Finance

1. Debt Financing – It is a method of raising funds for businesses by selling bonds, bills or
notes to individuals or institutions – they become Creditors.
 These creditors will receive principal amount at the time of maturity and interest in
between in the time-period.
 Some debt instruments are – bonds, debentures, t-bills, g-sec, ECBs.

2. Debt Ceiling – The maximum borrowing power of any government security.

3. Equity Financing – It is another method of raising funds for businesses by selling the
shares in open market – profits of which could be distributed as Dividends.
 In other words, it is a method to sell ownership rights to people.

4. Bond – A debt instrument on which certain principal amount is invested for some time
period. In this time, an interest is earned and after the maturity, the whole initial principal
amount is returned.

5. Debenture – It is a medium to long-term debt instrument used by large companies to

borrow money from RBI. No physical assets or collateral are needed while borrowing.
 An example of a debenture issued by government is Treasury Bond or Treasury Bill.
 Debentures are advantageous because they carry a low interest rate and a longer
time-period to return money.
 In some other countries, this term is also called Bond, Loan Stock or Note.

6. Credit Rating – It is a rating given by agencies like Standard & Poor’s, Moody’s or Fitch that
evaluates a person’s or organization’s ability to fulfill their financial commitments.
 Factors like credit history and credit score are also considered.
 These ratings are given by Credit Rating agencies.

7. Gilt-Edged Securities – They are the high-grade bonds or stocks that have a good
consistent track-record of earnings.
 They are extremely reliable debt instruments to earn dividends and interests.
 But in comparison to junk bonds (released by not-so good track-record companies),
these companies offer a little lower interest rate.
 They are investment-grade bonds.
8. Junk Bonds – They are the low-grade and high-yield bonds issued by poor performing
companies.
 They involve a high-risk investment. But the return is also high.
 They are noninvestment-grade bonds.
 They are issued by the companies seeking investment instantly.

9. Sovereign Bonds – They are the debt security instruments issued by governments who are
seeking investment.

 This money is used by the government to finance infrastructure projects or on social

programs.
 It can also be used to repay the older debts (which might be maturing now)
government is having with any world body, say World Bank or AIIB.
 All sovereign bonds are gilt-edged securities because they are safe for investment.
 These securities can be denominated in either local currency or global reserve
currencies, like dollar or euro (generally bonds are denominated in the currency of a
country with stable economy).

10. Bond Yield – It is the amount of return an investor will make on a bond. The most common
way to check bond yield is by calculating its Nominal Yield – which is the interest earned
divided by investment made on the bond (price at which bond was purchased).
 Bond Yield remains low for Gilt-Edged Bonds and high for Junk Bonds.

11. Nominal Interest Rate – This is the amount of interest rate mentioned in the agreement
paper, like in savings account or FD.
12. Optionally Fully Convertible Debentures (OFCDs) – Debentures whose value can be fully
convertible into equity shares at the issuer’s notice.
 The ratio of conversion is generally decided initially by the issuer at the time of
issuance of debentures.
 Upon conversion, the bond investors become shareholders and enjoy the same
status as the ordinary shareholders of the company.

13. Inflation Indexed Bonds – They are the bonds issued by RBI to control inflation in the
country. It guarantees a return higher than the inflation rate, if it is held to the maturity.
 The principal deposited by the buyers are indexed – means the amount deposited
while purchasing bonds will get automatically linked with the value of price index
(CPI or WPI).
 When these bonds get matured, the principal amount is returned to the buyer
according to the Inflation Rate of that time period.
 In between time, the interest would be paid to the investor.
 In simple terms, both principal and interest are protected against inflation.
 Government launched this bond so that people gets restrained to buy gold and real
estate for investments.

14. Institutional Investors – They refer to such entities which pool large sums of money to
purchase security, real estate, and other investment assets.

 They include banks, insurance companies, mutual funds, hedge funds, pensions,
investment advisors, etc.
 Basically, they invest on behalf of their members.
 Maximum IIBs are sold to these Institutional Investors. Thus, they remain qualified
for preferential treatment and face fewer protective regulations.

