CORPORATE FINANCE

CORPORATE FINANCE

•A corporate finance professional is primarily tasked with managing an organizations money and
you could find yourself working on a wide range of matters, including capital raising (through
either securing a loan from an investment bank, restructuring the business or winning
financial backing through another platform.

•Corporate finance is the division of finance that deals with how corporations deal with funding
sources, capital structuring, and investment decisions. Corporate finance is primarily concerned
with maximizing shareholder value through long and short-term financial planning and the
implementation of various strategies. Corporate finance activities range from capital investment
decisions to investment banking.

•Corporate finance departments are charged with governing and overseeing their firms' financial
activities and capital investment decisions. Such decisions include whether to pursue a proposed
investment and whether to pay for the investment with equity, debt, or both.
 NATURE OF CORPORATE FINANCE

•Financing as well as investing choices are always termed as two sides of a same
coin. That the firm must increase funds only when this has suitable ways in order to
invest them. Features of corporate finance and characteristics of corporate finance
offer different technology and also strategies what allow managers to evaluate
financing and also investing choices. It’s therefore important for us to understand
nature of corporate finance for well-being of a company. Here are some of the
guidelines below discuss the characteristics, features and nature of corporate
finance.
•Financial Planning:
•Corporate finance is a financial planning for a company. The characteristics of
corporate finance include preparation, raising funds, investing plus tracking each
finance of organization. At short, it offers all financial aspects for the firm. This
research, techniques and strategies are defined by each financial department lead
through that finance supervisor.
 NATURE OF CORPORATE FINANCE

• Fund Raising:
•An important features of corporate finance is to raise funds for the company. Finance
can be accumulated through shares, bank loans, debentures, bonds, etc. Its most hard for
newer service providers in order to collect finance as their investors do not have
confident and vision towards new businesses. Nevertheless, it is quite easy for respected
companies to gather finance considering goodwill, reputation in the market.
• Goal Oriented:

•One of the features of corporate finance is goal oriented. That means, it is important to
regularly achieve each objectives associated with the company. The main goal of
corporate finance are to maximize profits, giving good dividends to shareholders, as
well as creating fund reserves for future expansion activities and so forth.
• Investing Objective:
•The nature of corporate finance notes for every company is to optimize investing needs for
maximizing profits. Your finance can be used to quickly attain your investing objectives of the
company. For example: it can be used to invest in machines or fixed assets. It’s can also be used
for day to day company operations. That finance needs to be optimized for profitably.
• Finance Options:

•There are two main options in the nature of corporate finance, i e. working capital and fixed
capital. Working-capital normally called as short-term finance. It’s mainly used to meet the
short-term financial requirements for your business. For example: It can be used to cover your
day-to-day expenses or operational cost of a company. Fixed capital normally called as long-
term finance. It is always used to fulfill your very long-term financial requirements for your
business. For example: buying a new manufacturing unit or fixed assets.
•Legal Requirements:
•There are definitely various legal criteria to corporate finance. The company
need to take the appropriate permission, from the finance regulatory board of the
country for the rising finance from public. For example: In India SEBI
(Securities and Exchange Board of India) and SEC (Securities Exchange
Commission) in United States also offers to follow all of the guidelines to a
company. This features of corporate finance need to be taken utmost care when
raising funds.
Managing and Controlling:
Corporate finance is excellent art considering that it needs individual skills, techniques, strategies as
well as judgement. Nature of corporate finance requires ideal way for planning as well as control.
Creating is needed in order to collect finance from the investors. It’s also necessary for investing their
finance. Control is needed to find whether the finance are optimized and invested appropriately. If the
finance is not been utilized properly then corrective steps should be taken and may also need to
restructure the way finance is been utilized.
Business Management:
Corporate finance is plays a crucial and important role in business management. Characteristics of
corporate finance is that it is a blood or life-line of a business. A nature of corporate finance is needed
towards many business tasks. For example: It’s necessary for performing that business smoothly, its
required for promoting business, for expansion, modernization, diversification, replacing old assets
with new assets and more. Finance is also required for paying interest, dividend, taxes as well as for
managing risks.
Dynamic in Nature:
A dynamic in nature of corporate finance is a distinct feature of finance. That it goes on
changing based on the change in planning, environment, circumstances, times, project
delays etc. Your finance supervisor must suggestions new and innovative ideas to
utilize savings, invested money and corporate finance. He must be a creativity when
doing his task.
Connecting with Other Divisions:
A nature of corporate finance has a near relationship with different divisions within a
company. For example: marketing and promotional department, manufacturing
department, advertising division, accounting department, etc. That is mainly because
all the divisions require finance to perform their operation constantly and smoothly.
SCOPE OF CORPORATE FINANCE
TYPES OF CORPORATE FINANCE TASKS
•Capital Investments
•Corporate finance tasks include making capital investments and deploying a
company's long- term capital. The capital investment decision process is
primarily concerned with capital budgeting. Through capital budgeting, a
company identifies capital expenditures, estimates future cash flows from
proposed capital projects, compares planned investments with potential
proceeds, and decides which projects to include in its capital budget.

