Financial Market & Institutions.

(17 Batch Final Question)

Q-1 a. Define Bond Indenture. Compare and Contrast between debt and equity?
Bond Indenture: A bond indenture agreement is a contract or legal document that records the
obligations of the bond issuer and the benefits that will be given to the bondholder. A bond
indenture may also be called a bond resolution, a bond contract, or a deed of trust. A bond
indenture is a contract that is blanket and unconditional.
Compare and Contrast between debt and equity:
Basic Comparison Debt Equity
Meaning Funds owed by the company Funds raised by the company by
towards another party is known as issuing shares is known as Equity.
Debt.
What is? Debt is the borrowed fund. While, Equity is owned fund.
Reflects Debt reflects money owed by the Conversely, Equity reflects the
company towards another person capital owned by the company.
or entity.
Term Debt can be kept for a limited On the other hand, Equity can be
period and should be repaid back kept for a long period.
after the expiry of that term.
Shareholders Debt holders are the creditors. Whereas equity holders are the
owners of the company.
Risk Debt carries low risk as compared Equity carries high risk as
to Equity. compared to Equity.
Types Debt can be in the form of term But Equity can be in the form of
loans, debentures, and bonds. shares and stock.
Return Return on debt is known as In contrast to the return on equity is
interest which is a charge against called as a dividend which is an
profit. appropriation of profit.
Nature of return Return on debt is fixed and But it is just opposite in the case of
regular. return on equity.
 Collateral Debt can be secured or unsecured. Whereas equity is always
unsecured.

Q-1 b. Distinguish between general obligation bond and revenue bond.

Parameter General obligation bond Revenue bond
s
Definition A general obligation bond (GO bond) A revenue bond is a category of
is a municipal bond backed solely by municipal bond supported by the
the credit and taxing power of the revenue from a specific project, such as
issuing jurisdiction rather than the a toll bridge, highway, or local stadium.
revenue from a given project.
Issuer General obligation bonds are issued Typically, revenue bonds can be issued
with the belief that a municipality by any government agency or fund that
will be able to repay its debt is managed in the manner of a business,
obligation through taxation or such as entities having both operating
revenue from projects. No assets are revenues and expenses.
used as collateral.
Collateral Unlike revenue bonds, GO bonds are Revenue bonds are a class of municipal
not backed by collateral and do not bonds issued to fund public projects
pay creditors back on the basis of which then repay investors from the
income generated from funded income created by that project.
projects.
Taxation The amount of taxation available by For instance, a toll road or utility can be
a particular GO bond may be financed with municipal bonds with
specified as either limited or creditors' interest and principal repaid
unlimited. from the tolls or fees collected.
Examples In the case of an unlimited GO bond, Revenue bonds, unlike GO bonds, are
a municipality may increase property project-specific and are not funded by
taxes accordingly to cover its taxpayers.
payments and obligations.
Q-2 a. Distinguish between graduated payment mortgage (GPM) and graduated equity
mortgage (GEM).
Graduated payment mortgage (GPM): A graduated payment mortgage (GPM) is a type of
fixed-rate mortgage for which the payments increase gradually from an initial low base level to a
higher final level.
 Small initial payments
 Payments increase over time then level off
 Assumes income of borrower grows
Growing-Equity Mortgage (GEM): A growing-equity mortgage (GEM) is a type of fixed-rate
mortgage where monthly payments increase over time according to a set schedule, rather than
remaining fixed and equal over the loan term. The interest rate on the loan does not change, and
there is never any negative amortization.
 Like GPM low initial payments
 Unlike GPM, payments never level off