15. Under-recovery – It is a term used by Oil marketing companies that denotes the losses
incurred by them due to the difference between the subsidized prices at which they sell
their products to customers and the prices of their combined cost of purchase and
production.
 Generally, union government doesn’t pay them the subsidized cost but issues
government securities for a maturity period of 20-30 years, along with interests.
 16. Treasury Bills – They are the bills issued by Union government for taking short-term
loans with a maturity period of less than a year.
 These bills are issued by government at a discounted price and then further sold at
the face value during maturity date. So, the holder incurs profits through this
difference rather than by getting fixed interest payments regularly during holding
bonds.
 Treasury bills don’t provide any interests.
 These T-Bills offer some tax advantages.
 They are released by Union Government but their auctions are conducted by RBI.
 The commercial and cooperative banks use T-Bills for fulfilling their SLR
requirements.
 They are not issued by State governments.
 They are also issued under Market Stabilization Scheme (MSS).

Note: Government securities are the dated securities issued by Central and State governments.
But, RBI manages and services these securities through its public debt offices as an agent of
govt.

17. Commercial Paper – It is an unsecured and a short-term debt instrument issued by a

corporate company.

18. Certificate of Deposit – A short-term debt instrument issued by a bank or a financial

institution.
19. Zero Coupon Bonds (Accrual Bonds) – They are the long-term government securities that
are sold at a lower price and at the maturity date, government buys these bonds at the
original value – thus incurring profit for buyers. [Similar to Treasury Bills]
 It is a government security that doesn’t pay interest in the time period till the
maturity date is reached.
 These bonds don’t have any coupon, unlike those present during World War times.

20. Commercial Bills – They are the trade bills sold at a discounted price to the commercial
banks for getting money instantly.

21. Call Money and Notice Money – It is the money lent among banks or financial institutions
for a short time period. No collateral is charged over this amount and it is used mainly to
fulfill CRR of the institution. [Call Money if lent for 1 day; Notice Money if lent for 1-14 days]

22. Initial Public Offering – It is the offering of stocks or shares by a private company to public
in an open market.
 It is a very common method by which new younger companies seeks money to
expand their businesses (company doesn’t want to take loans from banks).
 But in this method, the major shareholder still remains the issuer (owner).

23. External Commercial Borrowing (ECB) – It is a method used by Indian corporations and
PSUs to access foreign money.

24. Bonus Share – It is an additional share given to current shareholders – based upon the
number of shares that the shareholder already owns.

25. Rights Issue – It is a provision under which cash-strapped companies turn to existing
shareholders to give them a chance to buy new shares at a discounted price.

26. Portfolio – It is a collection of financial assets like shares, stocks, bonds and cash
equivalents, and funds like mutual funds, exchange-traded funds and closed funds.

27. Disinvestment (Divestment/Divestiture) – Action of an organization or a government to

sell its assets and securities.
 This is a most common way to reduce fiscal deficit of a government.
28. Hedge Fund – It is a private investment fund where capital from High-net-worth
individuals, banks or other corporations are pooled together to invest in a variety of assets
(generally portfolio shares) – often with complex portfolio-construction and risk
management techniques.
 These high-net-worth individuals are also called as Accredited Investors or
Institutional Investors or Limited Partners.
 This investment is taken care by an Investment management firm, which manages
securities like shares, bonds etc. and assets like real estate.
 Majority of hedge fund investments are made in liquid assets.
 Hedge Fund is basically a private mutual fund for high net-worth individuals.
 SEBI’s regulations are not that strict over Hedge Funds as compared to over Mutual
Funds.
 Another name of Hedge Funds = Alternative Investment Fund Category III

29. Participatory Notes (P-Notes) – They are the financial instruments issued by registered
Foreign Institutional Investors (FII) to overseas investors, who are Hedge Fund Managers –
managing the portfolio funds of rich people.
 The FIIs invest money on the behalf of Hedge Fund Managers in the local markets
over the shares of risky companies (to get higher returns).
 These Hedge Fund managers don’t get themselves registered with SEBI.
 The prices of P-Notes are derived from the prices of shares or bonds in the market.
Thus, they are also called as Offshore Derivative Instrument.

30. Credit Default Swap (CDS) – It is a financial swap agreement that the seller of CDS will
compensate the buyer (creditor of the bond) in case the bond gets default by the debtor or
by any other credit event.
 For this, the creditor of bond has to pay insurance premiums regularly to the seller
of CDS, irrespective if the fact that default happen in future or not.
 The money paid by insurance (seller of CDS) is known as Bond Money.
 31. Depository Receipt – It is a financial instrument given to a person who is seeking for
investments in his company from abroad. This is issued by a bank set up in another country
that buys investor’s shares. This depository receipt is then sold to a buyer present in the
same another country. In this manner, the foreign people also invest their money. In the
same manner, they too get dividends.

