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Banking and financial Services Concepts

The use of debt is also referred to as Leverage Financing.
Income is the main objective for a debt investor. This income is paid in the form of Interest
Capital Appreciation is only a secondary consideration for debt investors.
Capital Appreciation is the main objective for a equity investor.
Income is only a secondary consideration for debt investors and is received in the form of
Debt is considered senior to equity (i.e.) the interest on debt is paid before dividends on
Security is a financial instrument that signifies ownership in a company. example Stock,
Bond, Option
Debt is money owed by one person or firm to another. Bonds, loans, and commercial paper
are all examples of debt
Bond - An investor loans money to an entity (company or government) that needs funds for
a specified period of time at a specified interest rate. In exchange for the money,the
entity will issue a certificate, or bond, that states the interest rate (coupon rate) to be paid
and repayment date (maturity date).
Interest on bonds is usually paid every six months (semiannually).
Bonds - Bearer Bonds, Registered As to Principal Only and Fully Registered Bonds.
Bearer bonds are like cash since the bearer of the bond is presumed to be the owner.
Bearer bonds are Unregistered because the owners name does not appear on the bond
Bonds that are registered as to principal only have the owners name on the bond certificate
Bonds that are issued today are most likely to be issued fully registered as to both interest
and principal.
Fully Registered Bonds have no physical certificate
CORPORATE BOND - A bond issued by a corporation.
CORPORATE BOND - Secured Bonds, Unsecured Bonds (Debentures), and Subordinated
Secured Bonds - Mortgage Bonds,Equipment Trust Certificates, Collateral Trust Bonds
Mortgage Bonds are secured by real estate owned by the issuer
Equipment Trust Certificates are secured by equipment owned and used in the issuers
Collateral Trust Bonds are secured by a portfolio of non-issuer securities.
Treasury bills are short-term obligations issued for one year or less. They are sold at a
discount from face value and don't pay interest before maturity.
Treasury notes and bonds bear a stated interest rate, and the owner receives semi-annual
interest payments.Term is >1 year and < 10 yrs
Treasury bonds are issued by the U.S. Government.interest on Treasury bonds is not subject
to state income tax and term is > 10 yrs
Savings Bonds are bonds issued by the Department of the Treasury and are not transferrable
ZERO COUPON BONDS - generate no periodic interest payments but they are issued at a
discount from face value
COMMERCIAL PAPER - An unsecured, short-term loan issued by a corporation, typically for
financing accounts receivable and inventories.

Banking and financial Services Concepts
Commercial paper maturities range from 1 day to 270 days, but most commonly is issued for
less than 30 days. Paper usually is issued in denominations of $100,000 or more.
Credit rating agencies like Standard & Poor rate the Commercial papers
Investors in the commercial paper market-private pension funds, money market mutual
funds, governmental units, bank trust departments, foreign banks and investment
IPO- Initial Public Offering
Corporations seeking capital sell it to investors through a Primary Offering or an Initial Public
Offering (IPO).
SEC - Securities and Exchange Commission
Before shares can be offered, or sold to the general public, they must first be registered with
the Securities and Exchange Commission (SEC).
NYSE - New York Stock Exchange
From time to time, the Issuer may choose to repurchase the stock they previously issued.
Such repurchased stock shares are referred to as Treasury Stock
shares that remain trading in the secondary market are referred to as Shares Outstanding.
POP - Public Offering Price
Public Offering Price (POP) The price at which shares are offered to the public in a Primary
Book Value The theoretical liquidation value of a stock based on the company's Balance
Par Value An arbitrary price used to account for the shares in the firms balance sheet.
Current Market Price The price determined by Supply and Demand in the Secondary
Preferred shareholders have priority over common stockholders on earnings and assets in
the event of liquidation
Preferred stock is issued with a fixed rate of return that is either a percent of par (always
assumed to be $100) or a dollar amount.
Preferred stock investors are primarily seeking income.
different types of preferred stock are Straight, Cumulative, Convertible, Callable,
Participating and Variable
Convertible preferred stock can be converted into shares of common stock either at a fixed
price or a fixed number of shares.
Convertible preferred stock is essentially a mix of debt and equity
Convertible preferred stock is most often used as a means for a risky company to obtain
capital when neither debt nor equity works
Convertible preferred stock offers considerable opportunity for capital appreciation.
Non-convertible preferred stock remains outstanding in perpetuity and trades like stocks.
ADR - facilitate the domestic trading of a foreign stock
An ADR is a receipt for a specified number of foreign shares owned by an American bank
ADRs trade like shares, either on a U.S. Exchange or Over the Counter
HYBRIDS - Hybrids are securities, which combine the characteristics of equity and debt.