Q-2 c. Which one is comparatively better between fixed- rate mortgages and adjustable-
rate mortgages?
Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two primary mortgage
types. While the marketplace offers numerous varieties within these two categories, the first step
when shopping for a mortgage is determining which of the two main loan type’s best suits your
needs.
Fixed- rate mortgages:
1. Fixed rate loans have a constant, unchanging rate
2. Interest rate risk can hurt lender rate of return
 If interest rates rise in the market, lender’s cost of funds increases
 No matching increase in fixed-rate mortgage return
3. Borrowers lock in their cost and have to refinance to benefit from lower market rates
4. Fixed monthly payment includes
 Interest owed first
 Balance to principal
5. Interest on the declining principal balance
6. Calculating monthly payment
Adjustable-rate mortgages:
1. Rates and the size of payments can change
 Maximum allowable fluctuation over year and life of loan
 Upper and lower boundaries for rate changes
2. Lenders stabilize profits as yields move with cost of funds
3. Uncertainty for borrowers whose mortgage payments can change over time
Comparatively better between fixed- rate mortgages and adjustable-rate mortgages: If you
are considering an ARM, you should run the numbers to determine the worst-case scenario. If
you can still afford it if the mortgage resets to the maximum cap in the future, an ARM will save
you money every month. Ideally, you should use the savings compared to a fixed-rate mortgage
to make extra principal payments each month, so that the total loan is smaller when the reset
occurs, further lowering costs.
If interest rates are high and expected to fall, an ARM will ensure that you get to take advantage
of the drop, as you’re not locked into a particular rate. If interest rates are climbing or a steady,
predictable payment is important to you, a fixed-rate mortgage may be the way to go.

Q-3 a. Why Preferred stock is called a hybrid security?

Preferred stocks combine features of common stocks and bonds. Preferred stock is a hybrid
security because it combines features of common stocks and bonds. At the same time, it has
several unique features that set it apart from both.
Preferred stock has a par value that the company assigns when issuing it. That value establishes
the base on which dividend payments are calculated and often fixes the price at which the
company has the right to redeem shares under set conditions. In some cases, preferred stock is
created with a fixed final redemption date, while in others, preferred stock can be perpetual
without any pre-set date on which the company will redeem the shares.
Advantages to issuer:
 Leverage is not default risk.
 Cash flow flexibility as dividends can be omitted.
 Preservation of stockholders control.
Disadvantages to issuer:
  Dividends are not tax deductible.
 More expensive than debt financing.
 Limited Upside Potential
 Interest Rate Sensitivity
 No Dividend Growth
 Dividend Income Risk
 Principal Risk
 Lack of Voting Rights

Q-3 b. Suppose that you are the CEO and owner of a firm that wishes to go public through
an IPO. (i) Why would you engage an investment banker? (ii) If the offer goes well and the
stock price rises after the underwriting, what reactions would you have?
I am the CEO and owner of a firm that ix ‘x’ and I wishes to go public through an IPO, because
an initial public offering refers to the process of offering shares of a private corporation to the
public in a new stock issuance. An IPO allows a company to raise capital from public inventors.
The transaction from private to public company can be an important time for private investors to
fully realize, gains from their investment as it typically includes a share Premium for current
private investors.
(1) The first step in the IPO process is for the issuing company to choose an investment bank to
advise the company on its IPO and to provide underwriting services. The investment bank is
selected according to the following criteria:
 Reputation.
 The quality of research.
 Industry expertise.
 Distribution that is if the investment bank can provide the issued securities to more
institutional investors or to more individual investors.
 Prior relationship with the investment bank.
Onward to the company the investment banker do the activities to issue IPO. Documents prepare,
market analysis, contract with regulation (DSE, CSE, BSEC & Bangladesh Bank) and Build in
guideline for the issuer company.
(II) If the stock price goes rise after the underwriting the issuer company have the right to sale
the share at a maximum rate or do the share transfer to the issuing company.
In a best-effort deal, the underwriter may not sale any of the IPO shares. It only makes a
guarantee that it will make its "best efforts" to sell the issue to the investing public at the best
price possible. Unlike a bought deal, there is no consequence for the underwriter if the entire
issue is not sold. It is the issuing company that will be stuck with any unsold shares. Because
there is less risk involved, the underwriter's gains are limited even if the issue sells well. In this
case, the underwriter is compensated with a flat fee. In that case the issuing company back to the
stock on there Depository participants Accounts.

