Question-2020

1.(a-c) Sheet

2.A. What is simple interest?

Simple interest is calculated based on your original investment or principal as opposed to

compound interest which is calculated on the principal plus any accumulated interest.

Typically, financial institutions that provide personal loans, auto loans, student loans and
mortgages use simple interest, although there could be some exceptions.

For instance, if you deposit $100 in a savings account that earns 5% interest annually, you will
earn $5 in interest on your original investment every year, but no more, because it is based on
your original investment. Though, it is rare nowadays to run into a savings account that utilizes
simple interest. Most use compound interest.

And as you will learn below, compound interest is more powerful because instead of just
earning interest on your principal, you would earn it on the principal plus any accrued interest.

What is compound interest?

With compound interest, your earnings grow based on your original investment and interest
earned. In other words, the interest you earn each year gets added to your account balance.
Then, the next year's interest is calculated based on the new, larger balance, so your earnings
grow at an accelerated rate.

Say you deposit $100 into a savings account that pays compound interest at a rate of 5%. After
one year, you would have earned $5 in interest on your original investment, putting $105 in
your account.

But in the second year, you would earn interest not only on your original $100 investment but
also on the $5 in interest that accrued. This means you would earn a total of $5.25 in interest
after two years. In total, you would have $110.25 in your account—your original $100 plus the
interest earned both years.

With compound interest, you earn interest not only on your original investment but also on any
accumulated interest, allowing you to reach your financial goals more quickly

Why is compound interest so important?

Compound interest is a powerful tool that can help you grow your savings and reach your
financial goals. There are a few key reasons why compound interest is so important:

 It allows you to grow your savings more quickly. If you're looking to save for a major
purchase, like a down payment on a home, compound interest can help you reach your
goal faster.
 It's an easy way to boost your earnings without taking on any additional risk. With
simple interest, you're limited to earning interest on your original investment. But with
compound interest, you can earn interest on both your original investment and any
accumulated interest, allowing your earnings to grow at an accelerated rate.
 It's a great way to plan for retirement. Because compound interest has the potential to
grow your savings at an accelerated rate, it can help put your retirement goals within
reach sooner.

2.B.P-66(9)

3.C. Difference between Real Interest Rates and Nominal Interest Rates:

REAL INTEREST RATES NOMINAL INTEREST RATES

Meaning
The nominal interest rate is the
The real rates are accustomed to considering the monetary
least difficult rate that doesn’t
waves or the financial ripples brought about by economic
take into consideration economic
inflation.
inflation.
Also Known as
The real interest rate is additionally called an actual interest The other name for the nominal
rate. interest rate is the coupon rate.
Formula
Nominal Rate = Real Rate +
Real Rate = Nominal Rate – Inflation
Inflation
Economic Inflation
The nominal interest rate is fixed
The rate of real interest is fixed in view of levels of
without the impact of economic
economic inflation.
inflation.
Stability
Strength and stability are the
Adaptability and flexibility are the components of the real
elements of the nominal interest
interest rate.
rate.
Adjustment
The real interest rate can be a negative measure assuming The nominal interest rate can
that specific circumstances prevail. never be a negative measure.
Amount
 Generally, the interest is high in
Typically, the interest is low in the real interest rate.
nominal interest rate.
Example
The deposit rate is 2% p.a. on an Rs.1,000 venture or an
A deposit rate is 2% p.a. on an Rs.
investment, and the economic inflation rate is 3%. The real
1,000 speculation or investment.
rate return the financial backer will acquire is 2% – 3% = –
The financial backer figures, he
1%. The return in the wake of considering the rate of
will get Rs. 200 as interes
economic inflation is negative.

4.B. What Is an Indenture?

Indenture refers to a legal and binding agreement, contract, or document between two or more
parties. Traditionally, these documents featured indented sides or perforated edges.

Historically, indenture has also referred to a contract binding one person to work for another
for a set period of time (indentured servant), particularly European immigrants. In modern-day
finance, the word indenture most commonly appears in bond agreements, real estate deals,
and some aspects of bankruptcies.

Types of Long-Term Debt

The term long-term debt is an all-in-one phrase that refers to a wide variety of loans. The most
typical instances of the many types of long-term debt are provided below:

Bank Debt

Any loan granted by a bank or other financial organization falls under this category. Unlike
bonds, a bank loan cannot be traded or transferred.