•Making capital investments is perhaps the most important corporate finance

task that can have serious business implications. Poor capital budgeting (e.g.,
excessive investing or under-funded investments) can compromise a company's
financial position, either because of increased financing costs or inadequate
operating capacity.
 •Capital Financing
•Corporate finance is also responsible for sourcing capital in the form of debt or equity. A
company may borrow from commercial banks and other financial intermediaries or may issue
debt securities in the capital markets through investment banks (IB). A company may also
choose to sell stocks to equity investors, especially when need large amounts of capital for
business expansions.
•
•Capital financing is a balancing act in terms of deciding on the relative amounts or weights
between debt and equity. Having too much debt may increase default risk, and relying heavily
on equity can dilute earnings and value for early investors. In the end, capital financing must
provide the capital needed to implement capital investments.
•Short-Term Liquidity
•Corporate finance is also tasked with short-term financial management, where the
goal is to ensure that there is enough liquidity to carry out continuing operations.
Short-term financial management concerns current assets and current liabilities or
working capital and operating cash flows. A company must be able to meet all its
current liability obligations when due. This involves having enough current liquid
assets to avoid disrupting a company's operations. Short- term financial
management may also involve getting additional credit lines or issuing commercial
papers as liquidity back-ups.
 CORPORATE FINANCE V/S BUSINESS FINANCE

•If corporations are businesses and some business are corporations, then shouldn’t
corporate finance and business finance be the same thing? Well, not really. Even
though a corporation is technically a business, there’s a different type of finance that
applies to a corporation than say, a sole proprietorship. Confused, yet? Hang in
there. A more thorough explanation is coming.
•
•Corporate finance deals with the financial decisions that a corporation makes in its
day to day operations. It focuses on using the capital the corporation currently has to
make more money while simultaneously minimizing risks of certain decisions. The
ultimate goal is to increase wealth of the corporation’s shareholders.
•
•Business finance has a focus on the financial decisions made in all types of
business — including, but certainly not limited to, corporations. Business finance
deals with the same underlying concept of raising capital for business use, but
also incorporates capital management. Managing accounts receivable
•
•Initial Public Offering, or IPO, is when the corporation makes its first sale of
common shares on a public stock exchange. An IPO’s primary goal is to make
money for the corporation. As you may discover through a business directory,
some choose to remain privately invested companies and never have stock that’s
traded on a public exchange market.
•Corporations often plan their investment portfolio in short-term and long-term
increments. In the short-term, money markets are the primary investing market.
Some common money market instruments are certificates of deposits, commercial
papers, federal funds, municipal notes, and treasury bills. Capital markets are used
for longer-term investing. The capital market includes the stock and bond markets.
•
•In corporate finance, the company makes decisions about the projects that will be
invested in. To determine which projects are profitable and which are not, the
company goes through a valuation process to estimate the value of the project.
Projects are assigned an NPV, or net present value, based on the expected cash flow
from the project.
•
 •Projects also have a risk associated. These risks must also be evaluated to determine whether the project
is a worthy investment. Projects with a high NPV and high risk might lose out to a project with a medium
NPV and low risk. Remember, the primary goal of the corporation is to provide value for the
shareholders. High risks will keep the company from achieving its goals. As such, projects with high risks
(that can’t be mitigated) will often be forfeited for more attractive projects.
•
•Mergers and acquisitions are another part of corporate finance. Companies often have financial reasons
for combining with another company. While it may be direct or indirect, ultimately all mergers and
acquisitions are to affect the corporation’s bottom line. When a company is merged or acquired it’s
usually done at market value. The “acquiring” firm has the hope that the result of the merger/acquisition
will exceed the premium of the purchase. Merger and acquisition decisions are treated as other project
decisions with a valuation and risk assessment being made prior to purchase.
 IMPORTANCE OF FINANCE FUNCTIONS

