflation: A condition of slow economic growth and relatively high unemployment –
economic stagnation – accompanied by rising prices, or inflation, or inflation and a decline in
Gross Domestic Product (GDP).
Indifference Curve: an indifference curve connects points on a graph representing different
quantities of two goods, points between which a consumer is indifferent.
Hedging: A hedge is an investment that protects your finances from a risky situation. Hedging is
done to minimize or offset the chance that your assets will lose value. It also limits your loss to a
known amount if the asset does lose value. It's similar to home insurance.
Difference between Monetary Policy and Fiscal Policy:
BASIS FOR FISCAL POLICY MONETARY POLICY
COMPARISON
Meaning The tool used by the government in The tool used by the central bank
which it uses its tax revenue and to regulate the money supply in the
expenditure policies to affect the economy is known as Monetary
economy is known as Fiscal Policy. Policy.
Administered by Ministry of Finance Central Bank
Nature The fiscal policy changes every year. The change in monetary policy
depends on the economic status of
the nation.
Related to Government Revenue & Expenditure Banks & Credit Control
Focuses on Economic Growth Economic Stability
Policy instruments Tax rates and government spending Interest rates and credit ratios
Political influence Yes No
Financial Assets: A financial asset is a non-physical asset whose value is derived from a
contractual claim, such as bank deposits, bonds, and stocks.
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Difference between Efficiency and Effectiveness:
BASIS FOR EFFICIENCY EFFECTIVENESS
COMPARISON
Meaning The virtue of being The magnitude of nearness of the actual
efficient is known as result with the intended result, is known as
efficiency. effectiveness.
What is it? Work is to be done in a Doing accurate work.
correct manner.
Emphasis on Inputs and Outputs Means and Ends
Time Horizon Short Run Long Run
Approach Introverted Extroverted
Ascertainment Strategy Implementation Strategy Formulation
Orientation Operations Strategies
Crowding out: when government spending fails to increase overall aggregate demand because
higher government spending causes an equivalent fall in private sector spending and investment is
called Crowding out.
Crowding out effect: A situation when increased interest rates lead to a reduction in private
investment spending such that it dampens the initial increase of total investment spending is
called crowding out effect.
Finance: Finance is the art and science of managing money. Finance is defined as the management
of money and includes activities like investing, borrowing, lending, budgeting, saving, and
forecasting.
Business finance: Business finance can broadly be defined as the activity concerned with
planning, raising, controlling, administering of the funds used in the business.
Corporate finance: Corporate finance is concerned with budgeting, financial forecasting, cash
management, credit administration, investment analysis and fund procurement of the business
concern
Finance types: Finance can be classified into two major parts:
Private Finance: includes the Individual, Firms, Business or Corporate Financial activities to meet
the requirements.
Public Finance: concerns with revenue and disbursement of Government such as Central
Government, State Government and Semi-Government Financial matters.
Financial Management: Financial Management deals with procurement of funds and their
effective utilization in the business.
Financial Economics: Financial economics is a branch of economics that analyzes the use and
distribution of resources in markets in which decisions are made under uncertainty
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Scope of Financial management and Economics: Financial management also uses the economic
equations like money value discount factor, economic order quantity etc. Financial economics is
one of the emerging area, which provides immense opportunities to finance, and economical areas
Difference between Financial management and Economics:
Economics Finance
Definition Economics is a social science that studies Finance is the science of
the management of goods and services, managing funds keeping in
including the production and mind the time, cash at hand and
consumption and the factors affecting the risk involved.
them.
Branches Branches of economics include macro Branches of finance include
and micro economics. personal finance, corporate
finance and public finance.
Management Profession economists are hired as Finance is managed by
consultants by private and public sector. individuals in families or by
banks or other institutions.
Related Courses Philosophy of Economics, Laws and Accountancy, Chartered
Economics, Political Economics. Financial Analyst and other
Management Accounting: Managerial accounting is the process of identifying, measuring,

analyzing, interpreting and communicating information for the pursuit of an organization's goals.
Scope of Financial management and Accounting: Accounting records includes the financial
information of the business concern.
Difference between Financial management and Accounting:
BASIS FOR ACCOUNTING FINANCE
COMPARISON
Meaning Accounting is an art of recording and Finance is the science of
reporting of the monetary transactions management of funds of a
of a business. business
Branches Financial Accounting, Management Private Finance, Public Finance,
accounting, Cost accounting, Tax Corporate Finance etc.
Accounting etc.
Career Accounting professionals can become Finance professionals can
accountants, auditors, tax consultant,become an investment banker,
etc. financial analyst, finance
consultant, etc.
Division Accounting is a part of finance. Finance is not a part of
accounting.
Objective To provide information regarding the To study the capital market and
solvency status of the company to the funds of business for making
readers of the financial statement. future strategies.
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Tools Income Statement, Balance Sheet, Cash Risk Analysis, Capital
flow Statement etc. Budgeting, Ratio Analysis,
Leverage, Working Capital
Management etc.
Econometrics: Econometrics is the application of statistical and mathematical theories in

economics for the purpose of testing hypotheses and forecasting future trends.
Scope of Financial management and Mathematics: Economic order quantity, discount factor,
time value of money, present value of money, cost of capital, capital structure theories, dividend
theories, ratio analysis and working capital analysis are used as mathematical and statistical tools
and techniques in the field of financial management.
Scope of Financial management and Marketing: The financial manager or finance department
is responsible to allocate the adequate finance to the marketing department. Hence, marketing and
financial management are interrelated and depends on each other.
Scope of Financial Management and Human Resource: Financial manager should carefully
evaluate the requirement of manpower to each department and allocate the finance to the human
resource department as wages, salary, remuneration, commission, bonus, pension and other
monetary benefits to the human resource department.
Objectives of Financial Management: Objectives of Financial Management may be broadly
divided into two parts such as:
1. Profit maximization
2. Wealth maximization.
Profit maximization: Profit maximization is the traditional and narrow approach, which aims at,
maximizes the profit of the concern.
Wealth maximization: Wealth maximization is known as value maximization or net present
worth maximization.
Wealth maximization is best for business:
 Favorable Arguments for Wealth Maximization
1. Wealth maximization is superior to the profit maximization because the main aim of the
business concern under this concept is to improve the value or wealth of the shareholders.
2. Wealth maximization considers the comparison of the value to cost associated with the
business concern. Total value detected from the total cost incurred for the business
operation. It provides extract value of the business concern.
3. Wealth maximization considers both time and risk of the business concern.
4. Wealth maximization provides efficient allocation of resources.
5. It ensures the economic interest of the society.
 Drawbacks of Profit Maximization

Profit maximization objective consists of certain drawback also:
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1. It is vague: In this objective, profit is not defined precisely or correctly. It creates some
unnecessary opinion regarding earning habits of the business concern.
2. It ignores the time value of money: Profit maximization does not consider the time value
of money or the net present value of the cash inflow. It leads certain differences between
the actual cash inflow and net present cash flow during a particular period.
3. It ignores risk: Profit maximization does not consider risk of the business concern. Risks
may be internal or external which will affect the overall operation of the business concern.
Financial management approach: Financial management approach may be broadly divided into
two major parts
1. Traditional Approach
2. Modern Approach
Traditional Approach: Traditional approach consists of the following important Area:
1. Arrangement of funds from lending body.
2. Arrangement of funds through various financial instruments.
3. Finding out the various sources of funds.
Functions of financial management: Finance manager performs the following major functions:
1. Forecasting Financial Requirements
2. Acquiring Necessary Capital
3. Investment Decision
4. Cash Management
5. Interrelation with Other Departments
Importance of financial management:
1. Financial Planning
2. Acquisition of Funds
3. Proper Use of Funds
4. Financial Decision
5. Improve Profitability
6. Increase the Value of the Firm
7. Promoting Savings
Financial statements: Financial statements are the summary of the accounting process, which,
provides useful information to both internal and external parties.
1. Financial statements generally consist of two important statements:
2. The income statement or profit and loss account.
3. Balance sheet or the position statement.
Income statement: Income statement is also called as profit and loss account, which reflects the
operational position of the firm during a particular period.
Position statement: Position statement is also called as balance sheet, which reflects the financial
position of the firm at the end of the financial year.
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Techniques of financial statement analysis:
1. Comparative Statement Analysis
2. Comparative Income Statement Analysis
3. Comparative Position Statement Analysis
4. Trend Analysis
5. Common Size Analysis
6. Fund Flow Statement
7. Cash Flow Statement
8. Ratio Analysis
Ratio can be classified into various types. Classification from the point of view of financial
management is as follows:
1. Liquidity Ratio
2. Activity Ratio
3. Solvency Ratio
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4. Profitability Ratio
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Long-term financial requirement: Long-term financial requirement means the finance needed
to acquire land and building for business concern, purchase of plant and machinery and other fixed
expenditure. Long-term financial requirement is also called as fixed capital requirements.
Short-term financial requirements: Apart from the capital expenditure of the firms, the firms
should need certain expenditure like procurement of raw materials, payment of wages, day-to-day
expenditures, etc. This kind of expenditure is to meet with the help of short-term financial
requirements which will meet the operational expenditure of the firms. Short-term financial
requirements are popularly known as working capital.
Sources of finance:
1. Based on the Period
Long-term sources of finance include:
1. Equity Shares
2. Preference Shares
3. Debenture
4. Long-term Loans
5. Fixed Deposits
Short-term source of finance includes:
1. Bank Credit
2. Customer Advances
3. Trade Credit
4. Factoring
5. Public Deposits
6. Money Market Instruments
2. Based on Ownership
An ownership source of finance includes
1. Shares capital, earnings
2. Retained earnings
3. Surplus and Profits
Borrowed capital include
1. Debenture
2. Bonds
3. Public deposits
4. Loans from Bank and Financial Institutions.
3. Based on Sources of Generation
Internal source of finance includes
2. Depreciation funds
3. Surplus
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External sources of finance may be including:
1. Share capital
2. Debenture
3. Public deposits
4. Loans from Banks and Financial institutions
4. Based in Mode of Finance
Security finance may be including:
1. Shares capital
2. Debenture
Retained earnings may include
2. Depreciation funds
Loan finance may include
1. Long-term loans from Financial Institutions
2. Short-term loans from Commercial banks.
Difference between Equity and Preference shares:
BASIS FOR EQUITY SHARES PREFERENCE SHARES
COMPARISON
Meaning Equity shares are the ordinary Preference shares are the shares that carry
shares of the company preferential rights on the matters of payment
representing the part of dividend and repayment of capital.
ownership of the shareholder
in the company.
Payment of The dividend is paid after the Priority in payment of dividend over equity
dividend payment of all liabilities. shareholders.
Repayment of In the event of winding up of In the event of winding up of the company,
capital the company, equity shares preference shares are repaid before equity
are repaid at the end. shares.
Rate of dividend Fluctuating Fixed
Redemption No Yes
Voting rights Equity shares carry voting Normally, preference shares do not carry
rights. voting rights. However, in special
circumstances, they get voting rights.
Convertibility Equity shares can never be Preference shares can be converted into
converted. equity shares.
Arrears of Equity shareholders have no Preference shareholders generally get the
Dividend rights to get arrears of the arrears of dividend along with the present
dividend for the previous year's dividend, if not paid in the last
years. previous year, except in the case of non-
cumulative preference shares.
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Difference between Bond and debenture:
BASIS FOR BONDS DEBENTURES
COMPARISON
Meaning A bond is a financial instrument A debt instrument used to raise
showing the indebtedness of the long term finance is known as
issuing body towards its holders. Debentures.
Collateral Yes, bonds are generally secured by Debentures may be secured or
collateral. unsecured.
Interest Rate Low High
Issued by Government Agencies, financial Companies
institutions, corporations, etc.
Payment Accrued Periodical
Owners Bondholders Debenture holders
Risk factor Low High
Priority in repayment First Second
at the time of
liquidation
Difference between debt financing and equity financing:

BASIS FOR DEBT EQUITY
COMPARISON
Meaning Funds owed by the company towards Funds raised by the company by
another party is known as Debt. issuing shares is known as Equity.
What is it? Loan Funds Own Funds
Reflects Obligation Ownership
Term Comparatively short term Long term
Status of holders Lenders Proprietors
Risk Less High
Types Term loan, Debentures, Bonds etc. Shares and Stocks.
Return Interest Dividend
Nature of return Fixed and regular Variable and irregular
Collateral Essential to secure loans, but funds Not required
can be raised otherwise also.
Cash credit: A cash credit is an arrangement by which a bank allows his customer to borrow
money up to certain limit against the security of the commodity.
Overdraft: Overdraft is an arrangement with a bank by which a current account holder is allowed
to withdraw more than the balance to his credit up to a certain limit without any securities.
Capital: The term capital refers to the total investment of the company in terms of money, and
assets.
Types of capital: The capital requirements of the business concern may be classified into two
categories:
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1. Fixed capital
2. Working capital.
Fixed Capital:
Character of Fixed Capital
1. Fixed capital is used to acquire the fixed assets of the business concern.
2. Fixed capital meets the capital expenditure of the business concern.
3. Fixed capital normally consists of long period.
4. Fixed capital expenditure is of nonrecurring nature.
5. Fixed capital can be raised only with the help of long-term sources of finance.
Working Capital:
Working capital is needed to meet the following purpose:
1. Purchase of raw material
2. Payment of wages to workers
3. Payment of day-to-day expenses
4. Maintenance expenditure etc.
Capitalization: Capitalization refers to the process of determining the quantum of funds that a
firm need to run its business.
Capital structure: The term capital structure refers to the relationship between the various long-
term source financing such as equity capital, preference share capital and debt capital.
Financial structure: The term financial structure is different from the capital structure. Financial
structure shows the pattern total financing
Cost of capital: Cost of capital is the rate of return that a firm must earn on its project investments
to maintain its market value and attract funds.
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Difference between financial structures and capital structures:
Leverage: leverage refers to furnish the ability to use fixed cost assets or funds to increase the
return to its shareholders.
Capital sturcture theories:
Average cost of capital: Average cost of capital is the weighted average cost of each component
of capital employed by the company.
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Marginal cost: Marginal cost is the weighted average cost of new finance raised by the company.
It is the additional cost of capital when the company goes for further raising of finance.
Cost of equity capital: Cost of equity capital is the rate at which investors discount the expected
dividends of the firm to determine its share value.
Cost of debt: Cost of debt is the after tax cost of long-term funds through borrowing.
Cost of Perpetual Debt and Redeemable Debt: It is the rate of return which the lenders expect.
The debt carries a certain rate of interest.
Cost of preference share capital: Cost of preference share capital is the annual preference share
dividend by the net proceeds from the sale of preference share.
There are two types of preference shares
1. irredeemable and
2. redeemable.
Cost of retained earnings: Cost of retained earnings is the same as the cost of an equivalent fully
subscripted issue of additional shares, which is measured by the cost of equity capital
Operating Leverage: The leverage associated with investment activities is called as operating
leverage. Operating leverage may be defined as the company’s ability to use fixed operating costs
to magnify the effects of changes in sales on its earnings before interest and taxes.
1. Operating leverage measures the relationship between the sales and revenue of the
company during a particular period.
2. Operating leverage helps to understand the level of fixed cost which is invested in the
operating expenses of business activities.
3. Operating leverage describes the overall position of the fixed operating cost.
Degree of Operating Leverage: The degree of operating leverage may be defined as percentage
change in the profits resulting from a percentage change in the sales. It can be calculated with the
help of the following formula:
Financial leverage: Leverage activities with financing activities is called financial leverage.
Financial leverage is defined as “the ability of a firm to use fixed financial charges to magnify the
effects of changes in EBIT on the earnings per share”.
1. Financial leverage helps to examine the relationship between EBIT and EPS
2. Financial leverage measures the percentage of change in taxable income to the percentage
change in EBIT.
3. Financial leverage locates the correct profitable financial decision regarding capital
structure of the company.
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4. Financial leverage is one of the important devices which is used to measure the fixed cost
proportion with the total capital of the company.
5. If the firm acquires fixed cost funds at a higher cost, then the earnings from those assets,
the earning per share and return on equity capital will decrease.
6. The impact of financial leverage can be understood with the help of the following exercise.
Degree of Financial Leverage: Degree of financial leverage may be defined as the percentage
change in taxable profit as a result of percentage change in earnings before interest and tax (EBIT).
This can be calculated by the following formula:
Difference between operating leverage and financial leverage:
Composite leverage or total leverage/ Combined leverage: When the company uses both
financial and operating leverage to magnification of any change in sales into a larger relative
changes in earning per share. Combined leverage is also called as composite leverage or total
leverage.
Degree of Combined Leverage: The percentage change in a firm’s earning per share (EPS) results
from one percent change in sales. This is also equal to the firm’s degree of operating leverage
(DOL) times its degree of financial leverage (DFL) at a particular level of sales.
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Breakeven analysis: it is used to indicate the level of operations necessary to cover all costs and
to evaluate the profitability associated with various levels of sales also called cost volume analysis.
Operating Breakeven point: is the level of sales necessary to cover all operating costs; the point
at which EBIT=0$
Financial Breakeven point: is the EBIT that is necessary to cover all fixed financial cost at which
EPS=0$
Total Breakeven point: is the level of sales that is necessary to cover all the cost.
Working capital leverage: One of the new models of leverage is working capital leverage which
is used to locate the investment in working capital or current assets in the company.
Working capital leverage measures the sensitivity of return in investment of charges in the level
of current assets.
Business Risk: Business risk is the possibility a company will have lower than anticipated profits
or experience a loss rather than taking a profit.
Financial Risk: Financial risk is the possibility that shareholders will lose money when they invest
in a company that has debt, if the company's cash flow proves inadequate to meet its financial
obligations.
Agency Cost: An agency cost is an economic concept concerning the fee to a "principal" (an
organization, person or group of persons), when the principal chooses or hires an "agent" to act on
its behalf.
Dividend: is defined as “a distribution to shareholders out of profits or reserves available for this
purpose”.
Types of dividend/form of dividend: Dividend may be distributed among the shareholders in the
form of cash or stock. Hence, Dividends are classified into:
1. Cash dividend
2. Stock dividend
3. Bond dividend
4. Property dividend
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Cash Dividend: If the dividend is paid in the form of cash to the shareholders, it is called cash
dividend.
Stock Dividend: Stock dividend is paid in the form of the company stock due to raising of more
finance.
Bond Dividend: Bond dividend is also known as script dividend. If the company does not have
sufficient funds to pay cash dividend, the company promises to pay the shareholder at a future
specific date with the help of issue of bond or notes.
Property Dividend: Property dividends are paid in the form of some assets other than cash. It will
be distributed under the exceptional circumstance.
Types of dividend policy:
1. The dividend policy may be classified under the following types:
2. Regular dividend policy
3. Stable dividend policy
4. Irregular dividend policy
5. No dividend policy.
Regular Dividend Policy: Dividend payable at the usual rate is called as regular dividend policy.
This type of policy is suitable to the small investors, retired persons and others.
Stable Dividend Policy: Stable dividend policy means payment of certain minimum amount of
dividend regularly. This dividend policy consists of the following three important forms:
1. Constant dividend per share
2. Constant payout ratio
3. Stable Taka dividend plus extra dividend.
Irregular Dividend Policy: When the companies are facing constraints of earnings and
unsuccessful business operation, they may follow irregular dividend policy.
No Dividend Policy: Sometimes the company may follow no dividend policy because of its
unfavorable working capital position of the amount required for future growth of the concerns.
Cash Dividend Payment procedure:
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Dividend payouts follow a set procedure as follows:
1. Declaration date
2. Ex-dividend date
3. Holder-of-record date
4. Payment date
1) Declaration Date: Declaration date is the announcement that the company's board of
directors approved the payment of the dividend.
2) Ex-Dividend Date: The ex-dividend date is the date on which investors are cut off from
receiving a dividend. If for example, an investor purchases a stock on the ex-dividend date,
that investor will not receive the dividend. This date is two business days before the holder-
of-record date.
The ex-dividend date is important as, from this date and forward, new stockholders will
not receive the dividend. As a result, the stock price of the company will be reflective of
this. For example, on and after the ex-dividend date, a stock most likely trades at lower
price, as the stock price is adjusted for the dividend that the new holder will not receive.
3) Holder-of-Record Date: The holder-of-record (owner-of-record) date is the date on which

the stockholders who are to receive the dividend are recognized.
Look Out! Remember that stock transactions typically settle in three business days.
Understanding the dates of the dividend payout process can be tricky. We clear up the
confusion in the following article
4) Payment Date: Last is the payment date, the date on which the actual dividend is paid out to
the stockholders of record.
Example of the process of dividend payment
Suppose Newco would like to pay a dividend to its shareholders. The company would proceed as
follows:
1. On Jan 28, the company declares it will pay its regular dividend of $0.30 per share to
holders of record on Feb 27, with payment on Mar 17.
2. The ex-dividend date for the dividend is Feb 23 (usually four days before of the holder-of-
record date). On Feb 23 new buyers do not have a right to the dividend.
3. At the close of business on Feb 27, all holders of Newco's stock are recorded, and those
holders will receive the dividend.
4. On Mar 17, the payment date, Newco mails the dividend checks to the holders of record.
Difference between cost and expenses:
1. A cost can be an expense or an asset or both, while an expense is always part of a cost.
2. A cost includes an unexpired cost (asset or, for example, the net carrying cost of a property)
or an expired cost (expense or, for example, the depreciation expense recognized on the
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property) or both, while an expense is the expired portion of the cost (expense or, for
example, the depreciation expense recognized on the property).
3. A cost is shown or presented either in the balance sheet (asset or, for example, prepaid
insurance) or in the income statement (expense or, for example, insurance expense) or
both, while an expense (for example insurance expense or the expired portion of insurance)
is only presented in the income statement.
4. Costs may or may not be recognized as an expense over several reporting periods, while
an expense is only recognized over a single reporting period.
5. Cost includes cost of goods sold or unsold goods or both, while expense only includes cost
of goods sold.
6. Cost may or may not reduce income or profit, while expense always decreases profit.
7. Costs may or may not reduce income tax, while allowable deductible expenses usually
reduce income tax.
8. Costs are incurred to obtain future economic benefits, either to acquire assets from other
entities in exchange transactions or to add value through operations to assets it already has
(Paragraph 178, FASB Statement of Financial Accounting Concepts). On the other hand,
expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants (F 4.25(b) of the
IFRS Framework).
Examples of costs
1. The cost of property, which includes the net carrying cost of the property and the
accumulated depreciation expense.
2. The cost of insurance, which includes the unexpired (asset) and expired portion (expense)
of the insurance.
3. The cost of product, which includes the cost of unsold goods or inventory (current asset)
and the cost of sold goods or inventory (expense).
4. Salaries and wages to personnel that are directly attributable to the finish products – either
sold (expense) or unsold product (asset).
Examples of expenses
1. The depreciation expense recognized for the reporting period.
2. Insurance expense or the expired portion of the cost of insurance.
3. Cost of goods sold.
4. Salaries and wages to personnel that are directly attributable to the finish products sold.
5. Salaries and wages to administrative personnel.
Capital budgeting: Capital budgeting consists in planning development of available capital for
the purpose of maximizing the long-term profitability of the concern.
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Capital budgeting process:
Difference between risk and uncertainty:

BASIS FOR RISK UNCERTAINTY
COMPARISON
Meaning The probability of winning or Uncertainty implies a situation where
losing something worthy is the future events are not known.
known as risk.
Ascertainment It can be measured It cannot be measured.
Outcome Chances of outcomes are known. The outcome is unknown.
Control Controllable Uncontrollable
Minimization Yes No
Probabilities Assigned Not assigned
Working capital: Working Capital is the amount of funds necessary to cover the cost of operating
the enterprises
Working capital management: Working capital management is an act of planning, organizing
and controlling the components of working capital like cash, bank balance inventory, receivables,
payables, overdraft and short-term loans.
Inventory: The dictionary meaning of the inventory is stock of goods or a list of goods. In
accounting language, inventory means stock of finished goods. In a manufacturing point of view,
inventory includes, raw material, work in process, stores, etc.
Types of inventory: Inventories can be classified into five major categories.
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A. Raw Material: It is basic and important part of inventories. These are goods which
have not yet been committed to production in a manufacturing business concern.
B. Work in Progress: These include those materials which have been committed to
production process but have not yet been completed.
C. Consumables: These are the materials which are needed to smooth running of the
manufacturing process.
D. Finished Goods: These are the final output of the production process of the
business concern. It is ready for consumers.
E. Spares: It is also a part of inventories, which includes small spares and parts
Collection Cost: This cost incurred in collecting the receivables from the customers to whom
credit sales have been made.
Capital Cost: This is the cost on the use of additional capital to support credit sales which
alternatively could have been employed elsewhere.
Administrative Cost: This is an additional administrative cost for maintaining account receivable
in the form of salaries to the staff kept for maintaining accounting records relating to customers,
cost of investigation etc.
Default Cost: Default costs are the over dues that cannot be recovered. Business concern may not
be able to recover the over dues because of the inability of the customers.
Leasing: Lease may be defined as a contractual arrangement in which a party owning an asset
provides the asset for use to another, the right to use the assets to the user over a certain period of
time, for consideration in form of periodic payment, with or without a further payment.
Merchant banking: A merchant banking is one who underwrites corporate securities and advises
clients on issue like corporate mergers. Merchant banking is basically service banking which
provides
1. non-financial services such as issue management, portfolio management, asset
management,
2. underwriting of new issues, to act as registrar, share transfer agents, trustees, provide
leasing,
3. project consultation, foreign credits, etc.
Credit rating: Credit rating is an act of assigning values to credit instruments by estimating or
assessing the solvency, and expressing them through predetermined symbols.
Mutual fund: A mutual fund is an investment vehicle for investors who pool their savings for
investing in diversified portfolio of securities with the aim of attractive yields and appreciation in
their value. Mutual fund is a trust that attracts savings which are then invested in capital markets.
Central Bank’s Administrative Structure:
Deputy
Deputy General Joint Deputy Assistant Data Entry
Governor General Officer Clerk
Governor Manager Director Director Director Operator
Manager
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Number of bank of Bangladesh:
List of banks in Bangladesh
1. Central bank
2. Scheduled Banks
3. State Owned Banks
4. Private Commercial Banks
5. Islamic Commercial Private Banks
6. Foreign Commercial Banks
7. Non-Scheduled Banks
8. Non-Bank Financial Institutions
9. Specialized Financial Institutions (Semi Formal Sector)
Central bank
Bangladesh Bank is the central bank of Bangladesh and the chief regulatory authority in the
banking sector.
Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka
Branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh
Bank with retrospective effect from 16 December 1971.
Scheduled Banks
Secheduled Banks are licensed under the Bank Company Act, 1991 (Amended up to 2013).[1]
1. State Owned Banks
2. Sonali Bank Ltd.
3. Agrani Bank Ltd.
4. Rupali Bank Ltd.
5. Janata Bank Ltd.
6. Bangladesh Development Bank Limited.
7. Basic Bank Limited
8. Bangladesh Krishi Bank
Private Commercial Banks
1. AB Bank Limited
2. Bangladesh Commerce Bank Limited
3. Bank Asia Limited
4. Bengal Bank Limited
5. BRAC Bank Limited
6. City Bank Limited
7. Dhaka Bank Limited
8. Dutch-Bangla Bank Limited
9. Eastern Bank Limited
10. IFIC Bank Limited
11. Jamuna Bank Limited
12. Meghna Bank Limited
13. Mercantile Bank Limited
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14. Midland Bank
15. Modhumoti Bank Limited
16. Mutual Trust Bank Limited
17. National Bank Limited
18. National Credit & Commerce Bank Limited
19. NRB Bank Limited
20. NRB Commercial Bank Limited
21. One Bank Limited
22. Premier Bank Limited
23. Prime Bank Limited
24. Pubali Bank Limited
25. South Bangla Agriculture & Commerce Bank Limited
26. Southeast Bank Limited
27. Standard Bank Limited
28. The Farmers Bank Limited
29. Trust Bank Limited
30. United Commercial Bank Limited
31. Uttara Bank Limited
32. Shimanto Bank Ltd
Islamic Commercial Private Banks
1. Islami Somaz Bank Limited
2. Al-Arafah Islami Bank Limited
3. EXIM Bank Limited
4. First Security Islami Bank Limited
5. ICB Islamic Bank Limited
6. Islami Bank Bangladesh Limited
7. Shahjalal Islami Bank Limited
8. Social Islami Bank Limited
9. Union Bank Limited
Foreign Commercial Banks
1. Bank Al-Falah Limited
2. Citibank N.A
3. Commercial Bank of Ceylon PLC
4. Habib Bank Limited
5. National Bank of Pakistan
6. Standard Chartered Bank
7. State Bank of India
8. Punjab National Bank
9. Woori Bank
10. HSBC
Non-Scheduled Banks
Non-Scheduled Banks are licensed only for specific functions and objectives, and do not offer the
same range of services as scheduled banks.
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1. Ansar VDP Unnayan Bank
2. Karmashangosthan Bank
3. Probashi Kollyan Bank
4. Grameen Bank
5. Jubilee Bank
6. Palli Sanchay Bank
Non-Bank Financial Institutions
1. Investment Corporation of Bangladesh
2. Agrani SME Financing Company Limited
3. Bangladesh Finance and Investment Company Limited
4. Bangladesh Industrial Finance Company Limited
5. Bangladesh Infrastructure Finance Fund Limited
6. Bay Leasing and Investment Limited
7. CAPM Venture Capital and Finance Limited
8. Delta Brac Housing Finance Corporation Limited
9. Far-east Finance & Investment Limited
10. FAS Finance & Investment Limited
11. First Finance Limited
12. GSP Finance Company (Bangladesh) Limited
13. Hajj Finance Company Limited
14. IDLC Finance Limited
15. Industrial and Infrastructure Development Finance Company Limited
16. IPDC Finance Limited
17. Infrastructure Development Company Limited
18. International Leasing and Financial Services Limited
19. Islamic Finance and Investment Limited
20. LankaBangla Finance Limited
21. Meridian Finance and Investment Limited
22. MIDAS Financing Limited
23. National Finance Limited
24. National Housing Finance and Investments Limited
25. People's Leasing and Financial Services Limited
26. Phoenix Finance and Investments Limited
27. Premier Leasing & Finance Limited
28. Prime Finance & Investment Limited
29. Reliance Finance Limited
30. Saudi-Bangladesh Industrial & Agricultural Investment Company Limited
31. SEAF Bangladesh Venture Limited
32. The UAE-Bangladesh Investment Company Limited
33. Union Capital Limited
34. United Finance Limited
35. Uttara Finance and Investments Limited
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Specialized Financial Institutions (Semi Formal Sector)
1. House Building Financial Corporation (HBFC)
2. Palli Karma Sahayak Foundation (PKSF)
Share market terminology
Ask price: The lowest price at which a seller is willing to offer a security of the time; also known
as the ‘offer’. If a person enters a market in order to buy a security, he will usually pay the ask
price.
Bear: A person who expects prices to fall and sells securities hoping to make a profit by
subsequently repurchasing at a lower price.
Bid: The price at which someone is prepared to buy shares.
Brokerage: Charges made by a broker for acting as an agent in the buying and selling of shares.
Bull: A person who buys securities in the expectation that prices will rise and so give him an
opportunity to resell on a profit.
Call option: An option giving the taker the right, but not the obligation, to buy the underlying
shares at a specified price on or before a specified date.
Depreciation: Amounts charged to provide for that part of the cost, or book value of a fixed asset,
which is not recoverable when it is finally put out of use.
Dividend: Distribution of a part of a company’s net profit to shareholders as a reward for investing
in the company. Usually expressed as percentage of par value or as cents per share.
Equity: The general term for ownership in securities value over debit balance.
Growth stock: Stock with good prospects for future expansion, which promises capital gain.
Immediate income prospects may be modest.
Limited liability: The liability of the shareholder in this type of company is limited to the extent
of any unpaid capital on his shares.
Market order: An order to buy or sell a security at the next available price. A buy order is
executed at the lowest price available and a sell order is executed at the highest price available.
All market orders are day orders.
Mutual funds: Type of investment operated by an investment company that raises money from
shareholders and invests it in a portfolio of stocks, bonds, or other securities. These funds offer
investors the advantages of diversification and professional management.
Open price: The price at which a security starts in a trading day.
Portfolio: Investors holding of securities of various types.
Preference shares: Rank above ordinary shares for claims an asset, earnings and dividends but
rank below creditors and debenture holders. These shares usually have a fixed dividend rate.
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Premium: The amount by which a security is quoted or issued above its value. The opposite to
‘discount’.
Security: An instrument that represents an ownership interest in a corporation (stock), a creditor
relationship with a corporation or government body (bond), or rights to ownership through such
investment vehicles as options, rights, and warrants.
Stag: A person who applies for a new issue of securities with the intention of selling immediately
at a profit as opposed to one who invests for long-term holding.
Par value: The par value is stated in the memorandum and written on the share script. The par
value of equity shares is generally Rs. 10 (the most popular denomination) or Rs.100. As per the
SEBI guidelines any company coming with new issues from April 2000 onwards the par value of
their shares should be of Rs.10 denominations.
Book value: The book value of an equity share is
Quite naturally, the book value of an equity share tends to increase as the ratio of reserves and
surplus to the paid-up equity capital increases.
Market value: The market value of an equity share is the price at which it is traded in the market.
This price can be easily established for a company that is listed on the stock market and actively
traded. For a company that is listed on the stock market but traded very infrequently. It is difficult
to obtain a reliable market quotation. For a company that is not listed on the stock market, one can
merely conjecture as to what its market price would be if it were traded.
Some Additional Information of Finance:
Stockholders: An individual, group, or organization that holds one or more shares in a company,
and in whose name the share certificate is issued. Also called shareholder.
Stakeholders: A stakeholder is a party that has an interest in a company and can either affect or
be affected by the business. The primary stakeholders in a typical corporation are its investors,
employees, customers, suppliers, government, trade association, etc.
Treasurer: The firm’s chief financial manager, who manages the firm’s cash, oversees its pension
plans and manages key risks.
Controller: The firm’s chief accountant, who is responsible for the firms accounting activities,
such as corporate accounting, tax management, financial accounting and cost accounting.
Free cash flow: Free cash flow is the cash a company produces through its operations, less the
cost of expenditures on assets. In other words, free cash flow—or FCF—is the cash left over after
a company pays for its operating expenses and capital expenditures, also known as CAPEX.
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Functions of Finance:
 Investment Decisions– This is where the finance manager decides where to put the
company funds. Investment decisions relate to management of working capital, capital
budgeting decisions, management of mergers, buying or leasing of assets. Investment
decisions should create revenue, profits and save costs.
 Financing Decisions– Here a company decides where to raise funds from. They are two
main sources to consider from mainly equity and borrowed. From the two a decision on
the appropriate mix of short and long-term financing should be made. The sources of
financing best at a given time should also be agreed upon.
 Dividend Decisions– These are decisions as to how much, how frequent and in what form
to return cash to owners. A balance between profits retained and the amount paid out as
dividend should be decided here.
 Liquidity Decisions– Liquidity means that a firm has enough money to pay its bills when
they are due and have sufficient cash reserves to meet unforeseen emergencies. This
decision involves management of the current assets so you don’t become insolvent or fail
to make payments.
Goal of The Firm: In finance, the goal of the firm is always described as "maximization
of shareholders' wealth". But in macroeconomics, profit maximization - is always used
as a goal of the firm. It Focus on short term goal to be achieved within a year. It stresses
on the efficient use of capital resources. In order to maximize profit, the financial manager
will implement actions that would result in maximum profits without considering the
consequence of his actions towards the company's future performance.
Drawbacks of Profit Maximization
1. Profit maximization is a short-term concept.

2. Profit maximization does not consider the timing of returns.
3. Profit maximization ignores risk.
Two address these limitations, wealth maximization is considered as the ultimate goal of the firm.
So, how shareholder’s wealth can be maximized?
Shareholder’s wealth can be maximized by actually trying to increase the company's stock price.
As the stock price increases, the value of the firm increases, as well as the shareholders' wealth.
Difference between Finance and Economics:
Finance Economics
Finance means optimization of funds Economics is the study of how the unlimited wants of
in the best possible manner. the people are satisfied through the limited resources.
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Maximization of Wealth. Optimization of scarce resources
Portfolio: A portfolio is a grouping of financial assets such as stocks, bonds, commodities,

currencies and cash equivalents for the purpose of investment.
Risk: A measure of the uncertainty surrounding the return that an investment will earn.
Key Differences Between Risk and Uncertainty:
The difference between risk and uncertainty can be drawn clearly on the following grounds:
1. The risk is defined as the situation of winning or losing something worthy. Uncertainty is
a condition where there is no knowledge about the future events.
2. Risk can be measured and quantified, through theoretical models. Conversely, it is not
possible to measure uncertainty in quantitative terms, as the future events are
unpredictable.
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3. The potential outcomes are known in risk, whereas in the case of uncertainty, the outcomes
are unknown.
4. Risk can be controlled if proper measures are taken to control it. On the other hand,
uncertainty is beyond the control of the person or enterprise, as the future is uncertain.
5. Minimization of risk can be done, by taking necessary precautions. As opposed to the
uncertainty that cannot be minimized.
6. In risk, probabilities are assigned to a set of circumstances which is not possible in case of
uncertainty.
Risk Averse: The attitude toward risk in which investors require an increased return as
compensation for an increase in risk.
Risk Neutral: The attitude toward risk in which investors choose the investment with the higher
return regardless of its risk.
Risk seeking: The attitude toward risk in which investors prefer investments with greater risk even
if they have lower expected return.
Probability: The chance that a given outcome will occur
Probability Distribution: Probability distribution is a table or function that represents the values
of random variables corresponding with probabilities.
Standard Deviation: Standard deviation measures the dispersion of an investment’s return around
the expected value.
Coefficient of Variation: A measure of relative dispersion that is useful in comparing the risks of
assets with differing expected return. It is calculated as standard deviation of return/expected value
of return. A higher coefficient of variation means that an investment has more volatility relative to
its expected return.
Efficient Portfolio: A portfolio that maximizes return for a given level of risk.
Correlation: A statistical measure of relationship between two variables.
Correlation coefficient: A measure of the degree of correlation between two variables.
Diversification: Diversification is a risk management technique that mixes a wide variety of

investments within a portfolio.
Capital Asset Pricing Model: The Capital Asset Pricing Model (CAPM) describes the
relationship between systematic risk and expected return for assets, particularly stocks. CAPM is
widely used throughout finance for pricing risky securities and generating expected returns for
assets given the risk of those assets and cost of capital
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Assumptions of CAPM:
1) Capital market is efficient because security prices reflect all available information
2) Investors are risk averse
3) All investors have the same expectations about expected return and risks of
securities
4) All investor’s decisions are based on a single time period
5) All investors can borrow and lend at a risk free rate of interest
Limitations of CAPM:
1) It is based on unrealistic assumptions

2) It is difficult to test the validity of CAPM
3) Betas do not remain stable over time
Total Risk: The combination of a security’s non-diversifiable risk and diversifiable risk.
Diversifiable risk: Risk that is unique to a certain asset or company. This risk can be eliminated
through diversification.
Non- diversifiable Risk: Risk which is common to an entire class of assets or liabilities. This risk
cannot be eliminated through non- diversifiable risk. It is also known as systematic risk.
Beta coefficient: A relative measure of non-diversifiable risk. An index of the degree of movement
of an asset’s return in response to a change in the market return.
Risk free rate of return: The required rate of return on a risk free asset, typically a 3 month U.S
Treasury Bill.
Security Market Line: The depiction of the capital asset pricing model as a graph that reflects
the required return in the marketplace for each level of non-diversifiable risk.
Capital Market Line: The capital market line (CML), in the capital asset pricing model (CAPM),
depicts the trade-off between risk and return for efficient portfolios. Under CAPM, all investors
will choose a position on the capital market line, in equilibrium, by borrowing or lending at the
risk-free rate, since this maximizes return for a given level of risk.
Difference between CML & SML: The CML represents the risk premiums of efficient portfolio
as a function of portfolio standard deviation. The SML, on the other hand, depicts individual
security risk premium as a function of security risk.
Time Value of Money: The time value of money (TVM) is the concept that money available at
the present time is worth more than the identical sum in the future due to its potential earning
capacity. Money that we have on hand today can be invested to earn a positive rate of return,
producing more money tomorrow. For that reason, a dollar today is worth more than a dollar in
the future.
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Annuity: An annuity is a series of payments made at equal intervals.[1] Examples of annuities are
regular deposits to a savings account, monthly home mortgage payments, monthly insurance
payments and pension payments.
Ordinary Annuity: An ordinary annuity is an annuity whose payment is made at the end of
consecutive periods over a fixed length of time.
Annuity Due: Annuity due is an annuity whose payment is due immediately at the beginning of
each period.
Required rate of return: The required rate of return is the minimum return an investor expects
to achieve by investing in a project.
Required Rate of Return= Risk free rate + Risk premium
The risk free rate compensates for time while the risk premium compensates for risk.
Future Value: The value at a given future time of an amount placed on deposit today and earning
interest at a specified rate.
Compounding: Method of estimating the future value of a present investment by applying

compound interest rates.
Simple interest: Interest earned only on the original principal amount invested.
Compound Interest: Interest that is earned on a given deposit and has become part of the principal
at the end of a specified period.
Present value: The current dollar value of a future amount.
Discounting: The process of finding present value from future value.
Sinking Fund: A sinking fund is a fund established by an economic entity by setting aside revenue
over a period of time to fund a future capital expense, or repayment of a long-term debt.
Perpetuity: A perpetuity is a type of annuity that lasts forever, into perpetuity. The stream of cash
flows continues for an infinite amount of time.
Nominal Interest Rate: Nominal interest rate refers to the interest rate before taking inflation into
account. It can also be defined as the annual rate of interest charged by a lender or promised by a
borrower.
Effective Annual Rate: The annual rate of interest actually earned or paid on an investment, loan
or other financial product due to the result of compounding over a given time period.
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Discount Rate: the discount rate refers to the interest rate used in discounted cash flow (DCF)
analysis to determine the present value of future cash flows. Discount rate; also called the hurdle
rate, cost of capital, or required rate of return; is the expected rate of return for an investment.
Prime Rate: The prime rate is the interest rate that commercial banks charge their most
creditworthy customers. Generally, a bank's best customers consist of large corporations.
Loan Amortization: The determination of the equal periodic loan payments necessary to provide
a lender with a specified interest return and to repay the loan principal over a specified period.
Share: A share is defined as the smallest division of the share capital of the company which
represents the proportion of ownership of the shareholders in the company. The shares are the
bridge between the shareholders and the company. The shares of a company can be issued in three
ways:
1. Par
2. Premium
3. Discount
Stock: A stock (also known as "shares" and "equity) is a type of security that signifies ownership
in a corporation and represents a claim on part of the corporation's assets and earnings. The stock
is a mere collection of the shares of a member of a company in a lump sum. When the shares of a
member are converted into one fund is known as stock. A public company limited by shares can
convert its fully paid-up shares into stock.
Warrant: A warrant entitles the purchaser to buy a fixed number of ordinary shares at a particular
price during a specified time period.
Difference Between Stock and share:
Basis for Comparison Share Stock

Meaning The capital of a company, is The conversion of the fully paid
divided into small units, which up shares of a member into a
are commonly known as shares. single fund is known as stock.
Is it possible for a Yes No
company to make
original issue?
Paid up value Shares can be partly or fully paid Stock can only be fully paid up.
up.
Definite number A share have a definite number A stock does not have such
known as distinctive number. number.
Fractional transfer Not possible. Possible
Nominal value Yes No
Denomination Equal amounts Unequal amounts
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Common Stock: Common stock, in some countries called ordinary shares, represents a residual
interest in the earnings and assets of a corporation. Whereas distributions to bonds or preferred
stock are ordinarily fixed, dividends paid on common stock are set at the time of payment by the
directors.
Preferred Stock: A preferred stock is a class of ownership in a corporation that has a higher claim
on its assets and earnings than common stock. Preferred shares generally have a dividend that must
be paid out before dividends to common shareholders, and the shares usually do not carry voting
rights.
Difference between common stock and preferred stock:
Basis for Common Stock Preferred Stock

Comparison
Meaning Common stock refers to the Preferred stock, represents that part of
ordinary stock, representing part company's capital that carry preferential
ownership and confers voting right, to be paid, when the company
rights to the person holding it. goes bankrupt or wound up.
Growth High Low
potential
Rights Differential Rights Preferential Rights
Return on Not guaranteed. Guaranteed and that too, at a fixed rate.
capital
Participation Entitles a person to participate and Does not entitles a person to participate
in elections vote in the company's meeting. and vote in the company's meeting.
Repayment Payment to common stockholders Preferred stockholders are paid before
priority are made at the end. common stockholders.
Redemption Cannot be redeemed Can be redeemed
Is it preferred stock debt or equity: Preferred stock is hybrid security that has the characteristics
of both debt and equity. Similar to fixed-income securities, preferred stock pays preferred
shareholders a fixed, periodic preferred dividend. Like equity, preferred stock represents an
ownership investment in that it does not require the return of the principal. In general, preferred
stock is riskier than debt but less risky than equity. The preferred dividend is paid out only after
interest has been first paid to regular debt holders but before common equity holders can retain
any of their profits.
Flotation Costs: Flotation costs are incurred by a publicly traded company when it issues new
securities, and includes expenses such as underwriting fees, legal fees and registration fees.
Bond: A bond is typically a loan that is secured by a specific physical asset.
Debenture: A debenture is a type of debt instrument that is not secured by physical assets or
collateral. Debentures are backed only by the general creditworthiness and reputation of the
issuer.
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Difference between bond and debenture:
Basis for Comparison Bonds Debentures