Banking and financial Services Concepts
CONVERTIBLE BONDS - Convertible Bonds are instruments that can be converted into a
specified number of shares of stock after a specified number of days.
Warrants are call options variants of equity.
Warrants are offered as bonus or sweetener, attached to another security and sold as a Unit.
A derivative is a product whose value is derived from the value of an underlying asset, index
or reference rate.
A forward contract is an agreement to buy or sell an asset (of a specified quantity) at a
certain future time for a certain price.
A futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price
Hedging involves protecting an existing asset position from future adverse price movements.
Arbitrage: An arbitrageur is basically risk averse. He enters into those contracts were he can
earn risk less profits.
An option is a contract, which gives the buyer the right, but not the obligation to buy or sell
shares of the underlying security at specific price on or before a specific date.
Two kinds of options: Call Options and Put Options.
Call Options are options to buy a stock at a specific price on or before a certain date.
Put Options are options to sell a stock at a specific price on or before a certain date.
The primary function of options is to allow investors ways to manage risk
Their price of stock is determined by factors like the underlying stock price, strike price, time
remaining until expiration (time value), and volatility.
American options can be exercised at any time between the date of purchase and the
expiration date. Most exchange-traded options are of this type.
European options can only be exercised at the end of their life.
Long-Term Options are options with holding period of one or more years
LEAPS - Long-Term Equity Anticipation Securities
Long-Term Options are called LEAPS
The simple calls and puts are referred to as "plain vanilla" options
Non-standard options are called exotic options
Open Interest is the number of options contracts that are open; these are contracts that
have not expired nor been exercised.
Swaps are the exchange of cash flows or one security for another
Currency Swap involves the exchange of principal and interest in one currency for the same
in another currency.
Forward Swap agreements are created through the synthesis of two different swaps,
differing in duration, for the purpose of fulfilling the specific timeframe needs
Swaptions - An option to enter into an interest rate swap.
Swapation - The contract gives the buyer the option to execute an interest rate swap on a
future date.
A financial transaction is one where a financial asset or instrument, such as cash, check,
stock, bond, etc are bought and sold.
Financial Market is a place where the buyers and sellers for the financial instruments come
together and financial transactions take place.
Primary market is one where new financial instruments are issued for the first time.

Banking and financial Services Concepts
Secondary Market is a place where primary market instruments, once issued, are bought
and sold.
Role of capital market - Channelling funds from savings pool to investment pool,
Providing liquidity to investors, Providing multitude of investment options to
investors, Providing efficient price discovery mechanism.
NASDAQ - National Association of Securities Dealers Automated Quotations
LSE - London Stock Exchange
BSE - Bombay Stock Exchange
NSE - National Stock Exchange of India
The share price is determined by the market forces, i.e. the demand and supply of shares at
each price.
Bond markets are also sometimes called Fixed Income markets.
The central bank of the country such as Federal Reserve in US and Reserve Bank of India in
India, is the biggest player in the bond market
Then the market interest rates go up, prices of bonds fall and vice-versa.
Foreign exchange markets are where the foreign currencies are bought and sold.
Currency trading is conducted in the over-the-counter (OTC) market.
The central bank regulates the markets to ensure its smooth functioning.
Money market is for short term financial instruments, usually a day to less than a year.
A repo is a contract in which the seller of securities, such as Treasury Bills, agrees to buy
them back at a specified time and price.
Money market instruments - Treasury bills of very short tenure, commercial paper,
certificates of deposits
SEBI - Securities and Exchange Board of India
SEC - Securities and Exchange Commission
PORTFOLIO MANAGEMENT SYSTEMS - allow the investment managers to choose the
instruments to invest in.
Stock markets, bond markets, money markets, foreign exchange markets and derivatives
markets are prominent examples of financial markets.
Shares (stock) of a company are issued and traded in the stock markets.
A Balance sheet is a statement that lists the total assets and the total liabilities of a given
business to portray its net worth at a given moment of time.
An Asset is anything owned by an individual or a business, which has commercial value.
A Liability is a debt payable by the firm to its creditors
Current Assets are those assets of a company that are reasonably expected to be realized in
cash, or sold, or consumed in the next one year.
Cash And Cash Equivalents means all cash, securities, which can be converted into cash at a
very short notice
Short Term Investments: All investments, which will be converted in Cash in the next one
Receivables: Also referred to as Account receivables. This indicates the money due to the
firm, for service rendered or goods sold on credit.
Inventory: Inventory for companies includes raw materials, items available for sale or in the
process of being made ready for sale.