• Classify the need for financing: You should understand how much is needed to
commence a company. So, the finance feature enables you to understand how much
you have initial investment and how much you need to increase.
• Describe modes of financing: You can collect all resources from subject areas once
you understand what requires to be enhanced. You can lend or purchase from different
stakeholders.
• Compare different sources of financing: Once various sources of resources identified,
compare the price and risk associated. Then select the best source of revenue that fits
your company demands.
 ROLE OF FINANCE FUNCTION

Investment Decisions— In this, the financial planner chooses where the business funds need to be stored.
Investment choices relate to operation capital management, capital budgeting choices, mergers strategic
planning, the purchase or lease of property. Investment choices should generate income, benefit, and cost
savings.
Financing Decisions— On it, a firm chooses from where to commence raising resources. There are two
primary sources to be regarded mainly equity and lent primarily. The decision is generated from the two
on a suitable combination of short-term and long-term funding. The functions of finance are to decide the
best revenue streams at a specified moment.
Dividend Decisions— There is decisions about money quantity, how frequently and condition to deliver
money to holders. A balance must be determined here among profitability maintained and the amounts
spent out as a dividend.
Liquidity Decisions— Liquidity implies a company has sufficient Capital to pay its debts when due and
has enough capital reserves to cope with the unexpected case of an emergency. The functions of finance
are to make choice that includes managing the current assets to avoid becoming insolvent or failing to
produce payments.
•Who is a Financial Manager?
•Financial managers are in charge of an institution’s financial health of an organization.
They produce financial statements, direct financing projects, and create policies and plans
for their institution’s long-term economic objectives. The role of finance manager is to
assist financial institution and insurance firms to operate in many locations.
•Financial managers are progressively helping corporations make choices that influence the
organization, a job that requires analytical abilities, and exceptional communication
abilities.

The Role of Finance Manager

The role of finance manager, especially in business is growing the reference to updating
technology that has substantially decreased the time required to generate financial statements.
The primary duty of financial managers tracks the accounts of a business, but now they do
more data mining and recommend senior executives on ideas to increase earnings. The main
functions of finance manager are to operate in teams, contributing to top managers as
company consultants.
• Usually, financial executives do the following:
• Plan ahead financial statements, business investment records, and predictions.
• Monitor financial information to guarantee that legal standards met.
• Supervises financial auditing and Budgeting Employees
• Survey financial reports from businesses and seek methods to decrease costs
• The role of finance manager is to evaluate market dynamics to identify possibilities
for growth or acquisition of other companies
•Profit Maximization
•The objective of corporate finance is profit maximization. It cannot be the sole
objective of a company as there is a directs/relationship between risk and profit. If
profit maximization is the only goal, then risk factories ignored.
•Sometimes, higher the risk, higher is the possibility of profits. Hence, risk has to
be balanced with the objective of profit maximization. In addition, a firm has to
take into account the social considerations, and normal obligations to the interests
of workers, consumers, society, government, as well as ethical trade practices.
However, as profit maximization ignores risk and uncertainty and timing of
returns, a firm can’t solely depend on the objective.
•Wealth Maximization
•Wealth maximization is the concept of increasing the value of a business in order to
increase the value of the shares held by its stakeholders. According to van Home value is
represented by the market price of the company’s common stock. The market price of a
firm’s stock takes into account present and prospective future earnings per share (EPS), the
timing and risk of these earnings, the dividend policy of the firm and many other factors that
bear upon the market price of the stock.
•
•The concept of wealth in the context of wealth maximization objective refers to the
shareholders’ wealth as reflected by the market price of their shares in the share market.
Hence, maximization of wealth means maximization of the market price of the equity shares
of the company.
 PROFIT MAXIMIZATION VS WEALTH MAXIMIZATION

