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Finance

Finance & Banking Quiz 1
Finance Notes 2
Finance Notes 3
Finance Notes 4
Finance Notes 5
Finance Terms

Finance & Banking

1.         Union budget refers-‘excess of total expenditure (including interest payments and repayment of borrowings) over total receipts (including borrowings)’  as

a.      Revenue deficit                               b.      Fiscal deficit

c.      Budgetary deficit                             d.      Primary deficit

2.        Union budget refers–‘excess of total expenditure over total receipts, excluding the borrowings’ as:

a.      Budgetary deficit                             b.      Fiscal deficit

c.      Revenue deficit                                d.      Primary deficit

 

3.         ‘Primary Deficit’ in a budgetary exercise means:

a.         Budgetary deficit reduced by borrowings

b.         Excess of Govt. revenue expenditure over revenue receipts

c.          Fiscal deficits reduced by expenditure on interest payments

d.          Budgetary deficit minus interest payments

 

4.         Fiscal Deficit in a budgetary exercise means:

  1. Total income less govt. borrowing
  2. Total payments less total receipts
  3. Total payments less capital receipts
  4. Total expenditure less total receipts excluding borrowing

5.         Which of the following is called revenue deficit in the Central Government’s budget exercise?

  1. Total receipts less total expenses
  2. Total payments less total revenue
  3. Revenue receipts less revenue payments
  4. Capital receipts less capital payments

6.         Total money value of all final goods and services produced within the geographical boundaries of the country during a given period of time, generally a year, is known as:

a.      GNP                                                 b.      GDP

c.      National Income                              d.      NNP

7.        If we add ‘Income earned and received by nationals within the boundaries of foreign countries’, and subtract ‘Income received by foreign nationals from within the country’, to/from Gross Domestic Product, we arrive at:

a.      National Income                              b.      NNP

c.      GNP                                                 d.      Gross National Income

8.         Net National Product may be arrived at as under:

a.      GDP – Depreciation                        b.      GNP – Indirect Taxes

c.      National Income –Depreciation      d.      GNP – Depreciation

9.         National Income of a country may be defined as:

a.       NNP at market price of goods and services

b.       NNP at factor cost  OR  NNP at market price – (Indirect Taxes – Subsidy)

c.       GDP at factor cost – Depreciation

d.       GDP at market price – Depreciation

10.       Which concept helps to make a meaningful comparison between two or more currencies in the light of what they can buy in their own economies?

a.      Gross Domestic Product                  b.      Purchasing Power Parity

c.      National Income                              d.      Net National Product

11.       The most appropriate measure of a country’s economic growth is the rise in:

a.      Gross Domestic Product                  b.      Gross National product

c.      Net National Product                       d.      Per Capita Real Income

12.       National Income estimates, in India, is prepared by: _________

a.      Planning Commission                     b.      RBI

c.      Finance Ministry                             d.      C.S.O.

13.       ‘The Internal Group on Rural Credit and Micro Finance’ submitted its report in July 2005 and its recommendations include setting up of Rural Kiosks and Village Knowledge Centres. The Group was headed by:__________

a.      Sh. R. V. Gupta                                b.      Sh. H,R. Khan

c.      Sh L. C. Gupta                                 d.      Sh. A.S. Ganguly

14.       “Economic Survey” is the publication of :

a.     Central Statistical Organisation       b.      Ministry of Industry

c.     The Reserve Bank of India               d.      Ministry of Finance

15.       ‘Report on Currency and Finance’ is the publication of:

a.     Ministry of Finance                          b.      Central Statistical Organisation

c.     The Reserve Bank of India               d.      CMIE

16.       ‘Foreign Trade Policy’ is prepared by :

a.      Ministry of Finance                         b.      Ministry of Commerce

c.      RBI                                                  d.      Ministry of International Affairs

17.       Tapering down the incremental credit-deposit ratio and concentrating on investment in Govt. Securities or low risk assets, by a bank, is known as

a. Virtual Banking                               b.      Low risk Banking

c.      Narrow Banking                              d.      None of the above.