Mortgages

These are loans that are secured by a particular real estate asset, such as a piece of land or a
structure.

Municipal Bonds

Municipal bonds are instruments of debt security issued by government organizations. This is to
finance infrastructure projects. Municipal bonds are often regarded as one of the least risky
bond investments on the debt market. This is because they only have a little more risk than
Treasury securities. For public investment, government organizations may issue either short- or
long-term debt.
Debentures

These are loans that lack a specified asset as collateral and have a lower priority for repayment
than other types of debt.

U.S. Treasuries

The U.S. Treasury is one of the many governments that issue both short- and long-term debt
securities. Long-term Treasury securities are issued by the U.S. Treasury and have maturities of
two, three, five, seven, ten, twenty, and thirty years.

Corporate Bonds

One popular form of long-term debt investing is corporate bonds. Compared to Treasury and
municipal bonds, corporate bonds are more susceptible to default. Corporations, like
governments and municipalities, are given ratings by rating agencies. This makes their risks
transparent. When evaluating and assigning entity ratings, rating agencies place a strong
emphasis on solvency ratios. Different maturities of debt can be issued by corporations. Long-
term debt investments are all corporate bonds with maturities longer than one year.

Difference between Finance Lease and Operating Lease

The terms “finance lease” and “operating lease” are so frequently confused that the key
difference between the two is easily missed. So, to understand the difference between finance
lease and operating lease better, let’s explore it in a tabular format.

Benchmark Finance Lease Operating Lease

A commercial contract in which the A commercial contract in which the

lessor allows the lessee to use an lessor allows the lessee to use an
What is it?
asset in favour of regular payments asset in favour of regular payments
for a usually long period. for a usually short period.

Duration It is a long-term contract It is a short-term contract

Ownership is transferred to the

Ownership remains with the lessor
Owner lessee (owner of an asset that is
(legal owner of the asset).
rented or leased).

This lease is also called Capital lease Rental lease

The risk of Lessee Lessor

obsolescence lies on
the part of the

Who takes care of or

Lessee Lessor
maintains the asset?

Cancellation of the Can only be done on the

Can be done at any time.
lease occurrence of a specific event.

In this lease, is the

bargain purchase or Yes. In this lease, the purchasing No. In this lease, no such option is
purchasing option option is given. given.
given?

Question-2019
1.B. What Are the 3 Basic Functions of a Finance Manager?

The three major functions of the financial manager are financial planning, financial control, and
financial decision-making. These functions are related as they all involve managing and
optimizing the financial resources of an organization. Financial planning involves setting
financial goals, creating budgets, and forecasting future financial needs. Financial control
involves monitoring and evaluating financial performance, implementing internal controls, and
ensuring compliance with financial regulations. Financial decision-making involves analyzing
financial data, assessing investment opportunities, and making strategic financial decisions to
maximize profitability and shareholder value.

2.A. Explain systematic risk is the "relevant" risk of an investment and why investors should be
rewarded only for this type of risk

Systematic risk is the "relevant" risk of an investment that investors should be rewarded for. It
refers to the risk that cannot be eliminated through diversification and is inherent in the overall
market or economy. This type of risk affects all investments to some degree and is beyond the
control of individual investors. Investors should be rewarded for bearing systematic risk
because it is unavoidable and represents the potential for loss in the overall market. By
accepting this risk, investors contribute to the efficient functioning of the market and provide
capital for businesses to grow and thrive.

2.B. Explain trade credit from suppliers is a "spontaneous source of funds"

Trade credit from suppliers is considered a "spontaneous source of funds" because it provides
businesses with a form of financing that is readily available and does not require them to seek
external sources of funding. In the transcript, the discussion revolves around the development
of a product called "briefly create" which aims to help people turn meeting transcripts into
desired outputs using custom prompts. The team discusses the features and functionalities of
the product, including the ability to store meeting transcripts, generate AI summaries, and
provide pre-made templates for prompts. They also emphasize the importance of privacy and
data security, suggesting that the product should only use local storage and not store any
customer data on behalf of the users. Overall, the team is excited about the potential of "briefly
create" and plans to turn their discussion into a product requirement document (PRD) to begin
the development process.