Aspect Profit Maximization Wealth Maximization

Maximize long-term shareholder
Primary Goal Maximize short-term profits
wealth
Time Horizon Short-term focus Long-term focus
Measurement of
Focuses on immediate profits Considers overall financial well-being
Success
Takes into account future income and
Emphasis Primarily on current income
capital gains
Risk Tolerance May prioritize riskier strategies Tends to be more risk-averse
May lead to decisions that sacrifice
Decision Focuses on sustainable growth and
long-term sustainability for short-term
Making value creation
gains
Approach to
May involve risk-taking for Emphasizes risk mitigation and
Risk
immediate gains sustainability
Management
 PROFIT MAXIMIZATION VS WEALTH MAXIMIZATION

Considers the interests of

Stakeholder May not prioritize the interests of all
shareholders, employees, and other
Consideration stakeholders
stakeholders
Flexibility in May not be flexible in adapting to Adapts strategies to achieve long-term
Strategy changing market conditions success
Considers economic value added
Accounting Often relies on accounting profits
(EVA) and total shareholder return
Methods and short-term financial metrics
(TSR)

Use of May focus on metrics like Return on Considers metrics

Financial Investment (ROI) and Net Profit like Price-to-Earnings (P/E)
Ratios Margin ratio and Price-to-Book (P/B) ratio
 PROFIT MAXIMIZATION VS WEALTH MAXIMIZATION

Impact on
May lead to short-termism and a Generally promotes responsible and
Corporate
negative public perception ethical business practices
Reputation
 FINANCIAL PLANNING

•Financial Planning is the process of estimating the capital required and determining it’s competition. It is
the process of framing financial policies in relation to procurement, investment and administration of funds
of an enterprise.
•Objectives of Financial Planning
•Financial Planning has got many objectives to look forward to:
• Determining capital requirements- This will depend upon factors like cost of current and fixed
assets, promotional expenses and long- range planning. Capital requirements have to be looked with
both aspects: short- term and long- term requirements.
• Determining capital structure- The capital structure is the composition of capital, i.e., the relative
kind and proportion of capital required in the business. This includes decisions of debt- equity ratio-
both short-term and long- term.
• Framing financial policies with regards to cash control, lending, borrowings, etc.
• A finance manager ensures that the scarce financial resources are maximally utilized in the best
possible manner at least cost in order to get maximum returns on investment.
 IMPORTANCE OF FINANCIAL PLANNING

•Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding
the financial activities of a concern. This ensures effective and adequate financial and investment policies.
The importance can be outlined as-
1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that
stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise
financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of
the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily
through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company.
This helps in ensuring stability an d profitability in concern.
 CHARACTERISTICS OF A SOUND FINANCIAL PLAN:

A Financial manager should consider the following factors while finalizing a financial plan:
1.Simplicity:
•A financial plan should be so simple that it may be easily understood even by a layman. A
complicated financial structure creates complications and confusion.

2. Based on Clear-cut Objectives:

•Financial planning should be done by keeping in view the overall objectives of the company. It
should aim to procure funds at the lowest cost so that profitability of the business is improved.

3. Less Dependence on Outside Sources:

•A long-term financial planning should aim to reduce dependence on outside sources. This can be
possible by retaining a part of profits for ploughing back. The generation of own funds is the way of
financial operations. In the beginning, outside funds may be a necessity but financial planning
should be such that dependence on such funds may be reduced in due course of time.
 CHARACTERISTICS OF A SOUND FINANCIAL PLAN:

4. Flexibility:
The financial plan should not be rigid. It should allow a scope for adjustments as and when new situations emerge. There
may be a scope for raising additional funds if fresh opportunities occur. Similarly, idle funds, if any, may be invested in
short-term and low-risk bearing securities. Flexibility in a plan will be helpful in coping with the demands of the future.
5. Solvency and Liquidity:
Financial planning should ensure solvency and liquidity of the enterprise. Solvency requires that short-term and long-term
payments should be made on dates when these are due. This will ensure credit worthiness and goodwill to the concern.
6. Cost:
The cost of raising capital is an important consideration in selecting a financial plan. The selection of various sources
should be such that the cost burden should be minimum. As and when possible interest bearing securities should be
returned so that this burden is reduced.
7. Profitability:
•
A financial plan should adjust various securities in such a way that profitability of the enterprise is not adversely affected.
The interest bearing securities and other liabilities should be so adjusted that business is able to improve its profitability.
 CONSIDERATIONS IN FORMULATING
FINANCIAL PLAN
A financial plan should be carefully determined. It has long-term impact on the working of the enterprise.
The following variables should be kept in mind while selecting a financial plan:

1. Nature of the Industry:

The needs for funds are different for various industries. The asset structure, element of seasonality, stability of earnings
is not common factors for all industries. These variables will influence determining the size and structure of financial
requirements.
2. Standing of the Concern:
•The standing of a concern will influence a decision about financial plan. The goodwill of the concern, credit rating in
the market, past performance, attitude of the management is some of the factors which will be considered in
formulating a financial plan.
3. Future Plans:
•The future plan of a concern should be considered while formulating a financial plan. The plans for expansion and
diversification in near future will require a flexible financial plan. The sources of funds should be such which will
facilitate required funds without any difficulty.
Availability of Sources:
•There are a number of sources from which funds can be raised. The pros and cons of all available sources should
be properly discussed for taking a final decision on the sources. The sources should be able to provide sufficient
and regular funds to meet needs at various periods. A financial plan should be selected by keeping in view the
reliability of various sources.
General Economic Conditions:
•The prevailing economic conditions at the national level and international level will influence a decision about
financial plan. These conditions should be considered before taking any decision about sources of funds. A
favourable economic environment will help in raising funds without any difficulty. On the other hand, uncertain
economic conditions may make it difficult for even a good concern to raise sufficient funds.
Government Control:
•The government policies regarding issue of shares and debentures, payment of dividend and interest rate, entering
into foreign collaborations, etc. will influence a financial plan. The legislative restrictions on using certain
sources, limiting dividend and interest rates, etc.; will make it difficult to raise funds. So, government controls
should be properly considered while selecting a financial plan.
 FINANCIAL SYSTEM

•Finance plays an important role in economic and business of a country. System and effective flow is
needed for effective management used for business concern. Indian financial system has developed
constantly to infuse the new blood to the economic development of the country.
•The financial system of an economy provides the way to collect money from the people who have it and
distribute it to those who can use it best. So, the efficient allocation of economic resources is achieved by a
financial system that distributes money to those people and for those purposes that will yield the best
returns.
•The financial system is composed of the products and services provided by financial institutions, which
includes banks, insurance companies, pension funds, organized exchanges, and the many other companies
that serve to facilitate economic transactions. Virtually all economic transactions are effected by one or
more of these financial institutions. They create financial instruments, such as stocks and bonds, pay interest
on deposits, lend money to creditworthy borrowers, and create and maintain the payment systems of
modern economies.
 FINANCIAL SYSTEM

• A financial system refers to a system which enables the transfer of

money between investors and borrowers. A financial system could be
defined at an international, regional or organizational level. The term
“system” in “Financial System” indicates a group of complex and
closely linked institutions, agents, procedures, markets, transactions,
claims and liabilities within an economy.
 The financial products and services are based on the following fundamental objectives of any modern
financial system:
•
I. To provide a payment system
II. To give time value to money
III. To offer products and services to reduce financial risk or to compensate risk-taking for desirable
objectives
IV. To collect and disperse information that allows the most efficient allocation of economic resources
V. To create and maintain financial markets that provide prices, which indicates how well investments are
performing, determines the subsequent allocation of resources, and to maintain economic stability in the
markets.
 CHARACTERISTICS, IMPORTANCE, AND FUNCTIONS OF
THE INDIAN FINANCIAL SYSTEM

• Issuing and gathering of deposits.