Banking and financial Services Concepts
Long-term assets are those assets that are not consumed during the normal course of
business, e.g. land, buildings and equipment, goodwill, etc.
Fixed Assets are assets of a permanent nature required for the normal conduct of a business,
and which will not normally be converted into cash during the next fiscal period.
Assets lose their value as they provide service. This loss of value, or spreading of cost, is
called depreciation.
Intangible Asset is an asset that is not physical in nature. Examples are things like copyrights,
patents, intellectual property, or goodwill.
Current Liabilities are amounts, or goods and services, to be paid or executed, within next
one year.
An accrued expense is an expense that the company has already incurred but company has
not paid for it so far.
Short Term Loans: All the loans that have to be paid in the next one year.
when company declares dividend,Nothing changes till the company pays out dividends
when company pays out dividends,Retained earnings go down by amount of dividend
Profit And Loss Statement (P&L) is also known as an income statement
Profit And Loss Statement (P&L) shows business revenue and expenses for a specific period
of time.
The difference between the total revenue and the total expense is the business net income.
EBIT- Earnings Before Interest and Taxes
PBT - Profit Before Tax
PAT - Profit after Tax
EPS - Earnings per share
EPS(T) = S/ Number of shares where S is Net Income or PAT
P/E Ratio = Market price/T where T is EPS
Revenue is the inflows of assets from selling goods or providing services to customers.
Direct Cost is that portion of cost that is directly expended in providing a product or service
for sale e.g. material and labor.
Gross profit shows the relationship between sales and the direct cost
Indirect Cost is that portion of cost that is indirectly expended in providing a product or
service for sale
Operating Expenses is all selling and general & administrative expenses. This includes
depreciation, but not interest expense.
Operating Income is revenue less cost of goods sold
Interest expense captures all the finance charges incurred on any borrowed capital.
Net Income or PAT (Profit after Tax)is is the profit after all the obligations, which can be
distributed to shareholders
Revenue is the Top Line and Net Income or PAT is the Bottom-line in P &L statement
Earnings per Share (EPS) is the amount of net income (earnings) related to each share
Price to Earnings Ratio (P/E) is a performance benchmark that can be used as a comparison
against other companies or within the stock's own historical performance
CASH FLOW STATEMENT - Statement accounting for all the inflows and outflows of cash is
captured in this statement.

Banking and financial Services Concepts
Bank is used generically to refer to any financial institution that is licensed to accept
deposits and issue credit through loans.
The Central bank of any country can be called the bankers bank.
The Federal Reserve is the central bank of the United States, while Reserve Bank of India is
the central bank in India.
CRR - Cash Reserve Ratio
Banks facilitate the investing/spending of money that multiply funds through circulation and
this is known as Money Multiplier effect.
The difference between the rates, which banks offer to depositors and lenders, is generally
referred to as Spread.
The universal banking concept permits banks to provide commercial bank services, as well as
investment bank services at the same time.
Glass-Steagall Act of 1933, created a Chinese wall between commercial banking and
securities businesses in US.
The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and
insurance services.
Provisions that prohibit a bank holding company from owning other financial companies
were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act.
The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to
Banks are an integral part of any economy channelizing savings from lenders to borrowers
Central banks define a nations monetary policy
A bank makes a profit by investing or lending money that is earning a higher rate of interest
than it pays to its depositors.
Banks are generally organized as corporate banking, investment banking, retail banking, and
private banking functions.
CDBs - Community development banks
Community development banks provide retail banking services to the residents of the
community and spureconomic development in low- to moderate-income geographical areas
CDFI - Community Development Financial Institution
The largest and oldest community development bank is Shore Bank, headquartered in the
South Shore neighborhood of Chicago.
A credit union is a cooperative financial institution that is owned and controlled by its
Credit Union is operated for the purpose of promoting thrift, providing credit at reasonable
rates, and providing other financial services to its members
Private Banks manage the assets of high net worth individuals
Offshore banks are banks located in jurisdictions with low taxation and regulation
An offshore bank is a bank located outside the country of residence of the depositor