Q-4 a. What are the primary differences between brokers and dealers?
Parameters Broker Dealer
Definition Brokers act as intermediaries Dealers act as market-makers for
between the buyer and seller to the securities
carry out a transaction.
Party Represented A broker executes a A Dealer executes a
deal/transaction on behalf of deal/transaction on behalf of
his/her client. In simple words, a himself/herself. In simple words,
broker trades on behalf of others. a dealer trades on behalf of
himself/herself.
The Account used A broker uses the account of A Dealer uses his/her personal
his/her clients to make trades. account to make trades.
Flexibility and A Broker does not enjoy a lot of A dealer enjoys full flexibility
freedom
freedom and flexibility as his/her and freedom as his trades are his
trades are mainly governed by own decisions and choices.
the instructions he/she gets from
his clients.
Source of Earning A broker mainly earns through A dealer earns solely through his
commission he charges from trading’s.
his/her clients for the services
availed.
 Position/Relationship A Broker represents an investor. A dealer is an opponent for other
with the Investor investors.
Other Names Brokers are also known as Dealers are also known as
Agents Market-Makers

Q-4 b. Describe the contrast limit order, market order, and stop-loss order.

Limit order Market order Stop-loss order

A limit order is visible to the Market orders are A stop-loss order specifies
market and instructs your transactions meant to execute that a stock be bought or sold
broker to fill your buy or sell as quickly as possible at the when it reaches a specified
order at a specific price or current market price. price known as the stop price.
better.
Limit orders set the Market orders offer a greater Once the stop price is met,
maximum or minimum price likelihood that an order will the stop order becomes a
at which you are willing to go through, but there are no market order and is executed
complete the transaction, guarantees, as orders are at the next available
whether it be a buy or sell. subject to availability. opportunity.
A limit order offers the Market orders are In many cases, stop-loss
advantage of being assured transactions meant to execute orders are used to prevent
the market entry or exit point as quickly as possible at the investor losses when the price
is at least as good as the current market price. of a security drops.
specified price.
If an investor is worried about For example, an investor A trader buys 100 shares of
buying XYZ shares for a enters an order to purchase XYZ for $100 and sets a stop
higher price and thinks it is 100 shares of a company loss order at $90. The stock
possible to get them for a XYZ Inc. "at the market". declines over the next few
lower price instead, it might Since the investor opts for weeks and falls below $90.
make sense to enter a limit whatever price XYZ shares The trader’s stop order gets
order are going for, the trade will executed and the position is
be filled rather quickly at sold at $89.95.
 wherever the current price of
that security is at.

Q-4 c. A specialist profits from his role as broker and dealer. Briefly discuss how this is
accomplished.
A broker-dealer is what most of us think of as a brokerage. It acts as the middleman between
buyers and sellers of securities. The dealer part comes into play when the firm is buying or
selling for its own account. Your wealth advisor may also serve as your broker-dealer, but this
presents a potential conflict of interest you should be aware of.
 A broker executes orders on behalf of clients and can be either a full-service broker or a
discount broker that only executes trades.
 Broker-dealers are those that perform both responsibilities, such as traditional Wall Street
organizations, as well as large commercial banks among others.
There are two types of broker and dealers. They are:
i) A firm that sells its own product lo to customers and
ii) An' independent broker-dealer or a firm that sell products, from outside sources..
Broker-Dealers and Conflicts of Interest: Until recently, large broker-dealers generally had
affiliated investment advisor firms. This kept the different roles clearly delineated and minimized
potential conflicts of interest. Your advisor recommends you buy a stock, you say yes, your
advisor puts in the order with their affiliated broker-dealer. Your advisor only gets paid for
giving you good advice and the broker-dealer gets paid for fulfilling the order.