• Supply of loans from the collected pool of money.
• The undertaking of financial transactions.
• Boosting the growth of stock markets and other financial markets.
• Setting up the legal commercial substructure.
• Provision of monetary and consultative services.
• Permits portfolio adaptation for existing assets.
• Allotment of chance and risk.
• It forges a connection between depositors and investors.
• Boosts depth and breadth of finances by increasing its horizon.
• It is responsible for capital creation.
• Adds time value to assets and money.
• To set up an entire payment structure and system.
• Allocate and dissipate the economic resources.
• To maintain the economic stability in the country and the
markets.
• To create markets that can judge the investment
performance.
COMPONENTS OF FINANCIAL SYSTEM
 FINANCIAL INTERMEDIARIES/FINANCIAL
INSTITUTIONS

• Different kinds of organizations/institutions which intermediate and facilitate financial transactions of both
individual and corporate customers are called as financial intermediaries or financial institutions. Basically they
are classified into two types:
• 1. Unorganized Sector
• 2. Organized Sector
• Unorganized Sector The sector that is not governed by any statutory or legal authority is known as unorganized
sector. This sector consists of the individuals and institutions for whom there are no standardized rules and
regulations governing their financial dealings. They are not under the supervision and control of RBI or any other
regulatory body. This sector consists of the individuals and institutions like Local money lenders, Pawn brokers,
Traders, Landlords, Indigenous bankers, etc., who lend money to needy persons and institutions. Organized Sector
The sector that is governed by some statutory or legal authority is known as organized sector. This sector consists
of the institutions like Commercial Banks, Non Banking Financial Institutions, etc. They are further classified into
two: 1. Capital Market Intermediaries 2. Money Market Intermediaries
• Capital Market Intermediaries
• Capital Market refers to the market for long term finance. The
intermediaries provide long term finance to individuals and corporate
customers. IDBI, SFCs, LIC, GIC, UTI, MFs, EXIM BANK,
NABARD, NHB, NBFCs (Hire Purchasing, Leasing, Investment and
Finance Companies) Government (PF, NSC) etc., are in the organized
sector providing long term finance.
• Money Market Intermediaries
• Money Market refers to the market for short term finance. The intermediaries
provide short term finance to individuals and corporate customers. RBI,
Commercial Banks, Co-operative Banks, Post Office Savings Banks,
Government (Treasury Bills) are in the organized sector providing short term
finance.
 CAPITAL MARKET

• Capital Market refers to the market for long term finance. Financial assets which have a long or indefinite maturity period
are dealt in this market. Capital Market is further classified into the following three: a) Industrial Securities Market b)
Government Securities Market c) Long-term Loans Market
• a) Industrial Securities Market - The financial market where industrial securities like equity shares, preference shares,
debentures, bonds, etc., are dealt with is called as Industrial Securities Market. In this market, the industrial concerns raise
their capital and debts by issuing appropriate securities. This market is again classified into the following two viz., Primary
Market and Secondary Market
• Primary Market - The financial market concerned with the fresh issue of industrial securities is called as primary market. It
is also called as new issue market. In this market, industrial securities which are issued for the first time to the public are
dealt.
• Secondary Market - The financial market concerned with the purchase and sale of already existing industrial securities is
called as secondary market. In this market, industrial securities which are already held by the individuals and institutions
are bought and sold. Generally, these securities are quoted in the stock exchanges. This market consists of all the stock
exchanges recognized by the Government of India. Securities Contracts (Regulation) Act, 1956 regulates the stock
exchanges and Bombay Stock Exchange is the main stock exchange in India which leads the other stock exchanges.
• Government Securities Market or Gilt-edged Securities Market - The financial market
where Government securities like stock certificates, promissory notes, bearer bonds,
treasury bills, etc., are dealt with is called as Government Securities Market. The long
term securities issued by the Central Government, State Governments,
Semi-government authorities like City Corporations, Port Trusts, etc., Improvement
Trusts, State Electricity Boards, All India and State level financial institutes and public
sector enterprises are bought and sold in this market.
• c) Long-term Loans Market - The financial market where long-term loans are provided
to the corporate customers is called as Long-term Loans Market. Development Banks
and Commercial Banks play a major role in this market. This market is classified into
three categories viz., Term loans market, Mortgages market and Financial guarantees
market:.
• Term loans market - This market consists of the industrial financing institutions which supply long term
loan to corporate customers. They are created by the Government both at the national level and regional
level. They provide term loans to corporate customers and also help them in identifying investment
opportunities. They also encourage new entrepreneurs and support modernization efforts. IDBI, IFCI,
ICICI, SFCs, etc., come under this market.
• Mortgages market - This market consists of the institutions which supply mortgage loan mainly to
individuals. The term ‘mortgage’ refers to the transfer of interest in a specific immovable property to
secure a loan.
• Financial guarantees market - This market consists of the institutions which provide financial guarantee to
individuals and corporate customers. The term ‘guarantee’ refers to a contract whereby one person
promises another person to discharge the liability of a third person in case of his default. There are
different types of guarantees prominent among them are Performance guarantee and Financial guarantee.
 MONEY MARKET