Banking and financial Services Concepts
Savings banks primary purpose is accepting savings deposits. It also provides other services
such as payments, credit and insurance.
Demand deposits are accounts that allow money to be deposited and withdrawn by the
account holder on Demand (Savings, Checking).
Deposits placed with a bank for a specified term and is called Term Deposits
IRA - Individual Retirement Account
IRA - Roth IRA, Simple IRA, Traditional IRA, SEP IRA, Self Directed IRA
Roth IRA - contributions are made with after-tax assets, all transactions within the IRA have
no tax impact, and withdrawals are usually tax-free.
Traditional IRA -contributions are often tax-deductible,all transactions and earnings within
the IRA have no tax impact, and withdrawals at retirement are taxed as income
SEP IRA - a provision that allows an employer to make retirement plan contributions into a
Traditional IRA established in the employee's name
SIMPLE IRA - a simplified employee pension plan that allows both employer and employee
Self-Directed IRA - a self-directed IRA that permits the account holder to make investments
on behalf of the retirement plan.
A typical Retail branch at a Bank has these two primary activities:Teller Operations and
Relationship Managers
A bank teller is an employee of a bank who deals directly with most customers.
Relationship Managers are the Banks single point of contact to the customer.
Relationship Managers have day-to-day personal contact with the Client for new account
opening, account maintenance and product sales.
CORE BANKING/MULTI BRANCH BANKING is a special facility that allows a customer to
operate his Accounts through a network of branches of the bank where he has an account.
Core banking vendors of repute are Fidelity, Temenos, Infosys (Finacle), Oracle (FLEXCUBE).
An automated teller machine (ATM) is a computerized telecommunications device that
provides the customers with access to financial transactions in a public space without the
need for a human clerk or bank teller.
PIN - personal identification number.
Debit cards and ATM cards are used to transact in ATMs and PoS (Point of Sale) Terminals.
Visa and Master networks are large global networks that service ATMs
ATM consortium - is a computer network that connects the ATMs of different banks and
permits these ATMs to interact with the ATM cards of non-native banks.
Telephone banking allows customers to perform transactions over the telephone
VRU - Voice Response Unit
CTI - computer telephony integration
Voice Response Unit (VRU) is a computer telephony integration (CTI) term that refers to the
interaction between a human and a computer that is programmed to respond to the
human's requests.
IVR - interactive voice response
IVR - this is a computer phone application that accepts touch-phone keypad selection input
from the caller and provides appropriate information in the form of voice answers.

Banking and financial Services Concepts
The contact centre /Call centre handle inbound service calls, technical support requests and
sales enquiries, Sell products and advice through outbound calls.
Online banking (or Internet banking) allows customers to conduct financial transactions on a
secure website operated by their bank or credit union.
Mobile banking is a term used for performing balance checks, account transactions,
payments etc. via a mobile phones
Instruments are used to move and /or transfer funds from one account to another.
A check is a bill of exchange and is an instrument instructing a financial institution to pay a
specific amount of a specific currency from an account holders specific demand
account held in that bank.
The receiver of the check is payee.
Paper check processing - The drawer issues the check in the name of the Payee. The Payee
presents the check in the drawer/makers bank to the credit of his account.
This clearing and settlement process is known as Check-truncation.
By introducing check-truncation, intra-city clearing turn-around-times can be reduced
An electronic check is a transaction that starts at the cash register with a paper check for
payment is converted to an electronic debit, which is processed via ACH
ECC converts a paper check into an electronic payment at the point of sale
ELECTRONIC CHECK CONVERSION -In a store, the customer can present a check to a store
cashier -> The check can be processed through an electronic system that captures the
information and the amount of the check. -> Once the check is processed, the customer
signs a receipt authorizing the store to present the check to the bank electronically and
deposit the funds into the stores account.-> The customer gets a receipt of the electronic
transaction and the check is returned to the customer.-> It should be voided or
marked by the merchant so that it can't be used again.
Retail payments usually involve transactions between consumers and businesses
Bill PaymentPayment for previously acquired or contracted goods and services.
P2P PaymentsPayments from one consumer to another.
EFT - electronic funds transfer
Electronic banking, also known as electronic fund transfer (EFT), uses computers and
payment networks as a substitute for checks and other paper transactions.
Electronic Bill Payment allows a depositor to send money from his demand account to a
creditor or vendor to be credited against a specific account.
Electronic bill presentment and payment (EBPP) is a process that enables bills to be created,
delivered, and paid over the Internet.
BSP - Bill Service Provider
The banking operations are basically divided in to three; Front office, Middle Office and Back