Meaning A bond is a financial instrument A debt instrument used to
showing the indebtedness of the raise long term finance is
issuing body towards its holders. known as Debentures.
Collateral Yes, bonds are generally secured by Debentures may be secured or
collateral. unsecured.
Interest Rate Low High
Issued by Government Agencies, financial Companies
institutions, corporations, etc.
Risk factor Low High
Priority in repayment First Second
at the time of
liquidation
Bond Indenture: A bond indenture is a legal document or contract between the bond issuer and
the bondholder that records the obligations of the bond issuer and benefits owed to the bondholder.
Zero coupon bond: Bond paying no interest that is sold at a deep discount from their face value.
Call provision: A call provision is a provision on a bond or other fixed-income instrument that
allows the original issuer to repurchase and retire the bonds.
Junk bond: junk bond is a fixed-income instrument that refers to a high-yield or noninvestment-
grade bond. Junk bonds carry a credit rating of BB or lower by Standard & Poor's (S&P).
Trade Credit: Trade credit is the credit extended by one trader to another when the goods and
services are bought on credit. Trade credit facilitates the purchase of supplies without immediate
payment. Trade credit is commonly used by business organizations as a source of short-term
financing.
The three major items of credit terms – due date, cash discount, and cash discount rate are usuall
stated as follows:
X/Y, net Z
X= cash discount
Y=discount date
Z= due date
Line of Credit: An agreement permitting a firm to borrow up to some specified maximum amount
from a bank.
Revolving Credit Agreement: A legal commitment in which a bank promises to lend a customer
up to a specified maximum amount during a specified period.
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Compensating Balance: A compensating balance is a minimum balance that must be
maintained in a bank account, used to offset the cost incurred by a bank to set up a business loan.
Commercial Paper: Short-term unsecured promissory notes issued by corporations with high
credit rating. The interest yield of commercial paper is-
[Face Value – Sale Price/Sale price] * (365/ Days to maturity)
Factoring: Factoring is a financial transaction and a type of debtor finance in which a business
sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business
will sometimes factor its receivable assets to meet its present and immediate cash needs.
General stages and relevant processes of listing with DSE through IPO
1. Decision to go Public
• Appoint Issue Manager from Bangladesh Securities and Exchange Commission
(BSEC) approved Issue Managers
• Decide method of IPO with assistance from Issue Manager – Fixed Price or Book
Building>
• In case of IPO under Book Building - Get Accounts audited by BSEC approved Panel
of Auditors
• Initiate process for credit rating - Mandatory for Bank, Insurance, NBFI and any issue
with offer price at premium
• Develop a Company Website with publications of Company Financials
2. Prepare Draft Prospectus

• Assist Issue Manager in preparing Draft Prospectus in accordance with Securities and
Exchange Commission (Public Issue) Rules, 2006
• Appoint Bankers to Issue, Underwriters etc.
• In case of IPO under Fixed Price Method fix a offer price and justify the same in
accordance with rules mentioned in the Securities and Exchange Commission
(Public Issue) Rules, 2006
• In case of IPO under Book Building Method prepare a Information Memorandum
with Financials for Road Show and Indicative Price Determination in accordance
with rules of the Securities and Exchange Commission (Public Issue) Rules, 2006
 Host road shows with all Eligible Institutional Investors

(EII)
 Collect offers from all EIIs
 Finalize a indicative price
3. Apply to BSEC for Public Offer
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• Apply to BSEC for IPO under Securities and Exchange Commission (Public Issue)
Rules, 2006. Submit copies of Draft prospectus to Exchanges simultaneously.
• Fulfill any discrepancy identified by BSEC in Draft Prospectus and respond to any
queries made by the Exchanges.
• Assist Issue Manager in updating draft prospectus to comply with or fulfill
deficiencies identified by BSEC and any issues identified by the Exchanges.
4. IPO Approved
• Print Abridged version of the approved and vetted prospectus in widely circulated
Bengali and English News Papers
• Print Final Prospectus
• Publish Soft Copy of vetted Prospectus on Company Website within 3 working days
• Apply for Listing with Exchanges in accordance with regulations of the Listing
Regulations of the Exchanges
• Appoint a Post Issue Manager
5. Bidding by EIIs (for Book Building only)

• Apply to Exchanges for holding bidding with BSEC approved Indicative price
• On completion of bidding collect allotment list for EII and cut-off price for
subscription from the Exchanges
6. Subscription, Lottery
• Start subscription for IPO through designated Bankers to the Issue
• Assist Issue Manager and Post Issue Manager in completing formalities related to
subscription, lottery, refund and crediting shares to successful allottees
• After Subscription period submit subscription status to BSEC and the Exchanges
where the issuer wishes to get listed
• In case of over subscription hold lottery
7. Allotment and Refund

• Process all subscriptions and lottery results
• Distribute Allotment letter and Refund Warrants
• After distribution of allotment letters/refund warrants submit a compliance report
before the Commission and the Exchanges
8. Listing Approval by the Exchanges

• After distribution of allotment letters/refund warrants and compliance of other
requirements, the application for listing by the Issuer is considered complete and is
placed for listing approval
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• Listing is approved or rejected
9. Credit Share/Units
• If listing is approved by any of the Exchanges, issuer apply to CDBL for crediting
tradable shares/units as per allotment
10. Commencement of Trading of scrips on the Bourse(s)

• Once shares/units are credited and confirmed by CDBL, commencement date for
trading is announced by the respective Exchange
Net Working Capital: Net working capital defined as current assets minus current liabilities.
Cash Conversion Cycle: The time necessary to convert cash into inventory, inventory into
receivables and receivables into cash.
Operating Cycle: The time from the beginning of the production process to collection of cash
from the sale of the finished product.
Economic order quantity: The Economic Order Quantity (EOQ) is the number of units that a
company should add to inventory with each order to minimize the total costs of inventory—such
as holding costs, order costs, and shortage costs.
Just in Time strategy: Just-in-time (JIT) inventory management, also known as lean
manufacturing and sometimes referred to as the Toyota production system (TPS), is an inventory
strategy that manufacturers use to increase efficiency. The process involves ordering and receiving
inventory for production and customer sales only as it is needed to produce goods, and not before.
Lease: A lease is a contractual agreement between two parties for the purpose of using an asset in
return for periodic payment by the user.
Operating lease: An operating lease is a short term, cancelable lease.
Financial lease: A financial lease is a long term but non-cancelable lease.
Leveraged lease: A lease involving a third party that lends the lessor part of the funds necessary
to purchase the asset to be leased
.
Sale and lease-back lease: In this arrangement the firm sells an asset it currently owns then leases
the same asset back from the buyer.
Term loan: Term loan are loans with a maturity of more than one year.
What are A, B, N , Z and G Category Companies?
A-Category Companies: Companies which are regular in holding the Annual General Meetings
and have declared dividend at the rate of 10 percent or more in the last English calendar year.
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B-Category Companies: Companies which are regular in holding the Annual General Meetings
but have failed to declare dividend at least at the rate of 10 percent in the last English calendar
year.
N-Category Companies: Newly listed companies except green-field companies which shall be
transferred to other categories in accordance with their first dividend declaration and respective
compliance after listing of their shares.
Z-Category Companies: Companies which have failed to hold the Annual General Meeting
when due or have failed to declare any dividend based on annual performance or which are not
in operation continuously for more than six months or whose accumulated loss after
adjustment of revenue reserve, if any, exceeds its paid up capital.
G- Category Companies: G- Category Companies are basically Greenfield companies. The

companies, which are not, started its operation but call subscribers to invest to their Company.
They basically call for capital in primary market.
Course Code: F-107

Course Title: Business Statistics – I
Statistics is the science of collecting, organizing, presenting, analyzing and interpreting data to
assist in making more effective decisions.
There are two types of statistics

1. Descriptive statistics are procedures used to organize and summarize data.
2. Inferential statistics involve taking a sample from a population and making estimates
about a population based on the sample results
Population The entire set of individuals or objects of interest or the measurements obtained from
all individuals or objects of interest.
Sample is a portion or part of the population of interest.
There are two types of variables

1. Qualitative Variable, when the characteristic being studied is nonnumeric.
2. Quantitative variable, when the characteristic being studied is numerically.
There are four level of measurement

1. With the nominal level the data are sorted into categories with no particular order to
the categories.
2. The ordinal level of measurement presumes that one classification is ranked higher than
another
3. The interval level of measurement has the ranking characteristic of the ordinal level of
measurement plus the characteristic that the distance between values of a constant size.
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4. The ratio level of measurement has all the characteristics of the interval level plus there
is a zero point and the ratio of two values is meaningful.
A frequency table is a grouping of qualitative data into mutually exclusive classes showing the
number of observations in each class.
A relative frequency table shows the fraction of the number of frequencies in each class.
A bar chart is a graphic representation of a frequency table.
A pie chart shows the proportion each distinct class represents of the total number of frequencies.
A frequency distribution is a grouping of data into mutually exclusive classes showing the
number of observation in each class.
A relative frequency distribution shows the percent of observations in each class.
Parameter is a characteristic of a population.
Statistic is a characteristic of sample
Median is The midpoint of the values after they have been ordered from the smallest to the largest
or the largest to the smallest.
Mode is the value of the observation that appears most frequently.
Mean deviation is the arithmetic mean of the absolute value of the deviations from the arithmetic
mean.
Variance is the arithmetic mean of the squared deviations from the mean.
Standard deviation the square root of the variance.
A Dot plots groups the data as little as possible and we do not lose the identity of an individual
observation.
Stem and leaf display is a statistical technique to present a set of data. Each numerical value is
divided into two parts. The leading digit(s) becomes the stem and the trailing digit the leaf. The
stems are located along the vertical axis and the leaf values are stacked against each other along
the horizontal axis.
Box plots is a graphical display based on quartiles that helps us picture a set of data.
In a symmetric set of observations, the mean and median are equal and the data values are evenly
spread around these values.
Positive Skewness of a set of values has a single peak and the values extend much further to the
right of the peak than to the left of the peak.
Negative Skewness has a single peak of but the observations extend to the further to the left in the
negative direction than to the right.
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Contingency Table is a table used to classify observations according to two identifiable
characteristics.
The coefficient of skewness is a measure of the symmetry of a distribution.
A scatter diagram is a graphic tool to portray the relationship between two variables.
Probability is a value between zero and one inclusive describing the relative possibility an event
will occur.
Experiment is a process that leads to the occurrence of one and only one of several possible
observations.
Outcome is a particular result of an experiment.
Event is a collection of one or more outcomes of an experiment.
Mutually exclusive is the occurrence of one event means that none of the other events can occur
at the same time.
Collectively exhaustive is at least one of the events must occur when an experiment is conducted.
Empirical probability is the probability of an event happening is the fraction of the time similar
events happened in the past.
Subjective concept of probability is the likelihood of a particular event happening that is assigned
by an individual based on whatever information is available.
Joint probability is a probability that measures the likelihood two or more events will happen
concurrently.
Independence is the occurrence of one event has no effect on the probability of the occurrence of
another event.
Conditional probability is the probability of a particular event occurring given that another event
has occurred.
Prior probability is the initial probability based on the present level of information.
Posterior probability is a revised probability based on additional information.
A Permutation is an arrangement in which the order of the objects selected from a specific pool
of objects is important.
A Combination is an arrangement in which the order of the objects selected from a specific pool
of objects is not important.
Hypothesis is a statement about a population parameter subject to verification.
Hypothesis testing is a procedure based on sample evidence and probability theory to determine
whether the hypothesis is a reasonable statement.
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Null hypothesis is a statement about the value of a population parameter developed for the purpose
of testing numerical evidence.
Alternate hypothesis is a statement that is accepted if the sample data provide sufficient evidence
that the null hypothesis is false.
Level of significant is the probability of rejecting the null hypothesis when it is true.
Type I error is rejecting the null hypothesis, H0 when it is true.
Type II error is accepting the null hypothesis when it is false.
Test statistic is a value determined from sample information used to determine whether to reject
the null hypothesis.
Critical value is the dividing point between the region where the null hypothesis is rejected and
the region where it is not rejected.
P-value is the probability of observing a sample value as extreme as or more extreme than the
value observed given that null hypothesis is true.
Total variation is the sum of the squared differences between each observation and the overall
mean.
Treatment variation is the sum of the squared differences between each treatment mean and the
grand or overall mean.
Random variation is the sum of the squared differences between each observation and its
treatment mean.
Blocking variable is a second treatment variable that when included in the ANOVA analysis will
have the effect of reducing the SSE term.
Correlation analysis is a group of techniques to measure the association between two variables.
Dependent variable is the variable that is being predicted or estimated. It is scaled on the Y axis.
Independent variable is the variable that provides the basis for estimation. It is the predictor
variable. It is scaled on X axis.
Coefficient of variation is a measure of the strength of the linear relationship between two
variables.
Coefficient of determination is the proportion of the total variation in the dependent variable Y
that is explained or accounted for, by the variation in the independent variable.
Regression equation is an equation that expresses the linear relationship between two variables.
Least square principle is determining a regression equation by minimizing the sum of the squares
of the vertical distances between the actual Y values and the predicted values of Y.
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Standard error of estimate is a measure of the dispersion or scatter of the observed values around
the line of regression.
Index Number is a number that expresses the relative change in price, quantity, or value compared
to a base period.
Course Code: F- 109

Course Title: Principles of Management
Management: A set of activities (including planning, and decision making, organizing, leading
and controlling) directed at an organization’s resources (human, financial, physical and
information) with the aim of achieving organizational goals in an efficient and effective manner.
Efficient: Efficient means using resources wisely and in cost effective way.
Effective: Effective means making the right decision and successfully implementing them.
Manager: A manager is someone whose primary responsibility is to carry out the management
process.
Planning: Planning means setting an organizations goals and deciding how best to achieve them.
Decision Making: Part of the planning process that involves selecting a course of action from a
set of alternatives.
Organizing: Determining how activities and resources are grouped.
Leading: The set of processes to get members of the organizations to work together to further the
interests of the organizations.
Controlling: Monitoring organizational progress toward goal attainment.
Communication Skill: The manger abilities both to effectively convey ideas and information to
others and to effectively receive ideas and information from others.
Decision making skill: The managers ability to correctly recognize and define problems and
opportunities and to then select an appropriate course of action to solve problems and capitalize
on opportunities.
Theory X: A pessimistic and negative view workers consistent with the scientific management.
Theory Y: A positive view of workers represents the assumptions that human relations advocates
make.
Scientific management: Concerned with improving the performance of individual workers.
Synergy: Two or more subsystems working together to produce more than the total of what they
might produce alone.
Competitor: An organization that compete with other organizations resources.
Customer: Whoever pays money to acquire an organizations products or services.
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Supplier: An organization that provides resources to other organizations.
Strategic Partners: An organization working together with one or more other organizations in a
joint venture or similar arrangements.
Regulators: A unit that has the potential to control legislate or otherwise influence the
organization’s policies and practices.
Owner: Whoever can claim property rights to an organization.
Board of Directors: Governing body elected by a corporation’s stockholders and charged with
overseeing the general management of the firm to ensure that it is being run in a way that best
serves the stockholders interests.
Uncertainty: Unpredictability created by environmental change and complexity.
Five competitor forces: The threat of new entrants, competitive rivalry, the threat of substitute
products, the power of buyers, and the power of suppliers.
Ethics: An individual believes about whether a behavior, action or decision is right or wrong.
Managerial ethics: Standards of behavior that guide individual mangers in their work.
Code of ethics: A formal, written statement of the values and ethical standards that guide a firm’s
actions.
Social Responsibility: The set of obligations an organization has to protect and enhance the
societal context in which it functions.
Regulations: Government’s attempts to influence business by establishing laws and rules that
dictate what businesses can or can’t do.
Lobbying: The use of person or groups to formally represent a company or group of companies
before political bodies to influence the Government.
Domestic Business: A business that acquires all of its resources and sells all of its products or
services within a single country.
International Business: A business that is based primarily in a single country but acquires some
meaningful shares of its resources or revenues from other countries.
Multinational Business: A business that has worldwide market place from which it buys raw
materials, borrows money and manufactures its products and to which it subsequently sell its
products.
Exporting: Making the products in the firms’ domestic marketplace and selling it another country
can involve both merchandise and services.
Importing: Bringing goods, services or capital into the home country from abroad.
Licensing: It is an arrangement whereby a firm allows another company to use it brand name,
trademark, technology, patent, copyright or other assets.
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Joint venture: A special type of strategic alliance in which the partners share in the ownership of
an operation on an equity basis.
Direct Investment: When a firm headquartered in one country builds or purchases operating
facilities or subsidiaries in a foreign country.
European Union: The first and most important international market system.
Pacific Asia: A market system located in Southeast Asia.
GATT: A trade agreement intended to promote international trade by reducing trade barriers and
making it easier for all nations to compete in international markets.
WTO: An organization, which currently includes 140+ member nations and 32 observer countries,
that requires members to open their markets to international trade and follow WTO rules.
Tariff: A tax collection on goods shipped across national boundaries.
Quota: A limit on the number or value of goods that can be traded.
Mission: A statement of an organizational purpose.
Strategic goal: A goal set by and for top management of the organization.
Tactical goal: A goal set by and for the middle managers of the organizations.
Operational goal: A goal set by and for the lower level managers of the organizations.
Optimizing: Balancing and recognizing possible conflicts among goals.
Strategic plan: A general plan outlining decisions of resources allocation, priorities and action
steps necessary to reach strategic goals.
Tactical plan: A plan aimed at achieving tactical goals and developed to implement part of a
strategic plan.
Operational plan: Focuses on carrying out tactical plans to achieve operational goals.
Crisis management: The set of procedures the organization uses in the event of disaster or other
unexpected calamity.
Policy: A standing plan that specifies the organization’s general response to a designated problem
or situation.
Strategy: A comprehensive plan for accomplishing an organizations goal.
Strategic management: A comprehensive and ongoing management process aimed at formulating
and implementing effective strategies a way of approaching business opportunities and challenges.
Organizational Strength: A skill or capability that enables an organization to conceive of and
implement its strategies.
Organizational Weaknesses: A skill or capability that does not enable an organization to choose
and implement strategies that support its mission.
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Organizational Opportunities: An area in the environment that if exploited, may generate higher
performance.
Organizational threat: An area in the environment that increases the difficulty of an
organization’s achieving high performance.
Product life cycle: A model that portrays how sales volume for products changes over the life of
products.
1. Introduction
2. Growth
3. Maturity
4. Decline
Diversification: The number of different businesses that an organization is engaged in and the
extent to which these businesses are related to one another.
Single product strategy: A strategy in which an organization manufactures just one product or
service and sell it in a single geographic market.
BCG Matrix: A method of evaluating businesses relative to the growth rate of their market and
the organization’s share of the market.
Global Strategy: International strategy in which a company views the world as a single
marketplace and has as its primary goal the creation of standardized goods and services that will
address the need of customers worldwide.
Decision making conditions:
1. Certainty
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2. Risk
3. Uncertainty
Certainty: A condition in which the decision maker knows with reasonable certainty what the
alternatives are and what conditions are associated with each alternative.
Risk: A condition in which the availability of each alternative and its potential payoffs and costs
are all associated with probability estimates.
Uncertainty: A condition in which the decision maker does not know all the alternatives.
Job Design: The determination of an individual’s work related responsibilities.
Job Specialization: The degree to which the overall task of the organization is broken down and
divided into smaller component parts.
Job rotation: An alternative to job specialization that involves systematically moving employees
from one job to another.
Job enlargements: An alternative to job specialization that involves giving the employee more
tasks to perform.
Job enrichment: An alternative to job specialization that involves increasing both the number of
tasks and the control the worker has over the job.
Work team: An alternative to specialization that allows an entire group to design the work system
it will use to perform an interrelated set of tasks.
Departmentalization: The process of grouping jobs according to some logical arrangements.
1. Functional
2. Product
3. Customer
4. Location
Chain of Command: A clear and distinct line of authority among the positions in an organization.
Span of management: The number of people who report to a particular manager.
Authority: Power that has been legitimized by the organization.
Delegation: The process by which a manager assigns a portion of his/her workload to others.
Decentralization: The process of systematically delegating power and authority throughout the
organization to middle and lower level managers.
Centralization: The process of systematically retaining power and authority in the hands of higher
level manager.
Coordination: The process of linking the activities of the various departments of the organization.
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Course Code:201
Financial Accounting - II
Company: Company is an artificial person created by law having separated entity with a perpetual
succession and common seal.
Public Company: A public company is a company that has issued securities through an initial
public offering and trades its stock on at least one stock exchange or over the counter market.
Private Company: A private Company is a firm held under private ownership. Private companies
may issue stock and have shareholders but their shares do not trade on public exchanges and are
not issued through an initial public offering.
Prospectus: A pamphlet that discloses relevant financial data on the firm and provisions
applicable to the securities.
Statutory Books: Statutory books are also known as the statutory records, company register or
company books. They are the documents that a company must legally keep a record of the
important legal and statutory aspects of the company.
Shares: A unit of ownership that represents an equal proportion of a company’s capital. Its entitles
its holder to an equal claim on the company’s profits and an equal obligation for the company’s
debt and losses.
Stocks: Stocks represent partial ownership in the corporations that issued them.
Book Building: Large investors communicate their interest in purchasing shares of the IPO to the
underwriters, these indications of interest are called a book and the process of polling potential
investors is called book building.
Right Issue: A right issue or right offer is a dividend of subscription rights to buy additional
securities in a company made to the company’s existing security holders.
Debenture: Unsecured long term bonds are called debenture.
Underwriting: The process of evaluating a borrower’s loan request in terms of potential

profitability and risk is referred to as underwriting.
Amalgamation: It is used when two or more companies are carrying on similar business go into
liquidation and a new company is formed to take over their business.
Insurance: Insurance is a form of contract or agreement under which one party agrees in return of
a consideration to pay an agreed amount of money to another party to make good for loss, damages,
injury to something of value in which the insured has a pecuniary interest as a result of some
uncertain event.
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Cash Flow statement: A cash flow statement is also known as statement of cash flow which is a
financial statement that shows how changes in balance sheet accounts and income affect cash and
cash equivalents.
Classification of cash flow:
a. Cash flows from operating activities

b. Cash flows from investing activities
c. Cash flows from financial activities.
Course Code: F-202

Course Title: Microeconomics
Economics: Economics is the social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity and the incentives that influence
and reconcile those choices.
Scarcity: A fundamental fact dominates our lives: We want more than we can get. Our inability
to get everything we want is called scarcity. Scarcity is universal. It confronts all living things.
Economics has two parts:
1. Microeconomics
2. Macroeconomics
Microeconomics: Microeconomics is the study of the choices that individuals and businesses
make, the way these choices interact in markets, and the influence of governments. Some examples
of microeconomic questions are: Why are people downloading more movies? How would a tax on
e-commerce affect e bay?
Macroeconomics: Macroeconomics is the study of the performance of the national economy and
the global economy. Some examples of macroeconomic questions are: Why is the U.S.
unemployment rate so high? Can the Federal Reserve make our economy expand by cutting
interest rates?
Goods: Goods are physical objects such as cell phones and automobiles.
Services: Services are tasks performed for people such as cellphone service and auto-repair service.
Goods and services are produced by using productive resources that economists call factors of
production. Factors of production are grouped into four categories:
1. Land
2. Labor
3. Capital
4. Entrepreneurship
Land: The “gifts of nature” that we use to produce goods and services are called land.
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Labor: The work time and work effort that people devote to producing goods and services is called
labor.
Capital: The tools, instruments, machines, buildings, and other constructions that businesses use
to produce goods and services are called capital.
Entrepreneurship: The human resource that organizes labor, land, and capital is called
entrepreneurship.
Self-Interest: A choice is in your self-interest if you think that choice is the best one available for
you.
Social Interest: A choice is in the social interest if it leads to an outcome that is the best for
society as a whole. The social interest has two dimensions: efficiency and equity (or fairness).
Efficiency: Efficiency is achieved when the available resources are used to produce goods and
Services at the lowest possible cost and in the quantities that give the greatest possible value or
benefit.
Tradeoff: A tradeoff is an exchange—giving up one thing to get something else.
A rational choice: A rational choice is one that compares costs and benefits and achieves the
greatest benefit over cost for the person making the choice.
The benefit of something is the gain or pleasure that it brings and is determined by preferences—
by what a person likes and dislikes and the intensity of those feelings.
Opportunity cost: The opportunity cost of something is the highest valued alternative that must
be given up to get it.
Marginal benefit: The benefit that arises from an increase in an activity is called marginal
benefit. For example, your marginal benefit from one more night of study before a test is the boost
it gives to your grade. Your marginal benefit doesn’t include the grade you’re already achieving
without that extra night of work.
Marginal cost: The opportunity cost of an increase in an activity is called marginal cost. For you,
the marginal cost of studying one more night is the cost of not spending that night on your favorite
leisure activity.
To make your decisions, you compare marginal benefit and marginal cost. If the marginal
benefit from an extra night of study exceeds its marginal cost, you study the extra night. If the
marginal cost exceeds the marginal benefit, you don’t study the extra night.
Positive Statements: A positive statement is about what is. It says what is currently believed about
the way the world operates. A positive statement might be right or wrong, but we can test it by
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checking it against the facts. “Our planet is warming because of the amount of coal that we’re
burning” is a positive statement. We can test whether it is right or wrong.
Normative Statements: A normative statement is about what ought to be. It depends on values
and cannot be tested. Policy goals are normative statements. For example, “We ought to cut our
use of coal by 50 percent” is a normative policy statement. You may agree or disagree with it, but
you can’t test it. It doesn’t assert a fact that can be checked.
Scatter diagram: Scatter diagram is a graph that plots the value of one variable against the value
of another variable for a number of different values of each variable.
Production possibilities frontier: The production possibilities frontier (PPF ) is the boundary
between those combinations of goods and services that can be produced and those that cannot.
Comparative advantage: A person has a comparative advantage in an activity if that person

can perform the activity at a lower opportunity cost than anyone else.
Absolute advantage: A person who is more productive than others has an absolute advantage.
Market: A market is any arrangement that enables buyers and sellers to get information and to
do business with each other.
Money: Money is any commodity or token that is generally acceptable as a means of payment.
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property rights: The social arrangements that govern the ownership, use, and disposal of anything
that people value are called property rights.
Real property: Real property includes land and buildings—the things we call property in ordinary
speech—and durable goods such as plant and equipment.
Financial property: Financial property includes stocks and bonds and money in the bank.
Intellectual property: Intellectual property is the intangible product of creative effort.
Competitive market: Competitive market a market that has many buyers and many sellers, so no
single buyer or seller Can influence the price.
Demand: If you demand something, then you
1. Want it,
2. Can afford it, and
3. Plan to buy it.
Wants: Wants are the unlimited desires or wishes that people have for goods and services.
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Quantity demanded: The quantity demanded of a good or service is the amount that consumers
plan to buy during a given time period at a particular price.
law of demand: The law of demand states Other things remaining the same, the higher the price
of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is
the quantity demanded.
Why does a higher price reduce the quantity demanded? For two reasons:
1. Substitution effect
2. Income effect
Substitution Effect: When the price of a good rises, other things remaining the same, its relative
price— its opportunity cost—rises. Although each good is unique, it has substitutes—other goods
that can be used in its place.
Income Effect: When a price rises, other things remaining the same, the price rises relative to
income.
Demand curve: A demand curve shows the relationship between the quantity demanded of a
good and its price when all other influences on consumers’ planned purchases remain the same.
Demand schedule: A demand schedule lists the quantities demanded at each price when all the
other influences on consumers’ planned purchases remain the same.
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Change in demand: When any factor that influences buying plans changes, other than the price
of the good, there is a change in demand.
Normal good: A normal good is one for which demand increases as income increases.
Inferior good: An inferior good is one for which demand decreases as income increases.
Supply: If a firm supplies a good or service, the firm
1. Has the resources and technology to produce it,

2. Can profit from producing it, and
3. Plans to produce it and sell it.
Quantity supplied: The quantity supplied of a good or service is the amount that producers plan
to sell during a given Time period at a particular price
The law of supply states: Other things remaining the same, the higher the price of a good, the
greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity
supplied.
Supply: The term supply refers to the entire relationship between the price of a good and the
quantity supplied of it.
supply curve: A supply curve shows the relationship between the quantity supplied of a good
and its price when all other influences on producers’ planned sales remain the same.
Supply schedule: A supply schedule lists the quantities supplied at each price when all the other
influences on Producers’ planned sales remain the same.
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Change in supply: When any factor that influences selling plans other than the price of the good
changes, there is a change in supply. Six main factors bring changes in supply. They are changes
in:
1. The prices of factors of production
2. The prices of related goods produced
3. Expected future prices
4. The number of suppliers
5. Technology
6. The state of nature
Equilibrium: Equilibrium in a market occurs when the price balances buying plans and selling
plans.
Equilibrium price: The equilibrium price is the price at which the quantity demanded equals the
quantity supplied.
Equilibrium quantity: The equilibrium quantity is the quantity bought and sold at the
equilibrium price. A market moves toward its equilibrium because-
1. Price regulates buying and selling plans.

2. Price adjusts when plans don’t match.
**When supply increases, the price falls and the quantity increases. **
**When supply decreases, the price rises and the quantity decreases. **
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Market Equilibrium:
1. At the equilibrium price, the quantity demanded equals the quantity supplied.
2. At any price above the equilibrium price, there is a surplus and the price falls.
3. At any price below the equilibrium price, there is a shortage and the price rises.
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Price Elasticity of Demand: The price elasticity of demand is a units-free measure of the
responsiveness of the quantity demanded of a good to a change in its price when all other
influences on buying plans remain the same.
Perfectly inelastic demand: If the quantity demanded remains constant when the price changes,
then the price elasticity of demand is zero and the good is said to have a perfectly inelastic
demand.
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Unit elastic demand: If the percentage change in the quantity demanded equals the percentage
change in the price, then the price elasticity equals 1 and the good is said to have a unit elastic
demand.
Inelastic demand: The price elasticity of demand is between zero and 1 and the good is said to
have an inelastic demand.
Total Revenue and Elasticity:
1. If demand is elastic, a 1 percent price cut increases the quantity sold by more than 1
percent and total revenue increases.
2. If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1
percent and total revenue decreases.
3. If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent
and total revenue does not change
Cross elasticity of demand: The cross elasticity of demand is a measure of the responsiveness
of the demand for a good to a change in the price of a substitute or complement, other things
remaining the same.
The cross elasticity of demand can be positive or negative. It is positive for a substitute and
negative for a complement.
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Income Elasticity of Demand: Income elasticity of demand, which is a measure of the
responsiveness of the demand for a good or service to a change in income, other things remaining
the same.
Income elasticities of demand can be positive or negative and they fall into three interesting ranges:
■ Greater than 1 (normal good, income elastic)

■ Positive and less than 1 (normal good, income inelastic)
■ Negative (inferior good)
Elasticity of supply: The elasticity of supply measures the responsiveness of the quantity
supplied to a change in the price of a good when all other influences on selling plans remain the
same.
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The Factors That Influence the Elasticity of Supply: The elasticity of supply of a good depends
on
1. Resource substitution possibilities

2. Time frame for the supply decision
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Consumer surplus: Consumer surplus is the excess of the benefit received from a good over the
amount paid for it. We can calculate consumer surplus as the marginal benefit (or value) of a good
minus its price, summed over the quantity bought.
Producer surplus: Producer surplus is the excess of the amount received from the sale of a good
or service over the cost of producing it. It is calculated as the price received minus the marginal
cost (or minimum supply-price), summed over the quantity sold.
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The Invisible Hand: Writing in his Wealth of Nations in 1776, Adam Smith was the first to
suggest that competitive markets send resources to the uses in which they have the highest value.
Smith believed that each participant in a competitive market is “led by an invisible hand to promote
an end [the efficient use of, resources which was no part of his intention.” You can see the invisible
hand at work in the cartoon and in the world today.
Market Failure: Markets do not always achieve an efficient outcome. We call a situation in which
a market delivers an inefficient outcome one of market failure. Market failure can occur because
too little of an item is produced (underproduction) or too much is produced (overproduction).
Sources of Market Failure: Obstacles to efficiency that bring market failure and create
deadweight losses are
1. Price and quantity regulations

2. Taxes and subsidies
3. Externalities
4. Public goods and common resources
5. Monopoly
6. High transactions costs
Deadweight loss: Deadweight loss is the decrease in total surplus that results from an inefficient
level of production.
Tax incidence: Tax incidence is the division of the burden of a tax between buyers and sellers.
The division of the tax between buyers and sellers depends in part on the elasticity of demand.
There are two extreme cases:
1. Perfectly inelastic demand—buyers pay.

2. Perfectly elastic demand—sellers pay.
The division of the tax between buyers and sellers also depends, in part, on the elasticity of supply.
Again, there are two extreme cases:
1. Perfectly inelastic supply—sellers pay.

2. Perfectly elastic supply—buyers pay.
Subsidy: A subsidy is a payment made by the government to a producer.
Imports: The goods and services that we buy from other countries are our imports; and
Exports: The goods and services that we sell to people in other countries are our exports.
Tariff|: A tariff is a tax on a good that is imposed by the importing country when an imported
good crosses its international boundary.
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Import quota: An import quota is a restriction that limits the maximum quantity of a good that
may be imported in a given period. Firm in the United States can obtain the goods and services
that it sells in any of four Ways:
1. Hire American labor and produce in America.

2. Hire foreign labor and produce in other countries.
3. Buy finished goods, components, or services from other firms in the United States.
4. Buy finished goods, components, or services from other firms in other countries.
Activities 3 and 4 are outsourcing, and activities 2 and 4 are offshoring. Activity 4 is offshore
outsourcing.
Budget line: A budget line marks the boundary between those combinations of goods and services
that a household can afford to buy and those that it cannot afford.
Utility: Utility as the benefit or satisfaction that a person gets from the consumption of goods and
services.
Total utility: A person gets from the consumption of all the different goods and services is called
total utility.
Marginal utility: Marginal utility as the change in total utility that results from a one-unit
increase in the quantity of a good consumed.
Diminishing marginal utility: The tendency for marginal utility to decrease as the consumption
of a good increases is so general and universal that we give it the status of a principle—the
principle of diminishing marginal utility.
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Consumer equilibrium: A consumer equilibrium is a situation in which a consumer has
allocated all of his or her available income in the way that maximizes his or her total utility, given
the prices of goods and services.
Marginal utility per dollar: Marginal utility per dollar is the marginal utility from a good that
results from spending one more dollar on it.
Real income: A household’s real income is its income expressed as a quantity of goods that the
household Can afford to buy.
Relative price: A relative price is the price of one good divided by the price of another good.
A Change in Income: A change in money income changes real income but does not change the
relative price.
Indifference curve: An indifference curve is a line that shows combinations of goods among
which a consumer is indifferent.
Marginal rate of substitution: The marginal rate of substitution (MRS) is the rate at which a
person will give up good y (the good measured on the y-axis) to get an additional unit of good x
(the good measured on the x-axis) while remaining indifferent (remaining on the same indifference
curve).
A diminishing marginal rate of substitution: It is a general tendency for a person to be willing

to give up less of good y to get one more unit of good x, while at the same time remaining
indifferent as the quantity of x increases.
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Accounting Profit vs Economic Profit:
1. Accounting profit is the real profit/realized by a firm during an accounting year whereas
Economic profit refers to the abnormal profit i.e. gains in excess of what is required to
cover the expenses. This includes opportunity cost.
2. Accounting profit is normally more than Economic profit since economic profit can
involve multiple categories of income and expenses accompanied by relevant assumptions
as well.
3. The aspects included in the calculation of accounting profits are Leased assets, Non-cash
adjustments/Depreciation, Allowances & Provisions and capitalization of Development
Costs. However, the calculation of Economic profits shall include: Opportunity
costs, Residual value, Inflation level changes, Rate of taxation and Interest rates on Cash
flows
4. Accounting profit can be referred as the revenue obtained post meeting all economic costs
and Economic profit is obtained when revenue exceeds the opportunity cost.
5. The accountant shall consider accounting profit as they will consider production costs and
its impact on profitability. Accounting profit vs economic profit was considered themselves
as production costs. In contrast, when an economist describes costs, Accounting profit vs
economic profit are interested in how the company has decided to implement any strategy.
It will also analyze how those strategies can have an impact on the firm and the economy.
Economic depreciation: Economic depreciation is the fall in the market value of a firm’s capital
over a given period.
Technological efficiency: Technological efficiency occurs when the firm produces a given output
by using the least amount of inputs.
Economic efficiency: Economic efficiency occurs when the firm produces a given output at the
least cost.
Command system: A command system is a method of organizing production that uses a

managerial hierarchy.
Incentive system: An incentive system is a method of organizing production that uses a market-
like mechanism inside the firm.
Proprietorship: A proprietorship is a firm with a single owner—a proprietor—who has unlimited

liability.
Unlimited liability: Unlimited liability is the legal responsibility for all the debts of a firm up to an
amount equal to the entire wealth of the owner.
Partnership: A partnership is a firm with two or more owners who have unlimited liability.
Corporation: A corporation is a firm owned by one or more limited liability stockholders.
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Limited liability: Limited liability means that the owners have legal liability only for the value of
their initial investment.
Economists identify four market types:
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
Perfect competition: Perfect competition arises when there are many firms, each selling an
identical product, many buyers, and no restrictions on the entry of new firms into the industry.
Monopolistic competition: Monopolistic competition is a market structure in which a large

number of firms compete by making similar but slightly different products.
Product differentiation: Making a product slightly different from the product of a competing firm
is called product differentiation.
Oligopoly: Oligopoly is a market structure in which a small number of firms compete.
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Monopoly: Monopoly arises when there is one firm, which produces a good or service that has
no close substitutes and in which the firm is protected by a barrier preventing the entry of new
firms.
Economies of scope: Economies of scope when it uses specialized (and often expensive)
resources to produce a range of goods and services. For example, Toshiba uses its designers and
specialized equipment to make the hard drive for the ipod. But it makes many different types of
hard drives and other related products. As a result, Toshiba produces the ipod hard drive at a lower
cost than a firm making only the ipod hard drive could achieve.
Total cost: A firm’s total cost (TC) is the cost of all the factors of production it uses. We separate
total cost into total fixed cost and total variable cost.
Total fixed cost: Total fixed cost (TFC) is the cost of the firm’s fixed factors.
Total variable cost: Total variable cost (TVC) is the cost of the firm’s variable factors.
Marginal cost: A firm’s marginal cost is the increase in total cost that results from a one-unit
increase in output
Average fixed cost: Average fixed cost (AFC) is total fixed cost per unit of output.
Average variable cost: Average variable cost (AVC) is total variable cost per unit of output.
Average total cost: Average total cost (ATC) is total cost per unit of output.
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Minimum Efficient Scale: A firm’s minimum efficient scale is the smallest output at which long-
run average cost reaches its lowest level.
Perfect competition is a market in which
1. Many firms sell identical products to many buyers.

2. There are no restrictions on entry into the market.
3. Established firms have no advantage over new ones.
4. Sellers and buyers are well informed about prices.
Price taker: A price taker is a firm that cannot influence the market price because its production
is an insignificant part of the total market.
Total revenue: A firm’s total revenue equals the price of its output multiplied by the number of
units of output sold
(price × quantity).
Marginal revenue: Marginal revenue is the change in total revenue that results from a one-unit
increase in
The quantity sold. Marginal revenue is calculated by dividing the change in total revenue by the
change in the quantity sold.
shutdown point: A firm’s shutdown point is the price and quantity at which it is indifferent
between Producing and shutting down. The shutdown point occurs at the price and the quantity at
which average variable cost is a minimum. At the shutdown point, the firm is minimizing its loss
and its loss equals total fixed cost.
External economies: External economies are factors beyond the control of an individual firm
that lower the firm’s costs as the market output increases.
External diseconomies: External diseconomies are factors outside the control of a firm that raise
the firm’s costs as The market output increases.
Monopoly: A monopoly is a market with a single firm that produces a good or service for which
no close substitute exists and that is protected by a barrier that prevents other firms from selling
that good or service.
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How Monopoly Arises: Monopoly arises for two key reasons:
1. No close substitute
2. Barrier to entry
There are two monopoly situations that create two pricing strategies:
1. Single price
2. Price discrimination
Single-price monopoly: A single-price monopoly is a firm that must sell each unit of its output
for the same price to all its customers.
Price discrimination: When a firm practices price discrimination, it sells different units of a
good or service for different prices.
Perfect price discrimination: Perfect price discrimination occurs if a firm is able to sell each
unit of output for the highest price anyone is willing to pay for it.
Social interest theory: The social interest theory is that the political and regulatory process
relentlessly seeks out inefficiency and introduces regulation that eliminates deadweight loss and
allocates resources efficiently.
Capture theory: The capture theory is that regulation serves the self-interest of the producer,
who captures the regulator and maximizes economic profit.
Price cap regulation: A price cap regulation is a price ceiling—a rule that specifies the highest
price the firm is permitted to set.
Monopolistic competition: Monopolistic competition is a market structure in which
1. A large number of firms compete.

2. Each firm produces a differentiated product.
3. Firms compete on product quality, price, and Marketing.
4. Firms are free to enter and exit the industry.
Markup: A firm’s markup is the amount by which price exceeds marginal cost.
Oligopoly is a market structure in which
1. Natural or legal barriers prevent the entry of new Firms.