4.A. From a value chain perspective, in what circumstances would the valuation process for a
bond, a preferred stock and common stock be identical

From a value chain perspective, the valuation process for a bond, a preferred stock, and
common stock would be identical in circumstances where the risk and return characteristics of
these securities are similar. This means that the expected cash flows, the timing of those cash
flows, and the required rate of return for each security would be comparable. Additionally,
factors such as the creditworthiness of the issuer, market conditions, and the overall economic
environment would also need to be similar for the valuation process to be identical.

5.A. Distinguish between primary and secondary market

Primary market Secondary market

Definition
A primary market is a marketplace where
A secondary market is a prototype of the
corporations imbibe a fresh issue of shares for
capital market where debentures, current
being contributed by the public for soliciting capital
shares, options, bonds, treasury bills,
to meet their necessary long-term funds like
commercial papers, etc., of the enterprises
extending the current trade or buying a unique
are patronised amongst the investors.
entity.
Also known as
New issue market (NIM) Aftermarket
Purchasing type
Direct purchase Indirect purchase
Parties of buying and selling
Buying and selling takes place between the Buying and selling takes place between the
company and the investors. investors.
To whom it provides financing
It provides financing to the existing companies for
It does not provide any kind of financing.
facilitating growth and expansion.
Intermediaries involved
Underwriters Brokers
Price levels
Price level varies with variations in demand
Remain fixed
and supply

5.B. How does a change in rates in one financial market affect the rates in other financial
markets

A change in rates in one financial market can affect the rates in other financial markets through
various channels. One of the main channels is the interest rate channel, where changes in
interest rates in one market can influence borrowing costs and investment decisions, leading to
changes in interest rates in other markets. For example, if the central bank raises interest rates
in the bond market, it can lead to higher borrowing costs for businesses and individuals, which
can then impact consumer spending and investment decisions. This can have a ripple effect on
other financial markets, such as the stock market and foreign exchange market. Additionally,
changes in rates can also affect investor sentiment and risk appetite, leading to shifts in capital
flows and exchange rates. Overall, the interconnectedness of financial markets means that
changes in rates in one market can have spillover effects on other markets.

6.A.Which Annuity Is Best?

In general, an ordinary annuity is most advantageous for consumers when they are making
payments. Conversely, an annuity due is most advantageous for people when they are collecting
payments. The payments made on an annuity due have a higher present value than an ordinary
annuity due to inflation and the time value of money.

Besides the question of making or collecting payments, interest rates are a factor in evaluating
annuities. When interest rates rise, the value of an ordinary annuity goes down; likewise, when
interest rates fall, the value of an ordinary annuity goes up. In other words, $100 today is worth
more than $100 one year from now.
 Question-2021
1.B. what are the different form of business
organiztion? explain the advantage and dis
advantage of each
The different forms of business organization include sole proprietorship, partnership,
corporation, and limited liability company (LLC).

- Sole proprietorship: This is a business owned and operated by a single individual. The
advantages of a sole proprietorship are that it is easy to set up, the owner has complete control
and decision-making power, and all profits go to the owner. However, the disadvantages include
unlimited personal liability for business debts and the potential difficulty in raising capital.

- Partnership: A partnership is a business owned by two or more individuals who share the
profits and losses. The advantages of a partnership are shared decision-making and workload,
access to more capital and resources, and the ability to combine different skills and expertise.
However, the disadvantages include unlimited personal liability for business debts and the
potential for conflicts and disagreements between partners.

- Corporation: A corporation is a legal entity separate from its owners, known as shareholders.
The advantages of a corporation are limited liability for shareholders, the ability to raise capital
through the sale of stocks, and the potential for perpetual existence. However, the
disadvantages include complex legal requirements and regulations, double taxation (on both
corporate profits and shareholder dividends), and less control for individual shareholders.

- Limited Liability Company (LLC): An LLC combines the advantages of a corporation and a
partnership. It provides limited liability for its owners (known as members) while allowing for
flexible management and taxation options. The advantages of an LLC are limited personal
liability, flexibility in management and taxation, and the ability to pass through profits and
losses to individual members. However, the disadvantages include potential self-employment
taxes for members and the need to comply with state-specific regulations.
Each form of business organization has its own advantages and disadvantages, and the choice
depends on factors such as the number of owners, liability concerns, taxation preferences, and
the need for capital.