18.       In general, a bank may be categorised as a Universal Bank if:

  1. The bank has its branch network spread all over the world
  2. The bank is engaged in diverse kind of financial services which traditionally would be handled by different type of institutions
  3. The whole branch network of bank is fully computerised
  4. The bank has adopted USGAP fully

19.      Banking in ATMs, through Credit/Debit/Smart Cards, Internet Banking are the examples of

a. Smart banking                                 b.      New age banking

c.      Virtual banking                                d.      Universal banking

20.       The term ‘Green Shoe option’ is used in relation to:

  1. Environment Audit
  2. Capital mobilization by plantation companies
  3. Option to retain by a company that portion of equity that has been subscribed by the public over & above the issued amount
  4. Option to return the amount of capital that has been received in excess of issued amount

 Key

Q. 1 2 3 4 5 6 7 8 9 10
Ans. c b c d c b c d b b
Q. 11 12 13 14 15 16 17 18 19 20
Ans d d b d c b c b c c

 

 

Finance/Banking    related questions- 2

‘Bancassurance’

A French term referring to the selling of insurance through a bank’s established distribution channels.( Bank + insurance)

Retail banking  aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. It includes basic banking services to individual customers including   investment services such as wealth management, brokerage accounts, private banking and retirement planning.

‘Investment Bank – IB’

A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.

Underwriting’

The word “underwriter” is said to have come from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment.

‘Initial Public Offering – IPO’

The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an Investment Banker/underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Also referred to as a “public offering” “going to public”

‘Private Placement’

The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

Going to Public

Going public refers to a private company’s initial public offering (IPO), thus becoming a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding; venture capitalists may use IPOs as an exit strategy – that is, a way of getting out of their investment in a company.

‘Bridge Loan’

A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory

‘Lien’

When a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to meet the obligations of a loan contract.

‘Encumbrance’

A claim against a property by another party. Encumbrance usually impacts the transferability of the property and can restrict its free use until the encumberance is removed. The most common instances of an encumbrance occurs in real estate such as an outstanding mortgage or unpaid property taxes. However, encumbrance can also be used in an accounting context to refer to restricted funds inside an account that are to be used only for a specific liability

‘Real Estate’

Land plus anything permanently fixed to it, including buildings, sheds and other items attached to the structure. Although, media often refers to the “real estate market” from the perspective of residential living, real estate can be grouped into three broad categories based on its use: residential, commercial and industrial. Examples of real estate include undeveloped land, houses, condominiums, townhomes, office buildings, retail store buildings and factories.

‘Fiscal Deficit’

When a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.

Fiscal Policy’

Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy.

‘Monetary Policy’

The actions of a central bank (RBI) that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rates( Repo/Bank rate), or changing reserve ratios.

‘Earnings Per Share – EPS’

The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio. P/E ratio

Cash Flow

An accounting statement called the “statement of cash flows”, which shows the amount of cash generated and used by a company in a given period. It is calculated by adding non-cash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company’s financial strength.

 