Q-5 a. As a specialized bank, how do you think Bangladesh Development Bank Limited
(BDBL) could satisfy the need of the society in the absence of BSB and BSRS? Give
reasoning to your answer.
The Bangladesh Development Bank Ltd that came into being through the merger of the
Bangladesh Shilpa Bank (BSB) and the Bangladesh Shilpa Rin Sangstha (BSRS), two public-
sector specialized development banks, has already passed its 2nd year of operation. From the
early part of the nineties, the two development financing institutions (DFIs) stopped extending
new loans and concentrating more on existing projects that had not gone sick.
BDBL has been formed with the following objectives:
  To mobilize the two big stagnant organizations (BSB & BSRS)
 To expand network of the Bank
 To reduce the rate of default on the repayment of loans
 To be competitive with other banks & financial institutions
 To launch new products & services
 To maintain continuous improvement in business policies & procedures
 To maximize profits by sound financial performance
 To contribute more to the country’s overall development
Achievement of Objectives to satisfy the need of society:
 The bank had no current loan liability with Bangladesh Bank & the Government due to
payment of the dues in time.
 The bank had kept sufficient loan provision as per instruction of BRPD circulars of the
Central Bank and left surplus provision.
 BDBL is engaged in short-, mid- and long-term financing; commercial banking
operation; foreign exchange services, capital market operation.
 Enhancement of Operational Capacity
 Improvement of Financial Position
 Enhancement of Capacity to Adapt
 Improvement of Standards & Quality of Products

Q-5 b. Under what mission and objectives Bangladesh Bank was established? Is it
independent since its inception?
Mission:
 Formulating monetary & credit polices
 Managing currency regulating payment system
 Managing foreign exchange & regulating foreign exchange
The main objectives of monetary policy of Bangladesh Bank are:
 Price stability both internal & external
 Sustainable growth & development
 High employment
 Economic and efficient use of resources
  Stability of financial & payment system
Is BB independent since its inception:
The Banking Company Act, 1991 empowered the Bangladesh Bank to regulate the country’s
banking sector as an autonomous body.
However, the central bank has lost its independence after the Ministry of Finance established its
own banking division, said senior officials of Bangladesh Institute of Bank Management
(BIBM).
“A few days ago, the central bank turned down proposals for setting up two new private
commercial banks. In response, the ministry instructed them to prepare primary courses that
would allow parties to get licenses to set up private banks. How does such an action leave any
room for the bank to operate independently?” said a supernumerary professor of BIBM,
requesting not to be named.

Q-6 a. How can you accomplish the activities of the World Bank (WB) group?
The World Bank Group is an extended family of five international organizations, and the parent
organization of the World Bank, the collective name given to the first two listed organizations,
the IBRD and the IDA.
Five institutions, one group
1. The International Bank for reconstruction and Development (IBRD). IBRD provides loans and
advice to middle income and credit worthy poor Countries. 189
2. The International Development Association (IDA). IDA provides interest free loans called
credits and grants to governments of the poorest countries. 173
3. The International Finance Corporation (IFC). IFC is the largest global development institution
focused exclusively on the private sector. We help developing countries achieve sustainable
growth by financing investment, mobilizing capital in international financial markets, and
providing advisory services to businesses and governments. 185
4. The Multilateral Investment Guarantee Agency (MIGA). It was created in 1988 to promote
foreign direct investment into developing countries to support economic growth, reduce poverty,
and improve people’s lives. 181
5. The International Centre for settlement of investment disputes (ICSID). It provides
international facilities for conciliation and arbitration of investment disputes. 154
IFC, MIGA, ICSID focus on strengthening the private sector in development countries. Through
this institutions the World Bank provides financing, Technical assistance, political risk
insurance.
Accomplish the activities of the WB group: The World Bank is a provider of financial and
technical assistance to individual countries around the globe. The bank considers itself a unique
financial institution that sets up partnerships to reduce poverty and support economic
development.
The World Bank supplies qualifying governments with low-interest loans, zero-interest credits,
and grants, all to support the development of individual economies. Debt borrowings and cash
infusions help with global education, healthcare, public administration, infrastructure, and
private-sector development. The World Bank also shares information with various entities
through policy advice, research and analysis, and technical assistance. It offers advice and
training for both the public and private sectors.