Banking and financial Services Concepts
Front office is the Banking channels Branch, ATM, Banks Website, etc. where the
customers contact the Banks representatives for their financial services.
Middle Office is where the decisions are made about the product, interest rate, credit
policies, Compliance monitored etc.
Back office mostly does the data base management, data processing, transaction processing
Checks can be processed in various modes: Paper check processing, check imaging /Check
truncation, Electronic Check conversion.
Consumers generally use one of these retail payments systems: Purchase of Goods and
Services, Bill Payment, P2P payments, Cash withdrawals and Advances.
Electronic banking, also known as electronic fund transfer (EFT), uses computer and
electronic technology as a substitute for checks and other paper transactions.
The federal Electronic Fund Transfer Act (EFT Act) covers most (not all) electronic customer
EBPP is a mode of transaction involving the use of electronic means, such as email or a short
message, for rending a bill
A residential mortgage is a loan made using residential property as collateral to secure
A commercial mortgage is a loan made using commercial real estate, like multifamily
property, or an office complex etc. as collateral to secure repayment.
The process by which a mortgage is secured by a borrower is called origination.
PROCESSING - This process ensures that documentary requirements are fulfilled and
regulatory checks are done.
UNDERWRITING - This is a process by which a lender determines if the risk of lending to a
particular borrower under certain parameters is acceptable.
Three Cs of underwriting: Credit, Capacity and Collateral.
It is always up to the underwriter to make the final decision on whether to approve or
decline a loan.
Escrow accounts is used for handling taxes and insurance premiums.
Fixed Rate - A fixed Rate Mortgage (FRM) is a mortgage loan where the interest rate on the
note remains the same through the term of the loan
Balloon Payment Mortgage - Balloon Payment Mortgage has a fixed rate for the term of the
loan followed by the ending balloon payment.
Adjustable Rate Mortgage (ARM) - An Adjustable Rate Mortgage (ARM) is a mortgage loan
where the interest rate on the note is periodically adjusted based on a variety of indices
such as 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI),
and the London Interbank Offered Rate (LIBOR)
Graduated Payment Mortgage - is a mortgage with low initial monthly payments which
gradually increase over a specified time frame
Interest Only Loan -An interest-only loan is a loan in which for a set term the borrower pays
only the interest on the principal balance, with the principal balance unchanged
Amortization refers to gradual decrease of principal balance of the loan as the loan is repaid
gradually over its term.

Banking and financial Services Concepts
Negative Amortization occurs whenever the loan payment for any period is less than the
interest charged over that period and so the outstanding balance of the loan increases.
Standard Variable Rate with Cash Back - one receive a substantial cash sum (Example 35%
of the amount borrowed) when we take up the loan.
Base Rate Tracker - the interest rate is guaranteed to be a set amount above the base rate
and alters in line with changes in that rate.
Discounted interest rate - The payments are variable, but they are set at less than that
lenders going rate for a fixed period of time. At the end of the period, one is charged
the lenders standard variable rate.
Capped rate - The payments go up and down as the mortgage rate changes but are
guaranteed not to go above a set level (the cap) during the period of the deal.
FHA Loan - FHA loans are meant for lower income Americans to borrow money for the
purchase of a home
VA Loan - home financing to eligible veterans in areas where private financing is not
generally available
Conventional Loans - These are loans without any government backing
Agency Loans - These are the loans issued by Government Sponsored Entities (GSEs) such as
Fannie Mae, Freddie Mac and Ginnie Mae.
Mortgage backed Security (MBS) is a type of asset-backed security that is secured by a
mortgage or collection of mortgages.
Self Certification Mortgages, informally known as "self cert" mortgages, are available to
employed and self employed people who have a deposit to buy a house but lack the
sufficient documentation to prove their income.
100% mortgages are mortgages that require no deposit (100% loan to value). These are
sometimes offered to first time buyers, but almost always carry a higher interest rate on
the loan.
Together/Plus Mortgages represent loans of 100% or more of the property value - typically
up to a maximum of 125%.
Student Loans are Loans availed by eligible students to pursue graduate and post graduate
studies in Schools/Colleges/Universities.
Students Loans offered can be categorized broadly into two types: Federally sponsored loans
& Non-federally sponsored loans
Federally sponsored loans are of two types - Federal Family Education Loan Program (FFELP)
& Federal Direct Loan (FDLP)
Federal Direct Loan (FDLP)- where the department of Education directly provides the loans
Federal Family Education Loan Program can further be divided into four types - Federal
Stafford, Federal PLUS, Consolidation loans,Graduate Plus
Federal Stafford Federal Stafford loans are the most common source of education loan
funds in the US.
Federal PLUS - PLUS loans are availed by the parents of a full- or half-time undergraduate
Consolidation loans - A consolidation loan involves two or more existing federally sponsored
loans into one single loan.