Economy related Terms :  Finance 03_2012

Fiscal Deficit – >Total Expenditure – {(Total Receipt-market borrowings)}
Capital Budget:-Capital receipts and payments + loans and advances granted by Union Govt to S & UT Govt, Govt. co, corporations and other parties +market loans + borrowings from RBI and other institutions through sale of Tr. Bills  + loans acquired from foreign govt.
Capital Expenditure: – On acquisition of assets  – land and building and machinery + investment in shares +loans and advances sanctioned by the center to SG, UT and PSU.
Current Account Deficit- Export – Imports
Gross Domestic Product- Mkt. Value of goods and services manufactured within the country during a financial year.
Gross National Product- GDP + Income earned from investments abroad by residents – Income earned from domestic mkt by foreign investors. It is made of three sectors viz; Agricultural , Industrial  and Services.( ie primary, secondary and tertiary sectors)
Monetised Deficit- Level of support by RBI to Central Govt. borrowings.
Peak Rate – Highest rate of Customs Duty  on an item.
Plan Expenditure.- Revenue exp + Capital exp  + Central Assistance of S & UT
Primary Deficit- Fiscal Deficit – Interest Payment
Revenue Deficit- Revenue exp – Revenue Receipt
Revenue Budget- Revenue Receipt and Revenue Exp (Details)
Revenue Surplus-  Opp of Revenue Deficit
Twin Deficit- Refers to Trade Deficit and Budget Deficit
Value Added Tax-  VATTax levied on a firm as a percentage of its value added.To avoid multiplying effect of taxes at different stages.Tax is based on Value of output – Value of input.Tax on value addition.
Balance of payment- Statement of  Net outstanding receivable or payable of Trade and financial transactions (all economic transactions) with other countries.
Current Account Deficit- Expenditure – Receipt in BOP if in deficit
Current Account Surplus- As above if in excess.
Foreign Direct Investment- Investment of a Foreign co. or its subsidiary
Foreign Institutional Investment-  Inv.of a foreign institution in the country. Unlike FDI, FIIs bring portfolio investment i.e. investment in shares, debentures , bonds etc.
MODVAT- Way of giving relief of Excise duties borne by suppliers to final manufacturer of goods
CENVAT- Replacement of MODVAT. For reducing cascading effect of indirect taxes on finished products. More extensive with most goods brought under its purview.
Ad-valorem duties- Duties as a certain % on the price of the product.
Consolidated Fund- Revenues from Govt. + Loans raised  + recoveries of loans.
Public Account- Account where money received through transaction not related to Consolidated Fund  is kept.
Contingency Fund- To meet urgent, unforeseen expenditures. Can’t wait for authorization by Parliament.
Per Capita Income- Income of the country / population
Countervailing Duties- Levied on imports that may lead to price in the domestic market. For discouraging unfair trade practices by other countries.
MARGIN TRADING- Investor purchases securities by borrowing a portion of the purchase value. Only Corporate brokers with NET WORTH above Rs. 3 crores would be eligible to participate.

 

Economic Indicators: Gross Domestic Product (GDP)

 

Background
The gross domestic product (GDP) is the godfather of the indicator world. As an aggregate measure of total economic production for a country, GDP represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted). 

Presented only quarterly, GDP is most often presented on an annualized percent basis. Most of the individual data sets will also be given in real terms, meaning that the data is adjusted for price changes, and is therefore net of inflation

The GDP is an extremely comprehensive and detailed report. In fact, reading the GDP report brings us back to many of the indicators covered in earlier tutorial topics, as GDP incorporates many of them: retail sales, personal consumption and wholesale inventories are all used to help calculate the gross domestic product. Various chain-weighted indexes discussed in earlier topics are used to create Real GDP Quantity Indexes with a current base year of 2000.

 


What it Means for Investors
Real GDP is the one indicator that says the most about the health of the economy and the advance release will almost always move markets. It is by far the most followed, discussed and digested indicator out there – useful for economists, analysts, investors and policy makers. The general consensus is that 2.5-3.5% per year growth in real GDP is the range of best overall benefit; enough to provide for corporate profit and jobs growth yet moderate enough to not incite undue inflationary concerns. If the economy is just coming out of recession, it is OK for the GDP figure to jump into the 6-8% range briefly, but investors will look for the long-term rate to stay near the 3% level. The general definition of an economic recession is two consecutive quarters of negative GDP growth. 

While the value of both exports and imports are included in the GDP report, imports are subtracted from total GDP, meaning that all consumer purchases of imported items are not counted as contributions toward GDP. Because the U.S. runs a current account deficit, importing far more than is exported, reported GDP figures have a slight drag on them. A related measure provided in the report, gross national product (GNP), goes one step further by only counting the value of goods and services produced by labor and property within the United States.

The “corporate profits” and “inventory” data in the GDP report are a great resource for equity investors, as both categories show total growth during the period; corporate profits data also displays pre-tax profits, operating cash flows and breakdowns for all major sectors of the economy. 

The biggest downside of this data is its lack of timeliness; investors only get one update per quarter and revisions can be large enough to significantly change the percentage change in GDP.

