Finance – An Overview

“Finance is the art of passing currency

from hand to hand until it finally
disappears” - Robert W Sarnoff
 Introduction to Finance

•“The study of how the financial systems co-ordinates and

channelises the flow of funds from lenders to borrowers
and vice versa and how funds are created by the financial
intermediaries during the borrowing process”

•Financial system consists of variety of institutions,

markets and instruments that are related
 Financial System – The Big Picture
Banks and Financial Institutions:
Central Bank,Mutual funds, Insurance,Pension Funds,
Development Banks,NBFCs,Commercial Banks(Public,
Private &Foreign Banks),Co-operative banks,
Investment Banks

Savings Deficit Units

(Corporate Sectors)

Funds
Funds Transfer
Transfer

Financial
FinancialIntermediaries
Intermediaries
Savings Surplus Units Capital Markets - Primary, Secondary
Capital Markets - Primary, Secondary
(households, Debt
DebtMarkets,
Markets,Money
MoneyMarkets
Markets
consumers)
 Functions of a Financial System

• The financial system helps determine both the cost

and volume of credit
– The Savings Function
– Liquidity Function
– Payment Function
– Risk Function
– Policy Function
 Essentials of Corporate Finance

Equity Debt Long/Short Govt/Pvt Retail/Wholesale

SOURCES

APPLICATION
Fixed Assets Current Assets
Loans Investments Project
 Introduction to Financial Markets
• What are Financial Transactions and Financial Markets?

“Markets in which spending units trade financial claims”

– Direct Finance (Stock Market, Bond Market)

Vs
– Indirect Finance (Banks and Credit Unions)

• Functions of Financial Markets

– facilitates price discovery

– provide liquidity

– reduces the cost of transacting - search costs & information costs

 Classification of Financial Markets
• By Nature of Claims
– Debt Market
– Equity Market
• By Maturity of Claims
– Money market - short term claims
– Capital Market - long term claims
• By Seasoning of Claims
– Primary market - New claims
– Secondary market - Outstanding claims
• By Timing of Delivery
– Cash / Spot Market
– Forward / Futures Market
Classification of Financial Markets
 Overview of the World’s Markets
•World’s Biggest Markets

•USA - EQUITY MARKETS

•NYSE, NASDAQ-AMEX, MID-WEST, PACIFIC

•USA- FUTURES MARKETS

•CBOT, CBOE, CME

•EUROPE - LONDON , FRANKFURT, SWISS,PARIS

•LIFFE, EUREX

•Tokyo, Taiwan, Hong Kong, Singapore, Australia

Types of Financial Markets
 Other Markets - Features
• Foreign Exchange Market

– Where the currencies of various countries are traded, and their value determined.

– Currency dealings are either on spot or forward basis. The deals take between
banks dealers.

– This market is either telephone or network based.

• Derivatives Market

– Where the transacted securities derive their value from the value of an underlying
asset dealt the cash markets e.g. options, futures, forward contracts.

– Derivatives are either Financial Derivatives or Commodity Derivatives.

• Financial Derivatives - Financial Derivative Contracts are interest futures, currency

futures, futures and options on stock indices, options on stocks.

• Commodities Derivatives - These contracts are futures and options on standard contracts
of various commodities transacted in wholesale e.g. bullion, tea, oilseeds, metals and
other products like energy, bandwidth etc.
 Types of Securities - Share

• Represents a share of the investor in the company

• Dividends payable on the value of shares held, depending upon the

performance of the company in a particular year

• May be obtained in Primary Market (directly from the company in its public
issue) or in the Secondary Market (from other shareholders)

• May be held in physical paper or de-materialized form

 Types of Securities – Bond / Debentures
• Represents a loan given to the company.

• Distinct from a loan or deposit.

• Interest payable on the principal amount loaned to the company at predetermined

rates and frequency like quarterly semi-annually or annually

• Can also be issued at a discount, and repaid at face value, without explicit interest
payment e.g. zero coupon bonds

• Can carry a fixed or varying (floating) interest rate

• Can be converted into a share if it is a convertible debenture

• Convertible debentures may be partially or fully convertible

• New Innovation - Bonus Debenture

 Types of Securities - Convertibles
Convertible Debenture

• Represents a loan given to the company which may be converted into a share at a
future date

• The full or partial amount of the loan may be converted into a share at a
conversion price

• Fully / Partly Convertible Debentures (FCD/PCD)

• Interest payable on debenture amount so long as it is not converted into the share,
thereafter, dividend is payable on the amount of shares held

• Preference Shares could also be convertible into equity shares.

Other instruments that may be defined as securities are:

• Commercial papers issued by reputed companies

• Certificates of Deposit and Inter Corporate Deposits

• Treasury Bills and Bonds issued by Government bodies

THANK YOU