2. A small number of firms compete.
Duopoly—an oligopoly market with two firms.
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Game theory: Game theory is a set of tools for studying strategic behavior—behavior that takes
into account the expected behavior of others and the recognition of mutual interdependence.
All games share four common features:
1. Rules
2. Strategies
3. Payoffs
4. Outcome
Collusive agreement: A collusive agreement is an agreement between two (or more) producers
to form a cartel to restrict output, raise the price, and increase profits.
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Public choice: A public choice is a decision that has consequences for many people and perhaps
for an entire society.
Government failure: Government failure is a situation in which government actions lead to

inefficiency—to either Under provision or overprovision
Excludable: Excludable A good is excludable if it is possible to prevent someone from enjoying

its benefits.
Nonexcludable: A good is nonexcludable if it is impossible (or extremely costly) to prevent

anyone from benefiting from it.
Rival: A good is rival if one person’s use of it decreases the quantity available for someone else.
Nonrival: A good is nonrival if one person’s use of it does not decrease the quantity available for
someone else.
Private good: A private good is both rival and excludable. A can of Coke and a fish on East Point
Seafood’s farm are examples of private goods.
Public good: A public good is both nonrival and nonexcludable. A public good simultaneously
benefits Everyone, and no one can be excluded from its benefits. National defense is the best
example of a public good.
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Mixed good: Mixed good is a private good the production or consumption of which creates an
externality.
Externality: An externality is a cost (external cost) or a benefit (external benefit) that arises from
the production or consumption of a private good and that falls on someone other than its producer
or consumer.
Negative externality: A negative externality imposes a cost and a positive externality provides
a benefit.
Marginal private benefit: Marginal private benefit (MB) is the benefit that the consumer of a
good or service receives from an additional unit of it.
Marginal external benefit: A marginal external benefit is the benefit from an additional unit of
a good or service that people other than its consumer enjoy.
Marginal social benefit: Marginal social benefit (MSB) is the marginal benefit enjoyed by
society—by the consumer of a good or service (marginal private benefit) and by others (the
marginal external benefit).
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Property rights: Property rights are legally established titles to the ownership, use, and disposal
of factors of production and goods and services that are enforceable in the courts.
Transactions costs: Transactions costs are the opportunity costs of conducting a transaction.
Course Code: F-207

Course Title: Business Statistics -II
Statistics: statistics is that branch of knowledge that deals with the collection, organization,
classification, presentation, summarization, analysis, and interpretation of statistical data in any
field of inquiry.
Population: Population is the totality or collection of all objects or individuals on which
observations are taken on the basis of some characteristics of the objects in any field of inquiry.
Sample: A sample is a part of a population that is taken and considered for study.
Census: If the relevant or information from each and every unit if the targeted population under
enquiry is collected it is called census.
Sampling Frame: A sampling frame is the complete list of all sampling units of targeted
population.
Sampling: Sampling is defined as the total process involving in collection of sample from a target
population for a particular study.
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Sampling error: The error due to drawing inference about the population on the basis of a sample
is termed as sampling error.
Standard error: The positive square root of the variance of a statistic is known as the standard
error of the statistic.
Data: A set of observations obtained from a particular enquiry is called data.
Parameter: Any numerical value describing a characteristic of a population is called a parameter.
Statistic: Any numerical value describing a characteristic of a sample is called a Statistic.
Discrete variable: A variable, which can take, only isolated or countable finite or infinite number
of values is called a discrete variable.
Continuous variable: A variable, which can take infinitely many values in a certain range, is
called a continuous variable.
Primary data: Primary data are those data which are collected by the investigator himself or by
any research institution for the purpose of some specific study.
Secondary data: when an investigator uses data which have already been collected by others, such
data are called Secondary data.
Hypothesis testing: The process that enables a decision maker to draw an inference about
population characteristic by analyzing the difference between the value obtained from sample and
the hypothesized value of parameter is called hypothesis testing.
Hypothesis: Any statement about any phenomenon is termed as hypothesis.
Null Hypothesis: Null hypothesis is the hypothesis which is tested for possible rejection under the
assumption that it is true. Null hypothesis is denoted by 𝐻0 .
Alternative Hypothesis: The hypothesis, which is true if the null hypothesis is false. Alternative
hypothesis is denoted by 𝐻𝐴 .
Type I error: The error of rejecting the null hypothesis when it is in fact true is called type I error.
Type II error: The error of accepting the null hypothesis when it is in fact false is called type II
error.
Level of significance: The probability of committing a type I error is called the level of
significance.
Power of a test: The complement of the probability of the type II error is called the power of a
test.
Test Statistic: The statistic, which is used to provide evidence about the rejection or acceptance
of null hypothesis, is called test statistic.
Critical Region: The set of possible values of the test statistic, which provides evidence to
contradict with null hypothesis and lead to the rejection of null hypothesis is called critical region.
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Acceptance Region: The set of values of the test statistic, which provides evidence to agree with
null hypothesis and lead to the acceptance of null hypothesis is called acceptance region.
Correlation: The statistical tool that helps to study the relationship between two or more than two
variables is called correlation.
Covariance: Co variation or relationship between two variables is measured by covariance.
Regression analysis: The general process of predicting the value of dependent variable y on the
basis of known value of the independent variable x is known as the regression analysis.
Correlation vs. Regression:
Correlation Regression
It measures the direction and strength of linear It measures the effect of independent variable
relationship between two variables. on dependent variable.
Dependent variable: The variable whose value is influenced or is to be predicted is called

dependent variable.
Independent variable: The variable, which influences the values or is to use for prediction, is
called independent variable.
Index Number: Index number is a pure number which measures the relative change of price or
quantity or value of a commodity or a group of commodities of a particular year called current
year with respect to some standard year called base year.
Time series: A time series is a set of numerical measurements on a time dependent variable of
interest arranged over a regular interval of time.
Seasonal variation: By seasonal variation we mean a periodic movement that repeats itself with
remarkable similarity at a regular interval of time, the period being no longer than one year.
Estimator: An estimator is a sample statistic used to estimate a population parameter.
Estimate: An estimate is a specific observed numerical value of a statistic used to estimate a
parameter.
Point estimate: A Point estimate is a single number that is used to estimate an unknown population
parameter.
Interval estimate: An interval estimate is a range of values is used to estimate an unknown
population parameter.
Course Code: F-208

Course Title: Macroeconomics
Open Economy: (Export and Import exists)
Close Economy: (Export and Import doesn’t exist)
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Objectives of Macroeconomics:
 GDP Growth (Increase)
 Inflation (Stable)
 Unemployment (Decrease)
Stagflation: (Stagnation + Inflation)
** Monetary policy is taken by Central Bank to control inflation.
** Fiscal Policy is taken by government as a part of tax and expenditure decisions.
Supply-side Policy
Circular Flow of Macroeconomics:
Markets:
 Goods Markets
 Labor Markets
 Money Markets
Business Cycle:
 Recession
 Boom
Expansionary Fiscal Policy: It is taken in Recession period by increasing govt. expenditure and
decreasing tax.
Contractionary Fiscal Policy: It is taken in Boom period by decreasing govt. expenditure and
increasing tax.
Tools used by Central Bank to control the quantity of money in the economy:
 Open Market Operation:
 When CB wants to decrease the money supply, it sells bonds to its consumer.
 When CB wants to increase the money supply, it buys bonds from its consumer.
 Reserve Requirement Ratio:
 When CB wants to decrease the money supply, it increases the RR.
 When CB wants to increase the money supply, it decreases the RR.
 Discount Rate: When Commercial Bank takes loan from CB, then the rate which is
received by CB is called discount rate.
 When CB wants to decrease the money supply, it increases the DR.
 When CB wants to increase the money supply, it decreases the DR.
Money Supply (Increase); Inflation Rate (Increase)
Money Supply (Decrease); Inflation Rate (Decrease)
GDP (Gross Domestic Product): It is the standard measure of the output of an economy and sums
up the total value of all goods and services produced by the residents of a nation during a specified
period.
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GDP = C+I+G+X-M
Consumption:
 Durable Goods
 Non-Durable Goods
 Services
Investment:
 Business Fixed Investment
 Residential Investment
 Inventory Investment
Govt. Expenditure:
Govt. Purchase goods and services (Transfer Payments is not included because it is free for all.)
GNP (Gross National Product):
It is the measures of the incomes of residents of a country including income they receive from
abroad but subtracting similar payments made to these abroad.
GNP = GDP + factor payments from abroad – factor payment to abroad
NNP (Net National Product) = GNP – Depreciation
NI (National Income) = NNP – Indirect Business Tax (VAT)
PI (Personal Income) = NI – Corporate Profits – Social Insurance Contribution – Net Interest +
Dividends + Govt. Transfers to Ind. + Personal Internal Income
Disposable Income = PI – Income Tax
Green GDP = GDP – Environmental Degradation
Potential GDP/ Highest GDP: Potential GDP is an economy's maximum, ideal production
with high employment across all sectors and maintaining currency and product price stability.
GDP Measurement Approaches:
 Expenditure Approach
 Income Approach
 Final Goods and Services Approach
Nominal GDP: Nominal GDP is GDP evaluated at current market prices. Therefore, nominal
GDP will include all of the changes in market prices that have occurred during the current year
due to inflation or deflation.
Real GDP: Real gross domestic product (real GDP for short) is a macroeconomic measure of
the value of economic output adjusted for price changes (i.e. inflation or deflation).
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GDP Deflator: the GDP deflator (implicit price deflator) is a measure of the level of prices of
all new, domestically produced, final goods and services in an economy in a year.
GDP Deflator vs CPI:
1. The first difference is that the GDP deflator measures the prices of all goods and services
produced, whereas the CPI or RPI measures the prices of only the goods and services
bought by consumers. Thus, an increase in the price of goods bought by firms or the
government will show up in the GDP deflator but not in the CPI or RPI.
2. The second difference is that the GDP deflator includes only those goods produced
domestically. Imported goods are not part of GDP and do not show up in the GDP deflator.
For example, an increase in the price of Toyota made in Japan and sold in the U.K. affects
the CPI or RPI, because the Toyota is bought by consumers in the U.K., but it does not
affect the GDP deflator.
3. The third difference concerns how the two measures aggregate the many prices in the
economy. The CPI or RPI assigns fixed weights to the prices of different goods, whereas
the GDP deflator assigns changing weights. In other words, the CPI or RPI is computed
using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to
change over time as the composition of GDP changes. To see how this works, consider an
economy that produces and consumes only apples and oranges.
Employed:
Any person 16 years old or older who works for paying, either for someone else or in his or her
own business for 1 hour or more hours per week.
Who works without pay for 15 or more hours per week in a family enterprise, or
Who has a job but has been temporarily absent, with or without pay due to illness, bad weather,
vacation, labor management dispute or personal reasons.
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Unemployed:
A person 16 years old or older who is not working, is available for work.
Efforts for finding job but still have no work.
Labor Force = Employed + Unemployed
Not in Labor Force = Population – Labor Force
Unemployment Rate = (Unemployed / Labor Force) × 100
Labor Force Participation Rate = (Labor Force / Total Population) × 100
Types of Unemployment:
 Seasonal Unemployment: Farmer (Unemployed at certain times of the year)
 Frictional Unemployment: Time between two jobs of an individual
 Structural Unemployment: Job is available but there is a serious mismatch between
companies need and what workers can offer.
 Cyclical Unemployment: Peak, Trough
 Discouraged Unemployment
Okun’s Law: Okun's law pertains to the relationship between the U.S. economy's unemployment
rate and its gross national product (GNP). It states that when unemployment falls by 1%, GNP
rises by 3%. However, the law only holds true for the U.S. economy and only applies when the
unemployment rate is between 3% and 7.5%
Circular Flow of Dollars:
MPC = Marginal Propensity to Consume
MPS = Marginal Propensity to Save
Money: An asset that can be used as a store of value, medium of exchange and unit of account.
Types of Money:
 Commodity Money
 Fiat Money/ Token Money
 Government Standard Money
Measures of Money Supply:

 Transaction Money (M1): Currency held outside banks + Demand Deposits +Travelers’
Check + Other Checkable Deposits.
 Broad Money (M2): M1 + Savings Account + Money Market Account + Other Near
Money (Small Time Deposit)
 High Powered Money (M3): M2 + Large Denomination Saving Accounts + Institutional
Money Accounts + Repurchase + Eurodollar
Total Money Supply = (1/RR) × BB
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Course Code: F-210
Course Title: Insurance and Risk Management
Risk Management: In the financial world, risk management is the process of identification,
analysis and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk
management occurs when an investor or fund manager analyzes and attempts to quantify the
potential for losses in an investment and then takes the appropriate action (or inaction) given his
investment objectives and risk tolerance.
What is Insurance?
Insurance is a contract, represented by a policy, in which an individual or entity receives financial
protection or reimbursement against losses from an insurance company. The company pools
clients' risks to make payments more affordable for the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or her property, or from liability for damage or injury
caused to a third party.
Insurable Interest
An insurable interest is a stake in the value of an entity or event for which a person or entity
purchases an insurance policy to mitigate the risk of loss. Insurable interest is a basic requirement
for issuing an insurance policy that makes the entity or event legal, valid and protected against
intentionally harmful acts.
What is Indemnity
Indemnity is compensation for damages or loss, and in the legal sense, it may also refer to an
exemption from liability for damages. The concept of indemnity is based on a contractual
agreement made between two parties, in which one party agrees to pay for potential losses or
damages caused by the other party.
Subrogation
Subrogation literally refers to the act of one person or party standing in the place of another person
or party. Subrogation in the insurance sector, especially among auto insurance policies, occurs
when the insurance carrier takes on the financial burden of the insured as the result of an injury or
accident payment and seeks repayment from the at-fault party.
Contribution
The principle holding that two or more insurers each liable for a covered loss should participate in
the payment of that loss. Having paid its share of a loss, an insurer may be entitled to equitable
contribution—a legal right to recover part of the payment from another insure whose policy was
also applicable
Utmost Good Faith
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In the insurance market, the principle of utmost good faith requires the applicant to disclose all
relevant personal information, such as previous health problems. Likewise, the insurance agent
must reveal critical details about the contract and its terms.
Proximate Cause
Proximate Cause is an important principle of insurance, which helps in deciding how the loss or
damage happen and whether it is the result of an insured peril or not. The important point to
consider here is that proximate cause is the only nearest cause and not the remote cause.
Reinsurance
Reinsurance occurs when multiple insurance companies share risk by purchasing insurance
policies from other insurers to limit the total loss the original insurer would experience in case of
disaster.
Insurance Pricing
Insurance pricing, is the determination of rates charged by insurance companies. The benefit of
rate making is to ensure insurance companies are setting fair and adequate premiums given the
competitive nature.
Insurance in Bangladesh
Insurance sector in Bangladesh emerged after independence with 2 nationalized insurance
companies- 1 Life & 1 General; and 1 foreign insurance company. In mid 80s, private sector
insurance companies started to enter in the industry and it got expanded. Now days, 62 companies
are operating under Insurance Act 2010. Out of them-
 18 are Life Insurance Companies including 1 foreign company and 1 is state-owned
company,
 44 General Insurance Companies including 1 state-owned company.
Insurance companies in Bangladesh provide following services:
1. Life insurance,
2. General Insurance,
3. Reinsurance,
4. Micro-insurance,
5. Takaful or Islami insurance.
What is Fire Insurance
Fire insurance is property insurance covering damage and losses caused by fire. The purchase of
fire insurance in addition to homeowner’s or property insurance helps to cover the cost of
replacement, repair, or reconstruction of property, above the limit set by the property insurance
policy. Fire insurance policies typically contain general exclusions, such as war, nuclear risks, and
similar perils.
Marine insurance
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Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport by which
the property is transferred, acquired, or held between the points of origin and the final destination
Course Code: F-301

Course Title: Organization behavior
Organization behavior: Study and application of knowledge about how people –as individuals
and groups-act within organizations.
Goals: Concrete formulations of achievements that the organization aims for within set periods of
time.
Structure: Leaders task orientation that, at the extreme, ignores personal issues and emotions of
employees.
Individual different: Idea that each person is different from all others and that these differences
usually are substantial rather than meaningless.
Mutual interest: Idea that people needs organizations and organizations need people, which give
them a super ordinate goal of joint interest to bring them together.
Ethics: Ethics is the use of moral principles and values to affect the behavior of individuals and
organizations with regard to choices between what is right and wrong.
Autocratic model: Managerial view that power and formal authority are necessary to control
employee behavior.
Autocratic leaders: people who centralize power and decision – making authority in themselves.
Custodial model: Managerial view that security needs are dominate among employees.
Supportive model: Managerial view that leaders should support employees in their attempts to
grow in their jobs and to perform them well.
Collegial model: Man agent view that teamwork is the way to build employee responsibility.
System model: Managerial view that employees are concerned about finding meaning at work;
having a work context infused with integrity, trust and a sense of community and receiving care
and compassion from managers.
Leadership: Process of encourage and helping others to work enthusiastically toward achieving
objectives.
Participation leader: Leaders who decentralize authority by consulting with followers.
Consultative leaders: Manager who approach one or more employees and task for inputs prior to
making a decision.
Managerial grid: Framework of management styles based on the dimensions of concern for
people and concern for production.
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Contingency model of leadership: Model which states that the most appropriate leadership style
depends on the favorableness of the situation, especially in relation to leader member relations,
task structure, and position power.
Task leader: Person who helps the group accomplishes its objectives and stay on target.
Task structure: Degree to which one specific method is required to do the job.
Path goal leader ship: Model that states that the leader’s job is to create a work environment
through structure, support and rewards that helps employees reach the organization’s goal.
Empowerment: Process that provides greater autonomy to employees through the sharing of
relevant information and the provision of control over factors affecting job.
Participation: Mental and emotional involvement of people in-group situations that encourages
them to contribute to group goals and share responsibility for them.
Attitudes: Feelings and beliefs that largely determine how employees will perceive their
environment, commit themselves to intended actions, and ultimately behave.
Job enlargement: Policy of giving workers a wider Variety of duties in order to reduce monotony.
Job enrichment: Policy of adding motivators to a job to make it more rewarding.
Job involvement: Degree to which employees immerse themselves in their jobs invests time and
energy in them, and view work as a central part of their overall lives.
Job satisfaction: Set of favorable or unfavorable feelings with which employees view their work.
Job rotation: Periodic assignment of an employee to completely different sets of job activities.
Organizational commitment: Degree to which an employee identifies with the organization and
wants to continue actively participating in it.
Theory x: Autocratic and traditional set of assumption about people.
Theory y: Humanistic and supportive set of assumptions about people.
Traits: Physical, intellectual, or personality characteristics that differentiate between leaders and
non-leaders or between successful and unsuccessful leaders.
Turnover: Rate at which employees leave an organization.
Conflict: Disagreement over the goals to attain or the methods to be used to accomplish them.
Power: Ability to influence other people and events.
Legitimate power: Power that is delegated legitimately from higher established authorities to
others.
Coercive power: Capacity to punish other people so as to influence.
Group dynamics: Social process by which people interact face to face in small groups.
Formal group: Groups established by the organization that have a public identity and goal to
achieve.
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Informal group: Groups formed on the basis of common interests, proximity, and friendship.
Committee: Specific type of group meeting in which members in their group role have been
delegated authority with regard to the problem at hand.
Structure: Leaders task orientation that, at the extreme, ignores personal issues and emotional of
employees.
Brainstorming: Group structure that encourages creative thinking by deferring judgment on ideas
generated.
Deferred judgment: Advantage of brainstorming by which all ideas are encouraged and criticism
is delayed until after the session.
Normal group technique: Group structure that combine individual input, group discussion, and
independent decision making.
Delphi Decision group: Group structure in which a series of questionnaires are distributed to the
respondents for their response but group members do not need to meet face to face.
Dialectic decision methods: Creation of two or more competing proposals, identification of
underlying assumption, examination by advocacy subgroups, and whole-group decision making.
F-302 Cost Accounting

&
F-310 Managerial Accounting
Financial accounting (or financial accountancy): is the field of accounting concerned with the
summary, analysis and reporting of financial transactions pertaining to a business.[1] This involves
the preparation of financial statements available for public consumption. Stockholders, suppliers,
banks, employees, government agencies, business owners, and other stakeholders are examples of
people interested in receiving such information for decision making purposes.
Financial accountancy is governed by both local and international accounting standards. Generally
Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial
accounting used in any given jurisdiction. It includes the standards, conventions and rules that
accountants follow in recording and summarizing and in the preparation of financial statements.
On the other hand, International Financial Reporting Standards (IFRS) is a set of passion able
accounting standards stating how particular types of transactions and other events should be
reported in financial statements. IFRS are issued by the International Accounting Standards Board
(IASB). With IFRS becoming more widespread on the international scene, consistency in financial
reporting has become more prevalent between global organizations.
While financial accounting is used to prepare accounting information for people outside the
organization or not involved in the day-to-day running of the company, managerial accounting
provides accounting information to help managers make decisions to manage the business.
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So Financial Accounting……….
1. Provides information to external parties.

2. Must maintain GAAP
3. Deals with past data
4. Mandatory for any organization
Examples: investor, creditor, govt, customers, people.
Versus cost accounting
1. Financial accounting aims at finding out results of accounting year in the form of Profit
and Loss Account and Balance Sheet. Cost Accounting aims at computing cost of
production/service in a scientific manner and facilitate cost control and cost reduction.
2. Financial accounting reports the results and position of business to government, creditors,
investors, and external parties.
3. Cost Accounting is an internal reporting system for an organization’s own management for
decision making.
4. In financial accounting, cost classification based on type of transactions, e.g. salaries,
repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of
functions, activities, products, process and on internal planning and control and
information needs of the organization.
5. Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss
for a period and Statement of financial position (Balance Sheet) on a given date. It aims at
computing ‘true and fair’ view of the cost of production/services offered by the firm.[12]
Cost Accounting:
Cost accounting is a process of recording, classifying, analyzing, summarizing allocating and

evaluating various alternative courses of action and control of costs. Its goal is to advise the
management on the most appropriate course of action based on the cost efficiency and capability.
Cost accounting provides the detailed cost information that management needs to control current
operations and plan for the future.[1]
Since managers are making decisions only for their own organization, there is no need for the
information to be comparable to similar information from other organizations. Instead, information
must be relevant for a particular environment. Cost accounting information is commonly used in
financial accounting information, but its primary function is for use by managers to facilitate
making decisions.
So cost accounting…………
1. Cost determination and control

2. Area: productive organizations
3. Deals with present and past data
4. GAAP is maintained partly
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5. Used by internal and external parties
Management Accounting/ Managerial Accounting
One simple definition of management accounting is the provision of financial and non-financial
decision-making information to managers.[2]
According to the Institute of Management Accountants (IMA): "Management accounting is a

profession that involves partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial reporting and control to
assist management in the formulation and implementation of an organization's strategy".[3]
Management accountants (also called managerial accountants) look at the events that happen in
and around a business while considering the needs of the business. From this, data and estimates
emerge. Cost accounting is the process of translating these estimates and data into knowledge that
will ultimately be used to guide decision-making.
So Management Accounting……….
1. Deals with past and present data but main objective is future decision making
2. Not mandatory to maintain any guidelines
3. Only for internal parties
4. Experience employees needed
Differences between financial accountancy and management accounting
 while shareholders, creditors, and public regulators use publicly reported financial
accountancy, information, only managers within the organization use the normally
confidential management accounting information
 while financial accountancy information is historical, management accounting information
is primarily forward-looking;
 while financial accountancy information is case-based, management accounting
information is model-based with a degree of abstraction in order to support generic decision
making;
 while financial accountancy information is computed by reference to general financial
accounting standards, management accounting information is computed by reference to the
needs of managers, often using management information systems.
Focus:
 Financial accounting focuses on the company as a whole.

 Management accounting provides detailed and disaggregated information about products,
individual activities, divisions, plants, operations and tasks
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Scope of Managerial Accounting:
1. Works with data from financial accounting

2. Data from cost accounting: to determine economic scale
3. Taxation: The management accountant is responsible for tax policies and procedures. He
will make available the reports required by various authorities. He will make proper
provision for taxation and he is to ensure that quarterly payments of taxes paid in advance
as required by the Income Tax Act are made in time to avoid penal interest payment on
delayed payment of tax.
4. Revaluation accounting:
5. Standard costing:
6. Decision accounting:
7. Statistical data:
Importance of studying Managerial Accounting:
1. Decision making: Forecasting aids decision-making and answering questions, such as:
Should the company invest in more equipment? Should it diversify into different markets?
Should it buy another company? Management accounting helps in answering these critical
questions and forecasting the future trends in business.
2. Employee motivation
3. Comparative analysis
4. Technological advantage
5. Co-ordination
6. Structural formulation
7. Specific goal attainment
8. Efficient use of resources
9. Helping in Make-or-buy Decisions: Is it cheaper to procure materials or a product from a
third party or manufacture them in-house? Cost and production availability are the deciding
factors in this choice. Through management accounting, insights will be developed which
will enable decision-making at both operational and strategic levels.
10. Forecasting Cash Flows: Predicting cash flows and the impact of cash flow on the business
is essential. How much cost will the company incur in the future? Where will its revenues
come from and will the revenues increase or decrease in the future? Management
accounting involves designing of budgets and trend charts, and managers use this
information to decide how to allocate money and resources to generate the projected
revenue growth.
11. Helping Understand Performance Variances: Business performance discrepancies are
variances between what was predicted and what is actually achieved. Management
accounting uses analytical techniques to help the management build on positive variances
and manage the negative ones.
12. Analyzing the Rate of Return: Before embarking on a project that requires heavy
investments, the company would need to analyze the expected rate of return (ROR). If
given two or more investment opportunities, how should the company choose the most
profitable one? In how many years would the company break even on a project? What are
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the cash flows likely to be? These are all vital questions that can be answered through
management accounting.
“GAAP is not mandatory in Management Accounting” do you agree?
GAAP is a term that refers to a set of rules, standards and practices used throughout the accounting
industry to prepare and standardize financial statements that are issued outside the company. ...
Companies are expected to follow generally accepted accounting principles when they report their
financial information.
GAAP affects the following activities:
 Measuring economic activity

 Disclosing information about an activity
 Preparing and summarizing economic information
 Recording measurements at regular intervals
Managerial Accounting deals with past and present data but main objective is future decision
making where high-skilled employees is needed.
Basic purpose of managerial accounting is to help the management in taking decisions which
will help them in gaining the competitive edge in the market space by reducing the cost of
product. Organizations must follow GAAP or IFRS with respect to financial accounting in order
to provide accurate, transparent and consistent financial information. Managerial accounting has
no such standards. Therefore, is managerial accounting information unreliable and not to be
trusted?
Cost: is something we pay for but utilities is not ended.

Variable cost: A variable cost remains constant on a per unit basis, but changes in total in direct
relation to changes in volume.
Fixed cost: A fixed cost remains constant in total amount. The average fixed cost per unit varies
inversely with changes in volume.
Mixed cost: A mixed cost contains both variable and fixed cost elements. It is generally fixed up
to a certain level.
What effect does an increase in the volume have on…….

a. Unit fixed cost
b. Unit Variable cost
c. Total FC
d. Total VC
a. Unit fixed costs decrease as volume increases.
b. Unit variable costs remain constant as volume increases.
c. Total fixed costs remain constant as volume increases.
d. Total variable costs increase as volume increases.
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Contribution Margin: The contribution margin is total sales revenue less total variable expenses.
3 Methods of Costing:
1. Graphical method: costs are graphically presented.

2. High Low Method: VC= (change in cost/changes in activities)
3. Least Square Method
Account analysis A method for analyzing cost behavior in which an account is classified as either
variable or fixed based on the analyst’s prior knowledge of how the cost in the account behaves.
Activity base A measure of whatever causes the incurrence of a variable cost. For example, the
total cost of X-ray film in a hospital will increase as the number of X-rays taken increases.
Therefore, the number of X-rays is the activity base that explains the total cost of X-ray film.
Committed fixed costs Investments in facilities, equipment, and basic organizational structure
that can’t be significantly reduced even for short periods of time without making fundamental
changes.
Contribution approach: An income statement format that organizes costs by their behavior.
Costs are separated into variable and fixed categories rather than being separated according to
organizational functions.
Contribution margin The amount remaining from sales revenues after all variable expenses have
been deducted.
Cost structure: The relative proportion of fixed, variable, and mixed costs in an organization.
Dependent variable: A variable that responds to some causal factor; total cost is the dependent
variable, as represented by the letter Y, in the equation Y =a + bx.
Discretionary fixed costs: Those fixed costs that arise from annual decisions by management to
spend on certain fixed cost items, such as advertising and research.
High-low method: A method of separating a mixed cost into its fixed and variable elements by
analyzing the change in cost between the high and low activity levels.
Independent variable: A variable that acts as a causal factor; activity is the independent variable,
as represented by the letter X, in the equation Y =a + bx.
Least-squares regression method: A method of separating a mixed cost into its fixed and variable
elements by fitting a regression line that minimizes the sum of the squared errors.
Linear cost behavior: Cost behavior is said to be linear whenever a straight line is a reasonable
approximation for the relation between cost and activity.
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Mixed cost: A cost that contains both variable and fixed cost elements.
Multiple regression: An analytical method required when variations in a dependent variable are
caused by more than one factor.
Relevant range The range of activity within which assumptions about variable and fixed cost
behavior are reasonably valid.
CVP Assumptions……..
1. Selling price is constant.
2. Number of outputs is constant.
3. Cost can be effectively divided into fixed and variable portion.
4. In multi-products company sales mix is constant.
5. In manufacturing company’s inventories do not change.
6. FC is constant.
7. VC is constant.
8. Consumer demands are relatively stable.
9. There is no uncertainty or risks involved in production.
CVP analysis: is a powerful tool that helps managers understand the relationships among cost,
volume, and profit. CVP analysis focuses on how profits are affected by the following five factors:
1. Selling prices.
2. Sales volume.
3. Unit variable costs.
4. Total fixed costs.
5. Mix of products sold.
Break-even point: The level of sales at which profit is zero.
Contribution margin ratio (CM ratio): A ratio computed by dividing contribution margin by
dollar sales.
Cost-volume-profit (CVP) graph: A graphical representation of the relationships between an

organization’s revenues, costs, and profits on the one hand and its sales volume on the other hand.
Degree of operating leverage: A measure, at a given level of sales, of how a percentage change
in sales will affect profits. The degree of operating leverage is computed by dividing contribution
margin by net operating income.
Incremental analysis: An analytical approach that focuses only on those costs and revenues that
change as a result of a decision.
Margin of safety: The excess of budgeted (or actual) dollar sales over the break-even dollar sales.
Operating leverage: A measure of how sensitive net operating income is to a given percentage
change in dollar sales.
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Sales mix: The relative proportions in which a company’s products are sold. Sales mix is computed
by expressing the sales of each product as a percentage of total sales.
Target profit analysis: Estimating what sales volume is needed to achieve a specific target profit.
Variable expense ratio: A ratio computed by dividing variable expenses by dollar sales.
Absorption costing: treats all manufacturing costs as product costs, regardless of whether they
are variable or fixed. The cost of a unit of product under the absorption costing method consists of
direct materials, direct labor, and both variable and fixed manufacturing overhead. Thus,
absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product,
along with the variable manufacturing costs. Because absorption costing includes all
manufacturing costs in product costs, it is frequently referred to as the full cost method. So it is
…….
1. Full costing
2. Use in external
3. Not needed in break even
4. Supported by GAAP
5. Excess value of inventory
6. NOI changes with the change of production and sales.
7. There is possibility of over and under applied.
Variable Costing
Under variable costing, only those manufacturing costs that vary with output are treated as
product costs. This would usually include direct materials, direct labor, and the variable portion of
manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under this
method. Rather, fixed manufacturing overhead is treated as a period cost and, like selling and
administrative expenses, it is expensed in its entirety each period. Consequently, the cost of a unit
of product in inventory or in cost of goods sold under the variable costing method does not contain
any fixed manufacturing overhead cost. Variable costing is sometimes referred to as direct costing
or marginal costing. So………
1. Fixed manufacturing overhead cost treated as period cost.

2. Not supported by GAAP.
3. Valued inventory in less price.
4. NOI changes for only the change of sales.
5. There is no opportunity of over or under applied.
Absorption costing A costing method that includes all manufacturing costs—direct materials,
direct labor, and both variable and fixed manufacturing overhead—in unit product costs.
Variable costing A costing method that includes only variable manufacturing costs—direct
materials, direct labor, and variable manufacturing overhead—in unit product costs.
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Comparison Chart product vs period costing
Basis for Product Cost Period Cost

Comparison
Meaning The cost that can be apportioned The cost that cannot be assigned to
to the product is known as the product, but charged as an
Product Cost. expense is known as Period cost.
Basis Volume Time
Which cost is Variable Cost Fixed Cost
regarded as Product
/ Period Cost?
Are these costs Yes No
included in
inventory valuation?
Comprises of Manufacturing or Production Non-manufacturing cost, i.e. office
cost & administration, selling &
distribution, etc.
Part of Cost of Yes No
Production
Examples Cost of raw material, production Salary, rent, audit fees,
overheads, depreciation on depreciation on office assets etc.
machinery, wages to labor, etc.
Activity cost pool: A “bucket” in which costs are accumulated that relate to a single activity
measure in an activity-based costing system.
Activity measure: An allocation base in an activity-based costing system; ideally, a measure of

the amount of activity that drives the costs in an activity cost pool.
Batch-level activities: Activities that are performed each time a batch of goods is handled or
processed, regardless of how many units are in the batch. The amount of resource consumed
depends on the number of batches run rather than on the number of units in the batch.
Benchmarking: A systematic approach to identifying the activities with the greatest potential for
improvement.
Customer-level activities: Activities that are carried out to support customers but that are not
related to any specific product.
Duration driver: A measure of the amount of time required to perform an activity.
First-stage allocation: The process by which overhead costs are assigned to activity cost pools in
an activity-based costing system.
Organization-sustaining activities: Activities that are carried out regardless of which customers
are served, which products are produced, how many batches are run, or how many units are made.
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Product-level activities: Activities that relate to specific products that must be carried out
regardless of how many units are produced and sold or batches run.
Second-stage allocation The process by which activity rates are used to apply costs to products
and customers in activity-based costing.
Transaction driver: A simple count of the number of times an activity occurs.
Unit-level activities: Activities that are performed each time a unit is produced.
Why ABC costing difference from Traditional costing?
Activity-based costing differs from traditional costing systems in a number of ways. In activity-
based costing, nonmanufacturing as well as manufacturing costs may be assigned to products. And,
some manufacturing costs— including the costs of idle capacity--may be excluded from product
costs. An activity-based costing system typically includes a number of activity cost pools, each of
which has its unique measure of activity. These measures of activity often differ from the allocation
bases used in traditional costing systems.
Why is the ABC unacceptable for external financing report?
The activity-based costing approach described in the chapter is probably unacceptable for external
financial reports for two reasons.
First, activity-based product costs, as described in this chapter, exclude some manufacturing costs
and include some nonmanufacturing costs.
Second, the first-stage allocations are based on interviews rather than verifiable, objective data.
Why is the top management support is crucial when attempting to implement ABC system?
Employees may resist activity-based costing because it changes the “rules of the game.” ABC
changes some of the key measures, such as product costs, used in making decisions and may affect
how individuals are evaluated. Without top management support, employees may have little
interest in making these changes. In addition, if top managers continue to make decisions based
on the numbers generated by the traditional costing system, subordinates will quickly conclude
that the activity-based costing system can be ignored.
Budget A quantitative plan for acquiring and using resources over a specified time period.
Budget committee A group of key managers who are responsible for overall budgeting policy and
for coordinating the preparation of the budget.
Cash budget A detailed plan showing how cash resources will be acquired and used over a specific
time period.
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The cash budget is composed of four major sections:
1. The receipts section.
2. The disbursements section
3. The cash excess or deficiency section.
4. The financing section.
The receipts section lists all of the cash inflows, except from financing, expected during the budget
period. Generally, the major source of receipts is from sales. The disbursements section
summarizes all cash payments that are planned for the budget period. These payments include raw
materials purchases, direct labor payments, manufacturing overhead costs, and so on, as contained
in their respective budgets. In addition, other cash disbursements such as equipment purchases and
dividends are listed.
Continuous budget A 12-month budget that rolls forward one month as the current month is
completed.
Control Those steps taken by management to increase the likelihood that all parts of the
organization are working together to achieve the goals set down at the planning stage.
Direct labor budget A detailed plan that shows the direct labor-hours required to fulfill the
production Budget.
Direct materials budget A detailed plan showing the amount of raw materials that must be
purchased to fulfill the production budget and to provide for adequate inventories.
Ending finished goods inventory budget A budget showing the dollar amount of unsold finished
goods inventory that will appear on the ending balance sheet.
Manufacturing overhead budget: A detailed plan showing the production costs, other than direct
materials and direct labor, that will be incurred over a specified time period.
Merchandise purchases budget A detailed plan used by a merchandising company that shows
the amount of goods that must be purchased from suppliers during the period.
Participative budget: Participative budgeting is a budgeting process under which those people
impacted by a budget are actively involved in the budget creation process.
Perpetual budget: A perpetual budget is a budget that is continually extended whenever the
current reporting period has been completed.
Planning: Developing goals and preparing budgets to achieve those goals.
Production budget: A detailed plan showing the number of units that must be produced during a
period in order to satisfy both sales and inventory needs.
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Responsibility accounting: A system of accountability in which managers are held responsible
for those items of revenue and cost—and only those items—over which they can exert significant
control. The managers are held responsible for differences between budgeted and actual results.
Sales budget: A detailed schedule showing expected sales expressed in both dollars and units.
Self-imposed budget: A method of preparing budgets in which managers prepare their own
budgets.
These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual
agreement.
Selling and administrative expense budget: A detailed schedule of planned expenses that will
be incurred in areas other than manufacturing during a budget period.
Master budget: A number of separate but interdependent budgets that formally lay out the
company’s sales, production, and financial goals and that culminates in a cash budget, budgeted
income statement, and budgeted balance sheet.
Financial Reporting
Depending on the size and type of business, financial reporting has different meanings and uses.
At nonprofits, the term includes disclosing sources and uses of funds, officer and key employee
salaries and other financial information to the public. At small businesses, financial reporting
provides managers with a variety of ongoing reports that let them understand how each area of the
business's operations affects the company's bottom-line performance; the reports also allow
managers to create and monitor budgets and to plan long-term business strategies. At publicly
traded companies, financial reporting refers to the public dissemination of data for scrutiny by
stakeholders such as shareholders, the Securities and Exchange Commission and the media.
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Helps with Pricing
Financial reporting helps companies set optimal prices. Financial data for your business should
include the calculation of your overhead and production expenses at different levels so you can
see how different sales volumes will affect your costs. Knowing this, you can effectively set your
prices. A financial report that shows you the cost of sales for different distribution methods, such
as selling online, using a print catalog or in a retail store, will help you set prices for using those
methods.
Reduces Cash Flow Problems
A typical budget shows when you expect to make a sale and the cost for that sale, often recording
both figures in the month when the sale is expected. This can cause cash shortfalls, because you
might not receive payment for that sale for 30 or more days, while your expenses to fulfill the sale
come before that. A key financial report for any business is a cash flow report, which shows when
you will receive money and when you must pay bills, debts, taxes or other obligations. This report
helps you plan your cash reserve and credit needs.
Effective Production and Labor Planning
Knowing your production and labor costs will help you better schedule your production and
worker needs, avoiding large spikes in expenses you might have otherwise spread out had you
known about potential problems. If you know that a large order might increase your costs because
you need to add temporary workers, pay overtime, increase training or add a shift, you can take
steps to make part of that order earlier, reducing your labor costs with better scheduling.
Improved Cost Containment
Knowing exactly how much you spend on overhead and production will help you track your
spending and spot areas where you can cut costs to maximize profitability. For example, you might
not realize how much credit card interest is cutting into your profits. Having that information might
spur you to use some of your excess cash to pay down debt and increase your profits.
Better Money Access
When you apply for credit, lenders often want internal financial reports, rather than just a bank
statement. A bank statement might show $25,000 in your account, but a balance sheet, which is a
list of your assets and liabilities, might show your net worth is actually negative. The ability to
show potential lenders, investors and creditors your cash flow, net worth and receivables might be
the difference between getting their money and not.
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Qualitative characteristics of information:
Primary Secondary
Relevance Compareability
Reliability Consistency
Relevance includes……
1. Productive value
2. Feedback
3. Timeliness
Reliability includes…….
1. Verifiability: verifying something with some methods
2. Representational faithfulness
3. Neutrality
Elements of Financial Statement

1. Assets
2. Liabilities
3. Owner’s equity
4. Investment by owners
5. Distribution to owners
6. Comprehensive income
7. Expense
8. Revenue
9. Loss
10. Gain
1) Assets
a. Past events
b. Future benefit
c. Controlled or administrated by someone
2) Liabilities
a. Past event
b. Present benefit
c. Future outflows
3) Owner’s equity: A-L = Owner’s equity. The position that remains after deducting
liabilities from assets is called owner’s equity.
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6) Comprehensive income: The changes take place in income for any non-ownership event
is referred as comprehensive income.
7) Expense: The portion that is utilized of total outflow.
8) Revenue: One kind of inflow which occur from routine and central operation.
9) Loss: Doesn’t provide any benefit and it is origin from operating activities
10) Gain: Part of revenue after deducting expense from revenue the possible portion we get
that is gain.
Measurement and Recognition:

Measurement and recognition can be divided in the following three sections.
1. Assumption in Accounting
2. Principles in Accounting
3. Constraints in Accounting
1) Assumption in Accounting:
a. Economic entity: is the core basic of accounting. It states that individual entity
separated from business entity.
b. Monetary unit: The base of all transactions of business is currency or money.

Monetary unit stated that every transaction of business should be evaluated in terms
of money.
c. Going concern: Business will run for indefinite period of time as the validity of all
business are uncertain.
d. Periodicity: It states that total life of business is divided into some artificial periods.
2) Principles of Accounting:
a. Historical cost: Says that assets should be recognized at acquisition or purchase
price not in market price.
It is believed that acquisition price is more reliable. Market price can fluctuate daily
that is why assets are recognized by purchase price.
b. Revenue recognized: Revenue should be recognized when it is earned not

considered when the cash is received.
c. Matching Principles: According to matching principles revenue is shown in

opposite view of cost. Require that all expense incurred in generating the revenue
also be recognized.
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d. Full Disclosure: All relevant information associated with operation or transaction
should be disclosed.
3) Constraints in Accounting:
a. Conservatism: Assets are shown in less value in balance sheet. Such as ending
inventory.
b. Materiality: Those Informations are relevant to decision making bring here.

Relevant information accepted and …………………….
c. Cost Benefit Analysis: It is the analysis of cost and benefit where benefits must
exceed the cost of earning.
d. Industry Practice: It is the government intervention of some organization. Such

as-------
i. Tax
ii. Depreciation
iii. Subsidies
Investment centers: A business segment whose manager has control over cost, revenue, and
investments in operating assets.
Margin: Net operating income divided by sales.
Net operating income: Income before interest and income taxes have been deducted.
Operating assets: Cash, accounts receivable, inventory, plant and equipment, and all other assets
held for operating purposes.
Profit center: A business segment whose manager has control over cost and revenue but has no
control over investments in operating assets.
Residual income: The net operating income that an investment center earns above the minimum
required return on its operating assets.
Responsibility center: Any business segment whose manager has control over costs, revenues, or
investments in operating assets.
Return on investment (ROI): Net operating income divided by average operating assets. It also
equals margin multiplied by turnover.
Segment: Any part or activity of an organization about which managers seek cost, revenue, or
profit data.
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Segment margin: A segment’s contribution margin less its traceable fixed costs. It represents the
margin available after a segment has covered all of its own traceable costs.
Traceable fixed cost: A fixed cost that is incurred because of the existence of a particular business
segment and that would be eliminated if the segment were eliminated.
Turnover: Sales divided by average operating assets.
Avoidable cost: A cost that can be eliminated (in whole or in part) by choosing one alternative
over another in a decision. This term is synonymous with relevant cost and differential cost.
Bottleneck: A machine or some other part of a process that limits the total output of the entire
system.
Constraint: A limitation under which a company must operate, such as limited available machine
time or raw materials, that restricts the company’s ability to satisfy demand.
Differential cost: Any cost that differs between alternatives in a decision-making situation. This
term is synonymous with avoidable cost and relevant cost.
Joint costs: Costs that are incurred up to the split-off point in a process that produces joint
products.
Joint products: Two or more products that are produced from a common input.
Make or buy decision: A decision concerning whether an item should be produced internally or
purchased from an outside supplier.
Relaxing (or elevating) the constraint: An action that increases the amount of a constrained
resource. Equivalently, an action that increases the capacity of the bottleneck.
Relevant cost: A cost that differs between alternatives in a decision. This term is synonymous
with avoidable cost and differential cost.
Sell or process further decision: A decision as to whether a joint product should be sold at the
split-off point or sold after further processing.
Special order: A one-time order that is not considered part of the company’s normal ongoing
business.
Split-off point: That point in the manufacturing process where some or all of the joint products
can be recognized as individual products.
Sunk cost: Any cost that has already been incurred and that cannot be changed by any decision
made now or in the future.
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Vertical integration: The involvement by a company in more than one of the activities in the
entire value chain from development through production, distribution, sales, and after-sales
service.
Course Code: F-303
Course Title: Working Capital Management
What is working capital management?
The management of short-term assets and liabilities so that a firm has sufficient liquidity to run its
operations smoothly. Practically speaking, it is the cash required to run daily, weekly, and monthly
operations of a business. Included here are assets such as cash, marketable securities, accounts
receivable, inventory, prepaid expenses and other current assets; also, liabilities such as accounts
payable, wages payable and accruals.
Capital Budgeting:
 Management of long-term assets (Fixed assets).
 The process in which a business determines and evaluates potential expenses or
investments those are large in nature.
 The process of determining the viability to long-term investments on purchase or
replacement of property plant and equipment, new product line or other projects.
Capital Structure:
 Management of long-term capital (Long-term debt and Equity)
 How a firm finances its overall operations and growth by using different sources of funds?
Debt comes in the form of bond issues or long-term notes payable, while equity is classified
as common stock, preferred stock and retained earnings.
Why is working capital necessary?
 Removing uncertainty regarding the demand, market price, quality
 Uninterrupted production
 Making the firm stable
 Avoiding any sort of cash deficiency issue
Importance of working capital management
 Higher return on capital, Higher  Favorable financing conditions
profitability  Uninterrupted production
 Improved credit profile and solvency  Ability to face shocks and peak
 Higher liquidity demand
 Increased business value  Competitive advantage
** Working capital cycle is the lifeblood of the firm as it helps to survive in the market. It reduces
some costly actions such as raising new external funds, reducing dividend outflows or postponing
capital expenditures.
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Principles of modern finance
 Shareholder Wealth Maximization: Maximizing the price of its shares
 Cash Flow Decision Making: In order to maximize shareholder wealth, the firm should
maximize the value of the firm’s cash flows. Higher NPV is preferred.
Stakeholder: A stakeholder is anybody who can affect or is affected by an organization, strategy
or project. They can be internal or external and they can be at senior or junior levels.
Risk is dealt with two steps:
 Assessing Risk(Identifying)
1. Total Risk
 Sensitivity Analysis: A method of estimating the effect of variation in individual
output variables on important outcome variables.
 Simulation Analysis: An attempt to assess the total risk(variability) of outcomes
based on variation in all the uncertain input variables taken simultaneously.
2. Systematic Risk
 Beta: It is the relative co-movement of the project’s returns with the returns on all
assets and securities.
 Addressing Risk(Pricing)
 Benchmark risk-adjusted discount rate: The analyst determines the appropriate risk
premium by comparing the risk of marginal cash flow with that of traded assets and
employing the market’s required returns for traded assets of comparable risk.
 Capital Asset Pricing Model: Used to determine the appropriate discount rate to apply to
the expected value of a risky future cash flow. (Only Non diversifiable risk)
Cash Management refers to the management of cash from the time it starts its transit to the firm
until it leaves the firm in payments.
Float: It refers to ‘the amount of money tied up between the time a payment is initiated and cleared
funds become available in the company’s bank account’. It refers to the period that passes before
a payment or receipt is made by a bank. It is the transit time of receipt or payment.
Types
 Mail Float
 At-Firm Float
 Clearing Float
Opportunity cost of float: The cost of not having the money.
Cash Concentration: The process of collecting funds from the lockbox banks into a central bank
account.
Concentration Bank: A financial institution that is the primary bank of an organization, or the
bank where the organization does most of its transactions.
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Cash Forecasting: An estimation of the flows in and out of the firm’s cash account over a
particular period of time. An estimation of the firm’s borrowing and lending needs and the
uncertainties regarding these needs during various future periods.
Baumol Model: The firm is assumed to receive cash periodically but to pay out cash continuously
(steady) at a steady rate.
Beranek Model: The firm is assumed to receive cash continuously (steady) but to pay out cash
periodically at a steady rate.
Miller-Orr Model: This model assumes that net cash flows are normally distributed with a mean
of zero, that the standard deviation of this distribution does not vary across time, and that there is
no correlation of the cash flows across time.
Stone Model: A modification of Miller-Orr model for the conditions when the company can
forecast cash inflows and outflows in a few-day perspective. Similarly, to the Miller-Orr model, it
takes into account control limits and surpassing these limits is a signal for reaction.
Autocorrelation: A characteristic of data in which the correlation between the values of the same
variables is based on related objects. It violates the assumption underlines most of the conventional
models.
Accounts Receivable Management/Credit Management: It starts where the management of
inventory ends and ends where the management of cash begin.
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Methods of receivables’ monitoring:
 Days’ Sales Outstanding (Average Collection Period): A calculation used by a company
to estimate their average collection period. It is the financial ratio that illustrates how well
a company’s accounts receivables are being managed.
 Aging Fraction Statistics
Why carry inventory?
 Raw Materials Inventory: Makes production scheduling easier
Avoid price changes for these goods
Hedge against supply shortages
 Work-In-Process Inventory: Buffer Stocks
 Finished Goods Inventory : Provide immediate service
Stabilize production
Alternatives to Holding Inventory

 Just-In-Time Systems: JIT substitutes demand-based systems based on flexible
production, small lot sizes and high-quality output. To reduce inventory, goods are
produced and delivered only as they are needed.
Stock-out Cost: It occurs when immediate service is required but inventory is unavailable.
Lead Times: A time lag from the imitation of the process until the inventory starts to arrive.
Replenishment Rate: The process of adding more stock to replace what has been sold. The
purchasers buy a certain quantity of the product, and when it is sold out, replenishment from the
supplier takes place.
Improved Indices for Measuring Aggregate Liquidity
 Cash Conversion Cycle: The net time interval between the expenditure of cash in paying
the liabilities and the receipt of cash from the collection of receivables.
(ACP+ICP)-PDP
 Average Collection Period: The inverse of accounts receivable turnover ratio
times the number of days in a year.
 Inventory Conversion Period: The inverse of the inventory turnover ratio times
360 days.
 Payment Deferral Period: The sum of all the sales-related accrual and payable
accounts divided by cost of sales, with this calculated figure multiplied by 360 days.
 Comprehensive Liquidity Index: Adjusted current asset divided by adjusted current debt.
 Net Liquid Balance: NLB= (Cash + Mar. Sec.- Notes Payable)/Total Assets
 Lambda Index: Lambda= (Initial Reserve + E(NCF))/Uncertainty
Temporary Short-Term Financing: Used to provide funds for transient cash flow shortages such
as caused by seasonality in sales.
Permanent Short-Term Financing: Used by firms on a continuing basis and are refinanced with
new short-term debt as they mature.
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Course Code: F-306
Course Title: Financial Market and Institutions
Financial market: a financial market is a market in which financial assets (securities) such as
stocks and bonds can be purchased or sold.
Surplus units: those participants who receive more money than they spend are referred to as
surplus units (or investors).
Deficit units: those participants who spend more money than they receive are referred to as deficit
units.
Role of financial markets:
1. Accommodating corporate finance needs