The Bureau of Economic Analysis (BEA) even supplies its own analysis of the quarterly data, presenting several useful documents that condense the massive release down to a manageable and readable size. They also provide an annual analysis of data that segments results down to the industry level – a very useful tool for both equity and fixed-income investors who are interested in particular industries related to their holdings.

Strengths:

  • GDP is considered the broadest indicator of economic output and growth.
  • Real GDP takes inflation into account, allowing for comparisons against other historical time periods. 
  • The Bureau of Economic Analysis issues its own analysis document with each GDP release, which is a great investor tool for analyzing figures and trends, and reading highlights of the very lengthy full release


Weaknesses:

  • Data is not very timely – it is only released quarterly.
  • Revisions can change historical figures measurably (the difference between 3% and 3.5% GDP growth is a big one in terms of monetary policy)

The Closing Line

While quarter-to-quarter figures can show some volatility, long-term trends in GDP growth remain the single most conclusive piece of information on the economy as a whole. This indicator is a must-know for investors in all asset classes.

World Bank- Different Arms

Arms of world bank Role
  1. International Bank for Reconstruction and Development (IBRD)
Give loans @market rates to middle class and poor countries.
  1. International Development Association (IDA)
Give loans @ZERO interest rate to poor countries. +knowledge sharing, health education etc.
  1. Multilateral Investment Guarantee Agency (MIGA)
Loans and insurance to private companies, when they invest in Developing countries.
  1. International Centre for Settlement of Investment Disputes (ICSID)
To settle investment disputes between foreign investors and their host developing countries.
  1. International Finance Corporation (IFC)
  • When foreign investor, wants to start business in developing country, IFC provides financing and technical advice and assistance, works as a catalyst.
  • So, Aim of IFC= boost private investment in developing countries.

 

What is fiscal Cliff?

• American economy was going through bad phase due to sub-prime crisis.

• So President Obama had to give stimulus to boost this economy (tax-cuts to companies, buying toxic assets from banks= examples of fiscal-stimulus.)

• Fiscal-Stimulus are similar to Steroids. If an athlete takes steroids, it will temporary improve his performance and take him towards the peak performance.

• But once you stop giving him steroids, his performance will suddenly decline. It will feel like falling off a cliff.

1.              Fiscal cliff term refers to more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after 1st January 2013.( now postponed)

2.              Many economists say these new taxes and spending cuts would be too much deficit reduction, too suddenly, for a weak economy. It’ll lead to an economic recession.

 

 

Why is Fiscal cliff bad for US Economy?

• When people have to pay more taxes= less money in their hands = less money to spend on cinema and Christmas vacations= less demand of products= not good for economy.

• When Government reduces research in space, military programs = many people  affected directly or indirectly. E.g. less funds for space research = less demand for electronic instruments, metals, pen-pencil-rubber required in those programs.

• Again, If parents were working in some Government-research program/ private company, lost jobs or their salary was reduced, they’d not hire maids or babysitters anymore, they’ll buy less clothes and toys for their kids, they’ll not go to some holiday resort during vacations. So indirectly many sectors get affected.

If President Obama’s plan is carried out, then

1.              Middle class families of USA, will have to pay average $2000 more in taxes every year. And $2000 is a big amount given that many people in USA don’t earn more than $40,000 a year. So imagine the reduction in their purchasing power.

2.              Overall, American public will have to pay $500 billion more in taxes.

3.              More than 10 lakh people will become jobless.

What is this fiscal consolidation? ( in Indian context)

Fiscal consolidation means doing everything to fix the fiscal deficit problem in its root and preventing heavy fiscal deficits situation from occurring in future.

But How can we do that?

Just try to reduce the outgoing money and increase the incoming money.

That means

1.              Cut down subsidies.

2.              Stop leakages in subsidies.

3.              Reform the tax structure (implement GST).

4.              Improve the performance of PSUs.

5.              Recover blackmoney

6.               Take austerity measures+ Policy reforms such as FDI (to create environment conductive for economy = that will automatically increase productivity and tax collection.  And of-course  give focus to  the second option.)