Q-6 b. Does Asian Development Bank (ADB) and Islamic Development Bank (IDB)
perform the same functions? If not, then mention the exact functions performed by each of
the financial institutions.
Both bank are not performing the same functions. The exact functions are given below:
ADB Functions:
 To promote investment in the region of public and private capital for development
purposes.
 To utilize the resources at its disposal for financing development of the developing
member countries in the region.
 Assistance to DMCs (Developing Member Countries) to coordinate policies designed for
development.
 To provide technical assistance for the preparation, financing and execution of
development projects and programmers.
 To co-operate with the international organizations and institutions, as well as national
entities whether public or private to encourage the investment of development funds in
the region.
  To undertake such other activities and provide such other services as may advance its
purpose.
 Equity investments and loans to member nations.
Functions of the IDB are:
 Project financing in the public and private sectors;
 Development assistance for poverty alleviation;
 Technical assistance for capacity-building;
 Economic and trade cooperation among member countries;
 Trade financing;
 SME financing;
 Resource mobilization;
 Direct equity investment in Islamic financial institutions;
 Insurance and reinsurance coverage for investment and export credit;
 Emergency relief.

(18 Batch Final Question)

Q- 2 b. Elucidate the steps of public offering process.
This guide will break down the steps involved in the process, which can take anywhere from six
months to over a year to complete.
Below are the steps a company must undertake to go public via an IPO process:
1. Select a bank
2. Due diligence and filings
3. Pricing
4. Stabilization
5. Transition
Step 1: Select an investment bank: The first step in the IPO process is for the issuing company
to choose an investment bank to advise the company on its IPO and to provide underwriting
services. The investment bank is selected according to the following criteria:
1. Reputation
2. The quality of research
3. Industry expertise
4. Distribution, i.e., if the investment bank can provide the issued securities to more
institutional investors or to more individual investors
5. Prior relationship with the investment bank
Step 2: Due diligence and regulatory filings: Underwriting is the process through which an
investment bank (the underwriter) acts as a broker between the issuing company and the
investing public to help the issuing company sell its initial set of shares. The following
underwriting arrangements are available to the issuing company.
Step 3: Pricing: After the IPO is approved by the SEC, the effective date is decided. On the day
before the effective date, the issuing company and the underwriter decide the offer price (i.e., the
price at which the shares will be sold by the issuing company) and the precise number of shares
to be sold. Deciding the offer price is important because it is the price at which the issuing
company raises capital for itself.
Step 4: Stabilization: After the issue has been brought to the market, the underwriter has to
provide analyst recommendations, after-market stabilization, and create a market for the stock
issued.
Step 5: Transition to Market Competition: The final stage of the IPO process, the transition to
market competition, starts 25 days after the initial public offering, once the “quiet period”
mandated by the SEC ends.

Q-4 a. What are the primary differences between brokers and dealers?
Brokers and dealers have to adhere to certain guidelines and regulations. Both brokers and
dealers have certain financial responsibilities.
1. A broker is a person who executes the trade on behalf of others, whereas a dealer is a person
who trades business on their own behalf.
2. A dealer is a person who will buy and sell securities on their account. On the other hand, a
broker is one who will buy and sell securities for their clients.
3. While dealers have all the rights and freedom regarding the buying and selling of securities,
brokers seldom have this freedom and these rights.
4. A broker has only a little experience in the field compared to dealers. It has also been seen that
brokers become dealers once they get experience.
5. A broker is normally paid a commission for transacting the business. A dealer is not paid a
commission, and he or she is a primary principal.

