Q5) Write short notes on money market

Ans) The money market is a component of the economy which provides short-term funds.
The money market deals in short-term loans, generally for a period of a year or less. The
money market consists of financial institutions and dealers in money or credit who wish to
either borrow or lend. The core of the money market consists of interbank lending—banks
borrowing and lending to each other using commercial paper, repurchase agreements and
similar instruments.

As money became a commodity, the money market became a component of the financial

market for assets involved in short-term borrowing, lending, buying and selling with original
maturities of one year or less. Trading in money markets is done over the counter and
is wholesale. There are several money market instruments in most Western countries,
including treasury bills, commercial paper, banker's acceptances, deposits, certificates of
deposit, bills of exchange, repurchase agreements, federal funds, and short-
lived mortgage- and asset-backed securities.

Money markets serve five functions—to finance trade, finance industry, invest profitably,
enhance commercial banks' self-sufficiency, and lubricate central bank policies

Q6) What are the types of leverages?

Ans) Leverages are of three types:

(i) Operating leverage
(ii) Financial leverage
(iii) Composite leverage.

Operating Leverage
The operating leverage may be defined as the tendency of the operating profit to vary
disproportionately with sales. It is said to exist when a firm has to pay fixed cost regardless of
volume of output or sales. The firm is said to have a high degree of operating leverage if it
employs a greater amount of fixed costs and a lesser amount of variable costs and vice versa.

Financial Leverage
The financial leverage may be defined as the tendency of the net income to very
disproportionately with the operating profit. It indicates the change that takes place in the taxable
income as a result of change in the operating income.

Where
OP = Operating Profit or Earnings before Interest and Tax (EBIT).
PBT = Profit before tax but after Interest.
Composite Leverage
Operating leverage measures the percentage change in the operating profit due to
percentage change in sales and it explains the degree of operating risk. Financial leverage
measures the percentage change in taxable profit (or EPS) on account of percentage change
in operating profit (EBIT) and it explains the financial risk.

Q8) Explain how the long term sources of finance is arranged.

Ans) Long-term sources are shares, debentures, long-term loans etc.

Shares
A share may be defined as one of the units into which the share capital of a company has been
divided. A share is the share in the capital of a company and includes stock except where a
distinction between stock and share is expressed or implied
A Public Company issue only two types of shares. They are
(i) Preference Shares
(ii) Equity Shares
The person holding the share is called a shareholder. He receives the dividend from the
company for investing money in the business. However, Payment of dividend is not legally
compulsory.

Debentures
A debenture is a document issued by a company as an evidence of a debt due from
the company with or without a charge on the assets of the company. It is a certificate issued by a
company under its seal acknowledging a debt due by it
to its holders
Types of debentures
Naked Debenture: Naked Debentures are those which do not carry any charge on
the assets of the company.
Mortgage Debenture: These are secured by a mortgage or a charge on the assets
of the company.
Convertible Debenture: These debentures can be converted into equity shares of
the company according to the terms specified.

Loan Financing
A Loan is a kind of advance with or without security. It is given for a fixed
period at an agreed rate of interest. Repayments mat be made in installments or at
the expiry of a certain period.
“Term loans is used for both medium as well as long-term loans. longterm loans are for period
from 5 to 15 years.
The term loans are offered by Financial institutions like IFCI, SFCs, SIDCs, ICICI, IDBI,
UTI, IRBI, SIDBI, HDFC, EXIM BANK
The term loan is granted on the basis of formal agreement and
this contains the terms of granting loan and provides for certain protective clauses
fro the benefit of the lender.