Credit & banking

Surplus / deficit parties More funds than required Lack of funds

Financial intermediaries The pathway ( 3rd party) of connecting surplus parties ( investors0 & deficit parties (borrowers)

Features of good money Durability Acceptability Divisibility Transportability Stable value Not easily counterfeited

Synchronization problem Need is there. Money is not When money is there , need is not

Solutions to lack of synchronization problem Short term ( less than 1 year) Bank loan, O/D Medium term( 2yrs- 5yrs)

 Bank loan, savings Long term ( 6yrs onwards) Bank loan

Short term & long term capital resources Short term instruments Credit agreements Bank O/D Bills of exchange [tradable credit agreement] Commercial paper [credit broken to small pieces]

Long term instruments Issued share capital [ equity capital] Retained[saved] profits Debt capital Long term loans Venture capitals The charged interest depends on the risk they take

Financial markets Money / capital market Short term [O/D , commercial paper , inter bank market , certificate of deposit ]

Long term

Main exchanges Stock exchange Strict laws and regulations

O.T.C market [ over the counter] , AIM [ Alternative investment market ] High risk / high return

Changes to financial market

Globalization Debt securitization [ because of financial crisis ] Competition Risk management for intermediaries

Foreign funds market [ obtaining required credit from foreign currency ] Short term foreign currency credit Medium term foreign currency credit Long term foreign currency credit euro currency euro credit - euro bonds

In a forex market , one currency is traded with other currencies . this allows to financial activities to take place between countries.

Insurance markets Assurance covers a risk that will happen for sure [ death life assurance]

Insurance covers a risk that may or may not happen [ motor accident vehicle insurance]

Types of life assurance Whole life Universal life Term life - same premium - increasing premium with age - life is covered upto a certain level

Insurance brokers and underwriters Insurance brokers bring several insurance companies together to handle a larger risk Underwriting is insurance company singing and accepting to share a risk at the end of the policy period

Re insurance insuring the insurance company

Governments management to lack of synchronization problem Short term Print money Obtaining a loan from the central bank Issuing treasury bills

Medium term Obtaining loans Issuing medium term government bonds

Long term Loans Issuing long term government bonds

Government budget deficit Government budget deficit = Total expenses total revenue

Bank & the banking system Most popular type of financial intermediary Types of banks Retail bank [ saving account , commercial loans] Wholesale bank [ deals with large scale foreign currency transactions] Investment bank Clearing bank

Commercial services of a bank Providing advise & consultancy Assisting importers & exporters / providing insurance Debt factoring Providing Leasing options Insurance brokering

Aims of a bank Liquidity bank should have enough cash to meet customer demands Profitability Security

 How banks make money To avoid the risk of bankruptcy banks keep some money with them. The percentage they keep with them is called the cash ratio. The new level of deposits generated By giving out the rest cash the bank has cash ratio

1/cash ratio = credit multiplier Deposits = cash x credit multiplier

Importance of Central Bank Services provided Banker to the government Issuing of notes & coins Providing advice to government regarding various financial actions Managing national debt Banker to commercial banks

Return yield The percentage return of the amount invested

Treasury bills [ short term government instrument] Treasury bills cannot be traded in the secondary market

Return yield = (face value purchased price)

x 360

Face value

no. of days

Bonds [ Cooperate bonds] Guaranteed return

Nominal yield = coupon / interest Face value

Running yield = coupon / interest Purchase/market price Variation of interest rate & expected return Higher the risk undertaken , higher the return expected

Reasons to increased return Level of inflation Uncertainty Government policy Interest rates in foreign countries rising

Equilibrium between shares & bonds Equity / share capital No guaranteed return Ownership

Bonds Guaranteed return

Risk on financial instruments Risk depend mainly on Authority which is issuing it Time period

Government financial instruments have a lower risk than the private sector instrument Longer the time , higher the risk Low expected return

Low risk
Equities

Treasury bills Government bonds High expected return Cooperate bonds

High risk