Q-5 a. Enumerate the role of investment Corporation of Bangladesh (ICB) as a contributor

to the capital market development in Bangladesh?
The functions of ICB are very much related to the development of the capital market in
Bangladesh. As a development financial institution it provides term loan to finance equity gap,
provides working capital. As a market maker it issues unit certificate, underwriting securities. It
also issues and manages Mutual Funds.
 Direct purchase of shares and debentures including Pre-IPO placement and equity
participation.
 Providing lease finance to industrial machinery and other equipment singly or by forming
syndicate.
  Underwriting of initial public offering of shares and debentures.
 Underwriting of right issue of shares.
 Managing investors’ Accounts.
 Managing Open End and Closed End Mutual Funds.
 Operating on the Stock Exchanges.
 Providing investment counsel to issuers and investors.
 Participating in Government divestment Program.
 Participating in and financing of, joint-venture projects.
 Introducing new business products suiting market demand.
 Providing Consumer Credit.
 Providing Bank Guarantee.
 To act as Trusty and Custodian.
 Dealing in other matters related to capital market operations.

Q-5 b. Do you think that Bangladesh Krishi Bank (BKB) works as a substitute of Rajshahi
Krishi Unnnayan bank (RAKUB)? Give your reasons.
Because of there their function or activisties I do not think Bangladesh Krishi Bank (BKB)
substitute Rajshahi Krishi Unnayan Bank (RAKUB) these are the reasons:
Bangladesh krishi Bank has been established under the Bangladesh Krishi Bank order 1973
(President's order No 27 of 1973), in order to boost up our economy by providing financing
facilities to our Agriculture Sector. BKB in being run as a Banking Company under the Banking
Company Act - 1991. The main objective of BkB in to provide easier and hassle free! Credit
disbursement facilities to the farmers. People engaged in agricultural activities, crop production,
fish culture, animal husbandry etc and entrepreneurs involved in development of Agro Based
industries and collage industries.
On the other hand, RAKUB is the state owned bank in Bangladesh, with regional approach. The
bank emerged as the government plan of intensive care to agriculture of Rajshahi and Rangpure
administrative division providing livelihood to 35 million people of the area. The region is less
developed compared to other parts yet full of potentials in agriculture.
Q-1 a. Define sinking fund provision in bond. Distinguish between corporate bond and
public bond.
Sinking fund provision in bond: The sinking fund provision is really just a pool of money set
aside by a corporation to help repay previous issues and keep it more financially stable as it sells
bonds to investors.
 A sinking fund is maintained by companies for bond issues, and is money set aside or
saved to pay off a debt or bond.
 Bonds issued with sinking funds are lower risk since they are backed by the collateral in
the fund, and therefore carry lower yields.
 Paying debt off early through a sinking fund saves a company interest expense and puts
the company on firmer financial footing.
 Sinking funds can also be used to finance the redemption of callable bonds.

Corporate bond Public bond

A corporate bond is debt issued by a company A government bond represents debt that is
in order for it to raise capital. issued by a government and sold to investors
to support government spending.
An investor who buys a corporate bond is Some government bonds may pay periodic
effectively lending money to the company in interest payments. Other government bonds
return for a series of interest payments, but do not pay coupons and are sold at a discount
these bonds may also actively trade on the instead.
secondary market.
Corporate bonds are typically seen as Government bonds are considered low-risk
somewhat riskier than U.S. government investments since the government backs
bonds, so they usually have higher interest them. There are various types of bonds that
rates to compensate for this additional risk. are offered by the U.S. Treasury are
considered to be among the safest in the
world.
The highest quality (and safest, lower Because of their relative low risk, government
yielding) bonds are commonly referred to as bonds typically pay low interest rates.
"Triple-A" bonds, while the least
creditworthy are termed "junk".