32. Mortgage-Backed Securities

33. Outstanding Shares – They are all the shares of a public company that have been
authorized and issued.
 The number of these shares would increase if the company issues additional shares.
 They include Floating Shares (shares available for trading purposes) and Restricted
Shares (shares held by insiders that can’t be traded).
 In the Sensex market, the value of only floating shares is accounted (b’ce they are
used in trading).

34. Market Capitalization (Market Cap) – It refers to the total capital held by a company or
the market value of a company’s outstanding shares.
 It is calculated by the multiplying the total outstanding shares present and the price
of one outstanding share.
 The investment community uses this figure to determine a company’s size, as
opposed to using sales or total asset figures.

35. Free Float Market Capitalization – It is the market capitalization of a company held purely
by the free-floating shares, which can be actually traded.
 It is calculated by the multiplying the total shares present with the public and the
price of one free-floating share.
 It is also called Float-adjusted Capitalization.
 India’s free float market cap is one of the lowest in the world – due to large
shareholdings of promoters.

Note: Why Share Market is necessary? Isn’t it promoting gambling?

Ans: Shares are must to be issued for getting money for investment. Also, it provides liquidity to the
investors – by which he can leave anytime if he requires money. Also, the person fixed to one company
as a shareholder won’t be buy share of any other company, due to the fear of getting frozen. So, by this
way, the new companies won’t get new investments.
36. Collective Investment Scheme (CIS) – It is a type of investment scheme wherein investors
pool their money to invest in particular assets, thereby earning the returns which could be
later distributed among them as per the agreement reached between them earlier.
 The corpus amount pooled should be minimum 100 Crores.
 CISs are regulated by SEBI.
 In India, the CIS excludes the Mutual Funds.
 All CISs have to obtain a Credit Rating from a recognized rating agency.
 The money is looked after by a manager on behalf of the investors and the investors
have no control over the management or operation of scheme.
 Regulated entities like Mutual Funds, Insurers, Pension Funds, Registered Chit
Funds, Cooperative Societies and Nidhis are specifically exempted from CIS
regulations even if they manage Rs 100 Crore or more.

37. Securities Appellate Tribunal – It is a statutory body established under the SEBI Act, 1992
to hear and dispose of appeals against orders passed by SEBI.
 It is a 3-member body composing a Presiding Officer and 2 other members who are
to be nominated by Central Government.
 It has only one bench that sits at Mumbai and has jurisdiction all over India.
 Every proceeding before the SAT is deemed to be judicial proceeding and it has all
the powers of a Civil Court.

38. Nidhi Company – It belongs to Non-banking financial sector and their function is
borrowing and lending money among their members.
 They are also called Permanent Funds, Benefit Funds, Mutual Benefit Funds and
Mutual Benefit Company.
 These companies are regulated by Ministry of Corporate Affairs.
 As far as their deposit acceptance activities from public is concerned, RBI is
empowered to issue directions to them.

39. Forward Markets Commission (FMC) – It is the chief regulator of Commodity Markets in
India.
 It is further overseen by Department of Economic Affairs, Finance Ministry.
 On 28 September 2015, FMC was merged with SEBI.
 Forward Market is the informal over-the-counter (security traded in context other
than on a formal exchange) financial market that sets the price of a financial
instrument/asset/commodity for future delivery. Such contracts between two
parties are called Forward Contract.

40. Chit Fund -

41. Capital Gains Tax
42. Tax Deducted at Source (Withholding Tax)
43. Transfer Pricing Issue – Under valuation of shares to pay less Capital Gains Tax
44. Stamp Duty
45. FSDC
46. Promissory Notes
47. Patent and Royalty (Royalty Tax)
48. SEZ – Export duty 1% and Excise duty 0%
49. Fiscal Imperialism
50. DTAA
51. Tax agreement – source model (developing nations) and destination model (developed
nations)
52. Intermediary Companies at Island nations (Panama)
53. Economies of Scale
54. rbi sebi irda pfrda fsdc fmc