Download - Sources of finance &
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SOURCES OF FINANCE & FINANCIAL
INSTRUMENTS
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Negotiated
Spontaneous
TYPES OF FINANCE
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FINANCE
SHORT TERM FINANCE
MEDIUM TERM FINANCE
LONG TERM FINANCE
CLASSIFICATION ACCORDING TO TERM FINANCE
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Short term finance are required primarily
to meet working capital requirements.
The focus is on maintaining liquidity at a
reasonable cost.
SHORT TERMS FINANCE
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Short Term
Finance
Working Capital finance
Trade Credit
Inter-Corporate Deposits
Factoring
Commercial Paper
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Medium term finance is defined as money
raised for a period for 1 to 5 years.
The medium term funds are required by a
business mostly for the repaired and
modernizing of machinery.
MEDIUM TERM FINANCE
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Medium Term Finance
Commercial Banks &
State Financial
Institutions
Lease Financing
Hire Purchase
External Commercia
l Borrowings
Euro & Foreign Bonds
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Long term finance refer to
those requirements of funds which are for
a period exceeding 5-10 years.
LONG TERM FINANCE
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Long term
finance
ShareDebentures
New Debt Instrument
s
Retained Earnings
Depository
Schemes
Venture Capital
Securitization
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Financial instruments are contracts that
gives rise to Financial asset to one
equity.
Financial liability or and equity
instrument to another entity.
MEANING OF FINANCIAL INSTRUMENT
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FINANCIAL INSTRUMENTS
PRIMARY INSTRUMENTS
Receivables, PayablesLoans and advances
Debentures and bondsInvestment in equity instruments,
Cash and bank balances
DERIVATIVE INSTRUMENTS
Options, futures,swaps,cap,collar,flo
or, forward rate agreement(fra) etc.
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Deposits
SDRs
Borrowings
Loans
Shares and other equity
Debentures or bonds
Other account receivables
and payables
Financial derivatives
Letter of guarantee
Letter of credit
Financial commitments
Pledged financial assets
TYPES OF FINANCIAL INTRUMENTS
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Deposits include all claims on the central
bank and other depository corporations,
represented as bank deposits
Fall into two categories:
Transferable deposits
OTHER deposits (non-transferable
deposits).
DEPOSITS
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SDRs are international reserve assets created by the IMF
and allocated to member countries to supplement existing
official reserves.
SDRs are not treated as the IMF’s liability. SDRs are
held only by the IMF member countries and by a limited
number of international financial organizations.
SDR holdings are held exclusively by official authorities,
which are normally the central banks.
SDRs(Special Drawing Rights)
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Normally, borrowings are not considered as a
separate financial instrument.
Borrowing is carried out through other
financial instruments,
For example, through loans, deposits, etc
BORROWINGS
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Loans are financial assets that are created when a creditor lends
funds directly to a debtor(borrower),evidenced by non-
negotiable documents.
Short-term loans – short-term loans normally involve loans
with maturity of one year or less.
Medium-term loans - depending on practices applied in
countries, loans with maturity from 1 to 5 years are classified as
medium-term loans.
Long-term loans – long-term loans include the loans with
maturity that exceeds those of short- and medium-term loans.
LOANS
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Shares are financial instruments that represent or provide
evidence on ownership rights of the holders over
enterprises or organizations, including financial
institutions.
Shares and other equity comprise all instruments and
records acknowledging, after the claims of all creditors
have been met, claims on the residual value of a
corporation
SHARES
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Types of equity are:
1) Ordinary shares that
provide for ownership right in an enterprise or
corporation;
2) Preferred shares that
provide right for claim over residual value of
an enterprise, equity participation in limited
liability companies.
EQUITY
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The term ‘creditor ship securities’ also known as
‘debt capital’ represents debentures and bonds.
They occupy a significant place in the financial
plan of the company.
A debenture or a bond is an acknowledgement
of A debt. It is a certificate issued by a company
under its seal acknowledging A debt due by its
holders.
DEBENTURES OR BONDS
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Unsecured and secured debentures
Redeemable and irredeemable debentures
Zero interest bonds/debentures
Zero coupon bonds
Guaranteed debentures
Collateral debentures
TYPES OF DEBENTURES AND BONDS
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Accounts receivable/payable include
trade credits, advances and other
receivables or payables.
This category includes also items such as
debtors and creditors, tax liabilities and
other accounts receivable/payable.
OTHER ACCOUNT RECEIVABLES AND PAYABLES
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Financial derivatives are financial instruments that are
linked to specific assets (other financial instruments, goods).
By nature, these instruments are similar to contingent
instruments.
Claims and liabilities related to financial instruments will
arise after a specific period of time. In this case, contingency
of an instrument relates only to the time regardless of
occurrence of any other event or condition
FINANCIAL DERIVATIVES
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In a forward contract, the
counterparties agree to exchange, on
a specified date,
a specified quantity of an
underlying item (financial or real asset) at
an agreed-upon contract price.
FORWARDS
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A future contract is an
agreement between seller and the buyer
that calls for the seller to deliver to the
buyer a specific quantity, grade of an
identified commodity at a fixed time in
the future and at a price agreed to when
the contract is first entered into.
FUTURES
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The buyer of an option acquires the right but
not the obligation to purchase or sell a specific
asset. I.E. The right to exercise the option
The option obtains a market value.
The statistical recording of options should be
carried out in the same way as for the forwards.
OPTIONS
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A swap represents a spot purchase (sale) of a financial asset with a condition of forward sale (purchase).
Swap agreement is a type of a forward, in which the parties agree to exchange different currencies, that is to buy (sell) any currency for another currency
Types of SWAPs Interest rate Swaps Currency Swaps
SWAPS
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Guarantee involves an
obligation by the economic entity to
assume the other entity’s financial
obligation if that other party defaults.
LETTER OF GUARANTEE
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A letter of credit is an obligation to make
payment against documents received.
The amounts to be paid upon receipt of the
documents become liabilities of the bank.
Letters of credit are used to finance
international trade operations
LETTER OF CREDITS
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Equity Warrants- The equity warrants is a paper attached
to a bond preferred stock that gives the holder the right to
buy a fixed number of company’s equity shares at a
predetermined price at a future date.
Secured Premium Notes(SPNs)- The secured premium
note is a tradable instrument with detachable warrant
against which the holder gets equity shares after a fixed
period of time.
INNOVATIVE FINANACIAL INSTRUMENTS
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Callable Bond- A callable bond is a bond that can be called in and paid off by issuer at a price, called the ‘call price’ stipulated in the bond contract.
It gives the advantage to issuer company to call the existing bonds if the interest rates fall in the market below the bond’s coupon rate.
• Floating/Variable or Adjustable Rate Bonds- The rate of interest payable on these bonds varies periodically depending upon the market rate of interest payable on the gilt-edged securities.
• Deep Discount Bonds(DDBs)- The deep discount bond does not carry any interest but it is sold by the issuer company at a deep discount from its eventual maturity(normal) value.
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PREPARED BYRENUKADEVI.KADALI