2. Accommodating investment needs
3. Primary versus secondary markets
Primary markets: primary markets facilitate the issuance of new securities.
Secondary markets: secondary markets facilitate the trading of existing securities, which allows
for a change in the ownership of the securities.
An important characteristic of securities that are traded in secondary markets is liquidity, which
is the degree to which securities can easily be liquidated (sold) without a loss of value.
Mortgages: mortgages are long-term debt obligations created to finance the purchase of real
estate.
Mortgage-backed securities: mortgage-backed securities are debt obligations representing

claims on a package of mortgages. There are many forms of mortgage backed securities. In their
simplest form, the investors who purchase these securities receive monthly payments that are made
by the homeowners on the mortgages backing the securities.
Foreign exchange market: international financial transactions normally require the exchange of
currencies. The foreign exchange market facilitates this exchange.
Role of financial institutions:

1. Role of depository institutions
2. Role of non-depository financial institutions
Depository institutions accept deposits from surplus units and provide credit to deficit units
through loans and purchases of securities. They are popular financial institutions for the
following reasons.
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1. They offer deposit accounts that can accommodate the amount and liquidity
characteristics desired by most surplus units.
2. They repackage funds received from deposits to provide loans of the size and maturity
desired by deficit units.
3. They accept the risk on loans provided.
4. They have more expertise than individual surplus units in evaluating the
creditworthiness of deficit units.
5. They diversify their loans among numerous deficit units and therefore can absorb
defaulted loans better than individual surplus units could.
The loanable funds theory: it describes the relationship between money available for
borrowing and interest rates. Both the supply of money available for borrowing and demand for
money to be borrowed depend upon interest rates. The loanable funds market consists of
borrowers and loaners of funds.
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The equilibrium interest rate: It is the rate that equates the aggregate demand for funds with the
aggregate supply of loanable funds.
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The aggregate demand for funds (DA) can be written as:
DA = Dh + Db + Dg + Dm + Df
Where,
Dh = household demand for loanable funds

Db = business demand for loanable funds
Dg = federal government demand for loanable funds
Dm = municipal government demand for loanable funds
Df =foreign demand for loanable funds
The aggregate supply of funds (SA) can likewise be written as:
SA = Sh + Sb + Sg + Sm + Sf
Where.
Sh = household supply of loanable funds

Sb = business supply of loanable funds
Sg = federal government supply of loanable funds
Sm = municipal government supply of loanable funds
Sf = foreign supply of loanable funds
Factors that affect interest rates:

1. Impact of economic growth on interest rates:
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2. Impact of inflation on interest rates:
3. Impact of monetary policy on interest rates: When the fed increases the money supply,
it increases the supply of loanable funds and this places downward pressure on interest
rates.
If the fed reduces the money supply, it reduces the supply of loanable funds. Assuming no
change in demand, this action places upward pressure on interest rates.
4. Impact of the budget deficit on interest rates: If the govt has budget deficit, it will need
more fund to recover it. So, demand of loanable fund will increase which turn interest rate
into higher.
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5. Impact of foreign flows of funds on interest rates:
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Framework for forecasting interest rate:
The yields on debt securities are affected by the following characteristics:
1. Credit (Default) Risk

2. Liquidity
3. Tax Status
4. Term to Maturity
The structure of interest rates: it defines the relationship between the term to maturity and the
annualized yield of debt securities at a specific moment in time while holding other factors, such
as risk, constant.
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Pure expectations theory: According to pure expectations theory, the term structure of interest
rates (as reflected in the shape of the yield curve) is determined solely by expectations of interest
rates.
Liquidity premium theory: The preference for the more liquid short-term securities places
upward pressure on the slope of a yield curve. Liquidity may be a more critical factor to investors
at some times than at others, and the liquidity premium will accordingly change over time. As it
does, the yield curve will change also. This is the liquidity premium theory (sometimes referred to
as the liquidity preference theory)
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Segmented markets theory: According to the segmented markets theory, investors and borrowers
choose securities with maturities that satisfy their forecasted cash needs. Pension funds and life
insurance companies may generally prefer long-term investments that coincide with their long-
term liabilities. Commercial banks may prefer more short-term investments to coincide with their
short-term liabilities.
Use of the term structure:
1. Forecasting interest rates

2. Forecasting recessions
3. Making investment decisions
4. Making decisions about financing
How the central bank controls money supply:

Central banks have three main monetary policy tools:
1. Open market operations,
2. The discount rate, and
3. The reserve requirement.
1) Open market operations: open market operations are when central banks buy or
sell securities. These are bought from or sold to the country's private banks. When the central
bank buys securities, it adds cash to the banks' reserves. That gives them more money to lend.
When the central bank sells the securities, it places them on the banks' balance sheets and
reduces its cash holdings. The bank now has less to lend. A central bank buys securities when
it wants expansionary monetary policy. It sells them when it executes contractionary monetary
policy.
2) Reserve requirement: the reserve requirement refers to the money banks must keep on hand
overnight. They can either keep the reserve in their vaults or at the central bank. A low reserve
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requirement allows banks to lend more of their deposits. It's expansionary because it creates
credit.
A high reserve requirement is contractionary. It gives banks less money to loan. It's especially
hard for small banks since they don't have as much to lend in the first place. That's why most
central banks don't impose a reserve requirement on small banks. Central banks rarely
change the reserve requirement because it's expensive and disruptive for member banks to
modify their procedures.
3) Discount rate: the discount rate is the third tool. It's the rate that central banks charge its
members to borrow at its discount window. Since the rate is high, banks only use this if they
can't borrow funds from other banks. There is also a stigma attached. The financial community
assumes that any bank that uses the discount window is in trouble. Only a desperate bank that's
been rejected by others would use the discount window.
How the central bank can stimulate the economy:
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How monetary policy can affect economic conditions:
There are three lags involved in monetary policy that can make the fed’s job more
challenging.
1. Recognition lag
2. Implementation lag
3. Impact lag
Recognition lag: the lag between the time a problem arises and the time it is recognized
Implementation lag: the lag from the time a serious problem is recognized until the time the fed
implements a policy to resolve that problem is known as the implementation lag.
Impact lag: impact lag until the policy has its full impact on the economy. For example, an
adjustment in money supply growth may have an immediate impact on the economy to some
degree, but its full impact may not occur until a year or so after the adjustment.
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Trade-off in monetary policy: When inflation is higher than the fed deems acceptable, it may
consider implementing a restrictive (tight-money) policy to reduce economic growth. As economic
growth slows, producers cannot as easily raise their prices and still maintain sales volume.
Similarly, workers are less in demand and have less bargaining power on wages. Thus the use of
a restrictive policy to slow economic growth can reduce the inflation rate. A possible cost of the
lower inflation rate is higher unemployment. If the economy becomes stagnant because of the
restrictive policy, sales may decrease, inventories may accumulate, and firms may reduce their
workforces to reduce production.
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Factors that affect the risk-free rate:
1. Impact of inflationary expectations

2. Impact of economic growth
3. Impact of money supply growth
4. Impact of budget deficit
Course Code: F-305

Course Title: International Business
Globalization: Globalization refers to the broadening set of interdependent relationship among
people from different parts of a world that happens to be divided into nations.
International Business: Which consist of all commercial transactions, including sales,
investment, and transportation- that take place between two or more countries.
What’s wrong with globalization?
1. Threats to National Sovereignty
2. Economic Growth and Environmental stress
3. Growing income inequality.
Why companies engage in international business?
There are three major operating objectives that may induce companies to engage in international
business-
1) 1.Expanding sales
2) 2.Acquiring resources
3) 3.Minimizing risk
Merchandise exports are tangible products goods that are sent out of a country
Merchandise imports are goods brought into a country.
Asset use When one company allows another to use its asset; such as trademarks, patents,
copyrights, or expertise, under contracts known as licensing agreements, they receive earnings
called royalties. Royalties also come from franchise contract.
Franchising is a mode of business in which one party (the franchisor) allows another (the
franchisee) to use a trademark as an essential asset of the franchisee’s business.
Foreign Investment means ownership of foreign property in exchange for a financial return such
as interest and dividend.
Foreign direct investment sometimes referred to simply as direct investment, in FDI the investor
takes a controlling interest in a foreign company.
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Joint venture is an operation when two or more companies share ownership of an FDI.
A portfolio investment is a non-controlling interest in a company or ownership of a loan made to
another party. A portfolio investment usually takes one of two forms; stock in a company or loans
to a company in the form of bonds, bills, or notes purchased by the investor.
Multinational enterprises (MNE) takes a worldwide view of markets and production; in other
words, it’s willing to consider market and production locations anywhere in the world.
Subsidy is a government payment to a domestic producer. Subsidies take many forms, including
cash grants, low interest loans, tax breaks, and government equity participation in domestic firms.
An Import Quota is a direct restriction on the quantity of some good that may be imported into a
country. The restriction is usually enforced by issuing import licenses to a group of individuals or
firms.
Under a Tariff Rate Quota, a lower tariff rate is applied to imports within the quota than those
over the quota.
A Voluntary export restraint (VER) is a quota on trade imposed by the exporting country,
typically at the request of the importing country’s government.
A local content requirement is a requirement that some specific fraction of a good be produced
domestically. The requirement can be expressed either in physical terms or in value terms.
Administrative trade policies are bureaucratic rules designed to make it difficult for imports to
enter a country.
Dumping is variously defined as selling goods in a foreign market at below their cost of production
or as selling goods in a foreign market at below their fair market value; the fair market value of a
goods is normally judged to be greater than the cost of producing that good because the former
includes a fair profit margin.
Antidumping policies are designed to punish foreign firms that engage in dumping. The ultimate
objective is to protect domestic producers from unfair foreign competition.
Zero sum game: In which a gain by one country results in a loss by another.
Mercantilism is a trade theory holding that a country’s wealth is measured by its holding treasure
which usually means its gold. The main tenet of Mercantilism was that it was in a country’s best
interests to maintain a trade surplus to export more than imported.
The Factor Endowments means the extent to which a country is endowed with such resources as
land, labor, and capital.
The Heckscher-ohlin theory predicts that countries will export those goods that make intensive
use of factors that are locally abundant, while importing goods that make intensive use of factors
that are locally scarce.
Economies of scale are unit cost reductions associated with a large scale of output. It has a number
of sources, including the ability to spread fixed costs over a large volume and the ability of large
volume producers to utilize specialized employees and equipment that are more productive than
less specialized employees and equipment.
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First-mover Advantages are the economic and strategic advantages that accrue to early entrants
into an industry.
Interest rate Parity borrow a foreign currency and convert that currency to the home currency
for use also simultaneously purchase the foreign currency forward to lock in the exchange rate of
the currency needed to pay off the loan. If the foreign currency’s interest rate is low this may
appear to be a feasible strategy. However, if interest rate parity exists the currency will exhibit a
forward premium that offsets the differential between its interest rate and the home interest rate.
Regional Economic Integration mean agreements among countries in a geographic region to
reduce and ultimately remove tariff and non-tariff barriers to the free flow of goods, services, and
factors of production between each other.
A customs union eliminates trade barriers between member countries and adopts a common
external trade policy.
A common market has no barriers to trade among member’s countries includes a common
external trade policy and allows factors of production to move freely among members.
An economic union involves the free flow of products and factors of production among member’s
countries and the adoption of a common external trade policy but it also requires a common
currency, harmonization of member’s tax rates and a common monetary and fiscal policy.
Political union: In which a central political apparatus coordinates the economic, social and foreign
policy of the member states.
Trade creation occurs when high cost domestic producers are replaced by low cost producers
within the free trade area.
Trade diversion occurs when lower cost external suppliers are replaced by higher cost suppliers
within the free trade area.
The European Council represents the interests of member states. It is clearly the ultimate
controlling authority within the EU because draft legislation from the commission can become EU
law only if the council agrees.
The European Parliament: Which as of 2012 has 754 members, is directly elected by the
populations of the member states.
The court of Justice: Which is comprised of one judge from each country is the supreme appeals
court for EU law.
Country risk represents the potentially adverse impact of a country’s environment on an MNC’s
cash flows.
The Delphi Technique involves the collection of independent opinion without group discussion.
As applied to country risk analysis the MNC could survey specific employees or outside
consultants who have some expertise.
Balance of trade: Some terminology of the mercantilist era has endured.
A Favorable balance of trade still indicates that a country is exporting more than it is importing.
An unfavorable balance of trade indicates the opposite which is known as a deficit.
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The term neo-mercantilism has emerged to describe the approach of countries that try to un
favorable balances of trade in an attempt to achieve some social or political objective.
Theory of absolute advantage: Adam Smith developed the theory of absolute advantage, which
holds that different countries produce some goods more efficiently than other countries. According
to Smith a country’s wealth is based on its available goods and services rather than on gold.
Natural advantage considers climate, natural resources and labor force availability.
Acquired advantage consists of either product or process technology.
Free trade will bring
1. Specialization
2. Greater efficiency
3. Higher global output
The theory of competitive advantage says that global efficiency gains may still result from trade
if a country specializes in those products it can produce more efficiently than other products –
regardless of whether other countries can produce those same products even more efficiently.
PLC: The international product life cycle theory (PLC) of trade states that the location of
production of certain kinds of products shifts as they go through their life cycles, which consist of
four stages-
 Introduction: Introductory stage generally occurs in a domestic location so the company
can obtain rapid market feedback as well as save on transport costs. It is marked by-
innovation in response to observed need, exporting by the innovative country, evolving
product characteristics.
 Growth: During the growth stage demand may justify producing in some foreign countries
to reduce transport charges. Growth is characterized by-increases in exports by the
innovating country, more competition, increased capital intensity.
 Maturity: In this stage worldwide demand begins to level off although may be growing in
some countries and declining in others. Maturity is characterized by-a decline in exports
from the innovating country, more product standardization, more capital intensity,
increased competitiveness of price, production startups in emerging economics.
 Decline: In this stage, those factors are occurring during the maturity stage continue to
evolve. It is characterized by-a concentration of production in developing countries, an
innovating country becoming a net importer.
The porter diamond theory

According to porter diamond theory, companies’ development of internationally competitive
products depends on their domestic demand conditions, factor conditions, related and supporting
industries, firm strategy, structure, and rivalry.
Motives for Direct Foreign Investment(DFI)
1. Revenue related motives
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 Attract new sources of demand
 Enter profitable market
 Exploit monopolistic advantage
 React to trade restrictions
 Diversify internationally
2.Cost Related Motives
 Fully benefit from economies of scale
 Use foreign factors of production
 Use foreign raw materials
 Use foreign technology
 React to exchange rate movements
Barriers to DFI
 Protective barriers
 Red Tape barriers
 Industry Barriers
 Environmental barriers
 Regulatory barriers
 Ethical differences
 Political Instability
Greenfield Investment involves establishing a new operation in a foreign country
The Current account records export and imports of goods and services and unilateral transfers.
The Capital account records all international transactions that involve a resident of the country
concerned changing either his assets with or his liabilities to a resident of another country.
Direct investment is the act of purchasing an asset and at the same time acquiring control of it.
Portfolio investment by contrast is the acquisition of an asset that does not give the purchaser
control.
The Basic Balance was regarded in the 1950s and as the best indicator of the economy’s position
vis-a-vis other countries. It is defined as the sum of the current account balance and the net balance
on long term capital, which were then seen as the most stable elements in the balance of payments
and so placed above the line.
The balance of payment accounts is an integral part of the national income accounts for an open
economy. It tracks a county’s both payments to and receipts from other counties.
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Course Code: F-306
Course Title: Real Estate Finance
Real Estate: It is used to refer to things that are not movable such as land and improvements
permanently attached to the land.
 Real Property: Ownership rights associated with the real estate (immovable).
 Personal Property: Ownership rights associated with personal estate (movable).
Property Rights: Rights that can be exercised by the property owner. These include possession,
use, enjoyment, control, and the creation of estates in property.
Interests in Property: Created by owners of real estate who pledge and encumber property in
order to achieve an objective without giving up ownership.
Real Estate Finance: Real Estate Finance is the study of institutions, markets and instrument used
to transfer money or credit for the purpose of developing or acquiring real property.
Lessee: Without ownership some of the rights can be acquired on real estate
Property: property is anything that can be possessed, used, enjoyed, controlled, developed or
conveyed that has utility or value is consider to be property.
Estate: All that a person owns. It represents the ownership of the property that an individual owns.
Classification:
1. Based on Rights
 Estate in Possession: It entitles its owner to immediate enjoyments of the rights to that
estate.
 Estate not in Possession: It doesn’t convey the rights of the estate until sometime in
the future, if at all.
a. Reversion: Reversion is a future interest of property or estate ownership that
reverts back to the grantor after a temporary ownership period.
For example: A child may be give his or her parents a home with the condition
that when parent pass away the child takes back ownership.
b. Remainder: Third party’s right to future enjoyment or ownership of a property,
after it has been enjoyed or owned by a second party who receives it as the
beneficiary of first party’s will or trust.
For examples: If A grants a property to B for life then to C Then C’s interest in the
property is a remainder.
2. Based on Possession and Use
 Freehold: Exclusive right to enjoy the possession and use of a parcel of land or
other asset for an indefinite period.
i. Fee Simple Estate: It, also known as a fee simple absolute estate, is the
freehold estate that represents the most complete form of ownership of real
estate.
ii. Life Estate: It is a freehold estate that lasts only as long as the life of the
owner of the estate or the life of some other person. Upon the death of that
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person, the property reverts back to the original grantor, his or her heirs, or
any other designated person.
 Leasehold: A leasehold estate grants a tenant exclusive rights to use an owner’s
property for a certain period of time.
i. Estate for Years: It is created by a lease that specifies an exact duration for
the tenancy.
ii. Estate from Year to Year: It continues for successive periods until either
party gives proper notice of its intent to terminate at the end of one or more
subsequent periods.
Interest: In real estate, it can be thought of as a right or claim on real property.
Encumber / Pledge: An owner can pledge his property as a condition to obtain a loan (mortgage
– dead pledge (gage))
Encumbrance: An encumbrance is a right to or legal liability on real property that does not
prohibit passing title to the property but that diminishes its value.
Easement: It is a non-possessory interest in land. It is the right to use land that is owned of lease
by someone else for some special purpose.
Title/ Evidence of the property: An abstract term frequently used to link an individual or entity
who owns property to the property itself.
Title Assurance/ Assurance of Title: It refers to the means by which buyers of real estate
(1) learn in advance whether their sellers have and convey the quality
of the title they claim to possess, and
(2) receive compensation if the title, after transfer, turns out not to be
represented.
Abstract of Title: A historical summary of the publicly recorded documents that affect a title.
Deed: A deed is a written document that conveys the title from one person (the grantor) to another
(the grantee)
Ownership: When a person or other legal entity has lawful possession of realty and real property
rights.
Proof of Ownership: Proof is accomplished with documents such as deeds, contracts, wills, grants
etc.
Deed: Written Instrument by which title is conveyed from one person (grantor) to another
(grantee)
Methods of Title Assurance:
 Warranty Deed Method
 General Warranty Deed: Most commonly used and desirable deed. In this type
of deed, the grantor warrants that the title he or she conveys to the property is free
and clear of all encumbrances other than those specifically listed in the deed.
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 Special Warranty Deed: It makes the same warranties as a general warranty deed
except that it limits their application to defects and encumbrances that occurred
only while the grantor held title to the property.
 Bargain and Sale Deed: It conveys property without seller warrantees. Sometimes
also called “as is”.
 Sheriff’s Deed-Trustee’s Deed: A type of bargain and sale deed received by a
buyer from a foreclosure or other forced sale because the sheriff or trustee is acting
in a representative capacity. No warrantees are added.
 Quitclaim Deed: It says that the grantor “quits” whatever “claim” he or she in the
property. It offers the grantee the least protection.

 Abstract and Opinion Method: There may be a search of relevant recorded documents
to determine whether there is reason to question the quality of the title.
 Title Insurance Method: Title insurance was developed to cure the inadequacies of title
validation accomplished through an abstract and legal opinion. In addition, it adds the
principle of insurance to spread the risk of unseen hazards among many property owners.
Promissory Note: A document which serves as evidence that debt exists between a borrower and
a lender and usually contains the terms under which the loan must be repaid and the rights and
responsibilities of parties.
Default—occurs when a borrower fails to perform one or more duties under the terms of the note.
Default usually occurs because of nonpayment of amounts due.
Forbearance Provision: is used by lenders when they believe that borrowers will make up late
payments
Notification of default and the acceleration clause—in the event of past due payments, the
lender must notify the borrower that he or she is in default. The lender may then accelerate on the
note by demanding that all remaining amounts owed under the loan agreement be paid immediately
by the borrower.
Nonrecourse clause—as quoted above, when a borrower executes a note, he is personally liable.
Loan assumability: Borrower will be allowed to substitute another party in his place, who will
then assume responsibility for remaining loan payments.
The assignment clause—clause giving the lender the right to sell the note to another party without
approval of the borrower.
Future advances: borrower may request additional funds up to some maximum amount or
maximum percentage of the current property value under the same terms contained in the original
loan agreement.
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Mortgage: It is used either by purchasers of real property to raise funds to buy real estate, or
alternatively by existing property owners to raise funds for any purpose, while putting a lien on
the property being mortgaged.
Mortgage document is created in a transaction whereby one party pledges real property to another
party as security for an obligation owed to that party.
Purchase-money mortgage: When a loan is made by a borrower to purchase real estate consisting
of an existing property and improvement.
Hazard Insurance: This clause requires the mortgagor to obtain and maintain insurance against
loss or damage to the property caused by fire and other hazards, such as windstorms, hail,
explosion, and smoke.
Due on sale Clause: gives the lender right to full repayment when property is sold. Due-on-sale
clause, allows the mortgagee to accelerate the debt when the property, or some interest in the
property, is transferred without the written consent of the mortgagee.
Future Advance/ Open end mortgage/ Construction Loan: a mortgage may be so written that
it will protect several successive loans under a general line of credit extended by the mortgagee to
the mortgagor.
Subordination Clause: By means of this clause, a first mortgage holder agrees to make its
mortgage junior in priority to the mortgage of another lender. A subordination clause might be
used in situations where the seller provides financing by taking back a mortgage from the buyer,
and the buyer also intends to obtain a mortgage from a bank or other financial institution, usually
to develop or construct an improvement.
Assumption – A property may be sold/granted with the condition of new buyer/grantee taking
over the responsibility of the loan
Assumption of mortgage: is the conveyance of terms and balance of an existing mortgage to the
purchaser of a financed property, commonly requiring that the assuming party is qualified under
lender or guarantor guidelines.
Liability: since the agreement is not with the lender original borrower is still responsible for the
loan
Release conditions – the lender may or may not release the original borrower
“Subject to” a mortgage: refers that Loan is a liability of the grantor
Fixture/ Chattel: An item of tangible personal property that has become affixed to or is intended
to be used with the real estate.
Trade Fixture: Trade fixtures are pieces of property that a tenant affixes to a leased building or
land for the purpose of conducting business.
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Senior/ Prior/ First Mortgage: First mortgage on a property, payment of which takes priority
over the junior mortgages on the same property.
Junior/ Second Mortgage: A mortgage that is the subordinate to a first or prior mortgage. A
junior mortgage often refers to a second mortgage, but it could also be a third or fourth mortgage.
All mortgages other than first/Prior/Senior mortgage.
Seller Financing: A source of credit for a real property buyer is often the seller. If the seller is
willing to take back a mortgage as part or full payment of the purchase price.
Land Contract: Land contract is a contract where
 Seller retain title
 Purchaser has equitable title
 Seller conveys title when purchaser completes the performance obligations
Default: A failure to fulfill a contract, agreement, or duty, especially a financial obligation such
as a note.
 Failure to fulfill contract, agreement, or duty, especially obligation such as a
note. The most common default is failure to make installment payment
 Beyond installment, failure to pay taxes or insurance premium can also result
in default
Technical default: Even failure to repair the property may result in default called technical default
Purchase money mortgage: A purchase money mortgage is a mortgage issued to the borrower
by the seller of the home as part of the purchase transaction.
Alternatives to Foreclosure
1. Restructuring the mortgage loan: Loans can be restructured in many ways. Such
restructuring could involve lower interest rates, accruals of interest, or extended maturity
dates.
a. Recasting – changing mortgage terms to avoid default
b. Extension agreement between borrower and lender
c. Alternatives – temporary extensions
2. Transfer of the mortgage to a new owner: Mortgagors who are unable or unwilling to
meet their mortgage obligations may be able to find someone who is willing to purchase
the property and either assume the mortgage liability or take the property “subject to” the
existing mortgage.
a. “Subject to” the existing mortgage. The buyer is not responsible for the original
loan
b. Purchase an option on property value
3. Voluntary conveyance of the title to the mortgage (lender): Borrowers who can no
longer meet the mortgage obligation may attempt to “sell” their equity to the mortgages.
a. transfer of title to lender with an agreement. The process is fast and less costly
b. Deed in lieu of foreclosure
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4. A “friendly foreclosure”: A foreclosure action in which the borrower submits to the
jurisdiction of the court, waives any right to assert defenses and claims and to appeal or
collaterally attack any judgment, and otherwise agrees to cooperate with the lender in the
litigation.
a. borrower fully cooperates
5. A prepackaged bankruptcy: Before filling the bankruptcy petition, borrowers agree with
all their creditors to the term on which they will turn their assets over to their creditors in
exchange for a discharge of liabilities.
a. agreement between creditors and a borrower to speed up the process
6. A “short sale” with the lender agreeing to a sale prices less than the loan balance: A
short sale is a sale of real estate in which the proceeds from the sale fall short of the balance
owed on a loan secured by the property sold.
Bankruptcy: It may be defined as a proceeding in which the court takes over the property of a
debtor to satisfy the claims of creditors.
Foreclosure: is a legal process in which a lender attempts to recover the balance of a loan from a
borrower who has stopped making payments to the lender by forcing the sale of the assets used as
the collateral for the loan.
Judicial Foreclosure: is a lawsuit against the property owner to execute a judgement to recover
losses on the loan.
Redemption – process of canceling a foreclosure sale by fulfilling debt obligations
i. Equity of redemption – prior to foreclosure
ii. Statutory right of redemption – after foreclosure
1. Not in every state
Time value of money: The time value of money is the idea that money available at present is
which more than the same amount in the future due to its potential earning capacity.
Annual percentage yield: is the effective annual rate of return taking into accounting the effect
of compounding interest.
(1+periodic rate) ^n -1
Annuity: an annuity is a series of payments mad at equal intervals.
Annuity due: Annuity due is an annuity whose payment is to be made immediately at the
beginning of each period.
An ordinary annuity is a series of equal payments made at the end of consecutive periods over a
fixed length of time.
Simple interest: is the amount of interest is not added to the principal, so there is no compounding.
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Simple annual interest rate is the interest amount per period, multiplied by the number of periods
per year. The simple annual interest rate is also known as the nominal interest rate (not to be
confused with the interest rate not adjusted for inflation, which goes by the same name).
Compound interest: Compounding interest is an interest calculated on initial principle and also
on the accumulated interest of previous periods of a deposit or loan.
Discounting: is a process of determining the present value of a payment or a stream of the payment
that is to be received in the future.
Present value (PV): The current worth of a future sum of money or stream of cash flows given a
specified rate of return.
Present value of annuity: is the current value of asset of cash flow in the future at a given discount
rate.
Future Value (FV): The value of a current asset at a specified date in the future based on an
assumed rate of growth over time.
Future value of annuity: The future value of annuity is the value of a group of recurring payment
at a specified date in the future.
Investment yield: The annual percentage return which is considered to be for a specified valuation
in an investment being expressed as the ratio of annual net income/ investment yield.
Effective Annual Interest Rate/ Yield: The interest rate that is actually earned or paid on an
investment, loan or other financial product due to the result of compounding over a given time
period. It is also called the effective interest rate, the effective rate or the annual equivalent rate.
Calculated as:
Compounding: The process where the value of an investment increases because the earnings on
an investment, both capital gains and interest, earn interest as time passes.
Equivalent nominal annual rate: is the interest that is calculated under the assumption that any
interest paid is combined with the original balance and the next interest payment will be n=based
on the slightly higher account balance.
Internal Rate of Return (IRR): A metric used in capital budgeting to estimate the profitability
of potential investments. Internal rate of return is a discount rate that makes the net present value
(NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same
formula as NPV does.
The payback period: The length of time required to recover the cost of an investment.
Investment Yield: The yield is the income return on an investment, such as the interest or
dividends received from holding a particular security.
Rate of return: A rate of return is the gain or loss on an investment over a specified time period
expressed as a percentage of the investments cost.
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Yield: is the income return on an investment such as the interest or dividends received from
holding a particular security.
Sinking fund: A means of repaying funds borrowed through a bond issue through periodic
payments to a trustee who retires part of the issue by purchasing the bonds in the open market.
Sinking fund factor: is the ratio use to calculate the future value of a series of equal annual
cash flows.
Annual percentage rate: is the rate that is added to the principle of a financial instrument between
cash payment of that interest.
Callable loan: is the loan which become payable when the lender demands its payment.
Default risk: is the possibility that borrower will fail to repay principal and interest in a timely
manner.
Interest: is the charge for the privilege of borrowing money, typically expressed as an annual
percentage rate.
Interest only loan: is a loan in which for a set term, the borrower pays only the interest on the
principal balance unchanged.
Loan constants: is a percentage that shows the annual debt service on a loan compared to its total
principal value.
Lenders usually charge these costs to borrowers when the loan is made, or “closed”, rather than
charging higher interest rates
Loan discount fees/ points: loan discount fees, or points represent an additional finance charge,
but its primary purpose is to adjust the yield on a mortgage loan. In the context of real estate
lending, loan discounting amounts to a borrower and lender negotiating the terms of a loan based
on a certain loan amount.
1. Loan origination fees: Loan origination fees are intended to cover expenses incurred by
the lender for processing and underwriting loan applications, preparation of loan
documentation and amortization schedules, obtaining credit reports, and any other
expenses that the lender believes should be recovered from the borrower.
Pay rate: is the amount of money received per unit of time.

Derived demand: A term used in economic analysis that describes the demand placed on one
good or service as a result of changes in the price for some other related good or service
Real interest rate: An interest rate that has been adjusted to remove the effects of inflation to
reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.
Real Interest Rate = Nominal Interest Rate - Inflation (Expected or Actual)
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Nominal interest rate: The interest rate before taking inflation into account. Nominal can also
refer to the advertised or stated interest rate on a loan, without taking into account any fees or
compounding of interest.
What is the difference between Nominal and Real Interest Rate?
Items Nominal Real Interest Rate

Inflation Nominal Interest Rate is adjusted for Real Interest Rate not adjusted for
inflation. inflation.
Time Value on Nominal Interest Rate does not Real Interest Rate accounts for time
Money account for time value of money. value of money.
Usefulness Nominal Interest Rate does not Real Interest Rate is more accurate than
provide an accurate sense of Nominal Interest Rate since it
investment return since it accounts calculates the actual rate of return
for inflation. excluding inflation.
The interest rate risk: is the risk that an investment's value will change due to a change in the
absolute level of interest rates, in the spread between two rates, in the shape of the yield curve, or
in any other interest rate relationship.
Default risk: is the chance that companies or individuals will be unable to make the required
payments on their debt obligations
Prepayment risk: is the risk associated with the early unscheduled return of principal on a fixed-
income security. When principal is returned early, future interest payments will not be paid on that
part of the principal, meaning investors in associated fixed-income securities will not receive
interest paid on the principal
Mortgage-backed securities: mortgage-backed security (MBS) is a type of asset-backed

security that is secured by a mortgage or collection of mortgages. This security must also be
grouped in one of the top two ratings as determined by an accredited credit rating agency, and
usually pays periodic payments that are similar to coupon payments.
Legislative Risk: is the risk that legislation by the government could significantly alter the
business prospects of one or more companies, adversely affecting investment holding in that
company.
Liquidity risk: is the risk stemming from the lack of marketability of an investment that cannot
be bought or sold quickly enough to prevent or minimize a loss.
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Factors in Mortgage Loan Pricing
Rate of Interest (i) = Real rate of interest +Premium for default and other risks +Premium for
anticipated inflation = r+p+f
FRM Loan Terms
 Loan Amount
 Loan Maturity Date
 Interest Rate
 Periodic Payment
Accrual rate: is the rate of interest that is added to the principal of a financial instrument between
cash payments of that interest. For example, a six-month bond with interest payable semiannually
will accrue daily interest during the six-month term until it is paid in full on the date it becomes
due.
Loan Amortization Patterns
 Constant Payment Mortgage
 Reverse Annuity Mortgage
Amortization: Amortization is the process of loan repayment over time. The paying off of debt
with a fixed repayment schedule in regular installments over a period of time for example with a
mortgage or a car loan.
Fully amortizing payment refers to a periodic loan payment where, if the borrower makes
payments according to the loan's amortization schedule, the loan is fully paid off by the end of its
set term.
Partially amortizing: Loan which is partially repaid by amortization during the term of the loan
and partially repaid at the end of the term.
Negative amortization is an increase in the principal balance of a loan caused by a failure to make
payments that cover the interest due. The remaining amount of interest owed is added to the loan's
principal. For example, if the periodic interest payment on a loan is $500 and a $400 payment is
allowed contractually, $100 is added to the loan's principal balance.
Zero Amortizing: Only interest is paid and principal balance remains constant at the end of the
period.
Anticipated Inflation: The percentage increase in the level of prices over a given period that is
expected by participants in an economy
Mortgage Constant: A ratio between the annual amount of debt servicing to the total value of the
loan. The mortgage constant is only applicable to mortgages that pay a fixed rate.
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Closing Costs: Fees associated with your home purchase that are paid at the closing of a real estate
transaction. Closing is the point in time when the title of the property is transferred from the seller
to the buyer. Closing costs are incurred by either the buyer or seller.
Principal: A term that has several financial meanings. The most commonly used refers to the
original sum of money borrowed in a loan, or put into an investment. Similar to the former, it can
also refer to the face value of a bond. Principal can also refer to an individual party or parties, the
owner of a private company or the chief participant in a transaction.
A prepayment penalty: A clause in a mortgage contract stating that a penalty will be assessed if
the mortgage is paid down or paid off within a certain time period. The penalty is based on a
percentage of the remaining mortgage balance or a certain number of months' worth of interest.
A reverse mortgage: A type of mortgage in which a homeowner can borrow money against the
value of his or her home, receiving funds in the form of a fixed monthly payment or a line of credit.
Unanticipated Inflation: As a consumer, we are all aware that goods have a price that we are
expected to pay in order to receive them. While we are always looking for a great deal, what would
happen if there was not a deal to be found because the general level for the price of goods kept
increasing? Would you buy the goods anyway, or would you wait to purchase the goods? This is
the general concept for inflation, and when this happens unexpectedly, it is known as
unanticipated inflation.
A callable bond: A bond that can be redeemed by the issuer prior to its maturity. If interest rates
have declined since the company first issued the bond, the company is likely to want to refinance
this debt at the lower rate of interest. In this case, the company "calls" its current bonds and reissues
them at a lower interest rate. A callable bond is also referred to as a redeemable bond.
A balloon payment: When the entire loan balance is due and payable. It occurs when a loan is not
amortized. The loan itself generally contains an early due date, involving the payoff of an existing
loan balance. Interest-only loans, also known as straight notes, generally contain a balloon
payment provision, but you can find these provisions in adjustable-rate mortgage loans as well.
Although it is possible for a financing contract to involve a balloon payment for a non-real estate
related loan, the most common usage of a balloon payment is related to a home mortgage. How
these types of payments occur depends on the type of loan?
Debt restructuring is a method used by companies with outstanding debt obligations to alter the
terms of the debt agreements in order to achieve some advantage. Debt restructuring can also be
carried out by individuals on the brink of insolvency and countries heading for default.
Capitalization effect: capitalization effect, that relates to the quality of the public services that
individuals receive relative to the taxes (usually property tax and fees) that are paid for these
services when they choose to purchase housing in a particular neighborhood or municipality
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Comparable properties: no two properties are exactly alike; the appraiser adjusts the values of
similar properties for dissimilarities is called comparable properties.
Cost approach: The cost approach is a real estate valuation method that surmises that the price a
buyer should pay for a piece of property should equal the cost to build an equivalent building. In
cost approach appraisal, the market price for the property is equal to the cost of land plus cost of
construction, less depreciation. It yields the most accurate market value when the property is new.
Distressed property: A distressed property is any property whose owner is in default on the
mortgage.
Driver industries: A variety of strong businesses operating in Superior-Douglas County help
boost the local economy. These businesses play a vital role in the continuing growth of the area.
Economic base: Businesses that generate employment in a community or a geographical area.
Hedge: A hedge is an investment to reduce the risk of adverse price movements in an asset.
Income approach: The income approach is a real estate appraisal method that allows investors to
estimate the value of a property by taking the net operating income of the rent collected and
dividing it by the capitalization rate. The income approach is typically used for income-producing
properties and is one of three popular approaches to appraising real estate.
Loan to value ratio: The loan-to-value ratio is a lending risk assessment ratio that financial
institutions and others lenders examine before approving a mortgage.
Location quotient: Location quotient (LQ) is a valuable way of quantifying how concentrated a
particular industry, cluster, occupation, or demographic group is in a region as compared to the
nation. It can reveal what makes a particular region “unique” in comparison to the national average.
Market value: the highest estimated price that a buyer would pay and a seller would accept for
an item in an open and competitive market.
Public goods: a public good is a good that is both non-excludable and non-rivalrous in that
individuals cannot be effectively excluded from use and where use by one individual does not
reduce availability to others.
Sales comparison: A real estate appraisal method that compares a piece of property to other
properties with similar characteristics that have been sold recently. The sales comparison approach
takes into account the affect that individual features have on the overall property value, meaning
that the total value of the property is a sum of the values of all of its features. Real estate
agents and appraisers may use this approach when evaluating properties to sell.
Seller financing: Seller financing is a loan provided by the seller of a property or business to the
purchaser.
Submarket: a specialized market within a larger market
Economic Influences on Housing Demand
 Population Growth -Positive  Employment - Positive
 Household Formations - Positive  Household Income - Positive
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 Interest Rates - Negative  Cost of Renting Housing - Positive
 Federal Income Tax Rates - Negative
Tax Savings/Benefit: A tax benefit is an allowable deduction on a tax return intended to reduce a
taxpayer’s burden while typically supporting certain types of commercial activity.
Deductible Expenses: One which you can subtract from your taxable gross income. It reduces
your tax liability. Such as property taxes.
Nondeductible Expenses: It doesn’t impact your tax bill. Certain expenses are always deductible,
while others can never be deducted. Such as maintenance and insurance.
Why could renting be favored in spite of financial returns on equity in residential ownership?
 Need for flexibility  Desire to shift maintenance, security
 Lack of Funds and management
 Credit Quality  Desire to avoid volatility or risk of
 No desire to bear the risk loss
Housing Bubbles: The term bubbles used to describe an extraordinary market condition in which
house buyers and speculators cause prices to increase to levels that cannot be sustained.
Bubbles Burst: Fears of significant increases in mortgage payments slowed home buying and
reduced the rate of house appreciation, with many investors believing that prices could decline.
𝐻𝑃(𝐸𝑛𝑑𝑖𝑛𝑔)−HP(Beginning)
Expected Rate of Appreciation in House Prices (EHAP) = 𝐻𝑃(𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔)
𝐻𝑃(𝐸𝑛𝑑𝑖𝑛𝑔)−𝐻𝑃(𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔)
Expected Appreciation Rate on Home Equity (EAHE) = 𝐿𝑜𝑎𝑛
𝐻𝑃(𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔)×(1−𝑉𝑎𝑙𝑢𝑒 )
Unrealized Equity Gains: The owner has the option of realizing by selling the residence or
refinancing.
Wealth Effect: This is the effect that expected appreciation in assets, including home equity, may
have on consumer spending on other goods and services in the economy. This comes about as
consumers feel more financially secure about their future economic well-being, because their
stocks, bonds, and houses are rising in value.
Reverse Wealth Effect: Where prices are declining, consumer spending also may decline as a
result of it.
Reasons of Comparative Advantages in Real Estate Finance
 Natural Advantages
 Employee Characteristics
 Proximity to many major consumer markets
Base/Driver Industry: Any region which employs a greater than proportionate amount of workers
in that industry than is the case for that country as a whole.
Supporting Industry: Any region which employs a lesser than proportionate amount of workers
in that industry than is the case for that country as a whole.
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Economic Base Analysis
 Location Quotients: A valuable way of quantifying how concentrated a particular
industry, cluster, occupation, or demographic group is in a region as compared to nation.
 Employment Multipliers: This aspect of economic base analysis is conducted to
determine how total employment in a region is affected by changes in base employment.
Housing Supply is determined by the relative cost of land, labor, and capital (materials)
Pricing Approaches
 Market/Sales Comparison: It involves selecting properties in the same submarket or in
close proximity to the subject property.
Subject value estimate = Comparable sales price ± Feature differences
 Cost: It involves estimating the cost to reproduce the structure (less depreciation), and then
adding the value of the land (site) to it in arriving at a value.
Subject value estimate = Cost new – Depreciation + Land value
 Income: It is a process whereby comparable residences that are currently renting for
income are used to estimate the value of the subject.
Subject value estimate = GRM × Rental income
Over- Improvement: When individuals make improvements that they may prefer and/or believe
will add value to the property. However, buyers in the market may not agree and will not pay for
the full cost of the improvement.
Under-Improvement: If too small a house is built on a large site. In this case, individuals may
not be willing to pay as much for the property as they would have if the relationship between the
site and the improvement had been conformity with other properties in the market area.
Depreciation: An accounting method of allocating the cost of a tangible asset over its useful life.
Types of Depreciation
 Physical Depreciation: Depreciation in the property’s value resulting from normal wear.
 Functional Obsolescence: Depreciation resulting from internal property characteristics
that make the property less livable or marketable than it was when first constructed.
 External Obsolescence: It is caused by characteristics external to the property, such as
changing land uses in a neighborhood that cause a structure to become obsolete before the
actual building wears out.
Gross Rent Multiplier: The ratio of sale price to monthly rental income.
Distressed Properties: It provides opportunities for investors to acquire properties at below
current market prices.
Why do people become distressed?
 Borrower inability to make mortgage payments
 Market Value of the Property below the Mortgage Balance
 Delinquent Property Taxes/Property Tax Liens
 Internal Revenue Service Tax Liens
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 Civil Judgments/Bankruptcy/Divorce
 Mechanics and/or Construction Loan Liens
 Personal Debts
 Estate Settlements.
Financial Framework for Analyzing Distressed Properties
 Acquisition Phase
 Sources of Information for Identifying Distressed Properties
 Legal Research
 The Auction Process
 Lenders at Auctions
 Buying at Auctions Conducted by Public Entities
 Market Research/Costs
 Inspection Costs
 Holding Period Phase
 Renovation Cost
 Interest or other financial carrying costs
 Property taxes and insurance
 Disposition Phase
ALTA loans: ALTA/Alternative to A paper/Low doc loan is loan where “A paper” is a low
risk, conforming loan such as self-employment income. Borrower may have sufficient assets (cash,
stocks etc.) to be approved for a loan.
Certificate of reasonable value: A document issued by the Veterans Administration establishing
maximum value and loan amount for a VA guaranteed mortgage.
Department of Veterans affairs: Department of Veterans Affairs provides patient care and
federal benefits to veterans and their dependents
Guarantees: A formal assurance (typically in writing) that certain conditions will be fulfilled,
especially that a product will be repaired or replaced if not of a specified quality.
Payment to income ratio: The ratio of monthly payments (both mortgage and real property tax
payments) to monthly income, a measure of the ability of the applicant to make monthly payments.
Residual income: Residual income measures the excess of the income earned over the desired
income
Underwriting: The process of evaluating a borrower’s loan request in terms of potential
profitability and risk.
Underwriting Analysis Base
 Loan Application
 An appraisal of the property
Default Insurance: The borrower purchases this insurance policy to protect the lender from
potential losses should the borrower default on the loan.
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Payment-to-Income Ratio: The monthly payment on the loan amount being applied for plus other
housing expenses divided by the borrower’s income.
Loan-to-Value Ratio: The loan amount requested divided by the estimated property value.
Fixed Rate Mortgage: Making payments as scheduled.
Adjustable Rate Mortgage: Making payments as market condition changes interest rate.
Major Problems Facing a lender when reviewing a loan request-
 Assessing variables that affect default risk
 Determining whether a fixed interest rate or adjustable rate mortgage can be made
 If the total risk on a particular loan request is too great, deciding whether the loan should
be refused or made with default insurance or guarantees from third parties
Default Risk: A potential loss that could occur if the borrower failed to make payment on a loan.
Classification of Mortgage Loans
 Conventional Mortgages: Negotiated between lender and borrower where maximum loan
amount will be 80 percent of value and equity of at least 20 percent of value must be
provided by the borrower.
 Insured Conventional Mortgages: If the income-earning ability of the borrower and the
location of the property being acquired are satisfactory, lenders may be willing to grant a
loan request in excess of 80 percent of value with a condition that the borrower purchase
mortgage insurance against default risk.
 FHA Insured Mortgages: FHA does not make loans but provides insurance. Because
FHA accepts the entire risk of borrower default, it maintains strict qualification procedures
before the borrower and property will be accepted under its insurance program.
 VA guaranteed mortgage loans: VA provides a loan guarantee, not default insurance.
GSE’s (Government Sponsored Enterprises) Loan Classification

 Conforming: This category specifies the maximum loan amount.
 Nonconforming (Jumbo): Loan amount greater than maximum amount.
 Subprime: Deficiency in credit listing
 ALTA/Alternative to A paper/Low doc where “A paper” is a low risk, conforming
loan such as self-employment income. Borrower may have sufficient assets (cash,
stocks etc.) to be approved for a loan.
Mortgage Insurance: Insurance which is made against default risk.
Mortgage Insurer: Private companies that operate by collecting premiums from borrowers based
on the incremental risk being assumed as loan amounts rise above 80 percent.
The Underwriting Process
 Borrower Income: Verify place of employment, verify wages, inquire as to whether
employment is likely to continue into the future and other possible income sources.
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 Verification of Borrower Assets: Assets must be sufficient to pay closing costs and make
a down-payment.
 Assessment of Credit History: Based on punctual payments, capacity used, length of
credit history experience, types of credit used and searches/inquiries.
 Estimated Housing Expense: Principal and interest on the mortgage being applied for,
mortgage insurance, property taxes, hazard insurance, and condominium or cooperative
homeowner’s association dues.
Borrower Strategies to Consider During the Loan Underwriting Period