• Money Market refers to the market for short term finance. Financial assets which have a short period of maturity
are dealt in this market. Near money like Trade Bills, Promissory Notes, Short term Government Papers, etc., are
traded in this market. Composition of money market (Financial instruments dealt in money market)
• The money market comprises of the following:
• 1. Call money market
• 2. Commercial bills market
• 3. Treasury bills market
• 4. Short-term loan market
• Call money market - The market where finance is provided just against a call made by the borrower is called call
money market. In this market finance is provided for an extremely short period of time.
• Commercial bills market - The market where finance is provided by discounting of commercial bills is called as
commercial bills market. The term ‘commercial bills’ refer to the bills of exchange arising out of genuine trade
transactions.
• Treasury bills market - The market where finance is provided against the treasury bills is called as treasury bills
market. The term ‘treasury bill’ refers to the promissory notes or finance bills issued by the government for its
short-term finance requirements.
• Short-term loans market - The market where finance is provided in the form
of short term loans is called as short term loans market. The term ‘short-term’
refers to a period less than one year.
• Foreign Exchange Market The market where foreign currencies are bought
and sold against domestic currency is called foreign exchange market. In
other words, the system where the domestic currency is converted into
foreign currency and vice-versa is called as foreign exchange market.
 FINANCIAL RATE OF RETURN

• The term ‘financial rate of return’ refers to the percentage of income generated from the financial assets
throughout its effective life.
• For calculation of financial rate of return, two types of incomes are considered.
• The first type of income is the annual income generated i.e., dividend on shares or interest on securities.
• The second type of income is the capital appreciation.
• Capital appreciation means increase in the value of securities over and above the purchase price of the
securities.
• Financial rate of return acts as a tool for investment decisions of the public and other financial
institutions. The financial system should offer attractive rate of return on investments so that the
investors would be ready to invest their surplus funds in the financial markets. The return on Government
securities and bonds are generally less than the Commercial securities as the risk involved in
Government securities is comparatively less.
• The central bank of the country fixes the key interest rates like CRR, SLR, REPO rates, Reverse
REPO rates, etc. The rate of return on any security depends on the risk involved in the investment,
the duration of the investment, the purpose for which the investment is utilized, the risk free rate of
return, etc.
• The interest rate policy of the country is designed by the central bank to achieve the following
objectives:
• 1. To enable the government to borrow funds at a lower rate of interest
• 2. To ensure stability by striking a balance between the economic growth and inflation
• 3. To mobilize savings in the economy
• 4. To support specific sector through concessional lending rates.
• Mr. A subscribes to the equity shares of RKS Ltd., on 1/4/2014 for
• Rs. 1,00,000. After receiving 15% dividend from the company, he sells the
said equity shares for Rs. 1,20,000. What is the financial rate of return?
• Solution Investment value Rs. 1,00,000
• Income generated = Dividend + Capital appreciation = Rs. 15,000 + Rs.
20,000 = Rs. 35,000
• Financial rate of return = (Income generated / Investment) X 100
• = (35,000 / 1,00,000) X 100 = 35%
 FINANCIAL INSTRUMENTS