2.A. What are some common personal finance decisions that individual face?
Some common personal finance decisions that individuals face include budgeting, saving for
retirement, investing, managing debt, and making major purchases. These decisions require
careful consideration and planning to ensure financial stability and achieve long-term goals.
what are the four major areas of finance? why do people in areas outside financial
management need to know something about managerial finance
The four major areas of finance are corporate finance, investments, financial institutions, and
international finance. People in areas outside financial management need to know something
about managerial finance because it helps them understand how financial decisions are made
within an organization. This knowledge can be useful in various roles, such as budgeting,
resource allocation, and decision-making, as financial considerations are often involved in these
areas.
2.B. What do you mean by financial market?
Financial Markets include any place or system that provides buyers and sellers the means to
trade financial instruments, including bonds, equities, the various international currencies, and
derivatives.

What are the methods by which funds transfer savers to borrowers

The methods by which funds transfer savers to borrowers can be explained through various
financial intermediaries and mechanisms. One common method is through banks, where savers
deposit their funds into savings accounts and borrowers can access these funds through loans or
credit facilities provided by the bank. Another method is through investment funds, where savers
invest their funds into a pool managed by a fund manager, and borrowers can receive funding
from this pool through various investment instruments such as bonds or equity. Additionally,
there are peer-to-peer lending platforms where savers can directly lend their funds to borrowers,
cutting out the need for traditional financial intermediaries. These platforms facilitate the transfer
of funds between savers and borrowers through online platforms and provide mechanisms for
risk assessment and repayment. Overall, these methods enable the transfer of funds from savers
to borrowers, allowing for capital allocation and economic growth.
Why do you think that most transfers of money and securities are indirect rather than direct

Most transfers of money and securities are indirect rather than direct because there are several
reasons that make indirect transfers more common. Firstly, indirect transfers provide an added
layer of security and protection for both the sender and the recipient. By using intermediaries
such as banks or financial institutions, the risk of fraud or theft is minimized. These
intermediaries have robust security measures in place to ensure the safe transfer of funds and
securities.

Secondly, indirect transfers offer convenience and ease of use. Transferring money or securities
directly may require complex procedures and documentation, which can be time-consuming
and cumbersome. Indirect transfers, on the other hand, can be done electronically or through
online platforms, making the process quick and efficient.

Additionally, indirect transfers often come with added benefits such as transaction tracking,
dispute resolution, and customer support. These services are provided by the intermediaries
involved in the transfer, ensuring a smooth and hassle-free experience for both parties.

Furthermore, indirect transfers allow for better record-keeping and auditing. Financial
institutions maintain detailed records of transactions, providing a clear trail of the transfer for
regulatory and compliance purposes. This helps in preventing money laundering, fraud, and
other illegal activities.

Overall, the prevalence of indirect transfers is driven by the need for security, convenience, and
regulatory compliance. While direct transfers may be suitable for certain situations, the majority
of money and securities transfers are conducted indirectly to ensure a safe and efficient
process.

2.B. What is the primary goal of management?

A primary objective of management includes maintaining the quality standards necessary for the
organization. The team collaborates with other departments, supervisors and employees to create,
implement and maintain quality.
How does the goal of stock price maximization benefit society at large
The goal of stock price maximization benefits society at large by promoting economic growth,
job creation, and innovation. When companies strive to maximize their stock prices, they are
incentivized to increase their profitability and efficiency. This leads to higher productivity, which
in turn drives economic growth and creates more job opportunities. Additionally, companies
that focus on maximizing stock prices are more likely to invest in research and development,
leading to innovation and technological advancements that benefit society as a whole. Overall,
the goal of stock price maximization aligns the interests of businesses with the interests of
society, resulting in positive outcomes for everyone involved.
4.A. How does money market provide short term finance for the companies
Money market provides short-term finance for companies by offering them a platform to
borrow and lend funds for a short duration. It allows companies to access quick and
temporary funding to meet their immediate financial needs. This can be done through various
instruments such as commercial paper, treasury bills, certificates of deposit, and repurchase
agreements. Money market instruments are highly liquid and have a low risk profile, making
them suitable for short-term financing. Companies can borrow funds from the money market
to cover working capital requirements, manage cash flow fluctuations, meet short-term
obligations, and seize investment opportunities. By utilizing the money market, companies
can efficiently manage their short-term financial needs and maintain liquidity.s