 Lock-in period and fee: Lock-in period is a commitment by the lender to make a loan at
a specific rate of interest for a specified number of days, even though market interest rates
may change prior to the actual loan closing.
 Prepayment Penalty: Borrowers may be able to negotiate a lower interest rate from
lenders in exchange for a prepayment penalty. With such a penalty, borrowers may repay
their loan early if they sell their property.
 Private Mortgage Insurance (PMI): This is usually required for loans that are over 80
percent of value.
 Option to eliminate PMI or FHA insurance after closing: These requirements may be
dropped when loan-to-value ratios reach 80 percent.
 Buying down interest rates: It may be compared with making larger down payments.
 Subprime Loans: Providing loan to a person who has low credit score by charging higher
interest rates.
 Power Payment Option: This allows a borrower to miss up to two monthly payments in
any year or up to 10 payments over the life of the loan. An up-front fee is charged for this
option, plus a usage fee which is added to the loan balance each time the option is used.
The Closing Process
 Fees and Expenses: Loan application fee, Credit report, Loan origination fee, Lender’s
attorney’s fees, Property appraisal fee required by the lender, Fees for property survey and
photos when required by the lender, Fees for preparation of loan amortization schedule by
the lender from the borrower, Loan discount points and Prepaid interest.
 Proration’s, Escrow Costs, and Payments to Third Parties: Property taxes, Proration’s,
and Escrow accounts; Mortgage Insurance and Escrow accounts; Hazard Insurance and
Escrow Accounts; Mortgage Cancelation Insurance and Escrow Accounts; Title Insurance,
Lawyer’s Title Opinion; Release Fees; Attorney’s Fee; Pest Inspection Certificate; and
Real Estate Commission.
 Statutory Costs: Recording fees and Transfer tax
RESPA: Requirements under the Real Estate Settlement and Procedures Act
The essential aspects of RESPA fall into seven areas that are used here to facilitate discussion:
 Consumer information
 Advance disclosure of settlement costs
 Title insurance placement
 Prohibition of kickbacks and referral fees
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 Uniform settlement statement
 Advance inspection of uniform settlement statement
 Escrow deposits
Build to suit: Build to Suit provides a "design build" approach to construction that speeds the
delivery of projects, ensures quality and minimizes cost.
Construction/ interim loan: Interim construction loan is a short term loan for the
actual construction of a project which ordinarily matures upon completion of the project.
Contingencies: contingency is a potential negative event which may occur in the future such as a
natural disaster, fraudulent activity or a terrorist attack.
Exculpation/ nonrecourse clause: an exculpatory clause is a clause that eliminates a party s
liability for damages caused by a breach of contract. A common type of exculpatory
clause involves limiting liability on a loan to the collateral.
Feasibility analysis: An analysis and evaluation of a proposed project to determine if it (1) is
technically feasible, (2) is feasible within the estimated cost, and (3) will be profitable
Gap financing: Gap Financing is a term mostly associated with mortgage
loans or property loans such as a bridge loan. It is an interim loan given to finance the difference
between the loan and the maximum permanent loan as committed.
Hard costs: Purchase price of a hard asset such as land, building, inventory, equipment or
machine, as opposed to accounting, banking, financing, or legal cost.
Holdbacks: General: (1) Sum of money that remains unpaid until certain conditions are met. (2)
Sum of money kept as a reserve to cover certain contingencies.
Mini-perm loan: A mini perm loan is a temporary form of financing that is commonly used in
commercial projects. It is a tool that many investors use to get around traditional bank loans. If
you are ever involved in a commercial development project, the chances that you will come across
the need for a mini perm loan are great.
Permanent financing: A mortgage loan or a bond that has been issued with a maturity period that
extends between 15 to 30.
Seasoned property: (a) each Real Property (other than a New Property) owned by the
Consolidated Parties on a consolidated basis and all Unconsolidated Affiliates (as the case may
be) and (b) upon the occurrence of the Seasoned Date of any New Property, such Real Property.
Soft cost: A cost for an item that is not considered direct construction cost. Soft costs include
architectural, engineering, financing, and legal fees, and other pre- and post-construction
Speculative:/ open ended construction lending: It is a tactic used by investors/ traders to hold
cash so as to make the best use of any investment opportunity that arises later on.
Triparty buy sell agreement: A tri-party agreement is a business agreement between three
separate parties. In the mortgage industry, a contract involving the buyer, the primary lender plus
a construction lender. This type of contract is commonly used to secure bridge loans for the
construction of a home or other real estate.
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Important terms/project development
Setback/building line—requirement to construct building a specified number of feet (setback)

from the right-of-way line or other landmark.
Right-of-way line—area designated for a public street or alley that is dedicated for traffic, public
use, utilities, etc. Public entities own this area and the general public has a right to use it. As a
result, no improvements are generally allowed to be constructed on rights-of-way.
Risk associated with Project Development:

 Market Risk: Construction delays, price increases in materials, and interest rate increases.
 Project Risk: Location of site, cost of acquisition, cost of building improvements, cost of
a given site increases, price of land increases, cost of quality improvements.
Developer’s Business Strategies Loan Structure

Owning and managing them for many years Long-term financing
Selling to institutional investors after the lease up phase Short-term financing
Involving in a combination of land development and the Mini-perm financing
development of commercial property
Construction/Interim Loan: The loan used for funds to construct the building and other site
improvements.
Hard Costs: Materials and labor for site improvements.
Soft Costs: Leasing costs, planning costs, and management.
Permanent or Take-Out Commitments: The permanent lender makes a commitment in writing
and specifies contingencies that the developer-borrower must meet before the permanent lender’s
commitment becomes legally binding. When these contingencies are met, the permanent lender
will provide funds for the developer to repay the construction loan.
Standby Commitments: It may be obtained occasionally from a “standby” lender (1) when the
developer cannot or does not want to pay fees to obtain a permanent loan commitment, (2) because
the borrower expects to find a permanent loan commitment elsewhere after construction is under
way and preleasing occurs on better borrowing terms, or (3) because the developer is planning to
sell the project upon completion and lease-up and does not believe a permanent loan will be
needed.
Contingencies in Lending Commitments:
 A maximum amount of time to obtain a construction loan commitment
 A date for completion of construction
 Minimum rent-up (leasing) requirements and an approval of major leases
 An expiration date of the permanent loan commitment and any provisions for extensions
 An approval by the permanent lender of design changes and substitution of any building
material
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Gap Financing: A term mostly associated with mortgage loans or property loans such as a bridge
loan. It is an interim loan given to finance the difference between the floor loan and the maximum
permanent loan as committed.
Mini-perm Loan: Rather than negotiating a construction loan and a permanent loan, a developer
may obtain a single loan from an interim lender and use it to finance construction and operations
for a year or two beyond the lease-up stage.
Monthly draw method: The developer requests a draw each month based on the work completed
during the preceding month.
Floating Interest Rate: An interest rate that moves up and down with the rest of the market or
along with an index.
Prime Lending Rate: An interest rate used by banks, usually the interest rate at which banks lend
to customer-i.e., those with good credit.
Requirements to Close the Interim Loan
 Assignment of Commitment Letter
 Tri-party Buy-Sell Agreement
Holdbacks: When project developers contact with various building contractors to perform work,
developers hold back a percentage (10%) of each progress payment made to such contractors until
all work is satisfactorily completed.
Percentage Rent/Overage: Percentage of the sales of a tenant in excess of a predetermined
breakpoint or sales volume.
Below/Equal Breakpoint= Fixed Rent
Above Breakpoint= Fixed Rent + Percentage (Fixed) of excess amount
Sensitivity Analysis: Enable investors to review the impact of change in one variable upon the
overall investment.
1. Price Sensitivity
2. Down Payment Sensitivity
3. Loan to Interest
a. Loan Amount
b. Interest Rate
Feasibility Analysis: A feasibility study is an analysis of how successfully a project can be
completed, accounting for factors that affect it such as economic, technological, legal and
scheduling factors
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Course Code: F-307
Course Title: Security Analysis and Portfolio Management
Portfolio: A portfolio is a group of securities held together as investment. A portfolio is a grouping
of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts,
including mutual, exchange-traded and closed funds.
Portfolio Management: the art and science of selecting the right investment policy for individuals
in terms of minimum risk and maximum return is called portfolio management.
Portfolio Manager: A portfolio manager is a person or group of people responsible for investing
a mutual, exchange-traded or closed-end fund's assets, implementing its investment strategy and
managing day-to-day portfolio trading
Process/Phases:
1. Security Analysis
2. Portfolio analysis
3. Portfolio selection
4. Portfolio revision
5. Portfolio evaluation
Security: A security is a fungible, negotiable financial instrument that holds some type of
monetary value. It represents an ownership position in a publicly-traded corporation (via stock),
a creditor relationship with a governmental body or a corporation (represented by owning that
entity's bond), or rights to ownership as represented by an option.
Security Analysis: The securities available to an investor for investment are numerous and of
various types. The securities are classified into 2 categories.
1. Equity security and
2. Creditor ship securities.
Two approach:
1. Fundamental Analysis: Fundamental analysis is a method of evaluating a security in an
attempt to measure its intrinsic value, by examining related economic, financial and other
qualitative and quantitative factors.
2. Technical Analysis: Technical analysis is a trading tool employed to
evaluate securities and attempt to forecast their future movement by analyzing statistics
gathered from trading activity, such as price movement and volume.
Portfolio Analysis: Portfolio analysis consists of identifying the range of possible portfolios that
can be constituted from a given set of securities and calculating their return and risk for further
analysis.
Portfolio selection: The goal of portfolio selection is to generate a portfolio that provides the
higher returns with lower risk.
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Portfolio Revision: The art of changing the mix of securities in a portfolio is called as portfolio
revision. Portfolio revision is the process of addition of more assets in an existing portfolio or
changing the ratio of funds invested.
Portfolio Evaluation: Portfolio evaluation is the process which is concerned with assessing the
performance of the portfolio over a selected period of time in terms of return and risk.
Financial derivative: A derivative is a financial contract that derives its value from an underlying
asset. The buyer agrees to purchase the asset on a specific date at a specific price. A derivative is
a contract between two or more parties whose value is based on an agreed-upon
underlying financial asset or set of assets (like an index).
1. Options: Options are contracts between two parties to buy or sell a security at a given
price. They are most often used to trade stock options, but may be used for other
investments as well.
 Call Option: A call option is an agreement that gives an investor the right, but not the
obligation, to buy a stock, bond, commodity or other instrument at a specified price within
a specific time period.
 Put option: A put option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an underlying security at a specified price within
a specified time.
2. Futures Contract: is essentially an agreement to buy or sell an underlying asset such as a

security or foreign currency at a certain time in the future for a predetermined price.
3. Forward contract is a non-standardized contract between two parties to buy or to sell an

asset at a specified future time at a price agreed upon today, making it a type of derivative
instrument.
4. Swaps: Swaps give investors the opportunity to exchange the benefits of their securities
with each other. For example, one party may have a bond with a fixed interest rate, but is
in a line of business where they have reason to prefer a varying interest rate. They may
enter into a swap contract with another party in order to exchange interest rates.
Investment: A commitment of funds made in the expectation of some positive rate of return. An
investment is an asset or item that is purchased with the hope that it will generate income or will
appreciate in the future.
In an economic sense, an investment is the purchase of goods that are not consumed today but are
used in the future to create wealth.
In finance, an investment is a monetary asset purchased with the idea that the asset will provide
income in the future or will be sold at a higher price for a profit.
Objective of Investment:
3 Objectives basically.
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1. Maximization of Return
2. Minimization of Risk
3. Hedge Against Inflation.
Speculation involves trading a financial instrument involving high risk, in expectation of
significant returns.
Types of investors:
1. Individual investors are those who are large in number but their investable resources are
comparatively smaller.
2. Institutional Investors are those who have a surplus of fund and engage in investment
activities. The institutional investors are fewer in number but their investable resources are
much larger.
Gambling: Gambling is the wagering of money or something of value (referred to as "the stakes")
on an event with an uncertain outcome with the primary intent of winning money or material goods
Investment VS speculation:
Particulars Investment Speculation
1)Risk Low risk bearing High risk bearing
2)capital gain Receive Stable return Making large capital gain
3)time period Long term Nature Short term nature
Speculation: Speculation is the purchase of an asset (a commodity, goods, or real estate) with the
hope that it will become more valuable at a future date.
1. Long buy: If s speculator feels that a security is underpriced or that a security which is
correctly priced at the moment is likely to show a rising trend then he would like to buy
the security for the purpose of selling it at a higher price when the price rises as anticipated.
2. Short sale: If a speculator estimates that a security is overpriced and its price is likely to
decline shortly, he would like to sell security at the current price and buy sometime of the
later when the price declines so as to deliver the security sold at the time is settlement of
the trade.
Speculators: The speculators are not genuine investors. They buy securities with a hope to sell
them in future at a profit. They are not interested in holding the securities for longer period.
Kinds of Speculators
The speculators are classified into four categories such as
1. Bull,
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2. Bear,
3. Stag, and
4. Lame Duck.
Bull: A bull is an optimistic speculator. He expects a rise in the price of the securities in which he
deals. Therefore, he enters into purchase transactions with a view to sell them at a profit in the
future. If his expectation becomes a reality, he shall get the price difference without actually taking
delivery of the securities.
Bear: A bear is a pessimistic speculator who expects a sharp fall in the prices of certain securities.
He enters into selling contracts in certain securities on a future date. If the price of the security
falls as he expects he shall get the price difference.
Stag: A stag is considered as a cautious investor when compared to the bulls or bears. He is a
speculator who simply applies for fresh shares in new companies with the sole object of selling
them at a premium or profit as soon as he gets the shares allotted.
Lame Duck: When a bear is unable to meet his commitment immediately, he is said to be
struggling like a lame duck.
Margin trading: Margin trading refers to the practice of using borrowed funds from a broker to
trade a financial asset, which forms the collateral for the loan from the broker.
Financial Market: A financial market brings buyers and sellers together to trade in financial
assets such as stocks, bonds, commodities, derivatives and currencies.
1. Primary Market: The primary market is the part of the capital market that deals with
issuing of new securities. Primary markets create long term instruments through which
corporate entities raise funds from the capital market.
When a new company is floated, its share is issued to the public in the primary market as an
Initial Public Offer (IPO). The NIM has three functions to perform. They are-
1.Origination
2.Underwriting
3.Distribution
 Origination: Origination is the preliminary work in connection with the flotation
of a new issue by a company. The origination works are,
1.Time of floating the issue
2. Type of Issues
3.Price of the issue
 Underwriting: The second function performed by NIM is underwriting which is
the activity of providing a guarantee to the issuer to ensure successful marketing of
the issue.
 Distribution: The third function of NIM is distribution which carried out by
brokers, sub-brokers and agents. New Issues have to be published by using different
mass media, such as newspaper, magazines, television, radio, internet etc.
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Methods of floating new issues:
i. Public issue: Issue of stock on a public market rather than being privately funded by
the companies own promoter(s), which may not be enough capital for
the business to start up, produce, or continue running. By issuing stock publically,
this allows the public to own a part of the company, though not be a controlling factor.
ii. Right issue: A rights issue is a dividend of subscription rights to buy
additional securities in a company made to the company's existing security holders.
iii. Private replacement: A private replacement is a sale of securities privately by a company
to a selected group of investors.
2. Secondary Market: The secondary market is where investors buy and sell securities they
already own.
Capital Markets: Long term securities. Capital markets include the equity (stock) market
and debt (bond) market. Together, money markets and capital markets comprise a large portion of
the financial market and are often used together to manage liquidity and risks for companies,
governments and individuals.
Money Markets: Money markets are used by government and corporate entities as a means for
borrowing and lending in the short term, usually for assets being held for up to a year. Treasury
bills, commercial paper, negotiable certificates of deposit, repurchase agreements, federal
agreements, federal funds and banker acceptances.
OTC Market: A decentralized market, without a central physical location, where market
participants trade with one another through various communication modes such as the telephone,
email and proprietary electronic trading systems.
Book Building: Book building is the process by which an underwriter attempts to determine at
what price to offer an initial public offering (IPO) based on demand from institutional investors.
Prospectus: A prospectus is a formal legal document that is required by and filed with
the Securities and Exchange Commission that provides details about an investment offering for
sale to the public.
Under Writer: An underwriter is any entity that evaluates and assumes another entity's risk for a
fee, such as a commission, premium, spread or interest.
Stock exchange: A stock exchange is an exchange where stock brokers and traders can buy and
sell shares of stock, bonds, and other securities. A centralized market for buying and selling stocks
where the price is determined through supply-demand mechanisms.
Functions of Stock Exchange: It have four essential functions.
1) To provide market placing.
2) To provide liquidity.
3) To help valuation of the securities.
4) To help booming the economy.
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Element:
1. Investors
2. Brokers
3. Clearing House
Trading system:
 Floor trading: Buyers and seller transact business face to face using a variety of signals.
 Screen based Trading: A fully automated computerized mode of trading.
1. Quote driven system: The dealer inputs two way quotes into the system. A dealer
in particular security, input two way quotes into the system that is bid price and
offer price
Bid Price- Buying Price
Offer price- Selling Price
2. Order Driven System: Clients place their buy and sell orders with the brokers.
Types of order:
An investor may place two type of order namely
Market Orders: In a market order, a broker is instructed to buy or sell a stated number of
shares immediately at the best possible price in the market.
Buy Limit Orders: A buy limit order sets the maximum price that the investor will pay for the
security. The order may never be executed at a price higher than the investor’s limit price.
“buy at tk. 50 or less”

“sell at tk. 60 or more”
No guarantee that limit order will be executed
There are certain types of orders to protect their profit or limit their losses:
Stop Orders / Stop Loss Orders: A stop order or stop loss order can be used by investors to limit
or guard against a loss or to protect a profit. A stop order will be placed away from the market in
case the stock starts to move against the investor.
Buy Stop Orders: A buy stop order is placed above the market and is used to protect against a
loss or to protect a profit on a short sale of stock. A buy stop order could also be used by a technical
analyst to get long the stock after the stock breaks through resistance.
Sell Stop Orders: A sell stop order is placed below the market and is used to protect against a loss
or to protect a profit on the purchase of a stock. A sell stop order could also be used by a technical
analyst to get short the stock after the stock breaks through support.
Stop Limit Orders: An investor would enter a stop limit order for the same reasons they would
enter a stop order. The only difference is that once the order has been elected the order becomes a
limit order instead of a market order.
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Day order: Valid only for the trading day on which the order is placed. If the order is not executed
by the end of the day, it is treated as cancelled.
Month orders: Valid till the end of the month during which the orders are placed. Month order
expire at the close of the trading session on the last working day of the month.
Open orders: Valid till they are executed by the brokers or specifically cancelled by the investor.
They are also known as GTC orders.
Fill or Kill order: These order are also known as FOK orders. These order mean to be executed
immediately, if not they are to be treated as cancelled.
Modern Portfolio Theory – MPT: Modern portfolio theory (MPT) is a theory on how risk-averse
investors can construct portfolios to optimize or maximize expected return based on a given level
of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory,
it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible
expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his
paper "Portfolio Selection," published in 1952 by the Journal of Finance.
Variance: Variance is the expectation of the squared deviation of a variable from its mean.
Informally, it measures how far a set of (random) numbers are spread out from their average value.
Standard deviation: is a measure that is used to quantify the amount of variation or dispersion of
a set of data values.
Optimal portfolio: A portfolio that provides the highest return and the lowest risk is known as
optimal portfolio.
Arbitrage pricing theory: Arbitrage pricing theory is an asset pricing model based on the idea
that an asset's returns can be predicted using the relationship between that asset and many common
risk factors. This theory predicts a relationship between the returns of a portfolio and the returns
of a single asset through a linear combination of many independent macroeconomic variables.
Single Index Model: A less restrictive form of the single index model. The Single Index Model
(SIM) is an asset pricing model, according to which the returns on a security can be represented as
a linear relationship with any economic variable relevant to the security.
Alpha: is the difference between actual return and expected return.
Beta: is the measurement of systematic risk. Beta is equal to the covariance of returns of the stock
with the returns of the market divided by the variance of the returns of the market.
Zero Model: It indicates a market condition where alpha is assumed to be zero and beta is 1.
Combination line: is a line that shows the relations between portfolios expected return and
standard deviation of various portfolios.
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Efficient Market: is a market which security prices adjust rapidly to the arrival of new information
and therefore, the current prices of securities reflect all information.
It includes
1) Past information
2) Public information
3) Private information
Efficient Market Hypothesis: is that asset price reflecting all available information like past,
public and private information.
Factors that affecting efficient market:
1. Time frame of price adjustment

2. Transaction cost and information acquisition cost
3. Market value vs intrinsic value
4. Other factor
The Three Basic Forms of the EMH: The efficient market hypothesis assumes that markets are
efficient. However, the efficient market hypothesis (EMH) can be categorized into three basic
levels:
a) Weak-Form EMH: The weak-form EMH implies that the market is efficient, reflecting
all market information. This hypothesis assumes that the rates of return on the market
should be independent; past rates of return have no effect on future rates. Given this
assumption, rules such as the ones traders use to buy or sell a stock, are invalid.
b) Semi-Strong EMH: The semi-strong form EMH implies that the market is efficient,
reflecting all publicly available information. This hypothesis assumes that stocks adjust
quickly to absorb new information. The semi-strong form EMH also incorporates the weak-
form hypothesis. Given the assumption that stock prices reflect all new available
information and investors purchase stocks after this information is released, an investor
cannot benefit over and above the market by trading on new information.
c) Strong-Form EMH: The strong-form EMH implies that the market is efficient: it reflects
all information both public and private, building and incorporating the weak-form EMH
and the semi-strong form EMH. Given the assumption that stock prices reflect all
information (public as well as private) no investor would be able to profit above the average
investor even if he was given new information
Why Should Capital Market Efficient?

1) A large number of profit maximizing participants analyze and value securities.
2) New information regarding securities comes to the market in a random fashion.
3) Profit maximizing investor adjust security price rapidly to reflect the new information
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Alternative Efficient Market Hypothesis: The efficient market hypothesis (EMH) is an
investment theory that states it is impossible to "beat the market" because stock market
efficiency causes existing share prices to always incorporate and reflect all relevant information.
Active investing: Active investing refers to an investment strategy that involves ongoing buying
and selling actions by the investor. Active investors purchase investments and continuously
monitor their activity to exploit profitable conditions.
Passive investing: Passive investing is an investment strategy that aims to maximize returns over
the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the
fees and the drag on performance that potentially occur from frequent trading. Passive investing is
not aimed at making quick gains or at getting rich with one great bet, but rather on building slow,
steady wealth over time.
The January effect: The January effect is a seasonal increase in stock prices during the month of
January. Analysts generally attribute this rally to an increase in buying, which follows the drop in
price that typically happens in December when investors, engaging in tax-loss harvesting to offset
realized capital gains, prompt a sell-off. Another possible explanation is that investors use year-
end cash bonuses to purchase investments the following month.
A market anomaly: A market anomaly (or market inefficiency) in a financial market is

a price and/or rate of return distortion that seems to contradict the efficient-market hypothesis.
a) Overreaction anomalies: A market hypothesis stating that investors and traders react
disproportionately to new information about a given security. Stock prices become inflated
for those companies releasing good or bad news.
b) Momentum anomalies: Securities that have experienced high returns in the short term
tend to continue to generate higher returns in subsequent periods.
A closed-end fund: A closed-end fund is a pooled investment fund with a manager overseeing the
portfolio; it raises a fixed amount of capital through an initial public offering (IPO)
Behavioral finance: Behavioral finance is a relatively new field that seeks to combine behavioral
and cognitive psychological theory with conventional economics and finance to provide
explanations for why people make irrational financial decisions.
Traditional Finance: Traditional Finance focuses on how individuals should behave.
Index: Index is the estimation of determining risk as well as evaluating the performance of stocks
and ultimately overall movement in the market.
Stock market index: It is a measurement of the value of a section of the stock market to measure
the growth of value.
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Uses of security market index:
1) To compute total risk and return.
2) To provide benchmark.
3) To track the performance of the specified market.
4) To measure aggregate market movement.
5) To predict future price movement.
Portfolio: Portfolio is a group of security get together under a single investment undertaking.
Portfolio Analysis:
 is a step of portfolio management process;
 comes after security analysis;
 analyses the expected rate of return & level of risk;
Expected return of a portfolio:
Risk of portfolio:
 Portfolio variance; &
 Portfolio standard deviation.
Portfolio variance:
 Variance of each security;
 Covariance between the securities; &
 Portfolio weights for each security.
Return: A return is the gain or loss of a security in a particular period.
Risk: Probability or uncertainty that and investor’s actual return or gain will be different from
expected. Risk is the potential for variability in returns.
Systematic risk Market risk or non –diversifiable risk: Can’t be avoided and denoted by beta.
Systematic risk is measured by beta.
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Unsystematic risk/diversifiable risk: Can be reduced through diversification. is the risk that
something with go wrong on the company or industry level Unsystematic risk is measured by
standard deviation.
Systematic risk + unsystematic risk =Total risk
Systematic Risk:
1) Interest rate risk: Interest rate risk is a type of systematic risk that particularly affects debt
securities like bonds debentures.
2) Market risk: Market risk is a type of systematic risk that affects shares. Market prices of
shares moves up or down consistently for same times periods.
3) Purchasing power of risk: Another type of systematic risk is the purchasing power of
risk. It refers to the variation in investor returns caused by inflation.
Unsystematic Risk:
There are two types of unsystematic risk –Business risk & Financial risk
1. Business risk: Business risk is the possibility a company will have lower than anticipated
profits or experience a loss rather than taking a profit. Business risk is influenced by
numerous factors, including sales volume, per-unit price, input costs, competitions, the
overall economic climate & government regulations.
2. Financial risk: Financial risk is any of various types of risk associated with financing,
including financial transactions that include company loans in risk of default.
Qualitative risk analysis: Evaluates and documents the probability and the impact of potential
project risk against a predefine scale.
Quantitative risk analysis: Numerically evaluates the effect of potential project on project targets.
Risk aversion: is the reluctance of a person to accept a bargain with an uncertain payoff rather
than another bargain with more certain, but possibly lower, expected payoff.
Investor’s view of risk:
a) Risk Averse: Risk averse refers to an investor who, when faced with two investments with
a similar expected return, prefers the one with the lower risk.
b) Risk neutral: is a mindset where an investor is indifferent to risk when making an
investment decision.
c) Risk seeking: Risk seeking is the search for greater volatility and uncertainty
in investments in exchange for anticipated higher returns.
Risk premium: is the excess rate of return over the risk free rate.
Utility: Utility is a measure of investor’s welfare.
CAPM: CAPM is a model that describes the equilibrium relationship between expected return and
the risk of a security.
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CML: is a line that shows equilibrium relation between expected return and total risk for all
efficient and diversified portfolios.
SML: is a line defecting tradeoff between systematic risk and expected return for all assets.
Characteristic line: Relationship between return of stock and return of the market.
Cardinal /Quantitative: Economists hold the view that utility is measured quantitatively, like
length, height, weight, temperature, etc. This concept is known as cardinal utility concept such
as 1,2,3 etc.
Ordinal/ Qualitative: Ordinal utility concept expresses the utility of a commodity in terms of
‘less than’ or ‘more than’. Take a read of the article to know the important differences between
cardinal and ordinal utility. Such as: tea/coffee/milk.
Sharp ratio/reward to variability ratio: measures the excess return per unit of total risk
measured by standard deviation.
Treynor ratio/reward to volatility ratio: measures the excess return per unit of systematic risk
measured by beta.
Jensen’s Alpha: is the difference between actual return and expected return.
Information ratio: It divides the alpha of the portfolio by nonsystematic risk of the portfolio,
called tracking error in the industry.
Course Code: F-308

Course Title: Monetary and Fiscal Policy
Money: Money is an asset that can be used as a store of value, medium of exchange and unit of
account. It can be paper, coin or currency.
Barter System: In trade, barter is a system of exchange where participants in a transaction directly
exchange goods or services for other goods or services without using a medium of exchange, such
as money.
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Positive Analysis in Economics: Positive economic analysis, which uses what is and what has
been occurring in an economy as the basis for any statement about the future. It is also called
“What is” analysis.
Normative Analysis in Economics: Normative economic analysis uses what should be happened
in an economy.
A normative statement carries judgment. Normative statements are opinions. They are subjective
statements.
For example, globalization inflicts economic harm to a country is an opinion.
A positive statement, on the other hand, is a factual statement. They can be tested or proven. These
are objective statements. For example, the unemployment rate in India in 2017 was 7.1%
The easiest way to discern a normative statement from a positive statement is to consider whether
the statement is a fact or opinion.
Laffer Curve: The curve which illustrates the theoretical relationship between rate of taxation and
the resulting level of govt. revenue (the difference between tax rate and government revenue is
laffer curve).
Substitution Effect: The tendency of an individual to consume more of on good and less of
another because of a decrease in the price of the former relating to the price of the latter.
For an example, assuming wage rate per hour $10 where tax rate 20% and because of tax rate, net
wage will be $8. So here one hour of leisure cost is $8. When wage rate lower it means leisure cost
lower and then people consume more and more leisure without involving in work.
Income Effect: due to the tax rate, wage rate reduce which induce people to engage in more and
more work to keep stable or increase his income and it is income effect.
Public Finance: Public finance is one of those subjects which lie on the border line between
economics and politics. It is concerned with the income and expenditure of public authorities and
with the adjustment of one with others.
Organic View of Government: Under this view society is conceived of as a natural organism.
Each individual is the part of this organism and government is thought as its heart. The goals of
the society are being set by the state, which attempts to lead society toward their realization.
Individual act as a part to accomplish the goal.
Mechanistic view of government: In this view, govt. is not a organic part of society rather it is a
contrivance created by individuals to better achieve their individual goal. Government is a trust
and the officers of the government are trustee and both trust and trustee are created for the benefit
of the people.
Externality: when the activity of one party directly affects the welfare of another party is known
as externality that are not reflected in market price. It may have positive impact or negative impact.
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Normal Good: A good for which demand increase as income increase and demand decrease as
income decrease, other things being the same is Normal Good.
Welfare Economics: A branch of economics concerned with improving human welfare and social
condition through the optimal allocation of resources as also optimum distribution of wealth.
Edgeworth Box: Named after Franchis Ysidro Edgeworth. It is a device used to depict the
distribution of goods in a two good two-person world. It is the way of representing various
distribution of wealth.
Pareto Efficient: Pareto efficient or pareto optimality I a state of allocation of resources from
which it is impossible to reallocate so as to make any one individual or preference criterion better
off without making at least one individual or preference criterion worse off.
Contract Curve: Contract curve is the set of tangency point between the indifference curve of
the two consumers that are pareto efficient. The locus of all pareto efficient point is contract curve.
Pareto Improvement: An allocation can be pareto improved if there exist another allocation such
that at least one person is better off and nobody is worse off.
Free rider: Party who enjoys a benefit or advantages from a collective effort but contribute little
or nothing.
Public Good: The indivisible goods, whose benefit can’t be priced, to which the principle of
exclusion does not apply are called public goods. The use of such good by an individual does not
reduce the availability to other individuals. For example: the national defense.
Private Goods: Private goods refers to all those goods and services consumed by private
individuals to satisfy their wants. For example: food, clothing, car etc.
Merit Goods: Those goods whose consumption and uses are to be encouraged is merit good. Other
word, goods that ought to be provided even if people don’t demand it is merit good.
Example: Education.
Demerit Good: Goods whose consumption and use are to be discouraged are called non-merit
goods or demerit goods like drugs, smoking.
Impure Public Good: A good that has some of the characteristics of public good but not entirely
non-rivalries or non-excludable is impure public good like: highway.
Market Failure: Market failure means the market mechanism’s inability to achieve desirable
result because of inefficient allocation of goods and services.
Market Power: Market power is the ability of a firm to profitably raise the market price of a good
or service over marginal cost. A firm with total market power can raise the market price without
losing any customer to competitors.
Asymmetric Information: A situation in which one party engage in an economic transaction has
better information about the good or service traded than the other party.
Social Welfare Function: is a function which reflects how the utilities of its members affects the
well-being of a society as a whole.
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M1/ Transaction Money: M1 is the money supply that include physical currency and coin,
demand deposit, travelers check and other checkable deposits.
M1(Transaction Money) = Currency held outside banks + Demand deposits + Travelers
Checks + Other checkable deposits
M2 / Broad Money: It is also a measure of money supply which includes M1 + short term time
deposits and other near monies.
M2= M1 + Saving account + Money market account + Other near monies
M3/ High Powered Money= M2 + Dollar denominated savings account + Institutional money
market account + Repurchase account + Eurodollars
Functional Distribution of Income: The way income of an economy is distributed among the
owners of different factors of production into wages, rent etc.
Size/ Personal Distribution of Income: The way that total income is distributed across different
income classes in an economy is personal distribution of income.
Partial Equilibrium Model: Model that study only one market and ignores possible spillover
effects in other markets is partial equilibrium model. This model considers only specific markets.
General Equilibrium Model: The study of how various markets are interrelated is general
equilibrium model.
Earmark: When funds have been dedicated to a specific program or purpose is earmark. For
instance, revenue resulting from taxes on fuel are frequently dedicated to transportation related
expense such as rod construction.
Coase Theorem: Coase theorem was introduced to settle dispute. Coase theorem insist that, if
transaction costs are low and property right are clearly defined the market can be efficient even
when there exist externalities.
Pigouvian Tax: Pigouvian tax is a tax levied on any market activity that generate negative
externalities. The tax is intended to correct an inefficient market outcome.
Pigouvian Subsidy: is a subsidy provided to an activity on the grounds that the activity generates
external benefits.
Social Discount Rate: Social discount rate is the discount rate used in computing the value of
fund spent on social project. Social discount rate and market discount rate is not same.
Emission Fees: A tax levied on each unit of pollution rather than each unit of output is emission
fees.
Crowding Out Effect: Due to government demand for loanable fund less fund remain available
for public which is crowding out effect.
Fisher Effect: The relationship between interest rate and expected inflation is often referred to as
fisher effect.
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Money Laundering: Money laundering is the process of creating the appearance that a large
amount of money obtained from criminal activity (dirty money) is obtained from legitimate
sources. It is the process of converting black money into white money.
Anti-money Laundering: AML refers to a set of procedures, laws or regulations designed to stop
the practice of generating income through illegal actions.
KYC (Know your customers): KYC is the process of business, identifying and verifying the
identity of its clients.
Indifference Curve: An indifference curve is a graph showing combination of two goods that
gives the consumer equal satisfaction and utility. Each point on an indifference curve indicates
that a consumer is indifferent between the two as all points give him the same utility.
Marginal Rate of Transformation: The marginal rate of transformation can be defined as how
many units of one good have to stop being produced in order to produce an extra unit of another
good.
Production Possibilities Curve: PPF is a graph that shows the combination of two goods that an
economy can produce with full and efficient utilization of economy’s scarce resources.
Utility Possibilities Curve: The utility possibilities frontier represents all allocation that are
efficient and shows the level of satisfaction that each person achieves when he has traded to an
efficient outcome on the contract curve.
Marginal Cost Curve: Marginal cost curve is a graph that shows the increase or decrease in cost
for extra unit of production.
Marginal Revenue Curve: The curve or graph which shows the increase in revenue that results
from the sale of one additional unit of output.
Budget Line: it is the graphical depiction that depicts the combination of two products that a
consumer can afford to buy at a given market price with a given income level.
Regression Line: The regression line is the line that best fits the data. The line attempts to model
the relationship between two variables where one is dependent and the other is independent.
Course Code: F-309

Course Title: Strategic Management
Strategic management: Strategic Management can be defined as the art and science of
formulating, implementing, and evaluating cross-functional decisions that enable an organization
to achieve its objectives.
Strategic Planning: Strategic Planning referring only to strategy formulation.
Competitive Advantage: Competitive Advantage can be defined as “anything that a firm does
especially well compare to rival firms.”
Strategists: Strategists are the individuals who are most responsible for the success or failure of
an organization and also help an organization gather, analyze, and organize information.
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Long-term Objectives: Objectives can be defined as specific results that an organization seeks to
achieve in pursuing its basic mission. Long-term means more than one year.
Annual objectives: Annual Objectives are short-term milestones that organizations must achieve
to reach long-term objectives.
Policies: Policies are the means by which annual objectives will be achieved. It includes
guidelines, rules, and procedures established to support efforts to achieve stated objectives.
Business Strategy: Business Strategy is formulated, implemented, and evaluated with an
assumption of competition.
Military Strategy: It is based on an assumption of conflict.
Vision statement: A statement that defines the company’s long term plans and discuss the desired
position of the company in future.
Mission statement: A statement that signifies the reason for the existence of the company and
talks about the firm’s business & purpose and the approach to pursue.
Competitive Intelligence: It is a systematic and ethical process for gathering and analyzing
information about competition’s activities and general business trends to further a business’s own
goals.
Market Commonality: It can be defined as the number and significance of markets that a firm
competes in with rivals.
Resource Similarity: It is the extent to which the type and amount of a firm’s internal resources
are comparable to a rival.
Planning: Planning consists of all those managerial activities related to preparing for the future.
Organizing: It includes all those managerial activities that result in a structure of task and
authority relationships. It means determining who does what and who reports to whom.
Motivating: It involves efforts directed toward shaping human behavior. It is the process of
influencing people to accomplish specific objectives.
Staffing: Staffing activities are centered on personnel or human resource management.
Controlling: It refers to all those managerial activities directed toward ensuring that actual results
are consistent with planned results.
Marketing: It can be described as the process of defining, anticipating, creating, and fulfilling
customers’ needs and wants for products and services.
Investing decision: It is the allocation and reallocation of capital and resources to projects,
products, assets, and divisions of an organization.
Financing decision: It determines the best capital structure for the firm and includes examining
various methods by which the firm can raise capital (for example, by issuing stock, increasing
debt, selling assets, or using a combination of these approaches).
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Dividend Decisions: It determines the amount of funds that are retained in a firm compared to the
amount paid to stockholders. Dividend decisions concern issues such as the percentage of earnings
paid to stockholders, the stability of dividends paid over time, and the repurchase or issuance of
stock.
Value chain Analysis: It refers to the process whereby a firm determines the costs associated with
organizational activities from purchasing raw materials to manufacturing products to marketing
the products.
Benchmarking: Benchmarking is an analytical tool used to determine whether a firm’s value
chain activities are competitive compared to rivals and thus conducive to winning in the
marketplace.
Financial Objectives: It includes those associated with growth in revenues, growth in earnings,
higher dividends, larger profit margins, greater return on investment, higher earnings per share, a
rising stock price, improved cash flow, and so on.
Strategic Objectives: It includes things such as a larger market share, quicker on-time delivery
than rivals, shorter design-to-market times than rivals, lower costs than rivals, higher product
quality than rivals, wider geographic coverage than rivals, achieving technological leadership,
consistently getting new or improved products to market ahead of rivals, and so on.
Forward Integration: Gaining ownership or increased control over distributors or retailers.
Backward Integration: seeking ownership or increased control of a firm’s suppliers.
Horizontal Integration: Seeking ownership or increased control over competitors.
Market Penetration: Seeking increased market share for present products or services in present
markets through greater marketing efforts.
Market Development: Introducing present products or services into new geographic area.
Product Development: Seeking increased sales by improving present products or services or
developing new ones.
Related Diversification: Adding new but related products or services.
Unrelated Diversification: Adding new or unrelated products or services.
Retrenchment: Regrouping through cost and asset reduction to reverse declining sales and profit.
Divestiture: Selling a division or part of an organization.
Liquidation: Selling all of a company’s assets, in parts, for their tangible worth.
Joint Venture: It is a popular strategy that occurs when two or more companies form a temporary
partnership or consortium for the purpose of capitalizing on some opportunities.
Merger: Merger Occurs when two organizations of about equal size unite to form on enterprise.
Acquisition: Acquisition occurs when a large organization purchases or acquires a smaller firm,
or vice versa.
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Hostile takeover: When a merger or acquisition is not desired by both parties, it can be a hostile
takeover.
Friendly merger: If the acquisition is desired by both firms, it is termed as a friendly merger.
First mover advantages: It refers to the benefits a firm may achieve by entering a new market or
developing a new product or service prior to rival firms.
Outsourcing: Outsourcing is an agreement in which one company hires another company to be
responsible for a planned or existing activity.
Restructuring/downsizing/rightsizing/delayering: It involves reducing the size of the firm in
terms of number of employees, number of divisions or units, and number of hierarchical levels in
the firm’s organizational structure.
Reengineering/process management/process innovation/process redesign: It involves
reconfiguring or redesigning work, jobs, and processes for the purpose of improving cost, quality,
service and speed.
Market segmentation: It can be defined as the subdividing of a market into distinct subsets of
customers according to needs and buying habits.
Product positioning: It entails developing schematic representations that reflect how your
products or services compare to competitors’ one dimensions most important to success in the
industry.
Balanced scorecard: A balanced scorecard is a performance metric used in strategic management
to identify and improve various internal functions of a business and their resulting external
outcomes.
Contingency plan: It can be defined as alternative plans that can be put into effect if certain key
events do not as expect.
Auditing: Auditing is the detailed examination of the final reports of an organization and is used
to provide confidence for all stakeholders that the organization’s report is accurate.
Social responsibility: It refers to actions some organizations takes beyond what is legally required
to protect or enhance the well-being of living things.
Sustainability: It refers to the extent that an organization’s operations and actions protect, mend,
and preserve rather than harm or destroy the natural environment.
Business ethics: It can be defined as principal of conduct within organizations that guide decision
making and behavior.
Multinational organizations: Organizations that conduct business operations across national
borders are called international firms/MNCs.
Globalization: It is a process of doing business worldwide.
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Course Code: F-401
Course Title: Financial Statement Analysis
Business analysis is a research discipline of identifying business needs and determining solutions
to business problems. Solutions often include a software-systems development component, but
may also consist of process improvement, organizational change or strategic planning and policy
development. The person who carries out this task is called a business analyst or BA.
Business analysis is a disciplined, structured, and formal approach to analyzing a business process,
identifying improvements, and implementing changes so that the business can better achieve its
goals. It is based on facts, figures, and observations.
What is Financial Statement Analysis
Financial statement analysis is the process of analyzing a company's financial statements for
decision-making purposes and to understand the overall health of an organization. Financial
statements record financial data, which must be evaluated through financial statement analysis to
become more useful to investors, shareholders, managers, and other interested parties.
Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a
company's financial statements to make better economic decisions. These statements include the
income statement, balance sheet, statement of cash flows, and a statement of changes in equity.
Financial statement analysis is a method or process involving specific techniques for evaluating
risks, performance, financial health, and future prospects of an organization.
Types of Business Analysis----2 types
!. Credit Analysis
Credit analysis is a type of analysis an investor or bond portfolio manager performs on companies
or other debt issuing entities to measure the entity's ability to meet its debt obligations. The credit
analysis seeks to identify the appropriate level of default risk associated with investing in that
particular entity.
Trade creditor
A trade creditor is a supplier who has sent your business goods, or supplied it with services, who
you haven't yet paid. The amount that goes on your business's balance sheet for trade creditors is
the sum of all its unpaid invoices from suppliers, as at that point in time.
Non-trade creditor
non trade creditors provide financing to a company in return for repayment with interest.
2. Equity Analysis
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Equity analysis: The process of analyzing sectors and companies, to give advice to professional
fund managers and private clients on which shares to buy. Sell-side analysts work for brokers who
sell shares to the investors (mainly fund management firms and private clients).
Two types of equity analysis are…….
a) Technical Analysis: Technical analysis is a trading discipline employed to evaluate

investments and identify trading opportunities by analyzing statistical trends gathered from
trading activity, such as price movement and volume.
b) Fundamental Analysis: Fundamental analysis is a method of evaluating a security in an
attempt to assess its intrinsic value, by examining related economic, financial, and other
qualitative and quantitative factors. Fundamental analysts study anything that can affect
the security's value, including macroeconomic factors (e.g. economy and industry
conditions) and microeconomic factors (e.g. financial conditions and company
management). The end goal of fundamental analysis is to produce a quantitative value that
an investor can compare with a security's current price, thus indicating whether the security
is undervalued or overvalued.
Intrinsic Value: Intrinsic value is the perceived or calculated value of a company, including
tangible and intangible factors, using fundamental analysis. Also called the true value, the intrinsic
value may or may not be the same as the current market value. Additionally, intrinsic value is used
in options pricing to indicate the amount that an option is "in the money."
Financial analysis: is the process of evaluating businesses, projects, budgets and other finance-
related entities to determine their performance and suitability. Typically, financial analysis is used
to analyze whether an entity is stable, solvent, liquid or profitable enough to warrant a monetary
investment.
Profitability analysis: is an analysis of the profitability of an organization’s output. Output of

an organization can be grouped into products, customers, locations, channels and/or transactions.
Risk analysis: is the process of assessing the likelihood of an adverse event occurring within the
corporate, government, or environmental sector.
Account analysis: is a process in which detailed line items in a financial transaction or statement
are carefully examined for a given account. An account analysis can help identify trends or give
an indication of how an account is performing.
Prospective Analysis: is the forecasting of future payoffs typically earning, cash flows or both.
Valuation is the analytical process of determining the current (or projected) worth of an asset or
a company.
3 valuation models are….
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A) Dividend discount model: The dividend discount model (DDM) is a method of valuing a
company's stock price based on the theory that its stock is worth the sum of all of its future
dividend payments, discounted back to their present value.
B) Free cash flow to equity (FCFE) is often used by analysts in an attempt to determine the
value of a company. This method of valuation gained popularity as an alternative to the
dividend discount model (DDM), especially if a company does not pay a dividend.
C) Residual income valuation (RIV; also, residual income model and residual income
method, RIM) is an approach to equity valuation that formally accounts for the cost of
equity capital.
Cash is legal tender -- currency or coins -- that can be used to exchange goods, debt or services.
Sometimes it also includes the value of assets that can be easily converted into cash immediately,
as reported by a company.
Financial flexibility: is used to describe a company's ability to react to unexpected expenses and
investment opportunities. Financial flexibility is usually assessed by examining the company's use
of leverage as well as cash holdings.
Cash flow: Cash flow is the net amount of cash and cash-equivalents being transferred into and
out of a business. At the most fundamental level, a company’s ability to create value for
shareholders is determined by its ability to generate positive cash flows, or more specifically,
maximize long-term free cash flow.
Free Cash Flow
To understand the true profitability of the business, analysts look at free cash flow (FCF). It is a
really useful measure of financial performance – that tells a better story than net income because
it shows what money the company has left over to expand the business or return to shareholders,
after paying dividends, buying back stock or paying off debt.
Free cash flow = operating cash flow - capital expenditures - dividends (though some companies
don’t because dividends are viewed as discretionary).
Methods of Cash flows
a) Direct Method
b) Indirect Method
Return on invested capital (ROIC) is a profitability ratio. It measures the return that an
investment generates for those who have provided capital, i.e. bondholders and
stockholders. ROIC tells us how good a company is at turning capital into profits.
The general equation for ROIC is: ( Net income- Dividends ) / ( Debt + Equity )
ROIC can also be known as "return on capital" or "return on total capital."
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For example, Manufacturing Company MM lists $100,000 as net income, $500,000 in total debt
and $100,000 in shareholder equity. Its business operations are straightforward -- MM makes and
sells widgets.
We can calculate MM's ROIC with the equation:
ROIC = (Net income - Dividends) / (Debt + Equity)
= (100,000 - 0) / (500,000 + 100,000) = 16.7%
Two Different Measures of Invested Capital are………….
A) Net Operating Asset= Net Financial Obligation + Shareholders equity