• Financial instruments refer to the documents that represent financial claim. A financial claim is claim to
the repayment of a certain amount of money at the end of a specified period along with interest or
dividend. Shares, Government Securities, Bonds, Mutual Funds, Units of UTI, Debentures, Bank
Deposits, Provident Funds, LIC Policies, Company Deposits, Post Office Certificates, etc., are some of
the examples of financial instruments. These instruments are classified into two types, viz., Primary
securities and Secondary securities.
• Primary Securities – These are the financial instruments that are issued directly to the savers by the
users of the funds. For example, shares or debentures issued by a joint stock company directly to the
public and institutions are called as primary securities.
• Secondary Securities – These are the financial instruments that are issued to the savers by some
intermediaries. For example, units issued by Unit Trust of India and other Mutual Fund Organizations
are called as secondary securities
 •Liquidity Function
•The most important function of a financial system is to provide money and monetary
assets for the production of goods and services. Monetary assets are those assets that
can be converted into cash or money easily without loss of value. All activities in a
financial system are related to the liquidity-either provision of liquidity or trading in
liquidity.
•Payment Function
•The financial system offers a very convenient mode of payment for goods and
services. The cheque system and credit card system are the easiest methods of
payment in the economy. The cost and time of transactions are considerably reduced.
•Saving Function
•An important function of a financial system is to mobilize savings and channelize
them into productive activities. It is through the financial system the savings are
transformed into investments.
 •Risk Function
•
The financial markets provide protection against life, health, and income risks. These
guarantees are accomplished through the sale of life, health insurance, and property
insurance policies.
•Transfer Function
•A financial system provides a mechanism for the transfer of resources across
geographic boundaries.
•Reformatory Functions
•A financial system undertaking the functions of developing, introducing innovative
financial assets/instruments services and practices and restructuring the existing
assets, services, etc, to cater to the emerging needs of borrowers and investors.
 C H A LL E N G E S F A C I N G T H E F I N A N C I A I
SERVICESINDUSTRY
•
•According to a recent survey, only 7% of financial companies have implemented a cloud-based
technology stack. The reluctance to adopt technological solutions is understandable. After all,
banking did quite well for hundreds of years without them.
•But the digital banking revolution has begun, and it will not end till the last institution has
crossed the digital divide.
•Whether your company makes the transition successfully or gets left behind will depend on one
thing: do you see digital banking technology as a problem, or the solution?
• Cybercrime in Finance.
• Regulatory Compliance in Finance.
• Big Data Use in Finance.
• AI Use in Finance
• Fintech Disruption of the Financial Service Industry
• Customer Retention in the Financial Services Industry
• Employee Retention in the Financial Service Industry
• Blockchain Integration in Finance

• Customer Experience in the Financial Services Industry

• Crossing the Digital Divide in Financial Services Marketing

•Sources of Finance:
•The sources of business finance are retained earnings, equity, term loans, debt, letter
of credit, debentures, euro issue, working capital loans, and venture funding, etc.
 CLASSIFICATION OF SOURCES OF FUNDS

• Businesses can raise capital through various sources of funds which are classified
into three categories.
• Based on Period — The period basis is further divided into three dub-division.
• Long Term Source of Finance — This long term fund is utilized for more than
five years. The fund is arranged through preference and equity shares and
debentures etc. and is accumulated from the capital market.
• Medium Term Source of Finance — These are short term funds that last more
than one year but less than five years. The source includes borrowings from a
public deposit, commercial banks, commercial paper, loans from a financial
institute, and lease financing, etc.
 •Short Term Source of Finance — These are funds just required for a year. Working Capital
Loans from Commercial bank and trade credit etc. are a few examples of these sources.
• Based on Ownership — These sources of finance are divided into two categories.
•Owner’s Fund — This fund is financed by the company owners, also known as owner’s capital.
The capital is raised by issuing preference shares, retained earnings, equity shares, etc. These are
for long term capital funds which form a base for owners to obtain their right to control the firm’s
management and operations.
> Burrowed Funds — These are the funds accumulated with the help of borrowings or loans for a
particular period of time. This source of fund is the most common and popular amongst the
businesses. For example, loans from commercial banks and other financial institutions.
Based on Generation — This source of income is categorized into two divisions.
•
•Internal Sources — The owners generated the funds within the organization. The
example for this reference includes selling off assets and retained earnings, etc.
•External Source — The fund is arranged from outside the business. For instance,
issuance of equity shares to public, debentures, commercial banks loan, etc.