B) Common Equity Capital
Importance of ROIC (3)
a) Managerial Effectiveness
b) Level of Profitability
c) Planning and Control
Return on Net Operating Asset(RNOA): Return on net assets (RONA) is a measure of financial
performance calculated as net income divided by the sum of fixed assets and net working capital.
RONA can be used to assess how well a company is performing compared to others in its industry.
It reveals if a company and its management are deploying assets in economically valuable ways
or if the company is performing poorly versus its peers. RONA can be calculated as:
Return on Net Assets = Net Income / (Fixed Assets + Net Working Capital)
NOPAT: Net operating profit after tax (NOPAT) is a company's potential cash earnings if its
capitalization were unleveraged — that is, if it had no debt. NOPAT is frequently used in economic
value added (EVA) calculations. NOPAT is a more accurate look at operating efficiency for
leveraged companies, and it does not include the tax savings many companies get because of
existing debt.
NOPAT = Operating Income x (1 - Tax Rate)
Prospective Analysis: is the forecasting of future payoffs typically earning, cash flows or both.
Financial statement analysis is the process of analyzing a company's financial statements for
decision-making purposes.
Investment analysis involves researching and evaluating securities to determine whether they will
make satisfactory investments.
Credit analysis is a type of analysis an investor or bond portfolio manager performs on companies
or other debt issuing entities to measure the entity's ability to meet its debt obligations.
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Fundamental analysis is the method of analyzing a security to measure its intrinsic value.
A ratio analysis is a quantitative analysis of information contained in a company’s financial

statements.
Horizontal analysis is used in financial statement analysis to compare historical data, such
as ratios or line items, over a number of accounting periods.
Solvency vs Liquidity:
Solvency and liquidity are both terms that refer to an enterprise's state of financial health, but with
some notable differences. Solvency refers to an enterprise's capacity to meet its long-term financial
commitments. Liquidity refers to an enterprise's ability to pay short-term obligations; the term also
refers to a company's capability to sell assets quickly to raise cash. A solvent company is one that
owns more than it owes; in other words, it has a positive net worth and a manageable debt load.
On the other hand, a company with adequate liquidity may have enough cash available to pay its
bills, but it may be heading for financial disaster down the road.
Pro forma financial statements: are the complete set of financial reports issued by an entity,
incorporating assumptions or hypothetical conditions about events that may have occurred in the
past or which may occur in the future. These statements are used to present a view of corporate
results to outsiders, perhaps as part of an investment or lending proposal. A budget may also be
considered a variation on pro forma financial statements, since it presents the projected results of
an organization during a future period, based on certain assumptions.
Three types of Pro forma Financial Statements are…………….
a) Pro Forma Income Statement: Pro-forma income statement is also an income statement
which however is prepared as a projection of the future as opposed to the actual transactions
of the past. In other words, an income statement projects the financial performance of the
period that has already expired (past) whereas pro forma income statement is prepared to
project the expected financial performance of the future.
b) Pro Forma Balance sheet: Pro forma balance sheets are used to project how the business
will be managing its assets in the future. For example, a pro forma balance sheet can
quickly show the projected relative amount of money tied up in receivables, inventory, and
equipment.
c) Pro Forma Cash flows: Pro forma cash flow is the estimated amount of cash inflows and
outflows expected in one or more future periods. This information may be developed as
part of the annual budgeting or forecasting process, or it may be created as part of a specific
request for cash flow information, as may be required by a prospective lender or investor.
Credit Analysis is a type of analysis an investor or bond portfolio manager performs on companies
or other debt issuing entities to measure the entity's ability to meet its debt obligations. The credit
analysis seeks to identify the appropriate level of default risk associated with investing in that
particular entity.
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What if Analysis: evaluates the expected value of a proposed investment or business activity. The
statistical mean is the highest probability event expected in a certain situation. By creating various
scenarios that may occur and combining them with the probability that they will occur, an analyst
can better determine the value of an investment or business venture, and the probability that the
expected value calculated will actually occur.
Horizontal analysis: is used in financial statement analysis to compare historical data, such as
ratios, or line items, over a number of accounting periods. Horizontal analysis can either use
absolute comparisons or percentage comparisons, where the numbers in each succeeding period
are expressed as a percentage of the amount in the baseline year, with the baseline amount being
listed as 100%. This is also known as base-year analysis.
Vertical analysis: is a method of financial statements analysis in which each line item is listed as
a percentage of a base figure within the statement. Thus, line items on an income statement can be
stated as a percentage of gross sales, while line items on a balance sheet can be stated as a
percentage of total assets or liabilities, and vertical analysis of a cash flow statement shows each
cash inflow or outflow as a percentage of the total cash inflows.
Vertical Analysis vs. Horizontal Analysis
While horizontal analysis looks at how the dollar amounts in a company’s financial statements
have changed over time, vertical analysis looks at each line item as a percentage of a base figure
within the statement. Thus, line items on an income statement can be stated as a percentage of
gross sales, while line items on a balance sheet can be stated as a percentage of total assets or
liabilities, and vertical analysis of a cash flow statement shows each cash inflow or outflow as a
percentage of the total cash inflows. Vertical analysis is also known as common size financial
statement analysis. For more, read The Common-Size Analysis of Financial Statements.
Financial distress: Financial distress is a term in corporate finance used to indicate a condition
when promises to creditors of a company are broken or honored with difficulty. If financial
distress cannot be relieved, it can lead to bankruptcy.
Locked-in Range: is the trading range in which the volume of open positions accumulates,
making the price change to the side where the prevailing volume of open positions will be locked
at a loss, because the price will no longer allow to close in profits or break-even.
LRA gives you answers for questions:
 Why Does Price Change Occur?

 Why Do Instruments Correlate?
 Value of Trading Session and Time-Frame
 Impact of Fundamental Factors on Price
Z-score: The Z-score formula for predicting bankruptcy was published in 1968 by Edward I.
Altman, who was, at the time, an Assistant Professor of Finance at New York University. The
formula may be used to predict the probability that a firm will go into bankruptcy within two years.
Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the
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financial distress status of companies in academic studies. The Z-score uses multiple corporate
income and balance sheet values to measure the financial health of a company
The Z-score is a linear combination of four or five common business ratios, weighted by
coefficients. The coefficients were estimated by identifying a set of firms which had declared
bankruptcy and then collecting a matched sample of firms which had survived, with matching by
industry and approximate size.
The Formula of Z- Score for Banks or Financial Institutions
Z – Score value = (6.56×x1) + (3.26×X2) + (6.72×X3) + (1.05×X4)
Where…….
X1 = Earnings before interest & tax/Total asset
X2 = Shareholders equity /total liabilities
X3=Net working capital/Total assets
X4= Retained earnings/total asset
Course Code: F-402

Course Title: Commercial Bank Management
Bank: Bank is a financial intermediary which accepting deposits and granting loan and advance
and also provide some financial services.
Nonbank bank: Nonbank bank is a financial institution which either accepting deposit from the
customer or granting loan to borrower.
Key nonbank competitors that bankers face today:
1. Insurance companies and pension plans:
Providing the customers with long terms saving plans, risk protection and credit
2. Mutual fund:
Supplying professional cash management and investing services for longer term savers.
3. Real estate developers and mortgage companies:
Supplying building and construction expertise and construction finance to their customers.
4. Check cashing firms, small loan vendors and finance companies:
Supplying customers with access to ready cash liquidity and short to medium loans for
everything from daily household and operating expenses to the purchase of appliances and
equipment.
5. Security brokers and dealer:
Providing investment and security planning, executing security purchases and sales and
providing credit cards to their customers.
6. Credit unions and other thrift institutions:
Offering customers credit payments, and savings deposit services often fully comparable
to what banks offer.
Traditional services offered by banks:
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1. Carrying out currency exchange
2. Discounting commercial notes and making business loans
3. Offering savings deposits
4. Safekeeping of valuables
5. Supporting government activities with credit
6. Offering checking accounts
7. Offering trust services
More recent services offered by banks:
1. Granting consumer loans
2. Providing financial advice
3. Managing cash
4. Offering equipment leasing
5. Making venture capital loans
6. Selling insurance policies
7. Selling retirement plans
Offering security brokerage and investment banking services:
1. Underwriting securities
2. Offering mutual funds and annuities
3. Offering merchant banking services
4. Offering risk management and hedging services
Trends affecting banks and other financial service firms today:
1. Service proliferation
2. Rising competition
3. Government deregulation
4. Rising funding costs
5. An increasingly interest-sensitive mix of funds
6. A technological revolution
7. Consolidation and geographic expansion
8. Globalization
9. Increased risk of failure
What are the reasons for dying banks?
1. Weaken the central bank’s ability to control the growth of the money supply and achieve
the nation’s economic goals.
2. Damage those customers, mainly small businesses and families, who rely most heavily on
banks for loans and other financial services.
3. Make banking services less conveniently available to customers as bank offices are
consolidated and closed.
How the banks fight back and slow the loss?
1. Offering new services such as selling shares in mutual funds, annuities, and insurance
polices
2. Charging higher user fees for many former free services.
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3. Offering more services through subsidiary businesses that are not as closely regulated as
banks
4. Entering into joint ventures with independent companies and thereby avoiding at least
some burdensome regulation.
Value of the bank’s stock:
Value of a bank’s stock rises when:

1. Expected dividends increase
2. Risk of the bank falls
3. Market interest rates decrease
4. Combination of expected dividend increase and risk decline
Value of bank’s stock if earnings growth is constant:
D1
P0 
r -g
Key profitability ratios in banking:
Serial Ratio Formula Explanation
no.
1. Return on 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠 It indicates that how much net
equity capital 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 benefit shareholders received
(ROE) from investing their capital in
the bank
2. Return on 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠 It indicates that how capable
assets (ROA) 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 the management of the bank
has been converting the
institution’s assets into net
earnings.
3. Net interest (𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑙𝑜𝑎𝑛𝑠 𝑎𝑛𝑑 It indicates that how large a
margin 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 spread between interest
𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑛 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠 𝑎𝑛𝑑 𝑜𝑛 𝑡ℎ𝑒 𝑜𝑡ℎ𝑒𝑟 revenues and interest costs
𝑑𝑒𝑏𝑡𝑠 𝑖𝑠𝑠𝑢𝑒𝑑) management has been able to
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 achieve by close control over
the bank’s earning assets and
the pursuit of the cheapest
sources of funding.
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4. Net non- (𝑛𝑜𝑛𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − It indicates that the amount of
interest 𝑛𝑜𝑛𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 noninterest revenues stemming
margin 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 from deposit service charges
and other services fees the bank
has been able to collect relative
to the amount of the noninterest
costs incurred
5. Net bank (𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑇𝑜𝑡𝑎𝑙 It indicates that how capable
operating 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 the management of the bank
margin 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 has been converting the
institution’s assets into
operating income.
6. Earnings per 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠 It indicates that how much net
share of 𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 benefit received from per share
stock(EPS) by shareholders.
7. Earnings 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 It indicates that effectiveness of
spread 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 the bank’s intermediation
−
𝑇𝑜𝑡𝑎𝑙 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑠𝑠𝑒𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 function in borrowing and
𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑏𝑎𝑛𝑘 lending money and also the
𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 intensify of competition in the
bank’s market area.
Breaking down:
ROE = Net Income/ Total Equity Capital
ROA = Equity Multiplier =

Net Income/Total Assets Total Assets/Equity Capital
Net Profit Margin = Asset Utilization =

Net Income/Total Operating Revenue Total Operating Revenue/Total Assets
Measuring the bank risks:

1) Credit risk
2) Liquidity risk
3) Market risk
4) Interest rate risk
5) Earnings Risk
6) Solvency Risk
185 | P a g e
Credit risk: Credit risk is the probability that some of the financial firm’s assets will decline in
value and perhaps become worthless.
Credit risk measures:
1) The ratio of nonperforming assets to total loans and leases.
2) The ratio of net charge-offs of loan to total loans and leases.
3) The ratio of annual provision for loan losses to total loans and leases or to equity capital
4) The ratio of allowance for loan losses to total loans and leases or to equity capital
Liquidity risk: Liquidity risk is the probability the financial firm will not have sufficient cash and
borrowing capacity to meet deposit withdrawals and other cash needs.
Liquidity risk measures:
1) Purchased funds/total assets
2) Net loans/total assets
3) Cash and due from banks/total assets
4) Cash and government securities/total assets
Market risk: comprises price risk and interest rate risk: Market risk is the probability of the
market value of the financial firm’s investment portfolio declining in value due to a change in
interest rates
Market risk measures:
1) Book-value of assets/ market value of assets
2) Book-value of equity/ market value of equity
3) Book-value of bonds/market value of bonds
4) Market value of preferred stock and common stock
Interest rate risk: Interest rate risk is the danger that shifting interest rates may adversely affect
a bank’s net income, the value of its assets or equity
Interest rate risk measures:
1) Interest sensitive assets/interest sensitive liabilities
2) Uninsured deposits/total deposits
Earnings risk: Earnings risk is the danger that a bank’s rate of return on assets or equity or its net
earnings may fall.
Earnings risk measures:

1) Standard deviation or variance of after taxes net income.
2) Standard deviation or variance of the bank’s return on equity (ROE) and return on the
assets(ROA).
Solvency or default risk: Solvency or default risk is the danger that a bank may fail due to
negative profitability and erosion of its capital.
Solvency or default risk measures:
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1) An interest rate spread between market yield on bond’s value and market yield on
government securities.
2) The ratio of bank’s stock price to Earnings per share.
3) The ratio of equity capital to total assets
4) The ratio of equity capital to risk assets
5) Purchased fund to total liabilities.
Asset-liability management:
Asset-liability management is to control a bank’s sensitivity to changes in market interest rates
and limit its losses in its net income or equity.
Bank Interest Bank’s net

revenue interest margin
Managing
Bank Interest
the bank’s
costs
response to Bank’s investment
changing Market value value, profitability and
interest of bank assets risk
rates
Market value
Bank’s net worth
of the
(equity)
liabilities
Historical view of asset-liability management:

1. Asset management strategy (control over assets, no control over liabilities)
2. Liability management strategy (control over liabilities by changing rates and other terms)
3. Funds management strategy (work with both strategies)
Asset management:
Asset management is the control of the composition of a bank’s assets to provide adequate liquidity
and earnings to meet other goals.
Liquidity management:
Liquidity management is the control over a bank’s liabilities usually through changes in interest
rates offered to provide the bank with adequate liquidity to meet other goals.
Fund management:
Fund management is the coordinated management of both a bank’s assets and its liabilities to
ensure an adequate level of liquidity to meet other goals.
Several key objectives of fund management:
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1) Bank management should exercise as much control as possible over the volume, mix and
return or cost of both assets and liabilities to achieve the bank’s goals.
2) Management’s control over assets must be coordinated with its control over liabilities.
3) Revenues and costs arise from both sides of the bank’s balance sheet.
Interest rate risk:
1. Price risk: when interest rates rise, the market value of the bond or asset falls
2. Reinvestment risk: when interest rates fall, the coupon payments on the bond are
reinvested at lower rates
Affects the rate of return on

bank loans and securities
and the bank’s borrowing
Price
costs from selling deposits

and issuing nondeposit IOUs
Interest rate risk: one of the main challenges:

Quantity of loanable fund
1. Forces determining interest rates (loanable funds theory) see: above picture
2. The measurement of interest rates
a. YTM: YTM is the rate of discount applied to the expected earnings stream from a
debt instrument that equalizes that stream’s present value with the instrument’s
market price.
b. Bank discount: bank discount is the rate of return on a financial instrument
calculated using the instrument’s face value and assuming a 360-day year.
3. Components of interest rates

Yield to maturity (YTM):
n
CFt
Market Price  
t 1 (1  YTM)
t
Bank discount rate (DR):

FV - Purchase Price 360
DR  *
FV # Days to Maturity
YTM equivalent yield=
FV - Purchase Price 365
*
Purchase price Days to Maturity
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Yield curves:
1. Graphical picture of relationship between yields and maturities on securities
2. Generally created with treasury securities to keep default risk constant
3. Shape of the yield curve
a. Upward – long-term rates higher than short-term rates
b. Downward – short-term rates higher than long-term rates
c. Horizontal – short-term and long-term rates the same
4. Shape of the yield curve and a maturity gap
Net interest margin:
Net interest margin is the ratio of a bank’s total interest revenue less its interest expenses divided
by the bank’s size often measured by total assets or earning assets.
Interest Income - Interest Expenses
NIM 
Total Earnings Assets
Interest-sensitive gap measurements:
Interest-sensitive gap measurement is the control over the difference between the volume of a
bank’s interest sensitive repriceable assets and the volume of its interest sensitive repriceable
liabilities.
1. Dollar interest-sensitive gap = interest-sensitive assets – interest sensitive liabilities
2. Relative interest-sensitive gap:

Dollar IS Gap

Bank Size
3. Interest sensitivity ratio:
Interest Sensitive Assets

Interest Sensitive Liabilitie s
Assets sensitive gap = interest sensitive assets – interest sensitive liabilities (which >
Liabilities sensitive gap = interest sensitive assets- interest sensitive liabilities (which < 0).
Asset-sensitive bank has:
1) Positive dollar interest-sensitive gap
2) Positive relative interest-sensitive gap
3) Interest sensitivity ratio greater than one
Liability sensitive bank has:
1) Negative dollar interest-sensitive gap
2) Negative relative interest-sensitive gap
3) Interest sensitivity ratio less than one
Gap positions and the effect of interest rate changes on the bank:
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1) Asset-sensitive bank
a. Interest rates rise – NIM rises
b. Interest rates fall - NIM falls
2) Liability-sensitive bank
a. Interest rates rise - NIM falls
b. Interest rates fall - NIM rises
Zero interest-sensitive gap:
1) Dollar interest-sensitive gap is zero
2) Relative interest-sensitive gap is zero
3) Interest sensitivity ratio is one when interest rates change in either direction - nim is
protected and will not change
Examples of repriceable (interest sensitive) assets and liabilities:
Important decision regarding to gap:

1) Management must choose the time period over which NIM is to be managed
2) Management must choose a target NIM
3) To increase NIM management must either:
a. Develop correct interest rate forecast
b. Reallocate assets and liabilities to increase spread
4) Management must choose volume of interest-sensitive assets and liabilities
NIM influenced by:
1) Changes in interest rates up or down
2) Changes in the spread between assets and liabilities
3) Changes in the volume of interest-sensitive assets and liabilities
4) Changes in the mix of assets and liabilities
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Aggressive interest-sensitive gap management:
Problems with interest-sensitive gap management:

1) Interest paid on liabilities tend to move faster than interest rates earned on assets
2) Interest rate attached to bank assets and liabilities do not move at the same speed as
market interest rates
3) Point at which some assets and liabilities are repriced is not easy to identify
4) Interest-sensitive gap does not consider the impact of changing interest rates on equity
position
Duration:
Duration is a measure of the maturity and value sensitivity of a financial asset that considers the
size and the timing of all its expected cash flows.
The concept of duration:
Duration is the weighted average maturity of a promised stream of future cash flows
To calculate the instrument’s duration:
n n
t * CFt t * CFt
 (1  YTM) t t 1 (1  YTM)
t
D  t n1 
CFt

Current Market Value or Price
t 1 (1  YTM)
t
Price sensitivity of a security:

P i
 -D*
P (1  i)
Convexity:
Convexity is the rate of change in an asset’s price or value varies with the level of interest rates or
yields
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Dollar-weighted duration of asset portfolio:
n
D A   w i * D Ai
i 1
Wi = the dollar amount of the asset divided by total assets

Dai = the duration of with asset in the portfolio
Dollar-weighted duration of a liability portfolio:
n
D L   w i * D Li
i 1
Wi = the dollar amount of the liability divided by total liabilities

Dli = the duration of the liability in the portfolio
Duration gap:
TL
D  DA - DL *
TA
Change in the value of a bank’s net worth:
 i   i 
NW  - D A * * A - - D L * * L
 (1  i)   (1  i) 
Impact of changing interest rates on a bank’s net worth:
Limitations of duration gap management:

1) Finding assets and liabilities of the same duration can be difficult
2) Some assets and liabilities may have patterns of cash flows that are not well defined
3) Customer prepayments may distort the expected cash flows in duration
4) Customer defaults may distort the expected cash flows in duration
5) Convexity can cause problems
Investment instruments:
Investment instruments are securities (tradeable financial assets, such as equities or fixed income
instruments) that are purchased in order to be held for investment.
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There are two types of investment securities:
1. Money market instrument
2. Capital market instrument
Money market instrument:
Money market instrument is any loan or security having an original maturity of one year or less.
There are
1. Treasury bills
2. Short term treasury notes and bonds
3. Federal agency securities
4. Certificates of deposit
5. International eurocurrency deposit
6. Bankers’ acceptance
7. Commercial paper
8. Short term municipal obligations
Treasury bills:
Treasury bill is a short term debt obligation issued by central bank on the behalf of government
with the maturity of less than one year. Features:
Salient features of treasury bills
 Form: T-BILLS are issued either in physical form as a promissory note or dematerialized form
by crediting to subsidiary general ledger (SGL) account.
 Eligibility: individuals, firms, companies, trust, banks, insurance companies, provident funds,
state government and financial institutions are eligible to invest in treasury bills.
 Issue price: T-BILLS are issued at a discount, but redeemed at par.
 Repayment: the repayment of the bill is made at par on the maturity of the term.
 Availability: treasury bills are highly liquid negotiable instruments, that are available in both
financial markets, i.e. primary and secondary.
 Method of the auction: uniform price auction method for 91 days T-BILLS, whereas multiple
price auction method for 364 days T-BILL.
 Day count: the day count is 364 days, in a year, for treasury bills.
Besides this, other characteristics of treasury bills include market-driven discount rate, selling
through auction, issued to meet short-term mismatches in cash flows, assured yield, low
transaction cost, etc
Types of treasury bills
At present there are three types of auctioned T-BILLS, which are:
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1. 91 days T-bills: the tenor of these bills complete on 91 days. These are auctioned on
Wednesday, and the payment is made on following Friday.
2. 182 days T-bills: these treasury bills get matured after 182 days, from the day of issue, and
the auction is on Wednesday of non-reporting week. Moreover, these are repaid on
following Friday, when the term expires.
3. 364 days T-bills: the maturity period of these bills is 364 days. The auction is on every
Wednesday of reporting week and repaid on the following Friday after the term gets over.
Treasury bills are backed by some advantages like no tax deducted at source, high liquidity and
trade-ability, zero risks of default, transparency, good return on investment and so on.
Commercial paper: Commercial paper or CP is defined as a short-term, unsecured money market

instrument, issued as a promissory note by big corporations having excellent credit ratings. As the
instrument is not backed by collateral, only large firms with considerable financial strength are
authorized to issue the instrument.
Features of commercial paper
1. The maturity period of commercial paper lies between 30 to 270 days.

2. It is sold at a discount but redeemed at its par value.
3. There is no well-developed secondary market for commercial paper; rather they are placed
with existing investors who intend to hold it till it gets matured.
The primary purpose of issuing commercial paper is to raise short-term funds so as to meet working
capital requirements of the firm. However, firms also raise money through CP’s to fill the gap
between fund required currently and long term funds raised from the market.
Certificate of deposit (CD): Certificate of deposit (cd) implies an unsecured, money market
negotiable instrument, issued by the commercial bank or financial institution, either in demat form
or as a usance promissory note, at a discount to face value at market rates, against the amount
deposited by an individual, for a stipulated time.
In finer terms, certificate of deposit is a fixed interest bearing term deposit, which has a fixed
maturity. It limits the access to the funds, until the lock-in period of the investment, i.e. the
depositor cannot withdraw funds, on demand.
Salient features of certificate of deposit

 Eligibility: all scheduled commercial bank, not including regional rural bank and cooperative
bank, are eligible to issue the certificate of deposit. It can be issued by the bank to individuals,
companies, trust, funds, associations, etc. On the non-reparable basis, it can be issued to non-
resident Indians (NRIS) also.
 Maturity period: the CDS are issued by the bank at a discount to face value, at market-related
rates, ranging from 3 months to one year. When a financial institution issues cd, the minimum
194 | P a g e
term is one year and maximum three years. In addition to this, no grace period is allowed for
the repayment of cd.
 Denomination: the minimum issue size of a certificate of deposit is rs. 5,00,000 to a single
investor. Moreover, when the certificate of deposit exceeds rs. 5,00,000, it should be in
multiples of rs. 1,00,000. Add to that; there is no ceiling on the total amount of funds raised
through it.
 Transferability: certificate of deposit existing in physical form can be freely transferred by
way of endorsement and delivery. Cds in dematerialised form can be transferred, as per the
process of other dematerialised securities.
 Reserve requirement: banks are required to keep crr and slr on the issue price of the certificate
of deposit.
 Format: banks and financial institutions can issue cd in dematerialised form only. Although
the investor, at their discretion, can seek a certificate in traditional form. Moreover, it attracts
stamp duty.
 Discount: certificate of deposit is issued at a discount to face value, determined by the market,
which can be front end or rear end discount. The effective rate of discount is greater than the
quoted rate in case of front end discount. On the contrary, in rear end discount, the cds yield
the quoted rate on the expiry of the specified term.
Banks issue certificate of deposit when the deposit growth is comparatively slow, and credit
demand is high, and there is a tightening trend in the call rate. These are high-cost liabilities, and
banks take recourse of cd’s only when there exist stiff liquidity conditions in the market.
Banker acceptance:
A draft or bill of exchange drawn upon and accepted by a bank and due on a specified date, often
traded in money markets is called banker acceptance
Capital market instrument:
Capital market instrument is any loan or security whose original maturity exceeds one year.
1. Treasury notes and bonds
2. Municipal state and local government) bonds
3. Corporate notes and bonds
4. Mortgage backed securities
Factors that affecting the banker’s choice among investment securities:
1. Expected rate of return
2. Tax exposure
3. Interest rate risk
4. Credit risk
5. Business risk
6. Liquidity risk
7. Call risk
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8. Prepayment risk
9. Inflation risk
10. Pledging requirement
Expected rate of return:
1. Yield to maturity
2. Holding period yield
Yield to maturity: Yield to maturity is a measure of the rate of return on a debt security that
equalizes all of its expected payments with its market price for holding a bond until it matures.
Holding period yield: Holding period yield is a measure of the expected rate of return on a debt
or equity instrument that equalizes all expected cash payments from the instrument during the
investor’s holding period to its current market price. Bond investors are not obliged to take an
issuer’s bond and hold it until maturity.
There is an active secondary market for bonds. This means that someone could buy a 30-year bond
that was issued 12 years ago and hold it for 5 years, then sell it again.
Tax swap: Tax swap is a transaction designed to reduce a bank’s tax burden and increase its future
income by selling lower-yielding securities at a loss and replacing them with higher-yielding
securities.
Portfolio shifting: Portfolio shifting is the movement out of one or more investment securities
(often to get rid of lower yielding instruments or reduce taxes) into another security or group of
securities.
Interest rate risk: Interest rate risk is the danger that shifting market interest rates can reduce
bank net income or lower the value of bank assets and equity.
Credit risk or default risk: Credit risk or default risk is the danger that a bank’s extensions of
credit will not pay out as promised, reducing the bank’s profitability and threatening its survival.
Business risk: Business risk is the danger that changes in the economy will adversely affect the
bank’s income and the quality of its assets.
Liquidity risk: Liquidity risk is the danger that a bank will experience a cash shortage or have to
borrow at high cost to meet its obligations to pay.
Call risk: Call risk is the danger that investment securities held by a bank will be retired early,
reducing the bank’s expected return.
Prepayment risk: Prepayment risk is the danger that banks holding loan backed securities will
receive a lower return because some of the loans backing the securities are paid off early.
Inflation risk: Inflation risk is the danger that rising prices of the goods and services will result in
lower bank returns or reduced values in bank assets and equity.
Pledging: Pledging is the collateralization of government deposits held in a bank by setting aside
selected securities to protect those deposits from loss.
Investment maturity strategies:
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1. The ladder or spaced-maturity, policy
2. The front-end load maturity policy
3. The back-end load maturity policy
4. The barbell strategy
5. The rate expectations approach
Ladder or spaced maturity policy:
Ladder or spaced maturity policy is equal percentage of investments over short and long term
maturing securities. Difficulty in finding good credit rated securities in all maturity profiles. Cost
of building the investment policy is high.
Front end load maturity policy: Front end load maturity policy is a strategy where all
investments are made in short-term maturity securities and place within a certain brief interval of
time. Persistent revision of portfolio is required. Policy will be successful only in liquid markets.
Back end load maturity policy: An opposite strategy of front end load maturity policy. Back end
load maturity policy is where all investments are long-term maturity securities. This policy is
subject to price and rate sensitiveness. Inflation risk is also to be borne by this policy.
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The barbell strategy: The barbell strategy is a combination of the front end and back end
approaches is the barbell strategy, in which a bank places most of its funds in a short-term portfolio
of highly liquid securities at one extreme and in a long-term portfolio of bonds at the other extreme,
with minimal or no investment holdings in intermediate maturities.
Rate expectation: Rate expectation is a strategy of buying bonds with high or low durations based
on the expectation of an upward or downward parallel shift in the yield curve. It is a type of yield
curve shift strategy.
Expected increase in interest rates - buy short duration investments
Expected decrease in interest rates - buy long duration investments
Maturity management tools:

1. Yield curve
2. Duration
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Yield curve: Yield curve is a graphical relationship between the maturity or term of a collection
of securities and their yield to maturity.
Duration: Duration is a value- weighted measure of maturity or term of a financial instrument
which considers the present value and timing of all its expected cash flows.
Liquidity:
Liquidity is the availability of cash in the amount and at the time needed at a reasonable cost.
Supplies of liquid funds:
1. Incoming customer deposits
2. Revenues from the sale of non-deposit services
3. Customer loan repayments
4. Sales of bank assets
5. Borrowings from the money market
Demands for liquidity:
1. Customer deposit withdrawals
2. Credit requests from quality loan customers
3. Repayment of non-deposit borrowings
4. Operating expenses and taxes
5. Payment of stockholder dividends
A financial firm’s net liquidity position:
A financial firm’s net liquidity position is the difference between the total supply of liquidity
flowing into a bank and the demands made upon the bank for liquidity.
Essence of liquidity management:
Essence of liquidity management divided into two distinct statement:
1. Rarely are the demands for liquidity equal to the supply of liquidity at any particular
moment. The financial firm must continually deal with either a liquidity deficit or surplus
2. There is a trade-off between liquidity and profitability. The more resources tied up in
readiness to meet demands for liquidity, the lower is the financial firm’s expected
profitability.
Why banks and their competitors face significant liquidity problems:
1. Imbalances between maturity dates of their assets and liabilities
2. High proportion of liabilities (especially demand deposits and money market borrowings)
subject to immediate repayment
3. Sensitivity to changes in interest rates
a. May affect customer demand for deposits
b. May affect customer demand for loans
4. Central role in the payment process, reputation and public confidence in the system
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Strategies for liquidity managers:
Strategies for liquidity managers are given below:
1. Asset liquidity management or asset conversion strategy
2. Borrowed liquidity or liability management strategy
3. Balanced liquidity strategy
Asset liquidity management:
This strategy calls for storing liquidity in the form of liquid assets (t-bills, fed funds loans, cds,
etc.) And selling them when liquidity is needed
Liquid asset characteristics:
1. Must have a ready market so it can be converted to cash quickly
2. Must have a reasonably stable price
3. Must be reversible so an investor can recover original investment with little risk
Options for storing liquidity:
1. Treasury bills
2. Fed funds sold to other banks
3. Purchasing securities for resale (repos)
4. Deposits with correspondent banks
5. Municipal bonds and notes
6. Federal agency securities
7. Negotiable certificates of deposits
8. Eurocurrency loans
Asset liquidity management is not costless and include opportunity cost:
1. Loss of future earnings on assets that must be sold
2. Transaction costs (commissions) on assets that must be sold
3. Potential capital losses if interest rates are rising
4. May weaken appearance of balance sheet
5. Liquid assets generally have low returns
Borrowed liquidity (liability) management:

This strategy calls for the bank to purchase or borrow from the money market to cover all of its
liquidity needs
Sources of borrowed funds:
1. Federal funds purchased
2. Selling securities for repurchase (repos)
3. Issuing large cds (greater than $100,000)
4. Issuing eurocurrency deposits
5. Securing advance from the federal home loan bank
6. Borrowing reserves from the discount window of the federal reserve
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Advantages:
1. Borrow only when there is a need for funds
2. Volume and composition of the investment portfolio can remain unchanged
3. The institution can control interest rates in order to borrow funds (raise offer rates when
needs requisite amounts of funds)
Disadvantages:
1. Highest expected return but carries the highest risk due to volatility of interest rates and
possible rapid changes in credit availability
2. Borrowing cost is always uncertain-> uncertain earnings
3. Borrowing needs can be interpreted as a signal of financial difficulties
Balanced liquidity management strategy:
The combined use of liquid asset holdings (asset management) and borrowed liquidity (liability
management) to meet liquidity needs
Guidelines for liquidity managers:
1. They should keep track of all fund-using and fund-raising departments
2. They should know in advance withdrawals by the biggest credit or deposit customers
3. Their priorities and objectives for liquidity management should be clear
4. Liquidity needs must be evaluated on a continuing basis
Methods for estimating liquidity needs:
1. Sources and uses of funds approach
2. Structure of funds approach
3. Liquidity indicator approach
4. Signals from the marketplace
Sources and uses of funds:
Sources and uses of funds is a method for estimating a banks liquidity requirements by focusing
primarily on expected changes in deposits and loans.
1. Loans and deposits must be forecast for a given liquidity planning period
2. The estimated change in loans and deposits must be calculated for the same planning
period
3. The liquidity manager must estimate the bank’s net liquid funds by comparing the
estimated change in loans to the estimated change in deposits
Liquidity gap:
Liquidity gap is the difference between a bank’s sources and uses of liquid funds.
Structure of funds approach:
1. A bank’s deposits and other sources of funds divided into categories. For example:
a. ‘hot money’ liabilities (volatile liabilities)
b. Vulnerable funds
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c. Stable funds (core deposits or core liabilities)
2. Liquidity manager set aside liquid funds according to some operating rule
Hot money liabilities:
Deposits and other borrowed funds such as federal funds that are very interest sensitive or that
management is sure will be withdrawn during the current period.
Vulnerable funds:
Customer deposits of which a substantial portion, perhaps 25 or 30 percent, will probably be
removed from the bank sometimes during the current time period.
Stable funds/ core deposits or core liabilities:
Funds that management considers most unlikely to be removed from the bank except for a minor
percentage pf the total.
Customer relationship doctrine:
Management should strive to meet all good loans that walk in the door in order to build lasting
customer relationships.
Total liquidity requirement for a bank =
0.95 x (hot money funds – legal reserves held) + 0.30 x (vulnerable deposits – legal reserves held)
+ 0.15 x (stable deposits – legal reserves held) + 1.00 x (potential loans outstanding – actual loans
outstanding)
Liquidity indicator approach (based on experience and industry averages):
1. Cash position indicator = cash and deposits due from depository institutions ÷ total assets,
where greater position the bank is in a stronger position to handle immediate cash needs.
2. Liquid security indicator =government securities / total assets.
3. Net federal funds position = federal funds sold – federal funds purchased/ total asset
4. Capacity ratio = net loans & leases / total assets.
5. Pledged securities ratio = pledged securities / total securities holdings.
6. Hot money ratio = money market assets / money market liabilities.
7. Deposit brokerage index = brokered deposits / total deposits.
8. Core deposit ratio = core deposits / total assets.
9. Deposit composition ratio = demand deposits / time deposits.
10. Loan commitment ratio= unused loan commitments/ total assets
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Factors influencing the money position
Course Code: F-403

Course Title: Merchant Banking and Investment Banking
Bidders: Bidders means the eligible investor who have participated in the bidding.
Book- building method: means the process by which an issuer attempts to determine the price to
offer its securities based on demand from the eligible investors.
Cut-off price: Means the lowest price offered by the bidders at which the EI portion of total issue
could be exhausted.
Eligible investors: means the institution who has business operation/ investment in Bangladesh
Fixed price method: means the process by which an issuer offers its securities at par value.
IPO: first offer of securities by an issuer to the general public.
Public Issue: Public issue of securities through initial public offer or repeated public offer.
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Road show: Presentation by an issuer and issue manager to eligible investors about the issuance
of securities disclosing all the features.
Red herring prospectus: Red Herring Prospectus is a prospectus, which does not have details of
either price or number of shares being offered, or the amount of issue. This means that in case
price is not disclosed, the number of shares and the upper and lower price bands are disclosed.
Sponsor: A sponsor provides support for someone or something, typically by supplying
cash. Sponsoring something is the act of supporting an event, activity, person, or organization
financially or through the provision of products or services. The individual or group that provides
the support, similar to a benefactor, is known as sponsor.
Index: It typically refers to a statistical measure of change in a securities market.
Underwriting: It is an arrangement whereby the underwriter undertakes to subscribe the
unsubscribed portion of shares offered by any public limited company.
Issue management: It helps capital market to increase the supply of securities.
Hot – issue markets: A hot- issue period there is a high optimism for the future performance of
the issuer so that there is the picture of underpricing.
Securitization: Securitization is the process of taking an illiquid asset, or group of assets, and
through financial engineering, transforming it (or them) into a security.
Factoring: It is a financial transaction and type of debtor finance in which a business sells its
accounts receivable to a third party at a discount.
Stock market index: A stock index or stock market index is a measurement of a section of
the stock market.
Credit rating: A credit rating is an evaluation of the credit risk of a prospective debtor, predicting
their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
Investment Banking: An investment bank is a financial services company or corporate division
that engages in advisory-based financial transactions on behalf of individuals, corporations, and
governments.
Merchant bank: A merchant bank is a company that deals mostly in international finance,
business loans for companies and underwriting. These banks are experts in international trade,
which makes them specialists in dealing with multinational corporations.
Financial Engineering: Financial engineering is the use of mathematical techniques to solve
financial problems. Financial engineering uses tools and knowledge from the fields of computer
science, statistics, economics, and applied mathematics to address current financial issues as well
as to devise new and innovative financial products.
Public offering: Securities that are issued offered for sale to the public investor
Private placement: A private placement is a capital raising event that involves the sale of
securities to a relatively small number of select investors. Investors involved in private placements
can include large banks, mutual funds, insurance companies and pension funds.
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Green shoe option: A green shoe is a clause contained in the underwriting agreement of an initial
public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares
at the offering price.
Asset backed securities: Bonds or notes backed by financial assets. Typically, these assets consist
of receivables, loans.
Dealer: A dealer busy and sells for her own account and she is the principal in the transaction.
Broker: He is not a principle to the transactions and he is acting as an agent on behalf of his
customer.
OTC: is a decentralized market where market participants trade with one another through
telephone, email etc.
Bucket shop: an unauthorized office for speculating in stocks or currency using the funds of
unwitting investors.
Boiler room: A boiler room is place or operation where high-pressure salespeople use banks of
telephones to call lists of potential investors (known as a "sucker lists") in order to peddle
speculative, even fraudulent, securities. A "boiler room" is so called due to high-pressure selling.
Churning: Churning is the practice of executing trades for an investment account by a salesman
or broker in order to generate commission from the account.
Fair Value: Which property could be sold in an armstenghty
Front Running: It is the practice of a broker or trader stepping in front of a large orders to gain
an economic advantage.
Economic life: Economic life is the expected period of time during which an asset remains useful
to the average owner. The economic life of an asset could be different than its actual physical life.
Circular trading: is a fraudulent scheme where sell orders are entered by a broker who knows that
offsetting buy orders for the exact same number of shares at the same time and, at the same price,
have either been or will be entered.
Pump and dump: is a scheme that attempts to boost the price of a stock through recommendations
based on false, misleading or greatly exaggerated statements.
Poop and Scoop: When a small group of informed people attempts to drive down a price by
spreading false information through internet.
Short and distort: refers to an illegal practice that involves. Investors shorting a stock and then
spreading rumors in an attempt to drive down its price.
Cowboy marketing: In which a company is unaware that a marketable hired to produce legitimate
opted-in email campaigns using sperm e-mails to promote the stock.
Trading: Taking positions in financial instruments in order to earn profits from either a change in
price level or discrepancy in relative values.
Speculation: To take a position in anticipation of a change in price levels.
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Arbitrage: Simultaneous taking of position in two or more markets in order to exploit pricing
aberrations.
Institutional trading: It is undertaking for the benefit of institutional clients of the investment
bank can be done on a profit sharing.
An absolute value trader: Who believes that price of an asset is too high or too low and who
takes an outright position in the asset.
Relative value trading: It is a form of trading that can and often does resemble arbitrage.
Merger: Combination of two firm such that only one survives.
Temporal arbitrage: It involves buying an asset for immediate delivery and selling it for later
delivery in order to exploit a price discrepancy between cash price and forward price.
Contraction: Disposition of assets called sell-offs can take either of three broad forms: spin- off,
divestitures, and carve-out.
Friendly takeover: Management of the target firm usually retain their position after the
acquisition is consummated.
Hostile takeover: currently management can expect to be replaced by management of the
acquiring firm’s choosing
Bear hug: It is an offer made by one company to buy the share of another for a much higher per
share price than what that company is worth in the market.
CMO (collateralized mortgage obligation): It is a fixed income security that uses mortgage backed
security as collateral.
Merger: Combination of two firms such that only one survives.
Consolidation: Creation of new firm owning the assets of both of the first two firms and neither
of the first two survive.
Horizontal Merger: Involves two firms in similar business
Vertical: Involves two firms involved in different stages of production of same end product.
Conglomerate merger: Involves two firms in unrelated business activities
Joint venture: A Joint Venture is a business entity created by two or more parties, generally
characterized by shared ownership, shared returns and risks, and shared governance.
Operating Lease: It is a short term and cancelable risk.
Financial lease: It is long term and long cancelable risk.
Leveraged lease: Involves the third party that lends the lessor part of the funds necessary to
purchase the asset to be leased.
Underpricing: It is the pricing of an IPO below its market value.
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Hot issue: An issue that sells at a premium over the public offering pric eon the first day of the
trading.
Risk arbitrage: It is associated with mergers and other form of corporate ownership restructuring.
Investment management: involves the investment of others people money.
Residual Value: Involves the determination of fair value at the end of the lease.
Salvage value: It is the resale value of an asset at the end of its useful life.
Leasing: A lease is contractual agreement between two parties establishing an arrangement for the
use of an asset in return for periodic payments by the user.
** Two variations:
1. Split-off: Some of the shareholders are given an equity interest in
the new firm in exchange for their shares of the parent company.
2. Split-Up: All the asset of the parent company is divided up among
spin-off companies and the original parent company causes to exist.
** Divestiture: Involves an out and out sale of assets usually for cash consideration.
** Carve –out: A carve-out is the partial divestiture of a business unit in which a parent company
sells minority interest of a child company to outside investors.
** Going private: Going private is a transaction or a series of transactions that convert a publicly
traded company into a private entity. Once a company goes private, its shareholders are no longer
able to trade their stocks in the open market.
** LBOs (Leverage buyout): A leveraged buyout (LBO) is the acquisition of another company
using a significant amount of borrowed money to meet the cost of acquisition. The assets of the
company being acquired are often used as collateral for the loans, along with the assets of the
acquiring company. The purpose of leveraged buyouts is to allow companies to make large
acquisitions without having to commit a lot of capital.
** Private placement: A private placement is a capital raising event that involves the sale of
securities to a relatively small number of select investors.
** Bridge financing: It is designed to cover expenses associated with the IPO and it typically
short-term in nature.
** Fairness opinion: A fairness opinion is a report that evaluates the facts of a merger, acquisition,
carve out, spin-off, buyback or another type of purchase and provides an opinion as to whether or
not the proposed stock price is fair to the selling or target company.
** Residual Value: The residual value is the estimated value of a fixed asset at the end of its lease
or at the end of its useful life. The lessor uses residual value as one of its primary methods for
determining how much the lessee pays in lease payments.
** DV01: It is defined as the dollar amount by which the market value of $100 of per bonds will
change when the instruments yield changes by one basis point.
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Course Code: F-404
Course Title: Financial Derivatives
Derivative: A derivative is an instrument whose value depends on, or is derived from, the value
of another asset. Examples: futures, forwards, swaps, options, exotics.
The underlying assets: The underlying assets include stocks, currencies, interest rates,
commodities, debt instruments, electricity, insurance payouts, the weather, etc.
Exchange traded markets: Exchange traded markets involves traders physically meeting on the
floor of the exchange, shouting, and using a complicated set of hand signals to indicate the trades
they would like to carry out.
Over-the-counter market OTC: A decentralized market, without a central physical location,
where market participants trade without one another through various communication modes.
Forward contract: Forward contract is an agreement to buy or sell an asset at a certain future
time for a certain price. A forward contract is traded in the over the counter market. Nobody pays
the forward price at initiation. So, you also don’t receive money if you short/sell the forward
contract.
Long Position: The party who agrees to buy the underlying assets on a certain future date for a
certain specified price.
Short Position: The party who agrees to sell the underlying assets on a certain future date for a
certain specified price.
Bid price: Bid price is the rate which is the company’s buying rate and investor’s selling rate.
Offer price: Offer price is the rate which is the company’s selling rate and investor’s buying rate.
Long forward position: When a trader enters into a long forward contract, she is agreeing to buy
the underlying asset for a certain price at a certain time in the future
Short forward position: When a trader enters into a short forward contract, she is agreeing to sell
the underlying asset for a certain price at a certain time in the future.
Future contract: Future contract is the same as a forward contract but then traded on an
exchange. The contracts are standardized and the exchange provides a mechanism that gives the
two parties a guarantee that the contract will be honored.
Options: Options are traded both on exchanges and OTC markets. The are two kind of options
1. Call options and
2. Put options.
Call options: A call option gives the buyer the right to buy the underlying asset by a certain date
for a certain price.
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Put option: A put option gives the seller the right to sell the underlying asset by a certain date for
a certain price.
Strike price: The price in the contract is the strike price.
Expiration date: the date is called the expiration date.
American options: American options can be exercised at any time up to the expiration date while
European options: European options can only be exercised on the expiration date itself.
Types of traders
1. Hedgers
2. Speculators
3. Arbitrageurs
Hedgers: A trader is hedging when she has an exposure to the price of an asset and takes a position
in a derivative to offset the exposure.
Speculators: Speculation the trader has no exposure to offset. She is betting on the future
movements in the price of the asset
Arbitrageurs: Arbitrage involves taking a position in two or more different markets to lock in a
profit.
Closing out a position: means entering into the opposite trade to the original one.
Initial margin: The amount that must be deposited at the time the contract is entered is called the
initial margin.
Daily settlement or marking to market: At the end of each trading day, the margin account is
adjusted to reflect the investor’s gain or loss. This is called daily settlement or marking to
market.
Maintenance margin: If the balance falls below the maintenance margin, the investor receives
a margin call.
Variation margin: If the investor does not provide the variation margin (extra required funds)
the broker closes out the position.
Market order: the trade is carried out immediately at the best price available in the market is
called market order.
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Limit order: Limit order specifies a particular price; the order can be executed only at this price
or at one more favorable to the investor.
Stop order or stop-loss order: This becomes a market order as soon as the specified price has
been hit. The purpose of a stop order is usually to close out a position if unfavorable price
movements take place.
Stop-limit: this is a combination of a stop order and a limit order. This becomes a limit order when
a specified price has been hit. So you need to determine the stop price and the limit price.
Commission merchant: A futures commission merchant trades on behalf of a client and charges
a commission.
Local merchant: A local merchant trades on his or her own behalf.
Open interest of a futures contract: The open interest of a futures contract at a particular time is
the total number of long positions outstanding. (Equivalently, it is the total number of short
positions outstanding.)
Trading volume: The trading volume during a certain period of time is the number of contracts
traded during this period.
Forward Futures
Private contract between two parties Traded on an exchange
Not standardized Standardized contract
Usually one specified delivery date Range of delivery dates
Settled at end of contract Settled daily
Delivery or final cash settlement usually takes Contract is usually closed out prior to
place maturity
Some credit risk Virtually no credit risk
Investment assets: Investment assets are assets held by significant numbers of people purely for
investment purposes (Examples: gold, silver)
Consumption assets: Consumption assets are assets held primarily for consumption (Examples:
copper, oil)
Short sale: If you want short a specific stock, you borrow this stock and sell it in the market. When
you want to close out your position, you purchase the stock and return it to the owner. An investor
with a short position must pay to the broker any income, such as dividends or interest, that would
normally be received on the securities that have been shorted. The investor is required to maintain
a margin account with the broker.
Swap: A swap is an agreement to exchange cash flows at specified future times according to
certain specified rules.
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LIBOR: The floating rate in most interest rate agreements is the London Interbank Offered Rate
(LIBOR).
Currency Swaps: involves exchanging principle and interest payments in one currency for
principal and interest payments in another.
Equity swaps: Equity swaps is an agreement to exchange the total return (dividends and capital
gains) realized on an equity index for either a fixed or a floating rate of interest.
Warrants: Warrants are options that are issued by a corporation or a financial institution
Convertible bonds: Convertible bonds are regular bonds that can be exchanged for equity at
certain times in the future according to a predetermined exchange ratio. Usually a convertible is
callable.
A naked option: A naked option is an option that not combined with an offsetting position in the
underlying stock.
Effect of Variables on Option Pricing when increasing one variable:
Variable c p C P
S0 + − + −
K − + − +
T ? ? + +
s + + + +
r + − + −
D − + − +
Volatility: Volatility is a measure of how uncertain we are about future stock price movements.
Delta: Delta (D) is the ratio of the change in the price of a stock option to the change in the price
of the underlying stock. The value of D varies from node to node.
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Course Code: F-405
Course Title: Capital Investment Decisions
Capital Budgeting: Capital Budgeting is the process of evaluating and selecting long term
investments that are consistent with the goal of maximizing owners’ wealth.
Capital Budgeting Techniques:
Traditional Technique:
Payback Period(PBP): Total number of year required for a firm to recover its initial investment
in a project as calculated from cash inflows.
In case of annuity, Other case,
PBP= Initial Investment/ Annual Cash flow PBP= A+(Io - C)/D
Average Rate of Return: Accounting rate of return(ARR) expresses the average profit per annum
as a percentage of the capital outlay.
ARR= Average Net Profit/ Average Investment
Modern Technique:
NPV: Net present value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time.
NPV= ƩPV - Io
IRR: Internal rate of return (IRR) is the interest rate at which the net present value of all the cash
flows (both positive and negative) from a project or investment equal zero.
MIRR: The modified internal rate of return (MIRR) is a financial measure of an investment's
attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the
name implies, MIRR is a modification of the internal rate of return (IRR) and as such aims to
resolve some problems with the IRR.
Profitability Index: The profitability index is a ratio that attempts to identify the relationship
between the costs and benefits of a proposed project.
Discounted Payback Period: Like, simple PBP, it is the method to calculate investment recovery
time with the difference that, in simple PBP absolute value of cash flows are taken whereas in
discounted payback period, discounted values of cash flows are taken.
NPV Profile: NPV profile is the graphical presentation of a project’s NPV against various
discount rate, with the NPV on the Y-axis and cost o capital on the X-axis.
Cross over rate: Cross over rate is the rate of return at which the NPV of two projects are equal.
It represents the rate of return at which the NPV profile of one project intersect the NPV profile of
another project.
Normal/ Conventional Cash Flow: One time sign change of cash flow is normal cash flow.
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- + + + + +
- - + + + +
+ + + - - -
Non-normal/ unconventional cash flow: More than one time sign change of cash flow within the
lifetime of the project is known as unconventional cash flow.
- + + + -
- + ++ - +++
Accounting Income: Accounting income is profitability that has been compiled using the accrual
basis of accounting. It is calculated as revenues minus all expenses.
Cash Flow: Cash Flow (CF) is the increase or decrease in the amount of money a business,
institution, or individual has.
Accounting Income VS Cash Flow: The difference between net income and net cash flow. Net
income is the revenues recognized in a reporting period, less the expenses recognized in the same
period. ... Net cash flow is calculated by determining changes in ending cash balances from period
to period, and is not impacted by the accrual basis of accounting.
Incremental Cash Flow: Incremental cash flow is the additional operating cash flow that an
organization receives from taking on a new project. A positive incremental cash flow means that
the company's cash flow will increase with the acceptance of the project.
Incremental Cash Flow= Cash flow with Project – Cash flow without project
Capital Rationing: Capital rationing is a strategy used by companies or investors to limit the
number of projects they take on at a time. Capital rationing occurs when management places a
constraint on the size of the firm’s capital budget during a particular period.
Benefit Cost Ratio: A benefit cost ratio attempts to identify the relationship between the cost and
benefit of a proposed project. If a project has a BCR that is greater than 1, indicates that the NPV
of the project Benefits outweigh the NPV of the cost.
Equivalent Annual Annuity: The equivalent annual annuity approach is one of two methods used
in capital budgeting to compare mutually exclusive project with unequal lives.
Replacement Chain Method: The replacement chain method is a capital budgeting decision
model that is used to compare two or more mutually exclusive capital proposals with unequal lives.
Under this approach, extends project until a equal or common time horizon is reached. It may also
have called common life approach.
Economic Value Added: EVA is a measure of company’s financial performance based on the
residual wealth by deducting its total cost of capital from its operating profit.
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EVA= Projected Cash Flow – [cost of capital × Invested Capital]
Discounted Cash Flow(DCF): DCF is a valuation method of capital budgeting used to estimate
the attractiveness of an investment opportunity. DCF analysis use future free cash flow projection
and discount them using a required rate to arrive at present value estimates.
Modern capital budgeting techniques are DCF techniques- NPV, IRR, MIRR, PI etc.
Capitalized Cost: A Capitalized cost is the cost incurred in the purchase and financing of fixed
assets. It includes not only the price paid for an asset but also the expense incurred on its
installation and transportation.
Financial Structure: Financial structure refers to the specific mixture of long-term debt and
equity that a company uses to finance its operations. This composition directly affects the risk and
value of the associated business.
Cost of Capital: The cost of capital of any investment is the rate of return the investor of capital
would expect to receive if the capital were invested elsewhere in an investment of comparable risk.
On the other side, it is the cost for borrower of the fund which is the combination of cost of debt,
cost of equity, cost of preferred stock and cost of retained earnings.
Risk in Capital Budgeting: Risk. The uncertainty associated with any investment. That is, risk is
the possibility that the actual return on an investment will be different from its expected return. A
vitally important concept in finance is the idea that an investment that carries a higher risk has the
potential of a higher return.
Stand –Alone Risk: risk associated with a single division, company, area or asset held by a
company or individual as opposed to well diversified portfolio.
It is point to be noted that, stand alone risk ignores diversification by both the firm and its
stockholders.
Within firm risk/corporate risk: Company risk is the financial uncertainty faced by an investor
who holds securities in a specific firm. Company risk is also called "specific risk," "unsystematic
risk" or "diversifiable risk."
Market RISK: Market risk is the possibility of an investor experiencing losses due to factors that
affect the overall performance of the financial markets through macroeconomic factors. Market
risk, also called "systematic risk," cannot be eliminated through diversification, though it can be
hedged against.
Sensitivity Analysis: The technique used to determine how independent variable values will
impact a particular dependent variable under a given set of assumptions is defined as sensitive
analysis. It helps in analyzing how sensitive the output is, by the changes in one input while
keeping the other inputs constant.
Scenario Analysis: Scenario Analysis is a method of estimating what will happen to portfolio
value if a specific event happens or doesn’t happen.
It is a method to discover and scrutinize probable events that can occur in the future when several
inputs turn out to be better or worse than expected.
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It examines several possible situations usually worst case, most likely case and
base case
Monte- carlo Simulation: Monte-carlo Simulation are used to model the probability of different
outcomes. The Simulation Analysis is a method, wherein the infinite calculations are made to
obtain the possible outcomes and probabilities for any choice of action.
Decision tree analysis: A decision tree is a graphical presentation that can be used for analyzing
pros and cons of all probable decisions.
Project: A project is a unique, separate entity with a set of activities, limited resources, fixed time
horizon and undertaken to achieve planned objectives.
Project Appraisal: Project appraisal is the process of assessing the projects viability in a
structured way. It is a tool that company’s use for choosing the best project that would help them
to attain their goal.
Delphi Techniques: Refers to group decision making techniques of forecasting demand. In this
method questions are individually asked from a group of experts to obtain their opinion on demand
for products in future. These questions are repeatedly asked until a consensus is obtained.
Extrapolation: is an act of inferring an unknown from something that is known. When we forcast
future through extending past trend is extrapolation.
Financial Appraisal: Financial appraisal consider whether the projected revenue will be sufficient
to cover expenditures and whether the financial return be sufficient to make the investment
commercially viable or profitable. Financial appraisal directly focusses on the cash flow of the
organization.
Economic Appraisal: Economic appraisal measures the effect of the project on the whole
economy like:
Social Cost-benefit analysis
Impact on level of savings and investment in society
Impact on fulfillment of national goal
Social-cost benefit analysis: As the name suggest social cost- benefit analysis of anything is
associated with its social impact. When someone analyze the cost –benefit of a public project
considering society then it is social cost-benefit analysis.
Two main approaches to social cost-benefit analysis:
UNIDO Approach: UNIDO approach first articulated in the guidelines for project evaluation
which provides a comprehensive framework for social cost-benefit analysis in developing
countries. UNIDO approach measures cost and benefit in terms of domestic currency.
Little-Mirrlees (L-M) Approach: The L-M techniques assumes that a country can buy and sell
any quantity of a particular good at a given world price. L-M approach measures cost and benefits
in terms of international price also referred to as border price.
Shadow Price: The estimated price of good or services for which no market price exist. The real
or actual price of a product including all cost related with social cost.
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Numeraire: numeraire is an economic term that represent a unit of account. It is the basic standard
by which value is computed. For an example, price of a pen is $5. Here dollar ($) is numeraire.
Social Project: Social projects are carried out by individuals or groups of people working together
for the good of others and not for profit. The objective of the project is to bring about social change
that will benefit an individual, communities or society.
Economic Rate of Return: ERR is the rate of discount that equates the economic cost of the
project to the economic benefit over its life and it is used for social project.
Course Code: F-406

Course Title: Corporate Finance
Corporate Finance: Corporate finance is an area of finance that deals with sources of funding,
the capital structure of corporations, the actions that managers take to increase the value of the
firm to the shareholders, and the tools and analysis used to allocate financial resources.
Capital Budgeting: Capital budgeting is a process used by companies for evaluating and ranking
potential capital expenditures or investments that are significant in amount.
Capital structure: Capital structure refers to the proportions or combinations of equity share
capital, preference share capital, debentures, long-term loans, retained earnings and other long-
term sources of funds in the total amount of capital which a firm should raise to run its business.
Working Capital Management: Working Capital Management (WCM) is the process of
managing current assets and Current liabilities to ensure the short-term liquidity of your firm.
Forms of Business Organization: The most common forms of businesses are:
1. Sole Proprietorships: A sole proprietorship is the most common form of
business organization which owned by one person
2. Partnerships: A partnership is the relationship existing between two or more

persons who join to carry on a trade or business. Each person contributes
money, property, labor or skill, and expects to share in the profits and losses
of the business.
3. Corporations: A corporation is a legal entity that is separate and distinct from

its owners
The goal of financial management:
1. Survive
2. Avoid financial distress and bankruptcy
3. Beat the competition
4. Maximize sales or market share
5. Minimize costs
6. Maximize profits
7. Maintain steady earnings growth
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Agency problem: In corporate finance, the agency problem usually refers to a conflict of interest
between a company's management and the company's stockholders.
Depreciation: A portion of the costs of fixed assets charged against annual revenues over time.
Modified accelerated cost recovery system (MACRS): System used to determine the
depreciation of assets for tax purposes.
Firm’s cash flows fall into three categories:

(1) Operating flows,
(2) Investment flows, and
(3) Financing flows.
Operating flows: Cash flows directly related to sale and production of the firm’s products and
services.
Investment flows: Cash flows associated with purchase and sale of both fixed assets and equity
investments in other firms.
Financing flows: Cash flows that result from debt and equity financing transactions; include
incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to
repurchase stock or pay cash dividends.
Operating cash flow (OCF): The cash flow a firm generates from its normal operations;
calculated as net operating profits after taxes (NOPAT) plus depreciation.
Free cash flow (FCF): The amount of cash flow available to investors (creditors and owners)
after the firm has met all operating needs and paid for investments in net fixed assets and net
current assets.
Cash budget (cash forecast): A statement of the firm’s planned inflows and outflows of cash that
is used to estimate its short-term cash requirements.
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Judgmental approach: A simplified approach for preparing the pro forma balance sheet under
which the firm estimates the values of certain balance sheet accounts and uses its external financing
as a balancing, or “plug,” figure.
Pro forma balance sheet: A pro forma balance sheet summarizes the projected future status of a
company after a planned transaction, based on the current financial statements.
Corporate restructuring: The activities involving expansion or contraction of a firm’s operations

or changes in its asset or financial (ownership) structure.
Merger: The combination of two or more firms, in which the resulting firm maintains the identity
of one of the firms, usually the larger.
(1) Friendly merger: A merger transaction endorsed by the target firm’s management,
approved by its stockholders, and easily consummated.
(2) Hostile merger: A merger transaction that the target firm’s management does not support,
forcing the acquiring company to try to gain control of the firm by buying shares in the
marketplace.
(3) Strategic merger: A merger transaction undertaken to achieve economies of scale.
(4) Financial merger: A merger transaction undertaken with the goal of restructuring the
acquired company to improve its cash flow and unlock its unrealized value.
Consolidation: The combination of two or more firms to form a completely new corporation.
Holding company: A corporation that has voting control of one or more other corporations.
Subsidiaries: The companies controlled by a holding company.
Acquiring company: The firm in a merger transaction that attempts to acquire another firm.
Target company: The firm in a merger transaction that the acquiring company is pursuing.
Motives of merger:
(1) Growth or diversification,
(2) Synergy,
(3) Fund raising,
(4) Increased managerial skill or technology,
(5) Tax considerations,
(6) Increased ownership liquidity,
(7) Defense against takeover.
The four types of mergers are the:

(1) Horizontal merger,
(2) Vertical merger,
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(3) Congeneric merger, and
(4) Conglomerate merger.
Horizontal merger: A merger of two firms in the same line of business.
Vertical merger: A merger in which a firm acquires a supplier or a customer.
Congeneric merger: A merger in which one firm acquires another firm that is in the same general
industry but is neither in the same line of business nor a supplier or customer.
Conglomerate merger: A merger combining firms in unrelated businesses.
leveraged buyout (LBO): An acquisition technique involving the use of a large amount of debt
to purchase a firm; an example of a financial merger.
Divestiture: The selling of some of a firm’s assets for various strategic reasons.
Defensive actions to ward off the hostile takeover are given below: (Takeover defenses
Strategies for fighting hostile takeovers.)
(1) White knight: A takeover defense in which the target firm finds an acquirer more to its
liking than the initial hostile acquirer and prompts the two to compete to take over the firm.
(2) Poison pill: A takeover defense in which a firm issues security that give their holders
certain rights that become effective when a takeover is attempted; these rights make the
target firm less desirable to a hostile acquirer.
(3) Green mail: A takeover defense under which a target firm repurchases, through private
negotiation, a large block of stock at a premium from one or more shareholders to end a
hostile takeover attempt by those shareholders.
(4) Leveraged recapitalization: A takeover defense in which target firm pays a large debt-
financed cash dividend, increasing the firm’s financial leverage and thereby deterring the
takeover attempt.
(5) Golden parachutes: Provisions in the employment contracts of key executives that
provide them with sizable compensation if the firm is taken over; deters hostile takeovers
to the extent that the cash outflows required are large enough to make the takeover
unattractive.
(6) Shark repellents: Antitakeover amendments to a corporate charter that constrain the
firm’s ability to transfer managerial control of the firm as a result of a merger
Insolvency: Business failure that occurs when a firm is unable to pay its liabilities as they come
due.
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Bankruptcy: Business failure that occurs when the stated value of a firm’s liabilities exceeds the
fair market value of its assets.
Recapitalization: The reorganization procedure under which a failed firm’s debts are generally
exchanged for equity or the maturities of existing debts are extended.
Capital structure: Capital structure is the way where a corporation finances its assets through
some combination of equity, debt, or hybrid securities.
Optimal capital structure: Optimal capital structure is a financial measurement that firms use to
determine the best mix of debt and equity financing to use for operation or expansions.
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MM proposition 1 (no tax): The value of the levered firm is the same as the value of the unlevered
firm.
MM proposition 2 (no tax): The cost of equity rises with leverage because the risk of equity rises
with leverage.
MM proposition 1 (with tax): Because the corporation can deduct interest payments but not
dividend payments, corporate leverage lowers tax payments.
Financial distress: Financial distress is a situation where a firm’s operating cash flows are not
sufficient to satisfy current obligations (such as trade credits or interest expenses) and the firm is
forced to take corrective action.
List of financial distress:
1. Dividend reductions
2. Plant closings
3. Losses
4. Layoffs
5. CEO resignations
6. Plummeting stock prices etc.
Direct costs of financial distress:
1. legal and Administrative costs of liquidation or reorganization.
Indirect costs of financial distress:

1. Impaired ability to conduct business
2. Incentive to take large risks
3. Milking the property.
4. Incentive toward underinvestment
**The probability of bankruptcy has a negative effect on the value of the firm .it is not only the
risk associated with bankruptcy but also the cost associated with bankruptcy that lower the value**
Direct bankruptcy cost: Legal and administrative cost of liquidation or reorganization
Indirect bankruptcy cost: Better loan miss in future, potential loss because of reducing credit
lender.
Agency cost: In corporate finance, Agency cost is a cost that arises because of the conflict between
management and stockholders.
Protective covenants: The participant agrees that to protect the company’s confidential
information, and in consideration for the equity compensation in this agreement
Negative covenants: Limits or prohibits actions that the company may take.
Positive covenants: Specifies an action that the company agrees to take or a condition that the
company must abide by.
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Signaling: Since the optimal level of debt increase the value of firm, investors view debt as a
signal of firm value.
Pecking order theory: Financing comes from three sources, internal funds, debt & new equity,
companies prioritize their sources of financing.
**First preferring internal source, then debt, lastly raising equity**
What Happens in Financial Distress?
Firms deal with financial distress in several ways, such as these:
1. Selling major assets.
2. Merging with another firm.
3. Reducing capital spending and research and development.
4. Issuing new securities.
5. Negotiating with banks and other creditors.
6. Exchanging debt for equity.
7. Filing for bankruptcy.
Stock based insolvency: When the value of the firm’s assets is less than the value of debt.
Flow based insolvency: When the firms cash flows are insufficient to cover contractually required
payments.
Liquidation: Means termination of the firm as a going concern; it involves selling the assets of
the firm for salvage value.
Reorganization: Reorganization is the option of keeping the firm a going concerns; it sometimes
involves issuing new securities to replace old securities.
Bankruptcy liquidation: Following sequence of events is typical:
1. A petition is filed in a federal court. A corporation may file a voluntary petition, or

involuntary petitions may be filed against the corporation.
2. A bankruptcy trustee is elected by the creditors to take over the assets of the debtor
corporation. The trustee will attempt to liquidate the assets.
3. When the assets are liquidated, after payment of the costs of administration, proceeds are
distributed among the creditors.
4. If any assets remain after expenses and payments to creditors, they are distributed to the
shareholders.
Priority of Claims: The distribution of the proceeds of liquidation occurs according to the
following priority:
1. Administration expenses associated with liquidation.
2. Unsecured claims arising after the filing of an involuntary bankruptcy petition.
3. Wages earned within 90 days before the filing date, not to exceed $2,000 per claimant.
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4. Contributions to employee benefit plans arising with 180 days before the filing date.
5. Consumer claims, not exceeding $900.
6. Tax claims.
7. Secured and unsecured creditors’ claims.
8. Preferred stockholders’ claims.
9. Common stockholders’ claims.
Bankruptcy Reorganization: A typical sequence:
1. A voluntary petition or an involuntary petition is filed.
2. A federal judge either approves or denies the petition.
3. In most cases the debtor continues to run the business.
4. The firm is given 120 days to submit a reorganization plan.
5. Creditors and shareholders are divided into classes. Requires only approval by 1/2 of
creditors owning 2/3 of outstanding debt
6. After acceptance by the creditors, the plan is confirmed by the court.
7. Payments in cash, property, and securities are made to creditors and shareholders.
Advantages of Bankruptcy:
1. New credit is available - "debtor in possession" or "DIP" debt.
2. Discontinued accrual of interest on pre-bankruptcy unsecured debt.
3. An automatic stay provision.
4. Tax advantages.
5. Requires only approval by 1/2 of creditors owning 2/3 of outstanding debt.
Disadvantages of Bankruptcy:
1. A long and expensive process.
2. Judges are required to approve major business decisions.
3. Distraction to management.
4. “Hold out” by stockholders.
Private workout: Private workout is a process between debtor and creditor where they personally
manage themselves to solve the financial distress.
Prepackaged bankruptcy: Prepackaged bankruptcy is a combination of private workout and legal
bankruptcy that prior filing bankruptcy, the firm approaches its creditors with a plan for
reorganization.
Course Code: F-407

Course Title: Investment Analysis
Real assets of the economy: Real assets of the economy is the land, buildings, machines, and
knowledge that can be used to produce goods and services.
Financial assets: Financial assets such as stocks and bonds. Financial assets are claims to the
income generated by real assets (or claims on income from the government).
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**Real assets determine the wealth of an economy, while financial assets merely represent claims
on real assets**
Three broad types of financial assets:
1. Fixed income,
2. Equity,
3. And derivatives
Fixed-income or debt securities: Fixed-income or debt securities promise either a fixed stream
of income or a stream of income determined by a specified formula.
Common stock, or equity: Common stock, or equity, in a firm represents an ownership share in
the corporation. Equity holders are not promised any particular payment. They receive any
dividends the firm may pay and have prorated ownership in the real assets of the firm. If the firm
is successful, the value of equity will increase; if not, it will decrease.
Derivative securities: Derivative securities such as options and futures contracts provide payoffs
that are determined by the prices of other assets such as bond or stock prices.
Do managers really attempt to maximize firm value?
It is easy to see how they might be tempted to engage in activities not in the best interest of
shareholders. For example, they might engage in empire building or avoid risky projects to protect
their own jobs or overconsume luxuries such as corporate jets, reasoning that the cost of such
perquisites is largely borne by the shareholders. These potential conflicts of interest are called
agency problems because managers, who are hired as agents of the shareholders, may pursue their
own interests instead.
Investment assets: Investment assets can be categorized into broad asset classes, such as stocks,
bonds, real estate, commodities, and so on
Investors make two types of decisions in constructing their portfolios:
1. Asset allocation decision

2. Security selection decision
Asset allocation: Asset allocation includes the decision of how much of one’s portfolio to place
in safe assets such as bank accounts or money market securities versus in risky assets.
Security analysis: Security analysis involves the valuation of particular securities that might be
included in the portfolio.
“Top-down” strategy: In this process, the portfolio construction starts with asset allocation. A
top-down investor first makes this and other crucial asset allocation decisions before turning to the
decision of the particular securities to be held in each asset class.
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“Bottom-up” strategy: In this process, the portfolio is constructed from the securities that seem
attractively priced without as much concern for the resultant asset allocation.
Passive management: Passive management calls for holding highly diversified portfolios without
spending effort or other resources attempting to improve investment performance through security
analysis.
Active management: Active management is the attempt to improve performance either by

identifying mispriced securities or by timing the performance of broad asset classes.
Three major players in the financial markets:
1. Firms are net demanders of capital.

2. Households typically are net suppliers of capital.
3. Governments can be borrowers or lenders, depending on the relationship between tax
revenue and government expenditures
Financial intermediaries: Financial intermediaries have evolved to bring the suppliers of capital
(investors) together with the demanders of capital (primarily corporations and the federal
government). These financial intermediaries include banks, investment companies, insurance
companies, and credit unions. Financial intermediaries issue their own securities to raise funds to
purchase the securities of other corporations.
Venture capital (VC): While large firms can raise funds directly from the stock and bond markets
with help from their investment bankers, smaller and younger firms that have not yet issued
securities to the public do not have that option. Start-up companies rely instead on bank loans and
investors who are willing to invest in them in return for an ownership stake in the firm. The equity
investment in these young companies is called venture capital (VC).
Financial markets: Financial markets are traditionally segmented into
1. Money markets and

2. Capital markets.
Money market: Money market is a where short-term, marketable, liquid, low-risk debt securities
are traded. Money market instruments sometimes are called cash equivalents, or just cash for short.
Capital market: Capital market is a market where longer term and riskier securities are traded.
Ask price: The ask price is the price you would have to pay to buy a T-bill from a securities dealer.
Bid price: The bid price is the slightly lower price you would receive if you wanted to sell a bill
to a dealer.
Bid–ask spread: The bid–ask spread is the difference in these prices, which is the dealer’s source
of profit.
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London Interbank Offered Rate (LIBOR): The London Interbank Offered Rate (LIBOR) is the
rate at which large banks in London are willing to lend money among themselves.
Treasury Inflation-Protected Securities: governments of many countries have issued bonds that
are linked to an index of the cost of living in order to provide their citizens with an effective way
to hedge inflation risk.
Municipal bonds: Municipal bonds are issued by state and local governments.
Mortgage-backed security: Mortgage-backed security is either an ownership claims in a pool of

mortgages or an obligation that is secured by such a pool.
Call option: A call option gives its holder the right to purchase an asset for a specified price, called
the exercise or strike price, on or before a specified expiration date.
Put option: A put option gives its holder the right to sell an asset for a specified exercise price on
or before a specified expiration date.
Futures contract: A futures contract calls for delivery of an asset (or in some cases, its cash value)
at a specified delivery or maturity date for an agreed-upon price, called the futures price, to be paid
at contract maturity.
Long position: The long position is held by the trader who commits to purchasing the asset on the
delivery date.
Short position: The trader who takes the short position commits to delivering the asset at contract
maturity.
The process of issuing security to public:
1. Management gets the approval of the Board of Directors.

2. The firm prepares and files a registration statement with the SEC.
3. The SEC studies the registration statement during the waiting period.
4. The firm prepares and files an amended registration statement with the SEC.
5. If everything is copasetic (completely satisfactory) with the SEC, a price is
set and a full-fledged selling effort gets underway.
The Process of a Public Offering:
Steps in Public Offering Time

1. Pre-underwriting conferences Several Months
2. Registration statements 20 days waiting period
3. Pricing the issue Usually on the 20th day
4. Public offering and sale After the 20th day
5. Market stabilization 30 days after offering
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Primary market: Investment bankers are generally hired to manage the sale of these securities in
what is called a primary market for newly issued securities.
Secondary market: Trades in existing securities take place in the secondary market.
A privately held company: A privately held company is owned by a relatively small number of
shareholders. Privately held firms have fewer obligations to release financial statements and other
information to the public.
Private placement: Private placement is a placement where private firms wish to raise funds, they
sell shares directly to a small number of institutional or wealthy investors.
initial public offering, or IPO: The first issue of shares to the general public is called the firm’s
initial public offering, or IPO.
A seasoned equity offering: A seasoned equity offering is the sale of additional shares in firms
that already are publicly traded.
Underwriters: Public offerings of both stocks and bonds typically are marketed by investment
bankers who in this role are called underwriters.
Prospectus: A preliminary registration statement must be filed with the Securities and Exchange
Commission (SEC), describing the issue and the prospects of the company. When the statement is
in final form and accepted by the SEC, it is called the prospectus.
Shelf registration: An important innovation in the issuing of securities was introduced where
firms allow to register securities and gradually sell them to the public for 2 years following the
initial registration. Because the securities are already registered, they can be sold on short notice,
with little additional paperwork. Moreover, they can be sold in small amounts without incurring
substantial flotation costs The securities are “on the shelf,” ready to be issued, which has given
rise to the term shelf registration.
Road shows: The investment bankers organize road shows in which they travel around the country
to publicize the imminent offering. These road shows serve two purposes.
1. They generate interest among potential investors and provide information about the
offering.
2. They provide information to the issuing firm and its underwriters about the price at which
they will be able to market the securities.
We can differentiate four types of markets:
1. Direct search markets,

2. Brokered markets,
3. Dealer markets, and
4. Auction markets.
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Direct search market: A direct search market is the least organized market. Buyers and sellers
must seek each other out directly.
A brokered market: The next level of organization is a brokered market. In this markets where
trading in a good is active, brokers find it profitable to offer search services to buyers and sellers.
Dealer markets: When trading activity in a particular type of asset increases, dealer markets arise.
Dealers specialize in various assets, purchase these assets for their own accounts, and later sell
them for a profit from their inventory. The spreads between dealers’ buy (or “bid”) prices and sell
(or “ask”) prices are a source of profit.
Auction market: The most integrated market is an auction market, in which all traders converge
at one place (either physically or “electronically”) to buy or sell an asset. The New York Stock
Exchange (NYSE) is an example of an auction market.
There are two types of orders:
1. Market orders and

2. Orders contingent on price.
Market orders: Market orders are buy or sell orders that are to be executed immediately at current
market prices.
Price-Contingent Orders: Investors also may place orders specifying prices at which they are
willing to buy or sell a security are called Price-Contingent Orders.
Limit buy order: A limit buy order may instruct the broker to buy some number of shares if and
when stock price may be obtained at or below a stipulated price.
Limit sell order: A limit sell order may instruct the broker to sell if and when the stock price rises
above a specified limit.
Limit order book: A collection of limit orders waiting to be executed is called a limit order book.
Stop orders: Stop orders are similar to limit orders in that the trade is not to be executed unless
the stock hits a price limit.
Stop-loss orders: Stop-loss orders are the order where the stock is to be sold if its price falls below
a stipulated level.
Stop-buy orders: Stop-buy orders specify that a stock should be bought when its price rises above
a limit.
Short sales: Short sales are the sales of securities you don’t own but have borrowed from your
broker.
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There are three trading systems employed in the United States:
1. Over the- counter dealer markets,

2. Electronic communication networks, and
3. Specialist markets.
Over the- counter dealer markets: Over the- counter dealer markets link brokers and dealers in
a computer network where price quotes could be displayed and revised. Dealers could use the
network to display the bid price at which they were willing to purchase a security and the ask price
at which they were willing to sell.
Electronic communication networks: Electronic communication networks allow participants to

post market and limit orders over computer networks.
Specialist market: Brokers wishing to buy or sell shares for their clients direct the trade to the
specialist’s post on the floor of the exchange. While each security is assigned to only one specialist,
each specialist firm makes a market in many securities.
Margin: Purchasing stocks on margin means the investor borrows part of the purchase price of
the stock from a broker. The margin in the account is the portion of the purchase price contributed
by the investor; the remainder is borrowed from the broker.
Insider Trading: It is illegal for anyone to transact in securities to profit from inside information,
that is, private information held by officers, directors, or major stockholders that has not yet been
divulged to the public.
Investment companies: Investment companies are financial intermediaries that collect funds from
individual investors and invest those funds in a potentially wide range of securities or other assets.
Investment companies perform several important functions for their investors:
1. Record keeping and administration.

2. Diversification and divisibility.
3. Professional management.
4. Lower transaction costs.
Net asset value: Net asset value equals assets minus liabilities expressed on a per-share basis.
Unit investment trusts: Unit investment trusts are pools of money invested in a portfolio that is
fixed for the life of the fund.
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There are two types of managed companies:
1. Closed-end and
2. Open-end.
Open-end funds: Open-end funds stand ready to redeem or issue shares at their net asset value
(although both purchases and redemptions may involve sales charges). When investors in open-
end funds wish to “cash out” their shares, they sell them back to the fund at NAV.
Closed-end funds: Closed-end funds do not redeem or issue shares. Investors in closed-end funds
who wish to cash out must sell their shares to other investors. Shares of closed-end funds are traded
on organized Exchanges and can be purchased through brokers just like other common stock; their
prices, therefore, can differ from NAV.
Commingled funds: Commingled funds are partnerships of investors that pool funds. The
management firm that organizes the partnership, for example, a bank or insurance company,
manages the funds for a fee. Commingled funds are similar in form to open-end mutual funds.
Real Estate Investment Trusts (REITs): A REIT is similar to a closed-end fund. REITs invest
in real estate or loans secured by real estate.
There are two principal kinds of REITs:
1. Equity trusts invest in real estate directly, whereas

2. Mortgage trusts invest primarily in mortgage and construction loans.
Hedge funds: Hedge funds are vehicles that allow private investors to pool assets to be invested
by a fund manager.
**Mutual funds are the common name for open-end investment companies. **
Funds are commonly classified by investment policy into one of the following groups:
1. Money Market Funds: These funds invest in money market securities such as commercial
paper, repurchase agreements, or certificates of deposit.
2. Equity Funds: Equity funds invest primarily in stock, although they may, at the portfolio
manager’s discretion, also hold fixed-income or other types of securities.
3. Sector Funds: Some equity funds, called sector funds, concentrate on a particular industry.
4. Bond Funds: As the name suggests, these funds specialize in the fixed-income sector.
Within that sector, however, there is considerable room for further specialization.
5. International Funds: Many funds have international focus. Global funds invest in
securities worldwide, including the United States. In contrast, international funds invest in
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securities of firms located outside the United States. Regional funds concentrate on a
particular part of the world, and emerging market funds invest in companies of developing
nations.
6. Balanced Fund: Some funds are designed to be candidates for an individual’s entire
investment portfolio. These balanced funds hold both equities and fixed-income securities
in relatively stable proportions
7. Asset Allocation and Flexible Funds: These funds are similar to balanced funds in that
they hold both stocks and bonds. However, asset allocation funds may dramatically vary
the proportions allocated to each market in accord with the portfolio manager’s forecast of
the relative performance of each sector
8. Index Fund: An index fund tries to match the performance of a broad market index. The
fund buys shares in securities included in a particular index in proportion to each security’s
representation in that index.
Costs of Investing in Mutual Funds:

Fee Structure: An individual investor choosing a mutual fund should consider not only the fund’s
stated investment policy and past performance but also its management fees and other expenses.
There are four general classes of fees:
1. Operating Expenses: Operating expenses are the costs incurred by the mutual fund in
operating the portfolio, including administrative expenses and advisory fees paid to the
investment manager.
2. Front-End Load: A front-end load is a commission or sales charge paid when you
purchase the shares.
3. Back-End Load: A back-end load is a redemption, or “exit,” fee incurred when you sell
your shares.
4. A 12b-1 charge: A 12b-1 charge is an annual marketing or distribution fee on a mutual

fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in
a fund's expense ratio.
Turnover: Turnover is the ratio of the trading activity of a portfolio to the assets of the portfolio.
It measures the fraction of the portfolio that is “replaced” each year.
Nominal Interest Rates: Nominal interest rates are the rate of return which an investor or
borrower will get or have to pay in the market without any adjustment for inflation.
Real Interest Rates: Real interest rates are the rate of return which an investor or borrower will
get or have to pay in the market with the adjustment for inflation.
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Nominal Interest Rate Real Interest Rate
Nominal interest rate does not include Real Interest rates include inflation effect
inflation effect
Nominal interest rate = Real Interest rate + Real Interest rate = Nominal interest rate –
Inflation rate Inflation rate
Nominal interest rate cannot be less than zero Real interest rate can be less than zero if
inflation is more than nominal rates
Rates which are published by all financial Real rates are not published anywhere but
institutions, banks, corporates, etc. Are these are derived rates
nominal rates
Nominal interest rates take monetary value Real interest rates take opportunity value into
into consideration consideration
Nominal rates will tell us what is happening Real rates will tell us the actual return we will
in the market and it is moving. It is not the get from the investment after adjusting the
actual return we will get. inflation effect
The real rate of interest is the nominal rate reduced by the loss of purchasing power resulting from
inflation. In fact, the exact relationship between the real and nominal interest rate is given by-
1+𝑟𝑛
1+rr= 1+𝑖
We call rn the nominal rate, rr the real rate, and i the inflation rate
Effective Annual Rate: The Effective Annual Rate (EAR) is the interest rate that is adjusted
for compounding over a given period.
Annual Percentage Rate: The Annual Percentage Rate (APR) is the yearly rate of interest that an
individual must pay on a loan, or that they receive on a deposit account.
Holding Period Return: The Holding Period Return (HPR) is the total return on an asset or
investment portfolio over the period for which the asset or portfolio has been held
Expected returns: Expected returns are profits or losses that investors expect to earn based on
anticipated rates of return.
Standard deviation vs Variance:
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FOR VARIANCE STANDARD DEVIATION
COMPARISON
Meaning Variance is a numerical value that Standard deviation is a measure

describes the variability of observations of dispersion of observations
from its arithmetic mean. within a data set.
What is it? It is the average of squared deviations. It is the root mean square
deviation.
Labelled as Sigma-squared (σ^2) Sigma (σ)
Expressed in Squared units Same units as the values in the set

of data.
Indicates How far individuals in a group are How much observations of a data
spread out. set differs from its mean.
The Reward-to-Volatility (Sharpe) Ratio: The sharpe ratio definition is the excess return or risk
premium of a well-diversified portfolio or investment per unit of risk.
Value at risk (VAR): Value at risk (VAR) is a measure of the risk of loss for investments. It
estimates how much a set of investments might lose (with a given probability), given normal
market conditions, in a set time period such as a day.
Normal distribution: A normal distribution is an arrangement of a data set in which most values
cluster in the middle of the range and the rest taper off symmetrically toward either extreme. A
graphical representation of a normal distribution is sometimes called a bell curve because of its
flared shape.
Skewness: It describes the asymmetry of a distribution. A skewed distribution therefore has one
tail longer than the other.
Positively skewed: A positively skewed distribution has a longer tail to the right:
Negatively skewed: A negatively skewed distribution has a longer tail to the left:
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Kurtosis: Kurtosis is a statistical measure that defines how heavily the tails of a distribution differ
from the tails of a normal distribution. In other words, kurtosis identifies whether the tails of a
given distribution contain extreme values.
The process of constructing an overall portfolio requires you to:
1. Select the composition of the risky portfolio and

2. Decide how much to invest in it, directing the remaining investment budget to a
risk-free investment. The second step is called capital allocation to risky assets.
The utility model also reveals: The utility model also reveals the appropriate objective function
for the construction of an optimal risky portfolio and thus explains how an industry can serve
investors with highly diverse preferences without the need to know each of them personally.
Risk premium: Risk premium represents the extra return above the risk-free rate that an investor
needs in order to be compensated for the risk of a certain investment.
Speculation: Speculations is “the assumption of considerable investment risk to obtain

commensurate gain.”
Considerable risk: Considerable risk is the risk which is sufficient to affect the decision. An
individual might reject an investment that has a positive risk premium because the potential gain
is insufficient to make up for the risk involved.
Commensurate gain: Commensurate gain means a positive risk premium, that is, an expected
profit greater than the risk-free alternative.
Gamble: Gamble means bet or wager on an uncertain outcome.
**The central difference between gambling and speculation is the lack of commensurate gain.**
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Risk aversion: Risk aversion is the reluctance of a person to accept a bargain with an uncertain
payoff rather than another bargain with more certain, but possibly lower, expected payoff.
Utility: Utility is defined as the total amount of satisfaction that a person can receive from the
consumption of all units of a specific product or service.
Certainty equivalent: The certainty equivalent is a guaranteed return that someone would accept
now, rather than taking a chance on a higher, but uncertain, return in the future.
Indifference curve: An indifference curve is a graph showing combination of two goods that give
the consumer equal satisfaction and utility.
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Capital market line (CML): Capital market line (CML) is a graph that reflects the expected
return of a portfolio consisting of all possible proportions between the market portfolio and a risk-
free asset.
Security market line (SML): Security market line (SML) is the representation of the capital asset
pricing model. It displays the expected rate of return of an individual security as a function of
systematic, non-diversifiable risk.
Capital allocation line (CAL): Capital allocation line (CAL) is a graph created by investors to
measure the risk of risky and risk-free assets. The graph displays the return to be made by taking
on a certain level of risk. Its slope is known as the "reward-to-variability ratio".
The investment decision can be viewed as a top-down process:
1. Capital allocation between the risky portfolio and risk-free assets,

2. Asset allocation in the risky portfolio across broad asset classes (e.g., U.S. stocks,
international stocks, and long-term bonds) and
3. Security selection of individual assets within each asset class.
Diversification: Diversification means investing capital more than one place to reduce risk.
Portfolio risk: The risk which is associated with portfolio. These risk are:
1. Market risk/systematic risk/Non-diversifiable risk: Market risk is the risk which is
associated with whole market condition which cannot be diversified. Because of changing
interest rate, political stability, inflation rate, national income there is an uncertainty of
getting expected return with actual return is called market risk.
2. Firm specific risk/ nonsystematic risk/Diversifiable Risk/Unique Risk: Firm specific
risk occurs firm’s internal decision which can be diversified.
Risk pooling: Risk pooling means merging uncorrelated, risky projects as a means to reduce risk.
Risk sharing: Risk sharing is the act of selling shares in an attractive risky portfolio to limit risk
and yet maintain the Sharpe ratio (profitability) of the resultant position.
Portfolio opportunity set: The set of all portfolios that can be constructed from a given set
of assets, based on different levels of acceptable risk. Evaluating the portfolio opportunity set for
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a collection of assets allows potential investors to choose among portfolio configurations
that match their level of risk tolerance.
The Markowitz procedure introduced in the preceding chapter suffers from two drawbacks:
1. The model requires a huge number of estimates to fill the covariance matrix.
2. The model does not provide any guideline to the forecasting of the security risk premiums
that are essential to construct the efficient frontier of risky assets.
Single factor model: Single factor model assumes that the actual returns deviates from
expectation due to macro event and firm specific event. A single-factor model of the economy
classifies sources of uncertainty as systematic (macroeconomic) factors or firm-specific
(microeconomic) factors. The index model assumes that the macro factor can be represented by a
broad index of stock returns.
Return: ri  E (ri )  i m  ei
Βi = response of an individual security’s return to the common factor, m. Beta measures

systematic risk.
M = a common macroeconomic factor that affects all security returns. The S&P 500 is
often used as a proxy for m.
Ei = firm-specific surprises
Total Risk:
Covariance:
Single index model: Single index model simply replaces macro event with a broad market index.
None of this deals with risk free rate.
 Regression equation:
Ri t    i  i RM t   ei t 
 Expected return-beta relationship:

ERi    i  i E RM 
 Risk and covariance:

Variance = Systematic risk and Firm-specific risk:
 i2  i2 M2   2 (ei )
Covariance = product of betas x market index risk:
Cov(ri , rj )  i  j M2
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Correlation = product of correlations with the market index
i  j M2 i M2  j M2
Corr (ri , rj )    Corr (ri , rM ) xCorr (rj , rM )
 i j  i M  j M
CAPM: CAPM models expected returns excess of risk free rate based on the security market line.
The model gives us a precise prediction of the relationship that we should observe between the
risk of an asset and its expected return. This relationship serves two vital functions:
1. It provides a benchmark rate of return for evaluating possible investments.

2. The model helps us to make an educated guess as to the expected return on assets that have
not yet been traded in the marketplace.
Expected rate of return:
Beta Coefficient:
The assumptions of the CAPM:
1. Individual behavior
A. Investors are rational, mean-variance optimizers.
B. Their planning horizon is a single period.
C. Investors have homogeneous expectations (identical input lists).
2. Market structure
A. All assets are publicly held and trade on public exchanges, short positions are
allowed, and investors can borrow or lend at a common risk-free rate.
B. All information is publicly available.
C. No taxes.
D. No transaction costs.
Challenges and Extensions to the CAPM:
1. The liability of investors who hold a short position in an asset is potentially unlimited, since
the price may rise without limit. Hence a large short position requires large collateral, and
proceeds cannot be used to invest in other risky assets.
2. There is a limited supply of shares of any stock to be borrowed by would-be short sellers.
It often happens that investors simply cannot find shares to borrow in order to short.
3. Many investment companies are prohibited from short sales. The U.S. and other countries
further restrict short sales by regulation.
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Efficient frontier: 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.
A zero-beta portfolio: A zero-beta portfolio is a portfolio constructed to have zero systematic risk
or, in other words, a beta of zero. A zero-beta portfolio would have the same expected return as
the risk-free rate.
The mutual fund theorem: The mutual fund theorem is an investing strategy suggesting the use
of mutual funds exclusively in a portfolio for diversification and mean-variance optimization.
A beta coefficient: A beta coefficient is a measure of the volatility, or systematic risk, of an
individual stock in comparison to the unsystematic risk of the entire market.
Expected return-beta relationship: The assumption that the expected rate of return on
an investment is directly related to the risk premium as indicated by its beta within the Capital
Asset Pricing Model.
Alpha: Alpha is a measure of the performance of an investment as compared to a suitable market

index, such as the S&P 500. An alpha of one (the baseline value is zero) shows that the return on
the investment during a specified time frame outperformed the overall market average by 1%. A
negative alpha number reflects an investment that is underperforming as compared to the market
average.
Course Code: F-408

Course Title: Project Appraisal and Management
Project: A project is an organized program of pre-determined group of activities that are non-
routine in nature and that must be completed using the available resources within the given time
limit.
Project management: Project management is a scientific application of modern tools and
techniques in planning, financing, implementing, monitoring, controlling and coordinating of a
project to produce desirable outputs in accordance with the pre-determined objectives within the
constraints of time and cost.
Project management consists of the following stages:
1. Project planning
2. Project scheduling
3. Project implementation
4. Project controlling
5. Project monitoring
Life cycle of a project:
1. Conception stage – idea conceived
2. Design stage – design of project worked out as par idea
3. Implementation stage – implemented as par the design
4. Commissioning stage – commissioning after implementation.
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Taxonomy of projects:
1. Based on type of activity
I. Industrial project: set up for the production of some goods by private sector.
II. Non-Industrial project: made by govt. and benefits from project enjoyed by entire
society of people.
2. Based on the location
I. National project: within the national boundaries
II. International project: outside of the national boundaries
3. Based on completion time
I. Normal project: there is on constraint of time.
II. Cash project: completed within the stipulated time.
4. Based on ownership
I. Private sector project: the ownership is completed in the hands of the project
promoters and investors.
II. Public sector project: owned by the state.
III. Joint sector project: ownership is shared by the Govt. and private entrepreneurs.
5. Based on size
I. Small project
II. Medium project
III. Large project
6. Based on need
I. New project: conceived and implemented to meet customer’s needs.
II. Balancing project: Projects have to be structured and managed, maintaining a
balance between utilizing the organization’s resources for daily operations and for
required tasks to complete work activities on a project.
III. Expansion project: aimed at increasing the plant capacity for the current product
range.
IV. Modernization project: set up with latest available te4chnology.
V. Replacement project: replacing some old machinery with new machinery of the
same capacity.
VI. Diversification project:
a) Related diversification: offer more than one product of same product line.
b) Unrelated diversification: offer more than one product of same product
line.
VII. Backward integration project: is when a business at the end of the supply chain
takes on activities "upstream."
VIII. Forward integration project: is when a company at the beginning of the supply
chain controls stages farther along. Examples include iron mining companies that
own "downstream" activities such as steel factories.
Fiscal policy: Fiscal policy is a policy of the government to influence the economic activity of the
country through the medium of budget. (govt. revenue and expenditure)
Monetary policy: Monetary policy is a policy which is concerned with the quantity of money and
its regulation.
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Project identification: Project identification is a process of identifying the worthwhile project
which can produce better outcome to achieve firms goal.
Project preparation: project preparation is a process which consists of four stages
1. Pre-feasibility study
2. Functional studies or support studies
3. Feasibility study
4. Detailed project analysis
Establishing project process:
1. Initiating
2. Planning
3. Organizing
4. Executing
5. Directing and controlling
Project: A project can be defined as a set of planned activities that involve an initial capital outlay,
with a flow of benefits in the future.
Project appraisal: Project appraisal is a process of detailed examination of several aspects of a
given project before recommending the same.
Several types of project appraisal are given below:
1. Technical appraisal: Technical appraisal is an in-depth study to ensure that a project is (I)
soundly designed, (II) appropriately engineered and (III) follows accepted standards.
2. Commercial appraisal: The commercial appraisal is concerned with market for the
product/service. The very idea of promoting a project is to produce some product/ service
and to market the same to the consumers and earning a profit thereby.
3. Market appraisal: Market appraisal occupies a prime place in project appraisal.

Commercial appraisal or market appraisal of a project is done studying the commercial
successfulness of the product/ service offered by the project from the following angles:
a. Demand for the project

b. Supply position for the product
c. Distribution channels
d. Pricing of the product
e. Government policies
4. Economic appraisal: Economic appraisal is a type of decision method applied to a project,

program or policy that takes into account a wide range of costs and benefits, denominated
in monetary terms or for which a monetary equivalent can be estimated. The main types of
economic appraisal are:
a) Cost–benefit analysis
b) Cost-effectiveness analysis
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c) Scoring and weighting
5. Financial Appraisal: Financial appraisal is a method used to evaluate the viability of a

proposed project by assessing the value of net cash flows that result from its
implementation.
6. Management appraisal: Management Appraisal is a leadership assessment which is used

today for the evaluation of the upper and top management levels.
The key steps in project appraisal are:
1. Determining the capital cost outlay of the project
2. Determining the financing pattern of the project (Debt and Equity)
3. Projecting cash flows for the project for a length of period in future
4. Evaluating various financial criteria for the project
5. Checking sensitivity of the project to key variables
6. Establishing risks and covering them suitably
Technical appraisal:
1. Selection of Process/Technology
- Appropriate technology
2. Scale of operation
3. Selection of raw material
4. Technical know-how
5. Collaboration agreements
6. Product mix
7. Selection and procurement of plant and machinery
8. Plant layout
9. Location of projects
- Regional factors:
a. Raw materials
b. Proximity to market
c. Availability of labor
d. Availability of supporting activities
e. Availability of infrastructural facilities
f. Locating industries in backward
g. Climatic factors
- Site factors:
a) Choice of location
b) Choice of location based on tangible factors
10. Project scheduling and implementation.
Project scheduling:
Project scheduling is only the arrangement of activities of the project in the order of time in which
they are to be performed. The schedule which broadly indicates the logical sequence of events
would be as under:
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1. Land acquisition
2. Site development
3. Preparing building plans, estimates, designs, getting necessary approvals and entrusting
the construction work to contractors.
4. Construction of building, machinery foundation and other related civil works and
completion of that project.
5. Placing order for machinery
6. Receipt of machinery at site
7. Erection of machinery
8. Commissioning of plant and taking trial runs.
9. Commencement of regular commercial production.
Demand: The term ‘demand’ can be defined as the number of units of a particular good or service
which consumers are willing to purchase during a specified period under a given set of condition.
Demand forecasting techniques: A forecast is a prediction or estimation of a future situation.
There are two approaches to the problem of business forecasting.
a. Survey approach: Survey approach is to obtain information about the intentions of
consumers through collecting views and opinions by experts in the field or by conducting
interview with the consumers. It is suitable for short term forecasting.
b. Statistical data: Statistical data approach is to use the past experience as a guide and to
arrive at the time of demand by extrapolating the past ‘statistical data’. It is suitable for
long term forecasting.
Survey Methods:
1. Jury of expert’s opinion method: In this method, experts in the particular field are
requested to give their views on the likely demand for the product in future.
In Survey of Expert’s Opinions, the specialized group of people in the concerned fields,
from both inside and outside the organization, are approached and asked to give their
opinions on sales trend.
2. Delphi technique: The Delphi method is a forecasting process framework based on the
results of several rounds of questionnaires sent to a panel of experts. Several rounds of
questionnaires are sent out, and the anonymous responses are aggregated and shared with
the group after each round. The experts are allowed to adjust their answers in subsequent
rounds. Since multiple rounds of questions are asked and the panel is told what the group
thinks as a whole, the Delphi method seeks to reach the correct response through
consensus.
3. Consumer’s survey method: Consumer Survey Method is one of the techniques of

demand forecasting that involves direct interview of the potential consumers.
4. Sales forecast composite: Sale Forecast Composite Method is a sale forecasting method
wherein the sales agents forecast the sales in their respective territories, which is then
consolidated at branch/region/area level, after which the aggregate of all these factors is
consolidated to develop an overall company sales forecast.
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Sale Forecast Formula =
𝑇𝑜𝑡𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑆𝑖𝑧𝑒 × 𝑁𝑜. 𝑜𝑓 𝑟𝑒𝑠𝑝𝑜𝑛𝑑𝑒𝑛𝑡𝑠 𝑤ℎ𝑜 𝑠𝑎𝑖𝑑 𝑦𝑒𝑠
𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
× % 𝑜𝑓 𝑡ℎ𝑜𝑠𝑒 𝑤ℎ𝑜 𝑠𝑎𝑖𝑑 𝑦𝑒𝑠 𝑤ℎ𝑜 𝑎𝑐𝑡𝑢𝑎𝑙𝑙𝑦 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒
× 𝑎𝑣𝑔. 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑡ℎ𝑎𝑡 𝑤𝑖𝑙𝑙 𝑏𝑒 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 𝑏𝑦 𝑎 𝑏𝑢𝑦𝑒𝑟
Statistical Methods:
1. Trend analysis: Trend analysis is a technique used in technical analysis that attempts to
predict the future stock price movements based on recently observed trend data.
a) Curve fitting: Curve fitting is the process of constructing a curve or

mathematical function that has the best fit to a series of data points possibly
subject to constraints
b) Moving average method: A moving average is a technique to get an overall
idea of the trends in a data set; it is an average of any subset of numbers. The
moving average is extremely useful for forecasting long-term trends.
c) Weighted moving average method: Weighted moving averages assign a
heavier weighting to more current data points since they are more relevant than
data points in the distant past.
d) Exponential smoothing method: Exponential moving averages (EMAs), are
also weighted toward the most recent prices, but the rate of decrease between
the one price and its preceding price is not consistent. The difference in decrease
is exponential
2. Regression technique: Regression technique is an equation relating a dependent variable

to many independent variables.
Y = a1+(b1*x1) +(b2*x2) +(b3*x3) +(b4*x4) +…. (bn*Xn)
3. Other methods of forecasting:
a) End use method: Under the End Use Method, also called as the User
Expectation Method, the list of several users of the product under forecasting
is prepared first, who are then asked about their individual purchasing patterns
and then from such information the complete product demand forecast is
ascertained.
b) Leading indicator method: A leading indicator is any economic factor that

changes before the rest of the economy begins to go in a particular direction.
Leading indicators help market observers and policymakers predict significant
changes in the economy.
c) Chain-ratio method: A method of calculating total market demand for a

product in which a base number, such as the total population of a country, is
multiplied by several percentages, such as the number in the population above
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and below certain ages, the number in the population with an interest in motor
sport, the number in the population with motor-cycle licenses, in order to arrive
at a rough estimate of the potential demand for a particular good or service (in
this case, say, a new type of motor cycle helmet.)
Social cost benefit analysis

Social cost benefit analysis: Social cost benefit analysis is a methodology developed for
evaluating investment projects from the point of view of the society or economic as a whole.
Rationale / Significance of SCBA:
1. Market imperfection: Market imperfections: When imperfection exits, market price do
not reflect social values. The common imperfections found in developing Countries are:
a) Rationing: Rationing of a commodity means control over its price and

distribution. The price paid by a consumer under rationing is often significantly
less Than the price that prevail in the competitive market.
b) Prescription of minimum wage rates: When minimum wages would be in a
competitive labor market free from such wage legislations.
c) Foreign exchange regulation: The official rate of foreign exchange in most of
the developing countries, which exercise close regulation over foreign
exchange, typically less than the rate that would prevail in the absence of
foreign regulation. That is why foreign exchange usually commands a premium
in unofficial transactions.
2. Externalities: A project may have a beneficial external effects. For example, it may create
certain infrastructural Facilities like roads which benefit the Neighboring areas. Such
benefits are considered in SCBA, though they are ignored in assessing the Monetary
benefits to the project sponsors because they do not receive any monetary compensation
from those who enjoy the external benefit created by the Project. Likewise, a project may
have harmful effect like environmental pollution.
3. Taxes & Subsidies: Taxes and Subsidies from the private point of view, taxes are definite
monetary costs and subsidies are definite monetary gains. From the social point of view,
However, taxes and subsidies are generally regarded as transfer payments and hence
considered irrelevant.
4. Concern for savings: Concern for savings: A rupee of benefits saved is deemed more
valuable than a rupee of benefit consumed. The concern of society for saving and
investment is dully reflected in SCBA wherein a higher a valuation is placed on saving
and lower valuation is put on consumption.
5. Concern for redistribution: The society is concern about the distribution of benefits
across different group. A rupee of benefit going to an economically poor section is
considered more valuable than a rupee of benefit going to an affluent section.
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6. Merit wants: Goals and preferences not expressed in the market place, but believed by
policy maker to be larger interest. For ex: Govt. may promote an adult education program
or balanced nutrition program for school –going children even though these are not sought
by consumer in market place
Objectives of SCBA:
The main focus of SCBA is to determine
1. Economic benefits of the project in terms of shadow prices
2. The impact of the project on the level of savings and investments in the society
3. The impact of the project on the distribution of income in the society;
4. The contribution of the project towards the fulfillment of certain merit wants (self-
sufficiency, employment etc.)
Approaches to SCBA:
Two approaches for SCBA
1. UNIDO Approach: This approach is mainly based on publication of UNIDO (United
Nation Industrial Development Organizations) named Guide to Practical Project
Appraisal in 1978.
2. L-M Approach: IMD Little and J.A. Mireless approach for analysis of Social Cost
Benefit in Manual of Industrial Project “Analysis in Developing countries and project
Appraisal and planning for Developing Countries.
The UNIDO method of project appraisal involves five stages:
1. Calculation of the financial profitability of the project measured at market prices.
2. Obtaining the net benefit of the project measured in terms of economic efficiency prices.
3. Adjustment for the impact of the project on savings and investment.
4. Adjustment for the impact of the project on income distribution.
5. Adjustment for the impact of the project on merit goods and demerit goods whose social
values differ from their economic values. Merits good is one for which the social value
exceeds the economic value. Demerits good is one social value of goods is less than the
economic value.
Little-Mirrlees approach:
1. I.M.D. Little and James A. Mirrless have developed an approach to SCBA which is
famously known as L-M approach.
2. The core of this approach is that the social cost of using a resource in developing
countries differs widely from the price paid for it
3. Hence, it requires Shadow Prices to denote the real value of a resource to society.
Feature of L-M Approach:
1. L-M Numeraire is present uncommitted social income.
2. L-M methods opt for savings as the yardstick of their entire approach. Present savings
is more valuable to them than present consumption since the savings can be converted
into investment for future
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3. L-M approach rejects the 'consumption' Numeraire of UNIDO approach since the LM
exponents feel that the consumption of all level is valuable
4. This approach measures the cost and benefits in terms of international or border prices.
5. Why do they prefer Border Prices?
6. It is because that the border prices represent the correct social opportunity costs or
benefits of using or producing traded goods.
UNIDO VS. L-M:
Similarities:
 Calculation of Shadow prices (Shadow price is the real price including social cost) to
reflect social value
 Usage of Discounted Cash Flow Techniques
Differences:
UNIDO L-M
Domestic currency is used as Nemeraire International price is used as Nemeraire
Consumption is the measurement base Uncommitted social income is the measurement

base
SCBA objectives are met through stage by stage At one place all SCBA objectives are fulfilled.
Social Cost Benefit Analysis (SCBA):

1. The resources of input and output of a project are classified into:
a) Labor
b) Traded goods
c) Non-traded goods
2. Therefore, to find out the real value of these resources, the following values are to be
calculated
a) Shadow wage rate (SWR)
b) Shadow price of traded goods
c) Shadow price of Non-traded goods
A) Shadow Wage Rate (SWR):
a) The reason for computing the SWR is to determine the opportunity cost of employing
an additional worker in the project. For this we have to determine
b) The value of the output foregone due to the use of a unit of labor
c) The cost of additional consumption due to the transfer of labor
B) Shadow price of Traded Goods
Shadow price of traded goods is simply its border or international price.
a) If a good is exported, its shadow price is its FOB Price
b) If a good is imported, its shadow price is its CIF price.
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C) Shadow price of Non-traded goods
a) Non-traded goods are those which do not enter into international trade by their very
nature. (e.g., land, building, transportation)
b) Hence, no border price is observable for them.
Accounting Rate of Return (ARR):
This is the rate used for discounting social profits.
a) Experience is the best guide to the choice of ARR
b) ARR should be such that all mutually compatible projects with positive present social
value can be undertaken
Kinds of project risks:
1. Project completion risk
2. Resource risk
3. Price risk
4. Technology risk
5. Political risk
6. Interest risk
7. Exchange rate risk
Techniques of risk analysis:
1. Break even analysis: Break-even analysis tells you at what level an investment
must reach to recover your initial outlay.
2. Sensitivity analysis: Sensitivity analysis is the study of how the uncertainty in the
output of a mathematical model or system (numerical or otherwise) can be divided
and allocated to different sources of uncertainty in its inputs
3. Decision tree analysis: Decision Tree Analysis is a general, predictive modelling

tool that has applications spanning a number of different areas.
4. Monte-Carlo technique: Monte Carlo Simulation is a mathematical technique

that generates random variables for modelling risk or uncertainty of a certain
system.
5. Game theory: Game theory is a theoretical framework for conceiving social

situations among competing players
Components of capital cost of a project:
1. Land
2. Land development
3. Buildings
4. Plant and machinery:
a) Cost of Indigenous plants: Cost of Indigenous plants include basic price
plus sales tax, octroi and other taxes.
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b) Cost of imported plants: Cost of imported plants include shipping/Air
cargo freight charges, marine/air insurance charges, import duty payable on
the machinery, clearing charges, loading and unloading charges.
5. Electricals
6. Transport and erection charges
7. Know-how/consultancy fees
8. Miscellaneous assets
9. Preliminary and preoperative expenses
10. Provision for contingencies: (Provision for uncertainty)
11. Margin money for working capital: working capital requirement minus probable
working capital loan that can be obtained from bank.
Project Financing: Project financing is a loan structure that relies primarily on the project's cash
flow for repayment, with the project's assets, rights, and interests held as secondary collateral.
Sources of Project Financing:
1. Ordinary shares: Ordinary shares are shares in a company that are owned by people
who have a right to vote at the company's meetings and to receive part of the company's
profits after the holders of preference shares have been paid.
2. Preference shares: Preference shares are one of the special types of share capital
having fixed rate of dividend and they carry preferential rights over ordinary equity
shares in sharing of profits and also claims over assets of the firm. It is ranked between
equity and debt as far as priority of repayment of capital is concerned.
3. Debentures: A debenture is a type of debt instrument unsecured by collateral. Since

debentures have no collateral backing, debentures must rely on the creditworthiness
and reputation of the issuer for support. Both corporations and governments frequently
issue debentures to raise capital or funds.
4. Bonds: A bond, also known as a fixed-income security, is a debt instrument created

for the purpose of raising capital. They are essentially loan agreements between the
bond issuer and an investor, in which the bond issuer is obligated to pay a specified
amount of money at specified future dates.
5. Term Loans: A term loan is a monetary loan that is repaid in regular payments over
a set period of time. Term loans usually last between one and ten years, but may last as
long as 30 years in some cases. A term loan usually involves an unfixed interest
rate that will add additional balance to be repaid.
6. Deferred Credits: A deferred credit is income that is received by a business but not
immediately reported as income because it has not yet been earned.
7. Capital investment subsidy: Capital Investment Subsidy is the assistance provided by

the Government on the amount invested in Gross Fixed Capital Investment in a
manufacturing sector through Bank finance.
a) Area subsidy
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b) Product subsidy
8. Lease Financing: Lease financing is one of the important sources of medium- and
long-term financing where the owner of an asset gives another person, the right to use
that asset against periodical payments.
9. Unsecured Loans: Unsecured loans are loans that are approved without the need for
collateral. Instead of pledging assets, borrowers qualify based on their credit history
and income.
10. Internal Accruals: The internal accruals of a business are the accumulation of
retained earnings and depreciation charges.
11. Bridge Loans: A bridge loan is a type of short-term loan, typically taken out for a
period of 2 weeks to 3 years pending the arrangement of larger or longer-
term financing.
12. Public deposits: Public deposits refer to the unsecured deposits invited by companies
from the public mainly to finance working capital needs
Financial analysis broadly falls under two categories:
1. Discounted cash flow techniques:
a) Net present value method: Net present value (NPV) is the difference between
the present value of cash inflows and the present value of cash outflows over a
period of time.
b) Profitability Index method: Profitability index method measures the present

value of benefits for every dollar investment.
c) Internal rate of return method: The internal rate of return is a discount rate that
makes the net present value (NPV) of all cash flows from a particular project
equal to zero.
d) Benefit cost ratio method: The benefit-to-cost ratio (BCR) is a financial ratio
that's used to determine whether the amount of money made through a project
will be greater than the costs incurred in executing the project.
2. Non-discounted cash flow techniques:
a) Payback period method: The payback period method is used to quickly

evaluate the time it should take for an investor to get back the amount of money
put into a project.
Disadvantages:
I. Does not consider time value of money
II. Does not consider cash flow which occurs after payback
period
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b) Accounting rate of return method: Accounting Rate of Return (ARR) is the
average net income an asset is expected to generate divided by its average capital
cost, expressed as an annual percentage.
Disadvantages:
I. Does not consider time value of money
II. Based on accounting profit and not on cash inflow.
Scheduling techniques:
1. Bar charts: Bar chart is a pictorial representation showing the various activities involved
in a project.
Limitation:
a) Bar charges are difficult to update when there are many changes.
b) When there are changes between the plan and the actual achievement, bar charts
become quickly obsolete.
c) Bar charts do not equate time with cost;
d) Bar charts do not provide methods for optimizing resource allocation.
e) Bar charts are useful for small firms and cannot be effective for medium and large
firm
2. Network based scheduling:
1. Critical path method (CPM): The critical path method (CPM) is a step-by-step
project management technique for process planning that defines critical and non-
critical tasks with the goal of preventing time-frame problems and process
bottlenecks. It represents the logical sequence of activities contained in each path
in a network will have different duration.
 The path that has the largest duration is called critical path.
 The activities that lie on the critical path are critical activities.
2. Programme evaluation review technique (PART):

The program (or project) evaluation and review technique (PERT) is a statistical
tool used in project management, which was designed to analyze and represent
the tasks involved in completing a given project.
BASIS FOR PERT CPM

COMPARISON
Meaning PERT is a project management CPM is a statistical technique of

technique, used to manage project management that manages
uncertain activities of a project. well defined activities of a project.
What is it? A technique of planning and A method to control cost and time.
control of time.
Orientation Event-oriented Activity-oriented
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Evolution Evolved as Research & Evolved as Construction project
Development project
Model Probabilistic Model Deterministic Model
Focuses on Time Time-cost trade-off
Estimates Three time estimates One time estimate
Appropriate for High precision time estimate Reasonable time estimate
Management of Unpredictable Activities Predictable activities
Nature of jobs Non-repetitive nature Repetitive nature
Critical and Non- No differentiation Differentiated

critical activities
Suitable for Research and Development Non-research projects like civil

Project construction, ship building etc.
Crashing concept Not Applicable Applicable
Activity: An activity is any identifiable job that has a beginning and an end. AN activity consumes
time, manpower and material resources.
Event: An event is the beginning or end of an activity. An event does not consume time, manpower
or material resources. An event represents a specific point of time. It is represented by a circle.
Relationship among activities:
1. Concurrent activity: The activity that can be carried out concurrently are
called concurrent activities.
2. Preceding activity: The activity that can occur immediately before it is called
its preceding activity.
3. Succeeding activity: The activity that follows immediately after it, is called
its succeeding activity.
4. Dummy activity: A dummy activity is an imaginary activity include in a
network.
Rules for drawing network diagram:
1. All activities shall be represented by way of straight arrows pointing
towards the right.
2. There shall not be any criss-crossing of arrows.
3. The arrows of a network shall not form loops.
4. There shall not be unnecessary dummy activities in the network.
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Fulkerson’s rule:
1. Identify the “Initial event” and assign it number “1”.
2. Delete all the emerging arrows from the initial event.
3. Delete all the emerging arrows from the new initial events.
4. Follow the4 above procedure till the end of the network is reached.
Forward pass computation: This is a method of computation of starting time of events.

Backward pass computation: This is a method of computation of finishing time of events.
Slack Time: Slack time of an event is the difference between the Latest Finish Time (TL) and the
Earliest start time (TE) of that event.
Critical path: The path connecting events with zero slack is the critical path.
Programme evaluation review technique (PART):
The program (or project) evaluation and review technique (PERT) is a statistical tool used
in project management, which was designed to analyze and represent the tasks involved in
completing a given project.
 The critical path model uses only one-time estimate for each activity.
 PERT uses three time estimates:
1. Optimistic time estimate: It is the shortest possible time in which an activity can
be completed under ideal conditions.
2. Pessimistic time estimate: It is the maximum possible time that it would take to
complete an activity under worst conditions.
3. Most likely time estimate: It lies between optimistic and pessimistic time
estimates.
Course Code: F-409

Course Title: Business Taxation
Public Finance: Public finance is a science that deals with the income and expenditures of public
bodies and the government of a nation.
The government of a nation has to perform two types of functions:
1. Obligatory Function (e.g. Defense, Maintenance of law, order situations etc.)
2. Optional Function (e.g. providing various facilities to its citizens like infrastructure, health,
environment)
Public Revenue: it consists of taxes, revenue from administrative activities like fines, fees, gift
and grants.
Sources of public finance:
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1. Tax Revenue
2. Non tax Revenue (E.g. Fees, Fines or penalties, surplus from public Enterprises,
Special assessment of betterment levy, grants and gifts, deficit financing.)
Tax: taxes are compulsory payment to government without expectation of direct return in benefit
to the tax payer.
Single Tax: When the tax system of a country incorporates only one tax, it’s called Single tax.
Direct tax: Directs taxes are those taxes which are paid entirely by those persons on whom they
are imposed.
Indirect Tax: Indirect taxes are those taxes which are imposed on sales or purchase of any goods
or services other than personal services.
Proportional Tax: a proportional tax is one in which, whatever the size of income, the rates of
taxation remains constant.
Progressive Tax: under this system, the rate of taxation increases as the taxable income increases.
Regressive Tax: under this system, the rate of taxation decreases as the taxable income increases.
Degressive tax: Under this system, a tax may be slowly progressive up to a certain limit, after that
it may be charged at a flat rate. In Bangladesh, this system is followed.
Value Added Tax: VAT is charged on the basis of the value addition in a commodity or service.
Tax impact: The impact of tax is the immediate money burden i.e. where tax falls on the person
who pays the tax in the first instance (i.e. who has legal responsibility to pay). The impact of a tax
is on the person on whom the tax is imposed.
Tax Incidence: The incidence of tax means the final money burden of a tax i.e. ultimate resting
point of tax (i.e. who ultimately pay it whether it may or may not be levied on him). The incidence
of tax is on the person who cannot shift it to anybody else.
Tax shifting: The process of transferring the direct burden of a tax to another person is known as
the shifting of tax.
Income Tax: Income Tax is the tax which is levied on the taxable income of a person or entity as
per the provisions of the Income Tax Ordinance, 1984.
Tax Holiday: An industrial enterprise established within prescribed time limit in the prescribed
area shall be exempted from tax for certain period i.e. five to ten years. This is known as Tax
Holiday.
Investment allowance: Investment allowance is given on the investment in new machineries.
Accelerated depreciation allowance: Depreciation allowance is allowed on the new machineries
used in various industries at a specified rate
Income Tax payment cycle:
1. Determination of income year and assessment year.
2. Determination of residential status.
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3. Classification of income under different heads
4. Exclusion of income not chargeable to tax
5. Computation of income under each head
6. Clubbing of income of spouse, minor child etc.
7. Set-off or carry forward of losses.
8. Computation of gross total income
9. Deductions from gross total income
10. Total Income
11. Application of the rates of tax on the total income.
12. Surcharge (is an additional tax payable over the income tax)
13. Computation of gross tax liability and surcharge
14. Deduction of tax credit / rebate on the tax free income and investment allowance\
15. Adjustment of advance tax, tax deducted at source and refund
16. Obtaining the tax identification number (TIN)
17. Submission of income tax return and payment of tax
Assessee: assessee means a person by whom any tax or other sum of money is payable.
Capital Asset: Capital Asset means property of any kind held by an assessee whether or not
connected with his business or profession.
Surcharge:
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Application of the rates of tax on the total income:
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Income Year: Income Year is the period for which the total income of an assessee is calculated.
Assessment Year: Assessment years means the period of twelve months commencing on the first
day of July every year. The assessment year always begins on 1st July and ends on 30th June every
year.
Person: Term person includes an individual, a firm, an association of persons, Hindu undivided
family, a trust, a fund, a local authority, a company, an entity and every other artificial judicial
person.
Residential status determination flowchart for individuals:
Non-resident Non-resident
Bangladeshi (NRB) Foreigner (NRF)
START
Yes No
Is the assessee a Bangladeshi Citizen?

An individual
stays in
Bangladesh
for Non-resident
No No
365 days or more

182 days or more in No 90 Days or more in a Yes
during 4 immediate
an income year? year? preceding years?
Yes
Yes
Resident
Income: Income means periodical, specifically annual receipt from one’s work, lands,
investments.
Assessable Income: Assessable incomes are those incomes, which are include in the
determination of the total income of an assessee.
Non - Assessable Income: Non - Assessable incomes are those incomes, which are not include in
the determination of the total income of an assessee.
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Casual Income: Casual incomes are the incomes about which the assessee remains uncertain
before it is received.
Non – recurring income: Non – recurring income are the incomes which arise at an irregular
interval.
Salary: salary means periodical payment made for work to an employee from an employer for the
services rendered to him.
Perquisite: Perquisite is a casual emolument or benefit attached to an office or position in addition
to salary or wages.
Wages: Wages is a pledge or payment of usually monetary remuneration by an employer
especially for labor or services usually according to the contract, on an hourly, daily or unit work
basis.
Dearness Allowance: Dearness allowance is the payment made by the employer to the employee
to cope with the higher cost of living, which, in general is a certain percentage of the basic salary.
Provident Fund: Provident fund is the fund where funds are accumulated during the active period
of employees for his financial protection at the end of his service life, amount contributed by the
employee or the employer or both employee and employer.
Gratuity: Gratuity is paid in recognition of past services.
Interest: Interest means the price that someone pays for the temporary use of someone else’s
funds.
Securities: Securities are financial instruments that represent a creditor relationship with a
corporation or government.
Cum interest: Cum interest is the amount of interest accrued in the duration between the last
coupon date and the settlement date or transaction date. In this regard, it is to be understood that
the closing register date of the coupon is due. Hence, cum interest refers to ‘with interest’. The
buyer of the transaction receives the full coupon payment is required to pay the portion
which is not due to him to the seller.
Ex-interest: Ex-interest is the amount of coupon interest between transaction date or settlement
date and the next coupon date. In this regard, it is to be understood that the closing register date of
the coupon is due. Hence, it is also known as ‘without interest’. Here, the seller is required to pay
the portion of interest not due to the buyer since the seller has already received the full coupon
payment.
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. Bond washing results in a tax-
free capital gains because after the coupon has been paid, the bond will sell for less.
Annual Value: annual value of house refers to the gross rental income from the house property in
a particular income year.
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Admissible Expenses of house property:
1. Land development tax or rent
2. Insurance premium
3. Interest on mortgage loan
4. Annual tax
5. Ground rent
6. Interest on borrowed capital
7. Interest on borrowing during construction
8. Vacancy Allowance
9. Uncollectible rent
10. Repair and maintenance
Business: Business includes any trade, commerce or manufacture or any adventure or concern in
the nature of trade, commerce or manufacture. These occupations carried on continuously and
systematically by a person by the application of his labor and skill with a view to earning profit.
Profession: Profession involves the idea of an occupation requiring purely intellectual skill or
manual skill on the basis of some special learning.
Written down value: Written down value is the value of an asset after deducting depreciation of
that asset from the purchase price.
Balancing allowance: If the written down value of any asset exceeds sales proceeds or disposed
value, the difference will be treated as balancing allowance.
Balancing charge: This is difference between sale proceeds and written down value, provided
that such difference does not exceed the difference between sale proceeds and actual costs.
Capital Gain: This is the difference between sale proceeds and actual cost.
Capital Asset: Capital asset means property of any kind held by the assessee whether or not
connected with his business or profession but does not include – any stock in trade, consumable
stores or raw materials held for the business purpose, movable property which are held exclusively
for personal use.
Fair Market Value: Fair market value is the price that is set after taking the concern of both seller
and buyer.
Sale: sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part-
promised.
Exchange: Exchange is a bilateral transaction involving two parties each of whom owns an asset
which constitutes the subject matter of exchange.
Relinquishment of the asset: Relinquishment of the asset means the owner withdraws himself
from the property and abandons his right thereto.
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Course code: f-410
Course title: international finance
Multinational corporations: a multinational corporation (MNC) or worldwide enterprise is

a corporate organization that owns or controls production of goods or services in at least one
country other than its home country.
Agency problem: the conflict of goals between a firm’s managers and shareholders is often
referred to as the agency problem.
Comparative advantage theory: when a country specializes in some products, it may not produce
other products, so trade between countries is essential. This is the argument made by the classical
theory of comparative advantage. Comparative advantages allow firms to penetrate foreign
markets.
International trade: international trade is a relatively conservative approach that can be used by
firms to penetrate markets (by exporting) or to obtain supplies at a low cost (by importing).
Licensing: licensing obligates a firm to provide its technology (copyrights, patents, trademarks,
or trade names) in exchange for fees or some other specified benefits.
Franchising: franchising obligates a firm to provide a specialized sales or service strategy, support
assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
Joint ventures: a joint venture is a venture that is jointly owned and operated by two or more
firms.
Uncertainty surrounding an MNC’s valuation:
1. Exposure to foreign economies

2. Exposure to political risk.
3. Exposure to exchange rate risk:
Balance of payments: the balance of payments is a summary of transactions between domestic

and foreign residents for a specific country over a specified period of time.
Factor income payments: a second component of the current account is factor income, which
represents income (interest and dividend payments) received by investors on foreign investments
in financial assets (securities).
Transfer payments: a third component of the current account is transfer payments, which
represent aid, grants, and gifts from one country to another.
Direct foreign investment: direct foreign investment represents the investment in fixed assets in
foreign countries that can be used to conduct business operations. Examples of direct foreign
investment include a firm’s acquisition of a foreign company,
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Factors affecting international trade flows:
1. Inflation
2. National income
3. Government policies
a) Exchange rates
b) Cost of labor
c) Credit condition.
Foreign exchange market is a global market allows for the exchange of one currency for another.
The market where currency transactions occur is known as the spot market.
The bid/ask spread: it represents the differential between the bid and ask quotes and is intended
to cover the costs involved in accommodating requests to exchange currencies. The bid/ask spread
is normally expressed as a percentage of the ask quote.
Direct quotations: quotations that represent the value of a foreign currency in term of home
currency are referred to as direct quotations.
Indirect quotations: quotations that represent the number of units of a foreign currency for per
unit of home currency are referred to as indirect quotations.
Factors affecting the spread

 Order cost
 Inventory cost
 Competition
 Volume
 Currency risk.
Cross exchange rate: the rate at which value of two currencies is measured in terms of third
currency.
Appreciation: the value of one country’s currency is increased compared to other country’s
currency then it called appreciation.
Depreciation: the value of one country’s currency is decreased compared to other country’s
currency then it called appreciation.
Forward contract: a forward contract is an agreement between a corporation and a financial

institution (such as a commercial bank) to exchange a specified amount of a currency at a specified
exchange rate (called the forward rate) on a specified date in the future.
The forward rate: the forward rate is the exchange rate specified within the forward contract at
which the currencies will be exchanged.
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Compensating balance: when a bank provides service to an unknown firm, they require a
minimum balance in customer account that a firm need to maintain must.
Forward rate: f= s(1+p)
Premium p= (f/s)-1
Bid ask spread = difference between ask rate and bid rate.
Currency future contract: currency futures contracts are contracts specifying a standard volume
of a particular currency to be exchanged on a specific settlement date at a specific rate.
Efficiency future market: if the currency futures market is efficient, the futures price for a
currency at any given point in time should reflect all available information.
Currency option: it is right to buy or sell not obligation
Currency call option: currency call option is the right to buy a specific currency at a designated
price within a specific period of time.
Exercise price: the price at which the owner is allowed to buy that currency is known as the
exercise price or strike price.
Currency put option: currency put option is the right to sell a currency at a specified price
(the strike price) within a specified period of time.
Factors affecting the currency call option & put option:
1. Spot price relative to strike price

2. Length of time
3. Volatility of currency.
Exchange rate classifications:
1. Fixed exchange rate system: in a fixed exchange rate system, exchange rates are either
held constant or allowed to fluctuate only within very narrow boundaries.
2. Freely floating rate: in a freely floating exchange rate system, exchange rate values are
determined by market forces without intervention by governments.
3. Managed float exchange rate: combination of freely floating and fixed exchange rate
system, in this case government sometimes intervene to prevent their currencies from
moving too far in a certain direction.
4. Pegged exchange rate: pegged exchange rate arrangement, in which home currency’s
value is pegged to one foreign currency or to an index of currencies.
Devaluation: a central bank’s actions to devalue a currency in a fixed exchange rate system are
referred to as devaluation,
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Revaluation: revaluation refers to an upward adjustment of the exchange rate by the central bank.
Reason for government intervention:
1. To smooth exchange rate movements

2. To establish implicit exchange rate boundaries
3. To respond to temporary disturbances.
Nonsterilized intervention: when the fed intervenes in the foreign exchange market without
adjusting for the change in the money supply, it is engaging in a nonsterilized intervention.
Sterilized intervention: when the fed intervenes in the foreign exchange market and
simultaneously engages in offsetting transactions in the treasury securities markets is called
sterilized intervention.
Factors affecting the indirect intervention:

1. Interest rate
2. Inflation
3. National income
4. Government control
5. Expectation
Arbitrage: arbitrage can be loosely defined as capitalizing on a discrepancy in quoted prices by

making a riskless profit.
Type of arbitrage
1. Locational arbitrage: it is the process of buying a currency at the location where it is

priced cheap and immediately selling it at another location where it is priced higher.
2. Triangular arbitrage: triangular arbitrage in which currency transactions are conducted

in the spot market to capitalize on a discrepancy in the cross exchange rate between two
currencies.
3. Covered interest arbitrage: covered interest arbitrage is the process of capitalizing on the
interest rate differential between two countries while covering your exchange rate risk with
a forward contract.
Interest rate parity (IRP): when market forces cause interest rates and exchange rates to adjust
such that covered interest arbitrage is no longer feasible, there is an equilibrium state referred to
as interest rate parity (IRP).
Discount point at IRP: when foreign interest rate is greater than home country interest rate.
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premium at IRP: when home country interest rate is greater than foreign country rate
Forecasting exchange rate: reasons for forecasting exchange rate

1. Hedging decision
2. Short term investment decision
3. Capital budgeting decision
4. Earning assessment
5. Long term financing decision
Technical forecasting: make decision by using all past or historical data.
Fundamental forecasting: make decision by analyzing all market factors like interest, inflation,
national income, government control and expectations.
Market-based forecasting: the process of developing forecasts from market indicators, known as
market-based forecasting, is usually based on either (1) the spot rate or (2) the forward rate.
Mixed forecasting: is the combination of all above technique
Weak form of efficient: when historical and current exchange rate information is not useful for
forecasting exchange rate movements because today’s exchange rates reflect all of this information
Semi strong form efficient: then all relevant public information is already reflected in today’s
exchange rates.
Strong form of efficient: then all relevant public and private information is already reflected in
today’s exchange rates. This form of efficiency cannot be tested because private information is not
available.
Exchange rate exposure: exchange rate exposure is the uncertainty created by the unintuitive
movement in the exchange rates between the currencies.
Forms of exchange rate exposure.
a. Transaction exposure: the sensitivity of the firm’s contractual transactions in foreign

currencies to exchange rate movements is referred to as transaction exposure. To
assess transaction exposure, an MNC needs to (1) estimate its net cash flows in each
currency and (2) measure the potential impact of the currency exposure.
b. Economic exposure: the sensitivity of the firm’s cash flows to exchange rate
movements is referred to as economic exposure.
c. Translation exposure: the exposure of the MNC’s consolidated financial statements

to exchange rate fluctuations is known as translation exposure.
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An MNC’s degree of translation exposure is dependent on the following:
a. The proportion of its business conducted by foreign subsidiaries

b. The locations of its foreign subsidiaries
c. The accounting methods that it uses
Macro assessment of country risk: macro assessment of country risk represents an overall risk
assessment of a country and involves consideration of all variables that affect country risk except
those unique to a particular firm or industry.
Micro assessment of country risk: micro assessment of country risk involves the assessment of
a country as it relates to the MNC’s type of business. It is used to determine how the country risk
relates to the specific MNC.
Techniques to assess country risk
a. Checklist approach: a checklist approach involves making a judgment on all the

political and financial factors & ratings are assigned to a list of various financial and
political factors, and these ratings are then consolidated to derive an overall assessment
of country risk.
b. Delphi technique: The Delphi technique involves the collection of independent

opinions without group discussion
c. Quantitative analysis: it can measure the sensitivity of one variable to other variables.
Quantitative models can quantify the impact of variables on each other, they do not
necessarily indicate a country’s problems before they actually occur.
d. Inspection visits: quantitative models can quantify the impact of variables on each
other, they do not necessarily indicate a country’s problems before they actually occur
e. Combination of techniques: combination of above techniques (more than one

measurement) for better measurement.
Cost of capital: is the cost of a company’s funds (both debt and equity), or, from investors point
of view “the required rate of return on a portfolio company’s existing securities”
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6/16/2019

2nd Batch of Finance & Banking

F-101 Business English and Communication

Users of Accounting Data:

Expanded accounting equation: Asset= Liabilities+ Owner’s Capital-Owner’s Drawings+

International Accounting Standards Board (IASB): An accounting standard-setting body that

International Financial Reporting Standards (IFRS): International accounting standards set by

Investments by owner: The assets an owner puts into the business.

Liabilities: Creditor claims against total assets.

Net income: The amount by which revenues exceed expenses.

Net loss: The amount by which expenses exceed revenues.

Partnership: A business owned by two or more persons associated as partners.

Owner’s equity: The ownership claims on total assets.

Partnership: A business owned by two or more persons associated as partners.

Proprietorship: A business owned by one person.

Transactions: The economic events of a business that are recorded by accountants.

 Analyze each transaction for its effects on the accounts.

Compound entry: A journal entry that involves three or more accounts.

Credit: The right side of an account.

Debit: The left side of an account.

General journal: The most basic form of journal.

Journalizing: The entering of transaction data in the journal.

Ledger: The entire group of accounts maintained by a company.

Posting: The procedure of transferring journal entries to the ledger accounts.

Simple entry: A journal entry that involves only two accounts.

T-account: The basic form of an account.

Trial balance: A list of accounts and their balances at a given time.

Accruals: Adjusting entries for either accrued revenues or accrued expenses.

Deferrals: Adjusting entries for either prepaid expenses or unearned revenues.

Fiscal year: An accounting period that is one year in length.

Interim periods: Monthly or quarterly accounting time periods.

Useful life: The length of service of a long-lived asset.

Comparability: Ability to compare the accounting information of different companies because

Intangible assets: Noncurrent assets that do not have physical substance.

Operating expenses: Expenses incurred in the process of earning sales revenue

Purchase invoices: A document that supports each credit purchase.

Sales invoice: A document that supports each credit sale.

Current replacement cost: The current cost to replace an inventory item.

Just-in-time (JIT) inventory: Inventory system in which companies manufacture or purchase

Accounts receivable: Amounts owed by customers on account.

Accounts receivable turnover: A measure of the liquidity of accounts receivable; computed by

Bad Debt Expense: An expense account to record uncollectible receivables.

Dishonored (defaulted) note: A note that is not paid in full at maturity.

Payee: The party to whom payment of a promissory note is to be made.

Promissory note: A written promise to pay a specified amount of money on demand or at a

Receivables: Amounts due from individuals and other companies.

Accelerated-depreciation method: Depreciation method that produces higher depreciation

Partnership: An association of two or more persons to carry on as co-owners of a business for

Acid-test (quick) ratio: A measure of a company’s immediate short-term liquidity; computed by

Return on assets: An overall measure of profitability; computed by dividing net income by

Course Code: F-106 Course Name: Business Finance

Management Accounting: Managerial accounting is the process of identifying, measuring,

Econometrics: Econometrics is the application of statistical and mathematical theories in

 Drawbacks of Profit Maximization

Difference between debt financing and equity financing:

Capital sturcture theories:

Difference between operating leverage and financial leverage:

3) Holder-of-Record Date: The holder-of-record (owner-of-record) date is the date on which

Difference between risk and uncertainty:

Drawbacks of Profit Maximization

1. Profit maximization is a short-term concept.

Portfolio: A portfolio is a grouping of financial assets such as stocks, bonds, commodities,

Key Differences Between Risk and Uncertainty: