ASSIGNMENT

ON
Short Notes for Viva (BBA: BIN.101-410)

Prepared by

Name Student ID Course Code

Md. Abu Bakar Siddik 1710537106 BIN:101-108
Md. Ariful Islam 1710237129 BIN: 109-206
Md. Hisbullah 1710437132 BIN: 207-304
Md. Al-Amin 1710837122 BIN: 305-402
Zahidul Islam 1710637108 BIN: 403-410

Submitted to
Md. Sahadat Hossain
Assistant Professor
Department of Banking & Insurance
University of Rajshahi

DEPARTMENT OF BANKING AND INSURANCE

UNIVERSITY OF RAJSHAHI
07th December, 2022
 Principles and Practice of Banking
(BIN-101)
Bank
A bank is a financial institution that is licensed to accept checking and savings deposits and make
loans. Banks also provide related services such as individual retirement accounts (IRAs),
certificates of deposit (CDs), currency exchange, and safe deposit boxes.

Banker
A person who owns a bank or has an important job at a bank

Commercial Bank
A commercial bank is a financial institution which accepts deposits from the public and
gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with corporations or a
large/middle-sized business to differentiate it from a retail bank and an investment bank.
Commercial banks include private sector banks and public sector banks.

Central Bank
A central bank is a public institution that manages the currency of a country or group of countries
and controls the money supply – literally, the amount of money in circulation. The main objective
of many central banks is price stability. In some countries, central banks are also required by law
to act in support of full employment.

Automated Clearing House (ACH)

It is a computer-based clearing and settlement facility established to process the exchange of

electronic transactions between participating depository institutions. Such electronic
transactions take the place of paper cheques.

BACH (Bangladesh Automated Clearing House) is the first ever electronic clearing house
of Bangladesh. It has two components: the Automated Cheque Processing System (ACPS) and
the Electronic Funds Transfer (EFT).

Balance of Payment is the summation of imports and exports made between one country and other
countries that it trades with. Balance of Payment of a country is defined as the record of all
economic transactions between the residents of a country and the rest of the world in a year.
These transactions are made by individuals, firms and government bodies. Thus balance of
payments includes all visible and non-visible transactions of a country in a year. All trades
conducted by both the private and public sectors are accounted for in the BOP in order to
determine how much money is going in and out of a country. If a country has received money,
this is known as a credit, and if a country has paid or given money, the transaction is counted
as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities
(debits) should balance, but in practice this is rarely the case. BOP tells the observer if a country
has a deficit or a surplus economy.

Balance of Trade is the difference in value over a period of time between a country’s imports and
exports.

Multiplication of Money: In monetary economics, a money multiplier is one of various closely

related ratios of commercial bank money to central bank money under a fractional-reserve
banking system. Most often, it measures the maximum amount of commercial bank money that
can be created by a given unit of central bank money.

Financial Inclusion is the delivery of financial services at affordable costs to sections of

disadvantaged and low-income segments of society in contrast to financial exclusion where
those services are not available or affordable.

Mortgage is a contract whereby a borrower provides a lender with a lien on real property as
security against a loan.

Collateral is a form of security such as life insurance policies or s no hares use to secure a bank
loan.

Security refers to anything pledged to cover a loan and interest thereupon for stipulated period
of time.

Bill of exchange: A non-interest-bearing written order used primarily in international trade that
binds one party to pay a fixed sum of money to another party at a pre-determined future date.

Monetary policy: The actions of a central bank, currency board or other regulatory committee 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 rate, or changing
the amount of money banks need to keep in the vault (bank reserves).

Fiscal policy: In economics and political science, fiscal policy is the use of government
revenue collection (taxation) and expenditure (spending) to influence the economy. The two
main instruments of fiscal policy are changes in the level and composition of taxation and
government spending in various sectors. Through fiscal policy, regulators attempt to improve
unemployment rates, control inflation, stabilize business cycles and influence interest rates inan
effort to control the economy.

Gross domestic product (GDP) is the market value of all officially recognized final goods and
services produced within a country in a given period of time.

Gross national product (GNP) is the market value of all the products and services produced in one
year by labor and property supplied by the residents of a country. Unlike Gross Domestic
Product (GDP), which defines production based on the geographical location of production,
GNP allocates production based on ownership.

Dear-money policy: A policy in which a government reduces the amount of money being
spent in an economy by raising interest rates, making it more expensive to borrow money.

Dear money: money which has to be borrowed at a high interest rate, and so restricts
expenditure by companies.

Clearing House: A clearing house is a financial institution that provides clearing and
settlement services for financial and commodities derivatives and securities transactions.

Call Money: Money loaned by a bank that must be repaid on demand. Unlike a term loan,
which has a set maturity and payment schedule, call money does not have to follow a fixed
schedule.

Money laundering refers to a financial transaction scheme that aims to conceal the identity,
source, and destination of illicitly-obtained money.

Rate of return: The gain or loss on an investment over a specified period, expressed as a
percentage increase over the initial investment cost.

Mobile banking
Mobile banking is a system that allows customers of a financial institution to conduct a number
of financial transactions through a mobile device such as a mobile phone or personaldigital
assistant.

Capital markets: are financial markets for the buying and selling of long-term debt- or equity-
backed securities.

Soft currency: A currency with a value that fluctuates as a result of the country's political or
economic uncertainty. As a result of the of this currency's instability, foreign exchange dealers
tend to avoid it. Also known as a "weak currency".

Hard currency: A currency, usually from a highly industrialized country, that is widely accepted
around the world as a form of payment for goods and services. A hard currency is expected to
remain relatively stable through a short period of time, and to be highly liquid in the forex
market.

Plastic money: debit cards, credit cards, used instead of cash.

Investment Bank - IB'

An investment bank (IB) is a financial intermediary that performs a variety of services.
Investment banks specialize in large and complex financial transactions such as underwriting,
acting as an intermediary between a securities issuer and the investing public, facilitating
mergers and other corporate reorganizations, and acting as a broker and/or financial adviser for
institutional clients.

Repo rate: is the rate at which the central bank of a country lends money to commercial banks
in the event of any shortfall of funds. Repo rate is used by monetary authorities to control
inflation.

Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase
government securities form central bank and lend money to the banking regulator, thus earning
interest.

Reverse repo rate is the rate at which central bank borrows money from banks.

Unit banking refers to a bank that is a single, usually small bank that provides financial
services to its local community. A unit bank is independent and does not have any connecting
banks — branches — in other areas.

Branch banking refers to a bank that is connected to one or more other banks in an area or
outside of it; to its customers, this bank provides all the usual financial services but is backed
and ultimately controlled by a larger financial institution.

Green Banking is a very general term which can cover a multitude of areas from a Bank being
environmentally friendly to how their money is invested.

Green Banking considers all the social and environmental / ecological factors with an aim to
protect the environment and conserve natural resources.

Chain Banking

Conceptually a form of bank governance that occurs when a small group of people control at
least three banks that are independently chartered. Usually, the controlling parties are majority
shareholders or the heads of interlocking directorates.

Certificate Of Deposit - CD'

A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed
interest rate and can be issued in any denomination aside from minimum investment
requirements.
Capital Asset Pricing Model - CAPM'

The capital asset pricing model (CAPM) is a model that describes the relationship between
systematic risk and expected return for assets, particularly stocks.

Syndicated Loan'

A syndicated loan, also known as a syndicated bank facility, is a loan offered by a group of
lenders – referred to as a syndicate – that work together to provide funds for a single borrower.
The borrower could be a corporation, a large project or a sovereignty, such as a government.
The loan can involve a fixed amount of funds, a credit line or a combination of the two

The 'Rule of 72' is a simplified way to determine how long an investment will take to double,
given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can
get a rough estimate of how many years it will take for the initial investment to duplicate itself

Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed.
Short selling is motivated by the belief that a security's price will decline, enablingit to be
bought back at a lower price to make a profit.

Parallel Loan' A type of foreign exchange loan agreement that was a precursor to currency
swaps. A parallel loan involves two parent companies taking loans from their respective
national financial institutions and then lending the resulting funds to the other company's
subsidiary.

A credit risk is the risk of default on a debt that may arise from a borrower failing to make required
payments

Market interest rate: The prevailing rate of interest offered on cash deposits, determined by
demand and supply of deposits and based on the duration (the longer the duration, the higherthe
rate) and amount (the higher the amount, the higher the rate) of deposits

Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991
(Amended up to 2013) are termed as Scheduled Banks.

Non-Scheduled Banks: The banks which are established for special and definite objective and
operate under the acts that are enacted for meeting up those objectives, are termed as Non-
Scheduled Banks. These banks cannot perform all functions of scheduled banks.
Financial Market

Financial Market is a means of bringing together buyers and sellers to make transactions.
Bonds, stocks and assets are traded in financial market. Financial markets are traditionally
segmented into money market and capital market.

Stock Market: The stock market is the market in which shares of publicly held companies are
issued and traded either through exchanges or over-the-counter markets. Also known as the
equity market, the stock market is one of the most vital components of a free-marketeconomy,
as it provides companies with access to capital in exchange for giving investors a slice of
ownership in the company. The stock market makes it possible to grow small initial sums of
money into large ones, and to become wealthy without taking the risk of starting a business or
making the sacrifices that often accompany a high-paying career.

Share Market is a highly organized market facilitating the purchase and sale of securities and
operated by professional stockbrokers and market makers according to fixed rules. Share
market is a marketplace where securities are regularly traded.

Primary Market is a market where new securities are bought and sold for the first time.

Secondary Market is a market where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The national exchanges - such asthe
DSE and CSE are secondary markets.

Money Market is a segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. The money market is used by participants as a
means for borrowing and lending in the short term, from several days to just under a year.
Money market securities consist of negotiable certificates of deposit, banker’s acceptances,
treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements.

Capital Market is a market for medium to long-term financial instruments such as — shares
and bonds issued by the government, corporate borrowers and financial institutions. In other
words, it is a market that brings together users and providers of capital. It is a marketplace
where debt or equity securities are traded.

Treasury Bill is government promissory letter. The government receives short-term loan
through it. The written document by which the government is pledged to pay the due loan back
with interest after three months is called Treasury Bill. So, treasury bill is a short-term debt
obligation backed by the government with a maturity of less than one year. The interest is the
difference between the purchase price and the price paid either at maturity (face value)or the
price of the bill if sold prior to maturity.
Treasury Notes are bonds of 2, 5 or 10 years. They are usually issued at face value and the
client receives regular interest payments. Treasury bonds are long term bonds (30 years) and
work similarly to notes. Treasury bills, notes and bonds are marketable securities the
government sells in order to pay off maturing debt and to raise the cash needed to run the
federal government. When a person buys one of these securities, s/he is lending his/her money
to the government of the Bangladesh. Treasury bills, notes and bonds are securities that have a
stated interest rate that is paid semi-annually until maturity. What makes notes and bonds
different are the terms to maturity. Notes are issued in two-, three-, five- and 10-year terms.
Conversely, bonds are long-term investments with terms of more than 10 years.

Bill of exchange: is a written and unconditional order issued by seller (the drawer) to buyer
(the drawee) who is bound to pay the price of products to the carrier mentioned on the bill at a
predetermined future date. The drawee accepts the bill by signing it, thus converting it into a
post-dated check and a binding contract.

Narrow Money: A category of money supply that includes all physical money like coins and
currency along with demand deposits, saving accounts and other operational liquid assets held
by the central bank.

Broad Money: In economics, broad money refers to the most inclusive definition of the money
supply. Since cash can be exchanged for many different financial instruments and placed in
various restricted accounts, it is not a simple task for economists to define how much moneyis
currently in the economy. Therefore, the money supply is measured in many different ways.
Broad money can also include Treasury Bills and gilts. These financial securities are seen as
‘near money’.

Foreign Exchange: The exchange or conversion of one currency into another currency. It also
refers to the global market where currencies are traded. Exchange (Conversion) Rate: The value
or price of a nation’s currency in terms of another currency.

Floating Exchange Rate: When the exchange rate of a currency is determined by the demand and
supply of that currency then it is called floating exchange rate. Floating Exchange Rate is a
country’s exchange rate regime where its currency is set by the foreign-exchange market
through supply and demand for that particular currency relative to other currencies. Thus,
floating exchange rates change freely and are determined by trading in the foreign exchange
market. Value Chain is a chain of activities that a firm operating in a specific industry performs
in order to deliver a valuable product or service for the market. It is a high-level model of how
businesses receive raw materials as input, add value to the raw materials through various
processes and sell finished products to customers.

Poverty Gap is the average shortfall of the total population from the poverty line. This
measurement is used to reflect the intensity of poverty. The poverty line that is used for
measuring this gap is the amount typical to the poorest countries in the world combined with
the latest information on the cost of living in developing countries. The poverty line isindicated
by the widely accepted international standard for extreme poverty.

Automated Clearing House (ACH) is a computer-based clearing and settlement facility

established to process the exchange of electronic transactions between participating depository
institutions. Such electronic transactions take the place of paper cheques.

BACH (Bangladesh Automated Clearing House) is the first ever electronic clearing house
of Bangladesh. It has two components: the Automated Cheque Processing System (ACPS) and
the Electronic Funds Transfer (EFT).

Balance of Payment is the summation of imports and exports made between one country and other
countries that it trades with. Balance of Payment of a country is defined as the record of all
economic transactions between the residents of a country and the rest of the world in a year.
These transactions are made by individuals, firms and government bodies. Thus balance of
payments includes all visible and non-visible transactions of a country in a year. All trades
conducted by both the private and public sectors are accounted for in the BOP in order to
determine how much money is going in and out of a country. If a country has received money,
this is known as a credit, and if a country has paid or given money, the transaction is counted
as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities
(debits) should balance, but in practice this is rarely the case. BOP tells the observer if a country
has a deficit or a surplus economy.

Balance of Trade is the difference in value over a period of time between a country’s imports and
exports.

Multiplication of Money: In monetary economics, a money multiplier is one of various closely

related ratios of commercial bank money to central bank money under a fractional-reserve
banking system. Most often, it measures the maximum amount of commercial bank money that
can be created by a given unit of central bank money.

Financial Inclusion is the delivery of financial services at affordable costs to sections of

disadvantaged and low-income segments of society in contrast to financial exclusion where
those services are not available or affordable.

Mortgage is a contract whereby a borrower provides a lender with a lien on real property as
security against a loan.

Collateral is a form of security such as life insurance policies or shares use to secure a bank
loan.

Security refers to anything pledged to cover a loan and interest thereupon for stipulated period
of time.
Negotiable instruments: Cheque, bill of exchange, promissory note, demand draft, bank note,
treasury note and government note Non-negotiable instruments: Postal order, money order,
payment order and share certificate Negotiable Instrument is a document guaranteeing the
payment of a specific amount of money (either on demand or at a set time) without conditions
in addition to payment imposed on the payer. They payment is given to the personnamed on the
instrument or to the bearer. A negotiable instrument is usually in the form of cheque, draft, bill
of exchange, promissory note or acceptance. A check is considered a negotiable instrument.
This type of instrument is a transferable and signed document that promises to pay the bearer
a sum of money at a future date or on demand. Insurance is a contract relationship between the
customer and the company which deals in risk to property and life of costumers for a certain
period of time.

Account Reconciliation is a process with the help of which the account balance can be easily
verified. It is usually done at the end of the week, month, financial year or at the end of any
financial period.

A derivative is a financial contract that derives its value from an underlying asset. The buyer
agrees to purchase the asset on a specific date at a specific price.

SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the
form of cash, or gold or govt. approved securities (Bonds) before providing credit to its
customers.

Bank rate, also referred to as the discount rate, is the rate of interest which a central bank
charges on the loans and advances that it extends to commercial banks and other financial
intermediaries. Changes in the bank rate are often used by central banks to control the money
supply.

Inflation is as an increase in the price of bunch of Goods and services that projects the Indian
economy. An increase in inflation figures occurs when there is an increase in the average level
of prices in Goods and services. Inflation happens when there are fewer Goods and more
buyers; this will result in increase in the price of Goods, since there is more demandand less
supply of the goods. New rate: P-P: 5.65%, M.A: 6.10%

Deflation is the continuous decrease in prices of goods and services. Deflation occurs when
the inflation rate becomes negative (below zero) and stays there for a longer period.

The Prime Interest Rate is the interest rate charged by banks to their most creditworthy
customers (usually the most prominent and stable business customers). The rate is almost
always the same amongst major banks. Adjustments to the prime rate are made by banks at the
same time; although, the prime rate does not adjust on any regular basis. The Prime Rate is
usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate.

Deposit Rate Interest Rates paid by a depository institution on the cash on deposit.

Basel III: It is a global, voluntary regulatory standard on bank capital adequacy, stress testing
and market liquidity risk. It is a comprehensive set of reform measures designed to improve
the regulation, supervision and risk management within the banking sector. The Basel
Committee on Banking Supervision published the first version of Basel III in late 2009, giving
banks approximately three years to satisfy all requirements. Largely in response to the credit
crisis, banks are required to maintain proper leverage ratios and meet certain capital
requirements. Basel III was agreed upon by the members of the Basel Committee on Banking
Supervision in 2010–11, and was scheduled to be introduced from 2013 until 2015; however,
changes from 1 April 2013 extended implementation until 31 March 2018 and again
extended to 31 March 2019.

CAMELS Rating System: An international bank-rating system where bank supervisory

authorities rate institutions according to six factors. It is a supervisory rating system originally
developed in the US to classify a bank’s overall condition. It is applied to every bankand credit
union in the USA and is also implemented outside the USA by various banking supervisory
regulators. The six factors are represented by the acronym CAMELS. Capital adequacy —
Asset quality — Management quality — Earnings — Liquidity — Sensitivity to Market Risk.

SWIFT — Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides

a network that enables financial institutions worldwide to send and receive information about
financial transactions in a secure, standardized and reliable environment. The members of this
society can exchange the international financial news easily, quickly and accurately by this
network. SWIFT also sells software and services to financial institutions.

Call Rate is the interest rate paid by the banks for lending and borrowing for daily fund
requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks
according to their daily or short-term requirements on a regular basis.

Call Money is the money loaned by a bank that must be repaid on demand. Unlike a term loan,
which has a set maturity and payment schedule, call money does not have to follow a fixed
schedule. Brokerages use call money as a short-term source of funding to cover margin
accounts or the purchase of securities. The funds can be obtained quickly.

Call Money Market is a short-term money market — which allows for large financial
institutions, such as banks, mutual funds and corporations to borrow and lend money at
interbank rates. The loans in the call money market are very short, usually lasting no longer
than a week and are often used to help banks meet reserve requirements.

Aging ‐‐ a process where accounts receivable is sorted out by age (typically current, 30 to 60
days old, 60 to 120 days old, and so on.) Aging permits collection efforts to focus on account
that are long overdue.

Intangible Assets are items such as patents, copyrights, trademarks, licenses, franchises, and other
kinds of rights or things of value to a company, which are not physical objects. These sets may
be the most important ones a company owns. Often, they do not appear on financial reports.

Amortization - Gradual and periodic reduction of any amount, such as the periodic write-down
of a BOND premium, the cost of an intangible ASSET or periodic payment Of MORTGAGES
or other DEBT.

Contingent Liability - Potential LIABILITY arising from a past transaction or a subsequent

event.

Employee Stock Ownership Plan (ESOP) - Stock bonus plan of an employer that acquires
SECURITIES issued by the plan sponsor.

Franchise - Legal arrangement whereby the owner of a trade name, franchisor, contracts witha
party that wants to use the name on a non-exclusive basis to sell goods or services, franchisee.
Frequently, the franchise agreement grants strict supervisory powers to the franchisor over the
franchisee which, nevertheless, is an independent business.

Leveraged Buy Out - Acquisition of a controlling INTEREST in a company in a transaction

financed by the issuance of DEBT instruments by the acquired entity.

Promissory Note - Evidence of a DEBT with specific amount due and interest rate. The note
may specify a maturity date or it may be payable on demand. The promissory note may or may
not accompany other instruments such as a MORTGAGE providing security for the payment
thereof.

Spinoff - Transfer of all, or a portion of, a subsidiary's stock or other ASSETS to the
stockholders of its parent company on a PRO RATA basis.

LIBOR

The London Interbank Offered Rate is the average of interest rates estimated by each of the
leading banks in London that it would be charged were it to borrow from other banks.
 Principles of Finance
(BIN-102)

Finance
Finance is defined as the management of money and includes activities such as investing,
borrowing, lending, budgeting, saving, and forecasting.

Objective of a firm
Every farm has two objectives, such as:
a. Profit maximization
b. Wealth or share price maximization

But profit maximization has some problems. By window dressing i.e., calculating lower
depreciation on fined asset profit can be maximized. Besides this profit maximization is an
unclear acceptant, incise of profit maximization time, time value of money and risk is not
considered. Share price maximization is a clear concept and in this case time, time Value of
money and risk is considered. Besides this if share price maximized Profit and wealth of the firm
will be also maximized. That is why; share Price maximize on is more logical objective of a firm.

Time value of Money

Ans: The time value of money (TVM) is the concept that a sum of money is worth more now
than the same sum will be at a future date due to its earnings potential in the interim. The time
value of money is a core principle of finance. A sum of money in the hand has greater value than
the same sum to be paid in the future. The time value of money is also referred to as the present
discounted value.

Why money has Time value?

Money has time value. In simpler terms, the value of a certain amount of money today is more
valuable than its value tomorrow. It is not because of the uncertainty involved with time but
purely on account of timing. The difference in the value of money today and tomorrow is referred
to as the time value of money.

Risk
Risk implies future uncertainty about deviation from expected earnings or expected outcome.
Risk measures the uncertainty that an investor is willing to take to realize a gain from an
investment.

Risks are of different types and originate from different situations. We have liquidity risk,
sovereign risk, insurance risk, business risk, default risk, etc. Various risks originate due to the
uncertainty arising out of various factors that influence an investment or a situation.

Uncertainty
Uncertainty refers to an absence of certainty, that is, there is no guarantee of something happening
in the present or the future. There is an absence of a given outcome in uncertainty. Since the
outcome of an event is not certain, there is hardly any measure of uncertainty. That is, we cannot
measure uncertainty in the business world. It is a process that can just be stated but not measured.
For example, let’s say that a business can earn 10% or 20% of profit within the next two years.
However, it is uncertain because we cannot measure it. So, there is a kind of probability attached
to uncertainty which is improbable in the case of risk.

Return
Return, also called return on investment, is the amount of money you receive from an investment.
You can think of it this way. For every dollar you put into an investment, the investments earn
two dollars. This money that the investment earns is considered your return.

Annuity
An annuity is a fixed amount of money that you will get each year for the rest of your life. Annuity
is an equal periodic payment which is received or paid up to certain period of time. Can be
classified in two kinds:

a. Ordinary annuity: when the annuity payment is made at the end of the payment
period then is called ordinary and waiting.
b. Annuity Due: when the annuity payment is made at the beginning of the period
then it is called annuity due.

Perpetuity
If the annuity is continued forever then is called perpetuity. Such as, The rent of a house.

Compounding and discounting

Compounding: compounding is the process of binding the future amount of a sum of money
invested now for a certain period.

Discounting: discounting is the process of determining the present value of a sum of money to
be received in future at a given of interest.

Required rate of return

Required rate of return means the maximum required rate of return on investment.

Relationship between risk and return

There is positive relationship between risk and return. If risk increases the return also increases
and vice versa.

Market risk premium?

The difference between risk free return and market return is called market risk premium.

Standard deviation
Standard deviation is a statistical measure of dispersion. Standard deviation measures the total
risk of an investment or an asset.

Private Finance includes the Individual, Firms, Business or Corporate Financial activities to
meet the requirements.
Public Finance concerns with revenue and disbursement of Government’s Financial matters.

Wealth maximization is known as value maximization or net present worth maximization.

Profit maximization is called as cashing per share maximization. It leads to maximize the
business operation for profit maximization

Financial statement is an organized collection of data according to logical and consistent

accounting procedures. Its purpose is to convey an understanding of financial aspects of a
business firm. It may show a position at a moment of time as in the case of a balance-sheet or
may reveal a service of activities over a given period of time, as in the case of an income
statement.

Income Statement
Income statement is also called as profit and loss account, which reflects the operational
position of the firm during a particular period. Normally it consists of one accounting year. It
determines the entire operational performance of the concern like total revenue generated and
expenses incurred for earning that revenue

Position Statement
Position statement is also called as balance sheet, which reflects the financial position of the
firm at the end of the financial year.Position statement helps to ascertain and understand the
total assets, liabilities and capital of the firm.

Statement of Changes in Owner’s Equity

It is also called as statement of retained earnings. This statement provides information aboutthe
changes or position of owner’s equity in the company.

Statement of Changes in Financial Position

Income statement and position statement shows only about the position of the finance; hence it
can’t measure the actual position of the financial statement. Statement of changes infinancial
position helps to understand the changes in financial position from one period to another period.

Liquidity Ratio
It is also called as short-term ratio. This ratio helps to understand the liquidity in a business
which is the potential ability to meet current obligations. This ratio expresses the relationship
between current assets and current assets of the business concern during a particular period.
The following are the major liquidity ratio:
Current ratio = Current assets / Current liabilities
Quick ratio = (Current assets – Inventories) / Current liabilities
Solvency = (Cash and equivalents + Marketable securities + Accounts receivable) / Current
liabilities
Activity Ratio
It is also called as turnover ratio. This ratio measures the efficiency of the current assets and
liabilities in the business concern during a particular period. This ratio is helpful to understand
the performance of the business concern. Some of the activity ratios are given below:
Accounts Receivable Turnover=Total Credit Sales/Accounts Receivable Average Collection
Period=365 Days/Accounts Receivable Turnover
Inventory Turnover=Total Annual Sales or Cost of Goods Sold/Inventory Cost
Days in Inventory=365 Days/Inventory Turnover

Solvency Ratio
It is also called as leverage ratio, which measures the long-term obligation of the business
concern. This ratio helps to understand, how the long-term funds are used in the business
concern. Some of the solvency ratios are given below:

Debt to equity = Total debt/ Total equity Debt to assets = Total debt / Total assets

Interest coverage ratio = Operating income (or EBIT) / Interest expense

Profitability Ratio
Profitability ratio helps to measure the profitability position of the business concern. Gross
Margin = Gross Profit/Net Sales * 100

Operating Margin = Operating Profit / Net Sales * 100 Return on Assets = Net Income / Assets
* 100
Return on Equity = Net Income / Shareholder Investment * 100

Stock
A stock is a type of security that signifies ownership in a corporation and represents a claim on
part of the corporation's assets and earnings.

Weighted Average Cost Of Capital - WACC

Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which
each category of capital is proportionately weighted .

Money Market
The money market is where financial instruments with high liquidity and very short maturities
are traded. It is used by participants as a means for borrowing and lending in the short term,
with maturities that usually range from overnight to just under a year. Among the most common
money market instruments are Eurodollar deposits,

Negotiable certificates of deposit (CDs), banker’s acceptances, Treasury bills, commercial

paper, municipal notes, federal funds and repurchase agreements (repos).
Capital Markets
Capital markets are markets for buying and selling equity and debt instruments. Capital markets
channel savings and investment between suppliers of capital such as retail investors and
institutional investors, and users of capital like businesses, government and individuals.Capital
markets are vital to the functioning of an economy, since capital is a critical component for
generating economic output. Capital markets include primary markets , where new stock and
bond issues are sold to investors, and secondary markets , which trade existing securities.

Common Stock
Common stock is a security that represents ownership in a corporation. Holders of common
stock exercise control by electing a board of directors and voting on corporate policy. Common
stockholders are on the bottom of the priority ladder for ownership structure; in theevent of
liquidation, common shareholders have rights to a company's assets only after bondholders,
preferred shareholders and other debt holders are paid in full.

Preference Shares
The parts of corporate securities are called as preference shares. It is the shares, which have
preferential right to get dividend and get back the initial investment at the time of winding up of
the company.

Deferred Shares Deferred shares also called as founder shares because these shares were
normally issued to founders. The shareholders have a preferential right to get dividend before
the preference shares and equity shares. These shares were issued to the founder at small
denomination to control over the management by the virtue of their voting rights.

No Par Share
When the shares are having no face value, it is said to be no par shares. The value of shares can
be measured by dividing the real net worth of the company with the total number of shares.

Debentures
A Debenture is a document issued by the company. It is a certificate issued by the company
under its seal acknowledging a debt. Debenture includes debenture stock, bonds and any other
securities of a company whether constituting a charge of the assets of the company ornot.

Capital
The term capital refers to the total investment of the company in terms of money, and assets.It is
also called as total wealth of the company. When the company is going to invest large amount
of finance into the business, it is called as capital.

Capitalization
Capitalization is one of the most important parts of financial decision, which is related to the
total amount of capital employed in the business concern
Over Capitalization
Over capitalization refers to the company which possesses an excess of capital in relation toits
activity level and requirements. In simple means, over capitalization is more capital than
actually required and the funds are not properly used.

Under Capitalization
Under capitalization is the opposite concept of over capitalization and it will occur when the
company’s actual capitalization is lower than the capitalization as warranted by its earning
capacity. Under capitalization is not the so-called inadequate capital.

Watered Capitalization
If the stock or capital of the company is not mentioned by assets of equivalent value, it is called
as watered stock. In simple words, watered capital means that the realizable value of assets of
the company is less than its book value

Capital Structure
Capital structure refers to the kinds of securities and the proportionate amounts that makeup
capitalization. It is the mix of different sources of long-term sources such as equity shares,
preference shares, debentures, long-term loans and retained earnings.

Financial Structure
The term financial structure is different from the capital structure. Financial structure shows
the pattern total financing. It measures the extent to which total funds are available to financethe
total assets of the business. Financial Structure = Total liabilities Or Financial Structure =
Capital Structure + Current liabilities

Optimum Capital Structure

Optimum capital structure is the capital structure at which the weighted average cost of capital
is minimum and thereby the value of the firm is maximum.

Modigliani and Miller Approach

Modigliani and Miller approach states that the financing decision of a firm does not affect the
market value of a firm in a perfect capital market. In other words MM approach maintains that
the average cost of capital does not change with change in the debt weighted equity mixor
capital structures of the firm.

Cost of Capital
Cost of capital is the rate of return that a firm must earn on its project investments to maintain
its market value and attract funds.

Explicit cost is the rate that the firm pays to procure financing.

Implicit cost is the rate of return associated with the best investment opportunity for the firm
and its shareholders that will be forgone if the projects presently under consideration by the
firm were accepted.

Cost of Equity
Cost of equity capital is the rate at which investors discount the expected dividends of the firm
to determine its share value. Conceptually the cost of equity capital (Ke) defined as the
Minimum rate of return that a firm must earn on the equity financed portion of an investment
project in order to leave unchanged the market price of the shares.

Cost of Debt
Cost of debt is the after-tax cost of long-term funds through borrowing. Debt may be issued at
par, at premium or at discount and also it may be perpetual or redeemable.
The overall cost of capital can be calculated with the help of the following formula; Ko=Kd
Wd+ Kp Wp + Ke We + Kr Wr Where,Ko = Overall cost of capital Kd = Cost of debt
Kp = Cost of preference share Ke = Cost of equity
Kr = Cost of retained earnings
Wd= Percentage of debt of total capital
Wp = Percentage of preference share to total capital We = Percentage of equity to total capital
Wr = Percentage of retained earnings

Leverage
Leverage refers to furnish the ability to use fixed cost assets or funds to increasethe return to
its shareholders.

Operating Leverage
The leverage associated with investment activities is called as operating leverage

Financial Leverage
Financial leverage represents the relationship between the company’s earnings before interest
and taxes (EBIT)or operating profit and the earning available to equity shareholders. Financial
leverage is defined as “the ability of a firm to use fixed financial charges to magnify the effects
of changes in EBIT on the earnings per share”.

Working Capital Leverage

Working capital leverage measures the sensitivity of return in investment of charges in the
level of current assets.

Financial BEP
It is the level of EBIT which covers all fixed financing costs of the company. It is the level of
EBIT at which EPS is zero.

Indifference Point
It is the point at which different sets of debt ratios (percentage of debt to total capital employed
in the company) gives the same EPS
Dividend
Dividend refers to the business concerns net profits distributed among the shareholders. It may
also be termed as the part of the profit of a business concern, which is distributed among its
shareholders.

Cash Dividend
If the dividend is paid in the form of cash to the shareholders, it is called cash dividend. Itis
paid periodically out the business concerns EAIT (Earnings after interest and tax).

Stock Dividend
Stock dividend is paid in the form of the company stock due to raising of more finance. Under
this type, cash is retained by the business concern. Stock dividend may be bonus issue. This
issue is given only to the existing shareholders of the business concern.

Bond Dividend
Bond dividend is also known as script dividend. If the company does not have sufficient funds
to pay cash dividend, the company promises to pay the shareholder at a future specificdate with
the help of issue of bond or notes.

Property Dividend
Property dividends are paid in the form of some assets other than cash. It will distribute under
the exceptional circumstance.

Yield To Maturity (YTM)

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until the
end of its lifetime.

Capital Budgeting
capital budgeting is a long-term planning for making and financing proposed capital out lays.
Capital budgeting is concerned with the allocation of the firms source financial resourcesamong
the available opportunities. Capital budgeting consists in planning development of available
capital for the purpose of maximizing the long-term profitability of the concern.

Pay-back Period
Pay-back period is the time required to recover the initial investment in
a project.Pay-back period = Initial investment / Annual cash inflows

Net Present Value

Net present value describes as the summation of the present value of cash inflow and present
value of cash outflow. Net present value is the difference between the total present value of
future cash inflows and the total present value of future cash outflows.
Internal Rate of Return
Internal rate of return is time adjusted technique. In other words it is a rate at which discount
cash flows to zero. It is expected by the following ratio:

Cash inflow / Investment initial.

Modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the
firm's cost of capital, and the initial outlays are financed at the firm's financing cost. By contrast,
the traditional internal rate of return (IRR) assumes the cash flows from a project arereinvested
at the IRR. The MIRR more accurately reflects the cost and profitability of a project.

Economic Order Quantity (EOQ)

EOQ refers to the level of inventory at which the total cost of inventory comprising ordering
cost and carrying cost. Determining an optimum level involves two types of cost such as
ordering cost and carrying cost.

Leasing
Lease may be defined as a contractual arrangement in which a party owning an asset provides
the asset for use to another, the right to use the assets to the user over a certain period of time,
for consideration in form of periodic payment, with or without a furtherpayment.

Financing lease
Financing lease is also called as full payout lease. It is one of the long-term leases and cannotbe
cancelable before the expiry of the agreement. It means a lease for terms that approach the
economic life of the asset, the total payments over the term of the lease are greater than the
leaser’s initial cost of the leased asset. For example: Hiring a factory, or building for a long
period. It includes all expenditures related to maintenance.

Operating lease
Operating lease is also called as service lease. Operating lease is one of the short-term and
cancelable leases. It means a lease for a time shorter than the economic life of the assets,
generally the payments over the term of the lease are less than the leaser’s initial cost of the
leased asset.
 Business Mathematics
(BIN-103)
What is the main difference between simple interest and compound interest?
Answer: Simple interest is calculated only on the principal and compound interest is calculated
on the principal plus all the amount of interest so far, which means interest on interest. Another
way of stating that is: with simple interest, the return or debt grows linearly while with
compound interest, it grows exponentially. Another important difference is that simple interests
are not very used while most of the investments and loans are calculated considering compound
interests.
Define Return Over Investment (ROI) or Rate of Return (ROR).
Answer: Return Over Investment (ROI) or Rate of Return (ROR) is a financial metric used to
evaluate how much an investment is expected to grow, in percent, over time. That means that it
is the difference between the future value and the invested value divided by the invested value.
What is unconditional probability?
Answer: Unconditional probability, also known as marginal probability is the probability of
occurrence of an event when it is not affected by any other previous events, which means that
the event is independent. For example, a coin toss always has a 50% chance of landing with
heads facing up and a 50% change of landing with tails facing up, regardless of how many coin
tosses have been performed before. That is because each coin toss is independent of the
previous ones, i.e. it has an unconditional probability of occurrence.
What is conditional probability?
Answer: Conditional probability is the probability of occurrence of an event that is affected by
one or more previous events, which means that the event is somehow dependent of them, being
more or less likely to happen, given that other events have or have not happened.
What is the multiplication rule of probability?
Answer: The probability of two or more events happening is equal to the multiplication of the
probabilities for each individual event.
What is a row matrix?
Answer: A row matrix is a matrix that contains one single row. That is equivalent to say that,
given a matrix , if , then A is a row matrix.
What is a column matrix?
Answer: A column matrix is a matrix that contains one single column. That is equivalent to say
that, given a matrix , if , then A is a column matrix.
What is a square matrix?
Answer: A square matrix is a matrix that contains the same amount of rows andc That is
equivalent to say that, given a matrix , if , then A is a square matrix.
What is the condition necessary for the following matrix multiplication to be possible?
What will the dimensions of C be?
Answer: The required condition is that, i.e. from left to right, the number of columns of the first
matrix must be equal to the number of rows of the second matrix. Then will be rows height and
rows wide, which is noted as.
How would you define gain and loss?
Answer: Gain is how much money is made by a business and loss is how much money is lost by
a business. When any financial activity gets more money than it spends, there is a gain which
corresponds to the difference between the money that comes in and the money that goes out.
When any financial activity gets less money than it spends, there is a loss which corresponds to
the difference between the money that goes out and the money that comes in.
How would you define markup and markdown?
Answer: Markup is the amount added to the cost of a good so that its selling price covers the
expenses of the business and profit. Markdown is the amount subtracted from the selling price
of a good in order to keep it competitive in the market, i.e. attractive from the customers
‘standpoint, to promote sells or to correct errors in the original costs.

Principles and Practice of Accounting

(BIN-104)

Accounting
The information system that identifies, records, and communicates the economic events of an
organization to interested users.
Balance sheet
A financial statement that reports the assets, liabilities, and owner’s equity at a specific date.

Basic accounting equation

Assets =Liabilities + Owner’s Equity

Bookkeeping
A part of accounting that involves only the recording of economic events.

Corporation
A business organized as a separate legal entity under state corporation law, having ownership
divided into transferable shares of stock.

Cost principle
An accounting principle that states that companies should record assets at their cost.

Drawings
Withdrawal of cash or other assets from an unincorporated business for the personal use of the
owner(s).

Economic entity assumption

An assumption that requires that the activities of the entity be kept separate and distinct from the
activities of its owner and all other economic entities.

Expanded accounting equation

Assets = Liabilities+ Owner’s Capital + Owner’s Drawings + Revenues - Expenses.

Expenses
The cost of assets consumed or services used in the process of earning revenue.

Financial accounting
The field of accounting that provides economic and financial information for investors,
accounting and other external users.

Financial Accounting Standards Board (FASB)

A private organization that establishes generally accepted accounting principles (GAAP).

Generally Accepted Accounting Principles (GAAP)

Common standards that indicate how to report economic events.

Income statement
A financial statement that presents the revenues and expenses and resulting net income or net loss
of a company for a specific period of time.

Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of
the United States.

Financial accounting
The field of accounting that provides internal reports to help users make decisions about their
companies.

Monetary unit assumption

An assumption stating that companies include in the accounting records only transaction data that
can be expressed in terms of money.

Net income
The amount by which revenues exceed expenses.
Net loss
The amount by which expenses exceed revenues.

Owner’s equity
The ownership claims on total assets.

Owner’s equity statement

A financial statement that summarizes the changes in owner’s equity for a specific period of time.
Revenues
The gross increase in owner’s equity resulting from business activities entered into for the
purpose of earning income.

Account
A record of increases and decreases in specific asset, liability, or owner’s equity items.

Chart of accounts
A list of accounts and the account numbers that identify their location in the ledger.

Double-entry system
A system that records in appropriate accounts the dual effect of each transaction.

Three-column form of account

A form with columns for debit, credit, and balance amounts in an account

Accrual-basis accounting
Accounting basis in which companies record transactions that change a company’s financial
statements in the periods in which the events occur.

Adjusted trial balance

A list of accounts and their balances after the company has made all adjustments.

Cash-basis accounting
Accounting basis in which companies record revenue when they receive cash and an expense
when they pay cash.

Adjusting entries
Entries made at the end of an accounting period to ensure that companies follow the revenue
recognition and matching principles.

Book value
The difference between the cost of a depreciable asset and its related accumulated depreciation.

Calendar year
An accounting period that extends from January 1 to December 31.

Contra asset account

An account offset against an asset account on the balance sheet.

Depreciation
The allocation of the cost of an asset to expense over its useful life in a rational and systematic
manner.

Fiscal year
An accounting period that is one year in length.

Matching principle
The principle that companies match efforts (expenses) with accomplishments (revenues).

Prepaid expenses
Expenses paid in cash that benefit more than one accounting period and that are recorded as
assets.

Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which it is earned.

Time period assumption

An assumption that accountants can divide the economic life of a business into artificial time
periods.

Unearned revenues
Cash received and recorded as liabilities before revenue is earned.

Liquidity
The ability of a company to pay obligations expected to be due within the next year.

Long-term investments
Generally, (1) investments in stocks and bonds of other companies that companies normally hold
for many years, and (2) long-term assets, such as land and buildings, not currently being used in
operations.

Long-term liabilities
Obligations that a company expects to pay after one year.

Operating cycle
The average time that it takes to go from cash to cash in producing revenues.

Permanent (real) accounts

Accounts that relate to one or more accounting periods. Consist of all balance sheet accounts.
Balances are carried forward to next accounting period.

Post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted
closing entries.

Reversing entry
An entry, made at the beginning of the next accounting period, that is the exact opposite of the
adjusting entry made in the previous period.

Stockholders’ equity
The ownership claims of shareholders on total assets. It is to a corporation what owner’s equity
is to a proprietorship.

Temporary (nominal) accounts

Accounts that relate only to a given accounting period. Consist of all income statement accounts
and owner’s drawing account. All temporary accounts are closed at end of the accounting period.

Worksheet
A multiple-column form that may be used in making adjusting entries and in preparing financial
statements.

Average-cost method
Inventory costing method that uses the weighted average unit cost to allocate to ending inventory
and cost of goods sold the cost of goods available for sale.

Conservatism
Concept that dictates that when in doubt, choose the method that will be least likely to overstate
assets and net income.

Days in inventory
Measure of the average number of days inventory is held; calculated as 365 divided by inventory
turnover ratio.

Finished goods inventory

Manufactured items that are completed and ready for sale.

First-in, first-out (FIFO) method

Inventory costing method that assumes that the costs of the earliest goods purchased are the first
to be recognized as cost of goods sold.

FOB (free on board) destination

Freight terms indicating that ownership of the goods remains with the seller until the goods reach
the buyer.
FOB (free on board) shipping point
Freight terms indicating that ownership of the goods passes to the buyer when the public carrier
accepts the goods from the seller.

Inventory turnover
A ratio that measures the number of times on average the inventory sold during the period;
computed by dividing cost of goods sold by the average inventory during the period.

Just-in-time (JIT) inventory method

Inventory system in which companies manufacture or purchase goods just in time for use.

Last-in, first-out (LIFO) method

Inventory costing method that assumes the costs of the latest units purchased are the first to be
allocated to cost of goods sold.

Lower-of-cost-or-market (LCM) basis

A basis whereby inventory is stated at the lower of either its cost or its market value as determined
by current replacement cost.

Raw materials
Basic goods that will be used in production but have not yet been placed into production.

Specific Identification Method

An actual physical flow costing method in which items still in inventory are specifically costed
to arrive at the total cost of the ending inventory.

Weighted Average Unit Cost

Average cost that is weighted by the number of units purchased at each unit cost.
Work In Process
That portion of manufactured inventory that has been placed into the production process but is
not yet complete.

Accounting Information System

A system that collects and processes transaction data, and communicates financial information to
decision makers.

Manual Accounting System

A system in which someone performs each of the steps in the accounting cycle by hand.

Bank Reconciliation
The process of comparing the bank’s balance of an account with the company’s balance and
explaining any differences to make them agree.

Deposits in Transit
Deposits recorded by the depositor but not yet been recorded by the bank.

Allowance Method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end
of each period.

Direct Write-Off Method

A method of accounting for bad debts that involves expensing accounts at the time they are
determined to be uncollectible.

Declining-balance method
Depreciation method that applies a constant rate to the declining book value of the asset and
produces a decreasing annual depreciation expense over the useful life of the asset.
Going-concern assumption
States that the company will continue in operation for the foreseeable future.

Intangible assets
Rights, privileges, and competitive advantages that result from the ownership of long-lived assets
that do not possess physical substance.

Materiality principle
If an item would not make a difference in decision making, a company does not have to follow
GAAP in reporting it.

Salvage value
An estimate of an asset’s value at the end of its useful life.

Straight-line method
Depreciation method in which periodic depreciation is the same for each year of the asset’s useful
life.

Definition of Accounting:

“Accounting is the process of identifying, measuring and communicating economic information

to permit informed judgment and decisions by the users of information”. – AAA
We have said that accounting consists of these functions:
• Recording
• Classifying
• Summarizing
• Reporting and evaluating the financial activities of a business

Origin and Evaluation

Primitive / Development Period (Before 1494), Second / Pre

analytical Period (1494-1800), Third / Analytical Period
(1800-1950),
Current / Modern Period (Post 1950).

Accounting Information:
Accounting information is that information of an organization that helps users to make better
financial decision.

Accounting Information System:

Accounting Information System is generally a computer-based method for tracking accounting
activity in conjunction with information technology resources.

An electronic system containing all documents that a company uses to prepare financial
statements and that one may use to defend against audit.

The accounting information system pulls data from the centralized database, process and
transforms it and ultimately generates a summary of that data as information that can now be
easily consumed and analyzed by business analyst, managers or other decision makers.
Management Information System
Management Information System is the study of people, technology, organizations and the
relationships among them.

AIS is a part of MIS. AIS just focuses on finance and accounting while MIS is broader. AIS
produce informal reports to the management, but MIS produce formal reports.

Users of accounting information:

A. Internal Users:
(i) Proprietor,
(ii) Management authority,
(iii) Internal auditor,
(iv) Accounts departments,
(v) Employees,
(vi) Company officers.
B. External Users:
 (i) Government,
(ii) Shareholders,
(iii) Lenders,
(iv) Creditors,
(v) Investors,
(vi) Customers,
(vii) Researchers,
(viii) Chamber of commerce,
(ix) General public,
(x) External auditor,
(xi) Stock Exchanges,
(xii) Tax authority.

Transaction

A transaction is a business event that has a monetary impact on an entity’s financial statements,
and is recorded as an entry in its accounting records.

Financial statements of business organizations

A financial statement (or financial report) is a formal record of the financial activities of a
business, person, or other entity.
All of the companies produce financial statements as the final end product of their accounting
process. These financial statements provide relevant financial information both to those inside
the company—management—and to those outside the company—creditors, stockholders, and
other interested parties. The next section introduces four common financial statements—the
income statement, the statement of retained earnings, the balance sheet, and the statement of
cash flow.
The financial statement that reflects a company’s profitability is the income statement.
The statement of retained earnings shows the change in retained earnings between the
beginning and end of a period (e.g. a month or a year).
The balance sheet reflects a company’s solvency and financial position.
The statement of cash flows shows the cash inflows and outflows for a company over a period
of time.
The cash flow statement represents an analysis of all of the transactions of the business,
reporting where the firm obtained its cash and what it did with it.

Basic Financial Statements:

(i) Comprehensive Income Statement,
(ii) Statement of Retained earnings/ Owners’ equity Statement,
(iii) Statement of financial Position,
(iv) Cash Flow statement.
(v)
Elements of Financial Statement;

(i)Assets, (ii) Liabilities, (iii) Equity, (iv) Investments by the Owners,

(v) Distribution to the owners, (vi) Revenues, (vii) Expenses, (viii) Gains, (ix) losses, (x)
Comprehensive income.

Account:

Simply account means title of homogenous transactions.

Account is a formal record of a particular type of transaction expressed in terms of money

and kept in a ledger.

Classification of Account:

A. Traditional Method:
(i) Personal Account,
(ii) Asset / Real Account,
(iii) Nominal Account.
B. Modern/ Equation Method:
(i) Asset Account,
(ii) Liability Account,
(iii) Owner’s Equity Account,
(iv) Revenue Account,
(v) Expenses Account,
(vi) Drawings Account.
Accounting Standard:

An accounting standard is a guideline for financial accounting, such as how a firm prepares
and presents its business income and expense, assets and liabilities. The generally Accepted
Accounting Principles is comprised of a large group of individual accounting standards.

International Accounting Standard:

Standards for the preparation and presentation of financial statements created by the
International Accounting Standard Committee (IASC). They were first written in 1973, and
stopped when the International Accounting Standard Board (IASB) took over their creation
in 2001.

Bangladesh Financial Reporting Standards (BFRS):

The financial reporting standard prescribed by the Institute of Chartered accountants of

Bangladesh (ICAB) are known as Bangladesh Financial Reporting Standards (BFRS
including BAS). BFRS and BAS are closely modelled on International Accounting
Standards and International Financial Reporting Standards issued by the International
Accounting Standard Boards.
Accounting Principle:

A principle that governs the current account practice and that is used as a reference to determine
the appropriate treatment of complex transactions.

Accounting Theory:

Accounting theory is a set of basic concepts and assumptions and related principles that explain
and guide the accountants action in identifying, measuring and communicating economic
information.

Accounting Assumptions or concepts:

Basic assumptions and conditions of accounting upon which the science of accounting is based.

(i) Business Entity Concept: Business Entity Concept assumes each business has
a separate existence from its owner’s, creditors, employees, customers, other
intended parties and other businesses.
(ii) Going Concern/ Continuity Concept: It assumes that an entity will continue
to operate indefinitely unless strong evidence exists that the entity will
terminate.
(iii) Money Measurement concept: It assumes each business uses a monetary unit
of measurement, such as TK. Instead of physical or other unit of measurement.
(iv) Periodicity/ Time period Concept: It assumes an entity’s life can be
subdivided into months or years to report its economic activity.
(v) Consistency Concept: It assumes a company uses the same accounting
principles and reporting practice every accounting period.

Accounting Principles:

(i) Matching Principle: The accounting rule that all expenses incurred in earning
a revenue be deducted from the revenue in determining net income whether the
expenses paid in cash or not.
(ii) Revenue Recognition Principle: Revenue should be earned and realized before
they are recognized (recorded).
(iii) Expense Recognized: Expenses should be recognized (recorded) as they are
incurred to generate revenues.
(iv) Gain and Loss recognition: Gain may be recorded when realized, but losses
should be recorded when they become first evident.
(v) Full Disclosure: Information important enough to influence the decisions
of an informed user of the financial statements should be disclosed.

Accounting Conventions:

Convention refers to a statement or rule of practice which is employed in the solution to a

given class of problem or guides the behavior in a certain kind of Situation.
32 | P a g e
 (i) Cost-benefit: Optional information should be included in financial statements
only if the benefits of providing it exceed its costs.
(ii) Materiality: Only items that would affect a knowledgeable user’s decision are
material (important) and must be reported in a theoretically correct way.
(iii) Conservatism: Transactions should be recorded so that net assets and net
income are not over stated.

Accounting Cycle:

Accounting cycle is a step-by-step process of recording, classification and summarization

of economic transactions of a business. It generates useful financial information in the form
of financial statement including income statement, balance sheet, cash flow statement and
statement of changes in equity.

Accounting cycle is a series of steps performed during the accounting period to analyze
record, classify, summarize and report useful financial information for the purpose of
preparing financial statements.

Steps of Accounting Cycle;

(i) Collecting and analyzing data from transactions and events,

(ii) Putting transaction into the general journal,
(iii) Posting entries to the general ledger,
(iv) Preparing an unadjusted trial balance,
(v) Giving adjusting entries appropriately,
(vi) Preparing an adjusted trial balance,
(vii) Organizing the accounts into the financial statements,
(viii) Closing the books,
(ix) Preparing a post-closing trial balance to check the accounts, and then
(x) Reporting to the related parties.
Golden Rules of Accounting

Personal Account; Receiver- Debit, and Sender- Credit.

Real account: What comes in – debit , and what goes out – credit.

Nominal Account: All expenses and losses – debit, and all income and gains
– Credit.

AICPA – American Institute of Certified Public Accountants (1939).

FASB- Financial Accounting Standard Board.

GASB – Governmental Accounting Standard Board. SFAC –

Statements of Financial Accounting Concepts. IASB – International
Accounting Standard Board.

33 | P a g e
APB- Accounting Principal Board.

IFRS- International Financial Reporting Standard issued by FASB. Till now 9 IFRS are
disclosed:

I- First time adoption of IFRS, II-

Share based payment,
III- Business combinations, IV-
Insurance contracts,
V- Non-current assets held for sale and discontinued operations, VI-
Exploration for the evaluation of mineral resources,
VII- Financial instruments, disclosures, VIII-
Operating segments, and
IX- Financial instruments.

ASB- Accounting Standard Board.

SSAP – Statement of Standard Accounting Practice.

AAA – American Accounting Association.

ICMA – Institute of Certified Management Accountants.

CMAs – Certified Management Accountants.

CIA – Certified Internal Audit.

IIA – Institute of Internal Audit.

TQM – Total Quality Management.

ABC – Activity Based Costing.

SEC – Securities and Exchange Commission.

BSEC – Bangladesh Securities and Exchange Commission.

FEI – Financial Executives Institute.

IMA – Institute of Management Accountants.

CFO – Chief Financial Officer.

CPA (Certified Public Accountant):

An accountant may become a certified public accounted by passing an examination prepared

and graded by the American Institute of Public Accountants (AICPA). As of May 1994, the
CPA examination became a two-day exam given each May and November. The section
includes business law and professional responsibilities, auditing, accounting and reporting.

34 | P a g e
AICPA (American Institute of Certified Public Accountants):

AICPA is a professional organization of CPAs. In a 20 years period ending in 1959, the

AICPA committee on accounting procedure issued 51 accounting research bulletins
recommending certain principles and practices. From 1959 through 1973, the committee’s
successor, the Accounting Principal Board (APB), issued 31 numbered opinions that CPAs
are generally required to follow.

FASB (Financial Accounting Standard Board):

In 1973, an independent, seven-member full time FASB replaced the APB. The FASB has
issued numerous statements of Financial Accounting standards. The FASB is the private
sector organization now responsible for the development of new financial accounting
standard.

GASB (Governmental Accounting Standard Board):

In 1984, the GASB was established with a full-time chairperson and four part-time members.
The GASB issued statements on Accounting and Financial Reporting in the governmental
area. The mission of the Governmental Accounting standards Board is to establish and
improve standards of state and local governmental accounting and financial reporting that
will result in useful information for the users of financial report and guide and educate the
public, including issuers, auditors, and users of those financial reports.

SEC (Securities and Exchange Commission):

SEC created under the Securities and Exchange Act of 1934. Securities and Exchange
Commission is a governmental agency that administers important acts dealing with the interstate
sale of securities. The SEC has the authority to prescribe accounting and reporting practice for
companies under its jurisdiction.

ICMAB (Institute of Cost and Management Accountants in Bangladesh):

The Institute of Cost and Management Accountants of Bangladesh (ICMAB) is the national
body of the professional Cost and Management Accountants of Bangladesh. It is established
with the prime objectives of promoting and regulating the Cost and Management Accounting
profession in the country. The institute offers education and training to the students interested
to pursue career in this field and provides highly recognized CMA degree on fulfillment of
requisite qualification. The institute undertakes research in relevant fields and is the sole
authority to issue practicing license to its members.

ICAB (Institute of Chartered Accountants of Bangladesh):

The Institute of Chartered Accountants of Bangladesh is the national professional accountancy

body in Bangladesh. It is the sole organization in Bangladesh with the right to award the
Chartered Accountant designation. It has around 1400 members.

It was established under the Bangladesh Chartered Accountants Order 1973 (Presidential Order
No. 2 of 1973). The Ministry of Commerce, Government of the People’s Republic of
35 | P a g e
Bangladesh is the administrative Ministry of the ICAB.

The mission of the ICAB is to provide leadership in the development, enhancement and
coordination of the accountancy profession in Bangladesh in order to enable the profession to
provide services of consistently high quality in the public interest.

ICAB has regional Offices in Dhaka, the capital of Bangladesh and Chittagong. There also
Chapter Management committee Offices both in London, UK and Ontario, Canada.

GAAP (Generally Accepted Accounting Principles):

Generally Accepted Accounting Principles (GAAP) are the standard framework of
guidelines for financial accounting used in any given jurisdiction; generally known as
accounting standards or standard accounting practice. These include the standards,
conventions, and rules that accountants follow in recording and summarizing and in the
preparation of financial statements.

Generally Accepted Accounting Principles are accounting rules used to prepare, present,
and report financial statements for a wide variety of entities, including public limited and
private limited companies, non-profit organizations, and governments.

Name of some CA firms in Bangladesh;

i. ACNABIN
ii. Hoda Vasi Chowdhury & Co
iii. Syful Shamsul Alam & Co
iv. A. Qasem & Co
v. Rahman Rahman Huq
vi. Howladar Yunus & Co
vii. M J Abedin & Co
viii. S F Ahmed & Co
ix. Ahmed Zaker & Co
x. AHMAD & AKHTAR
xi. A Wahab & Co
xii. S H Khan & Co
xiii. K M Alam & Co
xiv. Ata Khan & Co
xv. G Kibria & Co

Name of some CA firms in UK:

i. PwC, London (2nd)

ii. Ernst & Young, London (3rd)
iii. Grant Thornton Uk, London (5th)
iv. BDO, London ( 6th)
v. RSM Tenon, London (7th)
36 | P a g e
 vi. Smith and Williamson, London (8th).
vii. Moore Stephens, London (10th)
viii. Mazars, London (11th) ix.

Name of some CA firms in USA:

i. Deloitte, New York. (1st)

ii. Baker Tilly, Chicago (9th)
Others:

i. KPMG, Amsterdam,Netherlands (4th)

ii. Johnston Carmichael, Aberdeen, Scotland (20th)

Name of Some Accounting Software Used in Bangladesh:

i. The Tally Software

ii. The Troyee Software
iii. The QuickBook Software
iv. Tally.ERP 9

Name of Some Accounting Software Used in Banking Sector:

i. Flora Ltd. (Bangladesh)

ii. BaxiBank (Bangladesh)
iii. Loan Performer
iv. Moneyman
v. ARMNet Integrated Banking
vi. ABS
vii. Bank Mill
viii. Bank Fusion
ix. Bank Trade etc.

Journal:

Journal is a book containing chronological record of each day’s transactions.

Simple Journal Entries:

When one debit and one credit involved in journal entries then they are called simple journal
entries.

Compound Journal Entries:

When more than one debit and / or credit involved in journal entries, then they are called
compound journal entries.

Ledger:
37 | P a g e
The permanent store house of all the transactions. It is the complete collection of all the
accounts of an entity.
Accounting Period:

Any meaningful time period that may be length of one month or three months or six months
or one year and such on but the periods one year in length are standard.

Adjusting Entry:

Adjusting entries are journal entries made at the end of an accounting period to allocate
income and expenditure to the period in which they are actually occurred.

Closing Entry:

Closing entries are journal entries made at the end of an accounting period which transfer
the balances of temporary accounts to permanent accounts. Closing entries are based on the
account balances in an adjusted trial balance.

Reversing Entry:

Reversing entries are journal entries made on the first day of an accounting period in order
to remove certain adjusting entries made in the previous accounting period.

Trial Balance:

The proof of the mathematical equality of debit and credit balances of all accounts is called
a trial balance.

Correcting Entry:

If any error is occurred in recording transactions and to rectify the error of that transactions
which entries are given is called correcting entries.

Discount:

Discount is the incentive for early payment. Discount is two types-

(i) Trade Discount: Trade discount is the percentage deduction from the list price
of goods at the time of selling.
(ii) Cash Discount: Cash discount is usually allowed for making the payment early.

Cash Book:

Journal in which all cash receipts and payments (including bank deposits and withdrawals) are
recorded first, in chronological order, for posting to the

38 | P a g e
Ledger. Cash book is regularly reconciled with the bank statements as an internal auditing
measure.

Window Dressing:

Window dressing refers to actions taken or not taken prior to issuing financial statements in
order to improve the appearance of the financial statements.

Window dressing is the deceptive practice of using accounting tricks to make a company’s
balance sheet and income statement appear better than they really are.

Objectives:

i. To obtain funding (to borrow money),

ii. To increase profits and liquidity ratios,
iii. Showing the firm as profitable and sustainable,
iv. Improving the liquidity position of the firm,
v. Showing less liability, mainly to impress and attract investors, financial
lenders and employees- mostly managers.

Petty Cash:

A petty cash system or imprest cash system is a system that is installed to allow a company
to make small expenditure that might impractical or impossible by check.

Cash:

Cash includes deposit in banks available for current operations at the balance sheet date plus
cash on hand.

Cash Equivalents:

An asset that is so easily and quickly convertible to cash that holding is essentially equivalent
to holding cash.

A cash equivalent is a highly liquid investment having a maturity of three months or less. It
should be at minimal risk of a change in value. Examples of cash equivalents are:

Commercial paper,
Short-term government bonds,
Treasury bills, etc.

IOU:

This article is about the acknowledgement of debt.

39 | P a g e
An IOU (I Owe You) is usually an informal document of acknowledging debt. An IOU
differs from a promissory note in that an IOU is not a negotiable instrument and does not
specify repayment terms such as the time of repayment. IOUs usually specify the debtor,
the amount owed and sometimes the creditor.

Lease:

A “lease’ is defined as a contract between a lessor and a lessee for the hire of a specific
asset for a specific period on payment of specific rentals.

A lease is a contract between two parties to rent a property. The property owner is the
grantor of the lease and is the leaser. The person or company obtaining rights to possess
and use the property is the lease.

Lessor:

The party who is the owner of the asset permitting the use of the same by the other party
on payment of a periodical amount.

Lessee:

The party who acquires the right to use asset for which he pays periodically.

Types of lease:

Two types;

i. Operating lease: Operating lease is basically a rental agreement. The lessee

records rent expense for each of the lease payments.
ii. Capital Lease: A capital lease is a rental agreement in form, but the substance
of the transaction is an asset purchase. With capital lease, the lessee records
an asset and related liability rather than rental expense. The lessee also record
depreciation on the asset. If a lease agreement meets any of the following
criteria, it is considered to be a capital lease:
a. The lease term is equal to 75% or more of the life of the asset.
b. The present value of the minimum lease payments is equal to at least
90% of the cost of the asset.
c. The lease transforms ownership of the asset to the lessee at the end.
d. The lease contains a bargain purchase option.
Goodwill:
Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing
business, but pays more than the fair market value of the net assets (total assets – total
liabilities). The goodwill amounts to the excess of the “purchase consideration” (the money
paid to purchase the asset or business) over the total value of the assets and liabilities.

Patent:

40 | P a g e
A patent is a right granted by the federal government. It gives the owner of an invention the
authority to manufacture a product or to use a process for a specified time.

Copyright:

A copyright is a legal right created by the law of a country that grants the creator of original
work exclusive rights to its use and distribution, usually for a limited time.

Franchise:

A franchise is a contract between two parties granting the franchisee (the purchaser of
franchise) a certain rights and privileges ranging from name identification to complete
monopoly of service.

Trade Mark:

A trade mark is a symbol, design or logo used in conjunction with a particular product or
company.

Trade Name:

A trade name is a brand name under which a product is sold or a company does business.

Chain Discounts:

Sometimes the list price of a product is subject to several trade discounts, this series of
discounts is a chain discount.

Cost of Goods Sold:

Cost of goods sold is the cost to the seller of the goods sold to customers.

Merchandise Inventory:
Merchandise inventory is the quantity of goods available for at any given time.

Plant Assets:

To be classified as a plant asset, an asset must be tangible, have useful service life more
than one year, and be used in business operation rather held for resale.

Fair Market Value:

Fair market value is the price received for an item sold in the normal course of business.

Appraised value:

An appraised value is an expert’s opinion of an item’s fair market price if the items were
sold.

Book Value:

41 | P a g e
The book value of an asset is its recorded cost less accumulated depreciation.

Unclassified Balance Sheet:

An unclassified balance sheet has three major categories; assets, liabilities, and
stockholder’s equity.

Classified Balance Sheet:

A Classified balance sheet contains the three major categories; assets, liabilities and
stockholder’s equity and subdivides them to provide useful information for interpretation
and analysis by users of financial statements.

Centralized Accounting:

All accounting functions completed from head office or one unit.

One dedicated team.
One system.
One set of procedure.
Direct access to management team.

Benefits:

a. Dedicated central resource for finance.

b. Consistency of system and procedures.
c. Improved control and visibility.
d. Ease of access to documentation.
e. Less risk of document loss.
f. Efficiency of staff and ability to fully utilize.

Decentralized Accounting:

Staff at individual units.

Paperwork handled at site level.
Independent reporting accountability.

Benefits:

Increased engagement by local managers.

Increased skill levels of staff at site levels.
Inevitability of local procurement.
Local managers see information they think they need to see.
All documents seen and matched locally.

Bank:

Bank is a financial intermediary accepting deposits and granting loans.

42 | P a g e
Bank Account:

Account maintained by a bank in which a depositor’s money is kept.

Cheque:

A cheque is a formal order on a bank by depositors to pay a certain sum of money to a particular
person or bearer.

Bank Reconciliation Statement:

Bank reconciliation statement is an analytical statement of the differences between the cash
book balance and the balance of the bank statement of an organization.

Errors in Accounting:

(i) Clerical Error,

(ii) Errors of Omission,
(iii) Errors of Commission,
(iv) Compensating Errors,
(v) Errors of miss-posting,
(vi) Errors of Principle.

Worksheet:
A worksheet is a working paper used by the accountant in an ordinary manner to bring
together the information used in preparing the financial statements and the adjusting and
closing entries.

Depreciation:

Depreciation is the process of allocating the acquisition cost of an asset among the useful
life of that asset.

Accumulated Depreciation:

Accumulated depreciation is a contra asset account to depreciable assets such as

building, machinery and equipment.

Depletion:

Depletion is the exhaustion that results from the physical removal of a part of natural
resources.

Amortization:

The systematic write off to expense the cost of an intangible asset over its useful life.

43 | P a g e
Methods of depreciation:

(i) Straight line method,

(ii) Double declining balance method,
(iii) Sum of years digit method,
(iv) Machine hours method,
(v) Production output method,
(vi) Annuity method,
(vii) Sinking fund method,
(viii) Revaluation method.

Single Entry:

Single entry is not any particular system of book keeping, but it is an admixture of single
entry, double entry and no entry.

Stockholder:

An individual, group, or organization that holds one or more shares of a company and in
whose name the share certificate is issued.

Stakeholders:
An individual, group, organization, member or system that affects or can be affected by an
organization actions.

A person, group or organization that has interest in organization. Example- creditors,

government, owner, employees, suppliers etc.

Profitability:

Profitability is the ability to generate income.

Solvency:

Solvency is the ability to pay debts as they become due.

Assets:

Assets are the resources owned by a business which provide benefit to its future operations and
are convertible to cash.

Tangible Assets:

Tangible assets are those that maintain a physical existence or form. They can be seen and
touched and occupy space. Equipment, land and automobiles are examples of tangible assets.

Intangible Assets;

44 | P a g e
Intangible assets have no physical existence but exist in contracts or rights. Patents, copyrights
and goodwill are examples of intangible assets.

Liabilities:

Liabilities are obligations of the company to transfer something of value to another party. On
a company’s balance sheet, a liability may be a legal debt or an accrual, which is an estimate
of an obligation.

A liability is a present obligation of the enterprise arising from the past events, the settlement
of which is expected to result in an outflow from the enterprise' resources, i.e., assets.

Equity:

Equity is the residual interest in the assets of the enterprise after deducting all the liabilities
under the Historical Cost Accounting model. Equity is also known as owner's equity. Under
the units of constant purchasing power model equity is the constant real value of shareholders´
equity.

Revenues:

Revenues increase in economic benefit during an accounting period in the form of inflows
or enhancements of assets, or decrease of liabilities that result in increases in equity.
However, it does not include the contributions made by the equity participants, i.e.,
proprietor, partners and shareholders.

Revenues are the inflows of assets (such as cash) resulting from the sale of products or
rendering services to customers.

Expenses:

Expenses are the costs incurred to generate revenue.

Expenses decrease in economic benefits during an accounting period in the form of

outflows, or depletions of assets or increases of liabilities that result in decreases in equity

Gains:

Increase in equity from transactions or events except those that result from revenues or
investment by owners.

Losses:

Decrease in equity from transactions or events except those that result from expenses or
distributions to owners.

Inflation:

45 | P a g e
Inflation is the continuous and persistent rise in the level of price. Sudden rise in the price
level is not inflation, such as though the price of commodities rises in the month of
Ramadan, it is not inflation. Inflation up to 3-5% is beneficial for the growth of the
economy, because low inflation rate encourages producers, as their profit rises, they
increase output, unemployment falls but inflation in two digits is not good for the
economy.

Types of Business Organizations

In general, business entity or organizations are:

Sole proprietorship
Partnerships
Corporations
Sole Proprietorship
A sole proprietorship is a business wholly owned by a single individual.

Partnerships

A partnership is a legal association of two or more individuals called partners and

who are co-owners of a business for profit.

Company:

A corporation is a business incorporated under the laws of a state and owned by a few
stockholders or thousands of stockholders
A company is a voluntary association or organization of many persons who contribute money
or money’s worth to common stock and employs it in some trade or business and who shares
the profit or loss arising therefrom.

Articles of Association:

An article of Association is a document which contains rules, regulations and laws regarding
the internal management of an organization.

Memorandum of Association:

Memorandum of association is an official document setting out the details of a company’s

existence.

Financial accounting vs Management accounting

46 | P a g e
Financial accounting is concerned with the preparation of accounting information for the
needs of users who are external to the business.
Management accounting is concerned with the preparation of accounting information for the
needs of users who are internal to the business.

Cash Basis Accounting

Most of us use the cash method to keep track of our personal financial activities. The cash
method recognizes revenue when payment is received, and recognizes expenses when cash is
paid out.

Accrual Basis Accounting

The accrual method of accounting requires that revenue be recognized and assigned to the
accounting period in which it is earned. Similarly, expenses must be recognized and
assigned to the accounting period in which they are incurred.

Annual Report

An annual report is a comprehensive report on a company’s activities throughout the

preceding year. Annual reports are intended to give shareholders and other interested
people information about the company's activities and financial performance.

Definition of Corporate Financial Reporting

According to the Companies Act 1994: Corporate financial reporting is a series of

activities that allows companies to record operating data and report accurate accounting
statements at the end of each accounting year or where necessary

Conceptual Framework

A coherent system of interrelated objectives and fundamentals that is expected to lead to

consistent standards and that prescribes the nature, function and limits of financial
accounting and reporting.

What do you mean by Ratio?

A proportionate relationship between two variables.
A relationship between various accounting figures, which are connected with each other,
expressed in mathematical terms, is called accounting ratios.
Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition
and performance of a business concern.

Variance:
In accounting a variance is the difference between an expected or planned amount and an

47 | P a g e
actual amount.
In Cost Accounting, variance analysis is associated with analyzing the difference between
the standard costs and actual costs for a given level of output or activity.
Break-Even point:

The firm’s break-even point is defined as the level of sales at which all operating costs are
covered or alternatively the EBIT is zero.

Break-even point refers to a point of no profit, no loss. It is the level of sales where firm’s
revenues are equal to its total costs.

Off Balance Sheet Items:

An asset or debt that does not appear on a company’s balance sheet. Ex- Operating lease,
contingent asset or liability.

Banks off Balance sheet items:

Letters of credit,
Inland bill purchase (IBP),
Foreign bill purchases (FBPs),
Loans against trust receipts (LTRs),
Bills for collection,
Payments against documents (PADs),
Loans against Imported Merchandise (LIM), etc.

FOB Shipping Point

FOB shipping point indicates that the buyer must pay to get the goods delivered (The buyer
will record freight –in and the seller will not have any delivery expense). With terms of FOB
shipping point the title to the goods usually passes to the buyer at the shipping point. This
means that goods in transit should be reported as a purchase and as inventory by the buyer.
The seller should report a sale and an increase in accounts receivable.

FOB destination:

FOB destination indicates that seller will incur the delivery expense to get goods to the
destination. With terms of FOB destination the title to the goods usually passes from the buyer
to the seller at the destination. This means that goods in transit should be reported as inventory
by the seller, since technically the sale does not occur until the goods reach to the destination.

Perpetual Vs. Period Inventory System:

The periodic system relies upon an occasional physical count of the inventory to determine
the ending inventory balance and the cost of goods sold, while the perpetual system keeps
continual track record of inventory balances. The more sophisticated of the two is the
perpetual system, but it requires much more record keeping to maintain.

48 | P a g e
Under the perpetual system, there are continual updates to either the general ledger or
inventory journal as inventory-related transactions occur. Conversely, under a periodic
inventory system, there is no cost of goods sold account entry at all in an accounting period
until such time as there is a physical count, which is then used to derive the cost of goods
sold.

Balance Sheet:

A balance sheet is a financial statement that summarizes a company’s assets, liabilities,

and shareholder’s equity.

A summary of the financial balances of a company or organization is called a balance

sheet.

Contingent Liability:

A contingent liability is one where the outcome of an existing situation is uncertain, and
this uncertainty will be resolved by the court decision.

A contingent liability is either a possible obligation arising from past events and
depending on future events not under an entity’s control, or a present obligation not
recognized because either the entity cannot measure the obligation or settlement is not
probable.

Contingent Asset:

A contingent asset is a possible asset that may arise because of a gain that is contingent
on future events that are not under an entity’s control. According to the accounting
standards, a business does not recognize a contingent asset even if the associated
contingent gain is probable. A contingent asset becomes a realized (and therefore
recordable) asset when the realization of income associated with it is virtually certain. The
treatment of a contingent asset is not consistent with the treatment of a contingent liability,
which should be recorded when it is probable.

Contra Asset Account:

A contra asset account is a negative asset account that offsets the balance in the asset
account with which it is paired. The purpose of a contra asset account is to store a
reserve that reduces the balance in the paired account. By stating this information
separately in a contra asset account, a user of financial information can see the extent to
which a paired asset should be reduced.

Contra Entry:

In double entry accounting system, a contra entry is an entry which is recorded to reverse or
offset an entry on the other side of an account. If a debit entry is recorded in an account, contra
entry will be recorded on the credit side and vice-versa.

49 | P a g e
Debit and credit aspects of a single transaction are entered in the same account, but in different
columns. Each entry in this case is viewed as a contra entry of the other.

IPO (Initial Public Offering):

IPO stands for initial public Offering. This is the first offering of share to the general public
from a company to list on stock exchange.

Currency Policy:

The central bank reserves a certain amount of gold equivalent to the value of the money. This
is called currency policy.

Tally Accounting:

Financial software developed for the accounting of small business. It is mostly common and
user-friendly software.

Executive Accounting:

Executive accounting is designed for service type businesses that require a sophisticated
accounting system, yet simple to use accounting system. Executive Accounting contains
many advanced features such as three styles of invoicing (service, distribution and recurrent),
multi-currency capabilities, multiple bank account capabilities and other powerful features.

Share:

A share is a part of ownership of a company.

Stock:

Fully paid-up shares are called stock.

A certificate documenting the shareholder’s ownership in the corporation.

Stock Split:

An increase in the number of outstanding shares of a corporation without changing the

shareholder’s equity.

Authorized Capital:

Authorized capital is the amount of capital with which a company is registered with the
registrar of joint stock companies. It is the maximum amount of capital which a company
can raise through shares i.e. share capital can be maximum up to authorized capital and
obviously not beyond.

Paid up capital:

50 | P a g e
The amount of capital against which the company has received the payments from the
shareholders.

Main Assets and liabilities of Bank:

Assets: Cash in hand, securities, loans and advances, property and equipment, cash with
central bank, cash with other bank, bills and securities discounted.

Liabilities: Deposit from customers, borrowings, bank capital, reserve fund, etc.

MBO (Management by Objectives):

MBO is a personnel management technique where managers and employees work

together to set, record and monitor goals for a specific period of time.

Auditing:

Auditing is concerned with the verification of accounting data, with determining the
accuracy and reliability of accounting statements and report.

Teeming and lading: is a method by which misappropriation of cash already committed

is concealed for some time.
Internal audit: is the independent appraisal of activity within an organization for the review
of accounting, financial and other business practice as a protective and constructive arm of
management.

Vouch: Vouch means using personal experience to confirm the value or merit of someone or
something, to attest that someone or something is as good as claimed.

Vouching: Vouching consists in comparing entries in the books of accounts with

documentary evidence in support thereof.

Voucher: is documentary evidence in support of a transaction in the book of accounts.

Difference between an Invoice and a Voucher:

An invoice is the bill that is received by the Purchaser of goods or services from an outside
supplier. The vendor invoice lists the quantities of items, brief descriptions, prices, total
amount due, credit terms, where to remit payment, etc.

A voucher is an internal document used in a company’s accounts payable department in order

to collect and organize the necessary documentation and approvals before paying a vendor
invoice. The voucher acts as a cover page to which the following will be attached:

(i) Vendor invoice,

(ii) Company’s purchase order,
(iii) Company’s receiving report, and

51 | P a g e
 (iv) Other information needed to process the vendor invoice for payment.

Valuation: means to test the exact value of an asset on basis of its utility.

Capital reserve: is the part of capital gain, generally come from uncalled share capital, share
forfeiture etc.

Revenue reserve: is a reserve created out of profits.

Interim audit: is an audit which is conducted between the two annual audits, with a view to
find out interim profit so that the company can declare an interim dividend. Memorandum
of association: is an official document setting out the details of a company’s existence.

Articles of association: is a document which contains rules, regulations and byelaws

regarding the internal management of the company.

Reserve capital: Companies that portion of capital which doesn’t call before winding up.

Capital: In commerce and as applied to individuals it is understood to mean the sum of

money which a merchant, banker or trader invests in any under takings or which he
contributes to the common stock of a partnership or joint activity.

Capital reserve: That portion of net profit of the company is to be reserve for formation
capital fund etc.

Shares: Shares is small equal part of the capital of a company.

Bonus share: That share is issued free among the shareholder in exchange of dividend
that is called bonus share.

Right share: In order to collect excess capital to invite the present shareholder for
purchasing share before to distribute the new share in the market i.e. called right share.

Share certificate: The share certificate is a certificate issued under the common seal of
the company seal of the company specifying the number of share hold by any member.

Winding up of a company: Winding up of a company represents the process whereby its

life is ended and its property administrated for the benefit of its creditors and member.

Amalgamation: Amalgamation refers to the formation of a new company to purchase

two or more existing companies necessitating the liquidation of the latter’s companies.

Absorptions: When an existing company purchases the business of another existing

company then it is called absorption.

Reconstruction: Reconstruction denotes constitutional or organizational change of a

company.
Goods: Means every kinds of moveable property other than actionable claims and money and
includes stock and shares growing crops and things attached to or forming part of the land

52 | P a g e
which are agreed to be several before sale or under the contract of sale.

Profit: The profit of a business during a given period is the excess of income over expenditure
for that period.

Divisible profit: Divisible profits are those profits which can be legally distributed to the
shareholder of the company in the form of dividend.

Dividend: Dividend means the part of the profit of a company which is allocated among the
shareholder of that company.

Interim dividend: The dividend which is given before end of the accounting period is called
interim dividend.

Revenue profit: The profit which is arises from the normal business activities is called
revenue profit.

Certificate: A certificate is a written confirmation of the accuracy of the facts started there in
and does not involve any estimate or opinion.

Marketing: Marketing is the performance of business activities that direct the flow of goods
and services from producer to consumer or user.

Marketing management: Marketing management is the process of planning, organizing,

implementing and controlling marketing activities to facilitate exchanges effectively and
efficiently.

Company: Company is a corporate enterprise that has a legal identity separate from that of
its members; it operates as one single unites in the success of which all the members
participate.

Departmental accounts: Under the same roof when the single businessman operates several
businesses in several room than that business is known as departmental business and accounts
of that business is known is known as departmental accounts.

Actuary: The persons who are expert to measure the profit and loss of the insurance company.

Surrender value: If the insurance company pays something to policy holder who immediately
surrenders, that amount is known as surrender value.

Premium: Is a certain sum of money paid by the policy holder to insurer due to bear the
risk.

Contingent liabilities: Contingent liabilities are the liabilities which may or may not
happen. It is customary to show contingent liabilities as a foot note to the balance sheet.

Insolvent: The person who is unable to pay dept. is known as insolvent. Or insolvent
means any debtor who is declared as insolvent by the court.

53 | P a g e
Cost Accounting Cycle: Cost accounting cycle consists of recording a classification of
cost data, determination of cost and selling price, controlling cost through budgeting and
planning and taking cost decision.

Capital loss: Capital loss has been defined as any loss arising from the transfer of capital
assets.

Capital gain: The capital gain has been defined as any profits and gains arising from the
transfer of capital assets.

Soft loan:-The rate of interest is low of which loan and payment time is more called
soft loan.

Hard loan: Hard loan is a loan whose interest rate is high and payment period is
short.

Tied loan: If donor country adds condition with loan, then it is called tied loan.

United loan: United loan is unconditional loan.

Tax avoidance: If any assesses try to reduce total income and tax liability through various
plans under the law is called tax avoidance.

Tax evasion: If any assesses do not pay tax or pay tax less than actual by fraud law,
violating law or on the basis of lying is called tax evasion.

54 | P a g e
 Introduction to Business
(BIN-105)

Barriers to entry
Factors, such as technological or legal conditions, that prevent new firms from competing
equally with an existing firm.
Business
An organization that strives for a profit by providing goods and services desired by its
customers.
Business cycles
Upward and downward changes in the level of economic activity.
Capital
The inputs, such as tools, machinery, equipment. And buildings, used to produce goods
and services and get them to the customer.
Capitalism
An economic system based on competition in the marketplace and private ownership of
the factors of production (resources); also known as the private enterprise system.
Circular flow
The movement of inputs and outputs among households, businesses, and governments; a
way of showing how the sectors of the economy interact.
Communism
An economic system characterized by government ownership of virtually all resources,
government control of all markets, and economic decision-make Ing by central
government planning.
Consumer Price Index (CPI)
An index of the prices of a "market basket" of goods and services purchased by typical
urban consumers.
Contractionary Policy
The use of monetary policy by the Fed to tighten the money supply by selling government
securities or raising interest rates.
Cost-push Inflation
that occurs when increases in production costs push up the prices of final goods and
services.
Costs
Expenses incurred from creating and selling goods and services.
Crowding out
The situation that occurs when government spending replaces spending by the private
sector.

55 | P a g e
Cyclical Unemployment
Unemployment that occurs when a downturn in the business cycle reduces the demand for
labor throughout the economy.
Demand
The quantity of a good or service that people are willing to buy at various prices.
Demand Curve
A graph showing the quantity of a good or service that people are willing to buy at various
prices.
Demand-pull Inflation
Inflation that occurs when the demand for goods and services is greater than the supply.
Demography
The study of people's vital statistics, such as their age, gender, race and ethnicity, and
location.
Economic Growth
An increase in a nation's output of goods and services.
Economic System
The combination of policies, laws, and choices made by a nation's government to
establish the systems that determine what goods and services are produced and how they
are allocated. Economics
The study of how a society uses scarce resources to produce and distribute goods and
service
Entrepreneurs
People who combine the inputs of natural resources, labor, and capital to produce goods
or
services with the intention of making a profit or accomplishing a not-
for-profit goal.
Equilibrium
The point at which quantity demanded equals quantity supplied.
Expansionary Policy
The use of monetary policy by the Fed to increase, or loosen, the growth of the money
supply.
Factors of Production
The resources used to create goods and services.
Federal Budget Deficit
The condition that occurs when the federal government spends more for programs than it
collects in taxes.
Federal Reserve System (the Fed)
The central banking system of the United States.

56 | P a g e
Fiscal Policy
The government's use of taxation and spending to affect the economy.
Frictional Unemployment
Short-term unemployment that is not related to the business cycle.
Full Employment
The condition when all people who want to work and can work have jobs.
Goods Tangible items manufactured by businesses.
Gross Domestic Product (GDP)
The total market value of all final goods and services produced within a nation's borders each
year.
Inflation
The situation in which the average of all prices of goods and services is rising.
Knowledge
The combined talents and skills of the workforce.
Knowledge Worker s
Workers who create, distribute, and apply knowledge.
Macroeconomics
The subarea of economics that focuses on the economy as a whole by looking at aggregate
data for large groups of people, companies, or products.
Market Structure
The number of suppliers in a market.
Microeconomics
The subarea of economics that focuses on individual parts of the economy, such as
households or firms.
Mixed Economies
Economies that combine several economic systems; for example, an economy where the
government owns certain industries but others are owned by the private sector.
Monetary Policy
A government's programs for controlling the amount of money circulating in the
economy and interest rates.
Monopolistic Competition
A market structure in which many firms offer products that are close substitutes and in
which entry is relatively easy.
National Debt
The accumulated total of all of the federal government's annual budget deficits.
Not-for-profit organization
An organization that exists to achieve some goal other than the usual business goal of
profit.
Oligopoly

57 | P a g e
A market structure in which a few firms produce most or all of the output and in which
large capital requirements or other factors limit the number of firms.
Perfect (pure) Competition
A market structure in which a large number of small firms sell similar products, buyers and
sellers have good information, and businesses can be easily opened or closed.
Producer Price Index (PPI)
An index of the prices paid by producers and wholesalers for various commode cities,
such as raw materials, partially finished goods, and finished products.
Productivity
The amount of goods and services one worker can produce.
Profit
The money left over after all costs are paid.
Purchasing Power
The value of what money can buy.
Pure Monopoly
A market structure in which a single firm accounts for all industry sales of a particular
good or service and in which there are barriers to entry.
Quality of Life
The general level of human happiness based on such things as life expectancy, educational
standards, health, sanitation and leisure time.
Recession
A decline in GDP that lasts for at least two consecutive quarters.
Relationship Management
The practice of building, maintaining, and enhancing interactions with customers and
other parties to develop long-term satisfaction through mutually beneficial partnerships.
Revenue
The money a company receives by providing services or selling goods to customers.
Risk
The potential to lose time and money or otherwise not be able to accomplish an
organization's goals.
Savings Bonds
Government bonds issued in relatively small denominations.
Seasonal Unemployment
Unemployment that occurs during specific seasons in certain industries.
services
Intangible offerings of businesses that can't be held, touched, or stored.
Socialism
An economic system in which the basic industries are owned either by the government

58 | P a g e
itself or by the private sector under strong government control.
Standard of Living
A country's output of goods and services that people can buy with the money they have.
Strategic Alliance
A cooperative agreement between business firms; sometimes called a strategic partnership.

Code of Ethics
A set of guidelines prepared by a firm to provide its employees with the knowledge of what
the firm expects in terms of their responsibilities and behavior toward fellow employees,
customers, and suppliers.
Corporate Philanthropy
The practice of charitable giving by corporations; includes contributing cash,
donating equipment and products, and supporting the volunteer efforts of company
employees.
Corporate social Responsibility (CSR)
The concern of businesses for the welfare of society as a whole; consists of
obligations beyond those required by law or contracts.
Deontology
A philosophy in which a person will follow his or her obligations to an individual or society
because upholding one's duty iswhat is ethically correct.
Ethical Issue
A situation where a person must choose from a set of actions that may be ethical or unethical.
Ethics
A set of moral standards for judgi ng whether something is right or wrong.

Justice
What is considered fair according to the prevailing standards of society; an equitable
distribution of the burdens and rewards that society has to offer.
Social Investing
The practice of limiting investments to securities of companies that behave in accordance
with the investor's beliefs about ethical and social responsibility to encourage businesses to
be more socially responsible.
Stakeholders
Individuals or groups to whom a business has a responsibility; include employees,
customers, the genera l public, and investors.
Strategic Giving
The practice of tying philanthropy and corporate social responsibility efforts closely to a
company's mission or goals and targeting donations to the communities where a company
does business.
Utilitarianism

59 | P a g e
A philosophy that focuses on the consequences of an ac tion to determine whether it is right
or wrong; holds that an action that affects the majority adversely is morally wrong.
Absolute Advantage
The situation when a country can produce and sell a product at a lower cost than any other
country or when it is the only country that can provide the product.
Balance of Payments
A summary of a country's international financial transactions showing the difference
between the country's total payments to and its total receipts from other countries .
Balance of Trade
The difference between the value of a country's exports and the value of its imports during
a specific time.
Buy-national Regulations
Government rules that give special privileges to domestic manufacturers and retailers.
Contract Manufacturing
The practice in which a foreign firm manufactures private-label goods under a domestic
firm's brand name.
Countertrade
A form of international trade in which part or all of the payment for goods or services
is in the form of other goods and services.
Devaluation
A lowering of the value of a nation's currency relative to other currencies.
Direct foreign Investment
Active ownership of a foreign company or of manufacturing or marketing facilities in a
foreign country.
Dumping
The practice of charging a lower price for a product in foreign markets than in the firm's
home market.
Embargo
A total ban on imports or exports of a product.
European Integration
The delegation of limited sovereignty by European Union member states to the EU so that
common laws and policies can be created at the European level.
European Union
Trade agreement among 28 European nations.
Exchange Controls
Laws that require a company earning foreign exchange (foreign currency) from its exports
to sell the foreign exchange to a control agency, such as a central bank.
Exporting
The practice of selling domestically produced goods to buyers in another country.
Exports
Goods and services produced inone country and sold to other countries.

60 | P a g e
Floating Exchange Rates
A system in which prices of currencies move up and down based upon the demand for and
supply of the various currencies.
Free Trade
The policy of permitting the people and businesses of a country to buy and sell where
they please without restrictions.
Free-trade Zone
An area where the nations allow free, or almost free, trade among each other while
imposing tariffs on goods of nations outside the zone.
G20
Informal group that brings together 19 countries and the European Union-the 20 leading
economies in the world.
Global Vision
The ability to recognize and react to international business opportunities, be aware of
threats from foreign competition, and effectively use international distribution
networks to obtain raw materials and move finished products to customers.
Import Quota
A limit on the quantity of a certain good that can be imported.
Imports
Goods and services that are bought from other countries.
Infrastructure
The basic institutions and public facilities upon which an economy's development depends.
International Monetary Fund (IMF)
An international organization, founded in 1945, that promotes trade, makes short-term
loans to member nations, and acts as a lender of last resort for troubled nations.
Joint Venture
An agreement inwhich a domestic firm buys part of a foreign firm or joins with a foreign
firm to create a new entity.
Acquisition
The purchase of a target company by another corporate ion or by an investor group
typically negotiated with the target company board of directors.
Board of Directors
A group of people elected by the stockholders to handle the overall management
of a corporation, such as setting major corporate goals and policies, hiring
corporate officers, and overseeing the firm's operations and finances.
Buyer Cooperative
A group of cooperative members who unite for combined purchasing power.
C corporation
A conventional or basic form of corporate organization.
Conglomerate Merger

61 | P a g e
A merger of companies in unrelated businesses; done to reduce risk.
Cooperative
A legal entity typically formed by people with similar interests, such as suppliers
or customers, to reduce costs and gain economic power. A cooperative has
limited liability, an unlimited life span, an elected board of directors, and an
administrative staff; all profits are distributed to the member-owners in
proportion to their contributions.
Corporation
A legal entity with an existence and life separate from its owners, who are not
personally liable for the entity's debts. A corporation is chartered by the state in
which it is formed and can own property, enter into contracts, sue and be sued,
and engage in business operations under the terms of its charter.
Franchise Agreement
A contract setting out the terms of a franchising arrangement, including the rules
for
running the franchise, the services provided by the franchisor, and the financial
terms. Under the contract, the franchisee is allowed to use the franchisor's
business name, trademark, and logo.
Franchisee
a franchising arrangement, the individual or company that sells the goods or services of the
franchisor in a certain geographic area.
Franchising
A form of business organization based on a business arrangement between a franchisor, which
supplies the product or service concept, and the far chase, who sells the goods or services of the
franchisor in a certain geographic area.
Franchisor
n a franchising arrangement, the company that supplies the product or service concept to the
franchisee.
General Partners
Partners who have unlimited liability for all of the firm's business obligations and
who control its operations.
General Partnership
A partnership in which all partners share in the management and profits. Each
partner can act on behalf of the firm and has unlimited liability for all its business
obligations.
Horizontal Merger
A merger of companies at the same stage in the same industry; done to reduce
costs, expand product offerings, or reduce competition.
Joint Venture
Two or more companies that form an alliance to pursue a specific project, usually
for a specified time period.
Leveraged Buyout (LBO)

62 | P a g e
A corporate takeover financed by large amounts of borrowed money; can be
started by outside investors or the corporation's management.
Limited Liability Company (LLC)
A hybrid organization that offers the same liability protection as a corporation
but may be taxed as either a partnership or a corporation.

Limited partners
Partners whose liability for the firm's business obligations is limited to the
amount of them investment. They help to finance the business but do not
participate in the firm's operations.
Limited Partnership
A partnership with one or more general partners, who have unlimited liability,
and one or more limited partners, whose liability is limited to the amount of their
investment in the company.
Merger
The combination of two or more firms to form one new company.
Partnership
An association of two or more individuals who agree to operate a business together for profit.

Angel Investors
Individual investors or groups of experienced investors who provide financing for start-up
businesses by investing their own funds.
Business Plan
A formal written statement that describes in detail the idea for a new business and how it
wi ll be carried out; includes a general description of the company,the qualifications of the
owner(s), a description of the product or service,an analysis of the market,and a financial
plan.
Debt
A form of business financing consisting of borrowed funds that must be repaid with
interest over a stated time period.
Entrepreneurs
People with vision, drive, and creativity who are willing to take the risk of starting and
managing a business to make a profit, or greatly changing the scope and direction of an
existing firm.
Equity
A form of business financi ng consisting of funds raised through the sale of stock (i.e.,
ownership) in a business.
Entrepreneurs
Entrepreneurs who apply their creativity, vision, and risk-taking within a large
corporation, rather than starting a company of their own.
Small Business
A business with under 500 employees that is independently managed, is owned by an

63 | P a g e
individual or a small group of investors, is based locally, and is not a dominant company
in its industry.
Small Business Administration (SBA)
A government agency that speaks on behalf of small business; specifically it helps people
start and manage small businesses, advises them in the areas of finance and management,
and helps them win federal contracts.
Small Business Investment Company (SBIC)
Privately owned and managed investment companies that are licensed by the Small Business
Administration and provide long-term financing for small businesses.
Venture Capital
Financing obtained from venture capitalists, investment firms that specialize in financing
small, high-growth companies and receive an ownership interest and a voice in
management in return for their money.

Principles of Insurance
(BIN-106)

What are the different types of Insurance Coverage?

Insurance policy is categorized into two :

 General or Non-life insurance
 life Insurance

What do you mean by ‘insurance coverage’?

The term ‘insurance coverage’ means, when an individual takes an insurance policy the insured
will be covered by insurance company for a specific amount for themselves or the things that
he had taken the insurance policy, for which he would be paying premiums to the insurance
company. The insurance company will pay the insured in case of damage or claims made by
the insured according to their ‘insurance coverage’.

What is a premium’?
It is the amount to be paid for a contract of insurance to the insurance company. It is the
sumthat a person pays monthly, quarterly or annually according to their plan, in return of
the coverage he/she has taken from the insurance company.

What do you mean by term ‘Insurer’ and ‘Insured’?

Insured is the one who holds the policy and Insurer is the company that covers the insured.

Who is the beneficiary?

64 | P a g e
Beneficiary is the one whom you have nominated for the insured amount in case of your death.

What is the contestable period’ in insurance policy?

‘Contestable period’ is usually 1 or 2 years, during which the insurance company holds
all theright to investigate the policy and decide whether to pay or not to pay to the insured.

What is the difference between “revocable beneficiary” and “irrevocable

beneficiary”?
‘Revocable beneficiary’ designation gives right to the policy holder to change the
beneficiary’sname without the consent of the named beneficiary. While in ‘Irrevocable
beneficiary’ the policy holder has to take consent of the beneficiary before the name is
changed.

What is ‘declaration page’ in insurance policy?

‘Declaration page’ in insurance policy, bears all the information of the policy holder like
name,address, vehicle information, type of coverage and loss payee information.

What do you mean by ‘Loss Payee’?

The loss payee is a person or institution (Bank) that receives the insurance payment on the
lossof the property or vehicle you own. It is a legal definition used to cover the investment
of other parties or bank that is owned by you. For example, you have a car on loan, and also
you have insurance for that car. Now you met an accident, and your car is a total loss
(meaning completely damaged beyond repair). Your bank still owes money from you in
such case when you claim the insurance; the insurance company will pay money directly to
Bank or person you owe money. Here bank is a loss payee.

What do you mean by ‘Deductible’?

Deductible is one of the several types of clause that are used by the insurance company as a
threshold for policy payment for health insurance or travel insurance. Deductible is a decided
amount that you have to pay from your pocket while claiming the insurance. For example,
youhave a deductible of $500, and you have insurance coverage for $2000, then you are
responsible for paying for $500 and the remaining amount $1500 will be paid by insurance
company.

What is Co-insurance?
Co-insurance term is usually referred to health insurance companies. In this type of policy,
you share the coverage with, the insurance company in percentage of the policy value, after
paying deductible or co-payment. It is the split of insurance coverage between you and
insurance company; usually the split would be 80/20 % where you are liable to pay 20% and
the remainingamount by the insurance company. For example, for health policy you have
claimed for $200, according to policy clause you have to pay deductible, let say $100, now
after paying deductiblethe remaining amount is $100, now you have a co-insurance which is
split into 80/20%. So you will pay $20 out of $100 from your pocket while the $80 will be

65 | P a g e
paid by co-insurance(meaning the insurance company).

What do you mean by term “Annuity”?

An annuity is the term used for the regular amount paid by the insurance company to the
insured, after a certain period of time. The payment can be monthly or quarterly, this is
oftendone to supplement income after retirement.

What is the Surrender Value?

Surrender Value is the amount when you stop paying the premium and withdraw the entire
amount. The policy ceases as soon as you withdraw the money, and the insured will lose out
allthe returns on it.

What is Paid Value?

The paid value is something, when the insured stops paying the premium but do not withdraw
the amount. The sum assured by the insurance company is reduced proportionally depending
when insured has stopped paying the premium. You will get the amount at the end of the
term.

Is it advisable to replace the policy with another policy?

If it is not a long duration that you have bought the policy, then you can replace the policy.
But inother case it is not advisable as you will lose all the benefits of the previous policy also
the premium will go high as you go older. Also, the two-year period of contestability will
also begin again.

How to claim the policy?

In order to claim the policy, you have to fill up the claim form and contact your financial
advisor from whom you have bought the policy. You have to supplement all the required
documents likeoriginal payment receipt to your insurance company. If everything is ok, you
will be paid within seven days of the policy claimed.

What happens if you fail to make required premium payments?

Usually, Insurance Company gives a grace period of 10-15 days to the insured if they fail to
paythe premium before the due date. Further, if you fail to pay a premium, then your policy
will lapse. You can revive your policy by paying the outstanding premium along with the
interest, counted from the date the policy got lapsed. Different Insurance Company has a
different norm for reviving the policy.

However, if your policy is in force for a longer period like say more than2-3 years, and if
you failto pay a premium, then insurance company will deduct the premium amount from
your accumulated funds, especially in permanent life insurance. This will continue till
there is an available fund after which your policy will be terminated.

66 | P a g e
Is it safe to pay the premium through Insurance Agent?
It is safe to pay the premium through your agent as far as you are making the payment
through cheques on the name of Insurance Company and receiving all the receipts for the
payments.

What is the difference between the participating and non-participating policy?

Participating policy is a policy, where the profit or benefits of the insurance company is
sharedwith the insured in the form of a dividend or reversionary bonuses. While, the non-
participatingpolicy, does not share their profit with insured.

Is it possible to restrict the premium payment for a lesser number of years than the
duration of the policy?
Certain Insurance company have a provision of Limited Premium Payment, through which
you can pay the premium in 3, 5, 7 or 10 years depend upon your income, and you still can
have thecoverage for the entire tenure of the policy.

Can beneficiary claim the policy if the insured person is missing or disappeared for
several years?
It is possible to claim, if the beneficiary has court declaration that says that the insured person
ismissing or legally dead (disappeared for more than 7 years).

Can an individual take two policies and claim for both of them?
Yes, an individual can take two policies and claim for both.

What do you mean by ‘Additional Insured’?

‘Additional Insured’ is the status associated mainly with property insurance and liability
insurance. The additional insured will be protected under the main policy holder. For
examplea vehicle insurance policy which covers all the members of family and not only
the owner.

General Insurance

What does ‘Indemnity’ term means?

‘Indemnity’ term in the insurance is used to cover the loss or damage claimed by
another person. For example, the owner of the gym has indemnity insurance to
compensate it customers in case of injury or accident and to avoid the financial loss
due to a lawsuit.

What do you mean by term ‘Double Indemnity’?

‘Double Indemnity’ is a provision provided by certain insurance companies, where
according to their policy they are liable to pay double the face amount in case of death by
accidental means or murder. This type of policy does not cover suicide, and death caused by
gross negligence ofthe insured person. For example, a person who dies due to natural causes

67 | P a g e
including heart disease or cancer, Murder or conspiracy by beneficiary, or death due to an
injury from sheer negligence.

What is subrogation?
‘Subrogation’ is referred as the process of seeking reimbursement from the responsible
party for a claim that they had already paid. For example, you have an accident where your
car getsdamaged, and you have car insurance, the insurance company will pay you the
money. But the
insurance company comes to know that the accident occurs due to other party fault, now they
willclaim the money from the other party this is known as ‘subrogation’.

What do you mean by term ‘cash value’?

‘Cash Value’ is the cash amount offered to the policy holder while cancelling the policy,
where a portion of the premium paid goes into saving plan. It is also referred as surrender
value. Thisterm is normally used for life Insurance contract.

What happens to the cash value after the policy is fully paid up?
After the policy is fully paid up, the company plans to use the cash value to pay your
premiumuntil you die. If you take the cash value out, the insurer will require you to pay
the premium orreduce the amount of the death benefit so the remaining cash value will
support.
Life-Insurance

What is the different type of Life Insurance?

There are two type of life insurance

Term Life Insurance:

Term life Insurance is a type of life Insurance, which provides coverage for fixed rate of
premium for a limited period of time. Term Insurance can cover you for the term of one
or twoyears.

Permanent Life Insurance:

Permanent Life Insurance covers an individual for the whole life; people take
permanent lifeinsurance about 25-30 years normally. The premiums are slightly higher
than Term Life Insurance.

What is Elimination period in insurance?

In the disability income insurance or loss of income insurance, the elimination period
is theamount of time you have to wait before benefits are paid. In other words, it is a
time- period between the beginning of the injury and the benefits you are paid off.
Longer the Elimination period lower the premium and vice versa.

68 | P a g e
What is an ‘Endowment Policy’?
An endowment policy is a combination of saving along with risk cover. This type of policy
is specially designed to accumulate wealth and at the same time cover your life. In this
type of policy the insured will pay a regular premium for specific time period. And in case
of death themoney will be paid to beneficiary but, if you outlive the policy tenure, you
will receive the sum assured along with accumulated bonus.

What does it mean when company says “no physical exam”?

Such insurance company that says, “No physical exam” gives freedom to the
policyholder to take policy and exempt the physical test that is mandatory by certain life
insurance company. Normally, such insurance company is more expensive and the
insured has to pay a higher premium on their policy.

What is ‘group life’ insurance?

‘Group life insurance’ is a single policy that covers an entire group. Such policy is taken
by anemployer for the bigger organization to cover their employee, as an individual policy
holder, it may cost more than a group policy.
Does beneficiary have to pay tax on the proceeding of life insurance policy?
Generally, the benefits on the life insurance policy are tax free and the beneficiary is not
liableto pay any tax after the death of the policy holder. But if you are changing your
beneficiary formonetary gain or other purposes then the beneficiary has to pay tax on it.

Is it possible to convert a part of term life insurance into permanent life insurance?
Yes, it is possible to convert as far as you are having a convertible life insurance policy.
Butthere is a deadline that has to be taken care of, for converting term life insurance
into permanent life insurance. Also, your premium will rise soon you convert your
policy.

Auto-Insurance

What is third party Insurance?

An insurance policy that covers the damage caused by another person or party is known as
third party Insurance. In this type of insurance, the insured is the first party, insurance
companyis the second party while the damage done by another is referred as the third party.
This type ofInsurance policy is purchased for vehicles, so that in case of the accident they
can claim it.

What is Personal Accident cover? Does it cover anywhere in the world?

Personal Accident Insurance is for your personal vehicle and covers any fatal accidents to
you or your family excluding driver. Most of the insurance company’s gives coverage
anywhere in the world.

69 | P a g e
 In what all Instances you cannot claim your Personal Accident Insurance?
1) If your injuries are a result of sickness or disease

2) If your injuries are self-inflicted or attempt to suicide

3) Stress fractures, sprains and strains

4) Injury occurred while committing crime

5) Deliberately cause a car accident

What is ‘gap insurance’?

‘GAP insurance’ is also known as Guaranteed Auto Protection. It covers the difference
between the actual cash value of the vehicle and the balance still owed on financing like
loan.GAP insurance amount is generally paid-up front.

What is ‘collision coverage’ and ‘comprehensive coverage’ in Auto insurance?

Collision coverage covers when you have a collision with any other object or vehicle while
comprehensive coverage covers your vehicle other than collision, when your car is not in use.

What is a ‘PLPD’ insurance stand for?

PLPD stands for ‘personal liability and property damage’. Personal liability covers when
an individual cause injury to others in an accident while property damage is done when
any property gets damaged. In both, the injured party or third party will claim for
insurance moneyfrom the insurance company of the offender.

Home Insurance

Does it cover silver or golden ornaments if I have ‘Home insurance’?

You can cover your valuable items like silver or golden ornaments in home insurance, but
yourpremium and policy amount will rise accordingly.

What is the difference between the ‘All perils’ and ‘Specified perils’ coverage in
home insurance coverage?
In home insurance coverage, ‘All perils’ protects you from the widest range of risks besides
common risks while ‘Specified perils’ will give coverage only for the common risks, that
is listedin your policy.

What is ‘schedule of loss’ in home insurance?

Schedule of loss is a document submitted to the insurance company to claim the policy; it
gives the information of damaged or lost items like model number, when it was purchased,
cost of theitem etc.

What in case if my house completely damage in, fire or flood, and if I stay in a rented

70 | P a g e
house, will insurance company bear all my additional living expenses?
If your policy has Additional Living Expenses coverage, then sure the insurance company
willpay you additional expense that you require, to maintain your normal standard of
living.

71 | P a g e
 Microeconoics
(BIN-107)

Microeconomics
Microeconomics is the social science that studies the implications of incentives and decisions,
specifically about how those affect the utilization and distribution of resources.
Microeconomics shows how and why different goods have different values, how individuals
and businesses conduct and benefit from efficient production and exchange, and how
individuals best coordinate and cooperate with one another. Generally speaking,
microeconomics provides a more complete and detailed understanding than macroeconomics.

Price theory
The study of the economic behavior of individual decision-making units such as consumers,
resource owners, and business firms in a free-enterprise economy.

Normative Economics
The study of what ought to be, or how the economic problems facing the society should be
solved.

Positive Economics
The study of what is, or how the economic problems facing a society are actually solved.

Economic Resources
Economic resources, factors of production, or inputs refer to the services of the various types
of labor, capital equipment, land (or natural resources), and (in a world of uncertainty)
entrepreneurship. Since in every society these resources are not unlimited in supply but are
limited or scarce, they command a price (i.e., they are economic resources).

Non-Economics Resources
Noneconomic resources such as air, which (in the absence of pol-lotion) is unlimited in supply
and free. In economics, our interest lies with economic resources, rather than with
noneconomic resources.

Change In Demand
A shift in the entire demand curve of a commodity resulting from a change in the individual’s
money income or tastes, or prices of other commodities.

Change in the Quantity Demanded

A movement along a given demand curve for a commodity as a result of a change In its price.

Change In The Quantity Supplied

A movement along a given supply curve for a commodity as a result of a change in Its price.

72 | P a g e
Change in supply
A shift in the entire supply curve of a commodity resulting from a change in technology, the
prices of The inputs necessary to produce the commodity, and (for agricultural commodities)
climate and weather conditions.

Equilibrium
The market condition which, once achieved, tends to persist. This occurs when the quantity of
a commodity Demanded equals the quantity supplied to the market.

Law of Demand
The inverse relationship between price and quantity reflected in the negative slope of a demand
curve.

Stable Equilibrium
The type of equilibrium where any deviation from equilibrium brings into operation market
force Which push us back toward equilibrium.

Unstable Equilibrium
The type of equilibrium where any deviation from the equilibrium position brings into
operation Forces which push us further away from equilibrium.

Elasticity of Demand
The coefficient of price elasticity of demand between two points on a demand curve.

Cross Elasticity of Demand

The ratio of the percentage change in the amount of commodity X purchased per unit of time
to the percentage change in the price of commodity Y. If exit. 0, X and Y are substitutes; if
exit, 0, X and Y are complements; and if exit ¼ 0, X and Y are nonrelated (i.e., independent).

Income Elasticity Of Demand

The ratio of the percentage change in the amount of a commodity purchased per unit of time to
the percentage change in the consumer’s income. If end. 0, the commodity is normal, and if
end, 0, it is inferior; if end. 1, it is a luxury, and if 0, end, 1, it is a necessity.

Point Elasticity Of Demand

The coefficient of price elasticity of demand at a particular point on a demand curve.

Price Elasticity Of Demand

The ratio of the percentage change in the quantity of a commodity demanded per unit of time
to the percentage change in the price of the commodity. If e. 1, demand is elastic; if e, 1, demand
is inelastic; and if e ¼ 1, demand is unitary elastic.
Price elasticity of supply

73 | P a g e
The ratio of the percentage change in the quantity of a commodity supplied per unit of time to
the percentage change in the price of the commodity.

Consumer equilibrium
The point where a consumer maximizes the total utility or satisfaction, subject to a given
income and price constraints. Consumer’s demand curve It shows the amount of a commodity
the consumer would purchase at various presenters paribus.

Income-consumption curve
The locus of points of consumer equilibrium resulting when only the consumer’s income is
varied.

Income effect
The increase in the quantity purchased of a commodity with a given money income when the
commodity price falls. Indifference curve shows the various combinations of two commodities
which yield equal utility or satisfaction to the consumer.

Marginal rate of substitution

The amount of commodity Y that a consumer is willing to give up in order to gain one
additional unit of commodity X (and still remain on the same indifference curve).

marginal utility (MU )

The change in the total utility per unit change in the quantity of a commodity consumed per
unit of time.

Price-consumption curve
The locus of points of consumer equilibrium resulting when only the price of the commodity
is varied.

Principle of diminishing marginal utility

A concept stating that as an individual consumes more units of a commodity per unit of time,
the total utility received increases, but the extra or marginal utility decreases.

saturation point
The point where the total utility received by an individual from consuming a commodity is
maximum And the marginal utility is zero.

Substitution effect
The increase in the quantity purchased of a commodity when its price falls (as a result of
consumers switching from the purchase of other similar commodities).

Total utility (TU)

The overall satisfaction that an individual receives from consuming a specified quantity of a
commodity per unit of time.

74 | P a g e
Utility
The property of a commodity that satisfies a want or need of a consumer.

Average product (AP)

Total product divided by the number of units of the input used.

Constant returns to scale

When all inputs are increased in a given proportion and the output produced increases exactly
in the same proportion.

Law of diminishing returns

As more units of an input are used per unit of time with fixed amounts of another input, the
marginal product of the variable input declines after a point.

Marginal product (MP)

The change in total product per unit change in the quantity used of one input.

Marginal rate of technical substitution (MRTS)

The amount of an input that a firm can give up by increasing the amount of the other input by
one unit and still remain on the same isoquant.

Production function
An equation, table, or graph showing the (maximum) quantity of a commodity that can be
produced per unit of time for each of a set of alternative inputs, when the best production
techniques available are used.

X-inefficiency
The degree by which the output of a commodity falls short of the maximum possible (indicated
by the production function) due to lack of adequate motivation of labour and management.

Perfect competition
The form of market organization in which (1) there are a great number of sellers and buyers of
the commodity, so that the actions of an individual cannot affect the price of the commodity,
(2) the products of all firms in the market are homogeneous, (3) there is perfect mobility of
resources, and (4) consumers, resource owners, and firms in the market have perfect knowledge
of present and future prices and costs.

Third-degree price discrimination

The practice of charging different prices in different markets in such a way that the last unit of
the commodity sold in each market gives the same MR.

75 | P a g e
Bertrand model
The premise of this model of oligopoly is that each oligopolistic firm, in attempting to
maximize its profits (or TR if TC ¼ 0), assumes that the other firm holds its price constant.

Cartel
A formal organization of producers within an oligopolistic industry that determines policies for
all firms in the cartel, with a view to increasing total profits for the cartel.

Centralized cartel
A cartel that makes all decisions for the member firms, leading to the monopoly solution.

Chamberlin model
It is similar to the Cournot model except that the two oligopolists recognize their
interdependence
and maximize their joint profits.

Cournot model
The premise of this model of oligopoly is that each oligopolistic firm, in attempting to
maximize its total profits (or TR if TC ¼ 0), assumes that the other firm holds its output
constant.

76 | P a g e
 Principles of Management
(BIN-108)

Career
Career means a job which you are trained for and which you expect do all your life- P. H.
Collin
Management:
The word Management comes from a Latin or Italian word manager (to train up the horses)

Management is a set of activities (including planning, organizing, leading, controlling) directed

at an organization’s resources (human, financial, physical, and information) With the aim of
achieving organizational goals in an efficient and effective manner.

Management is the co-ordination and integration of all resources, both human and technical to
accomplish various specific results.

In other words, management is the activities or process of proper utilization of the

organizational resources to achieve the optimal goal.

Who is Manager?
Manager is one who organizes other people’s doings. Those who undertake the task and
functions of managing at any level in any kind of enterprise.

Managerial Know-How:
Managerial knowledge applied effectively in practice; it includes both knowledge of the
science underlying managing and the artful ability to apply it to realities

Who is Father of Modern Management?

Henry Fayol

Define Scientific Management:

A set of principles to enhance worker productivity (DiCenzo)

Who is Father of scientific Management?

Frederick Winslow Taylor (Born in 1856, Philadelphia, USA)

The famous book of FW Taylor

The principle of scientific Management

Management level
There are three levels TOP, Middle, lower-level mgt.

What is the meaning of POSDCORB?

77 | P a g e
Given by Luther Gulick;
»Planning
» Organizing
»Staffing
»Directing
»Co-ordinating
»Recruiting
»Budgeting

Theory of Jungle
Given by Harold Koontz; there are six approaches in management school. These altogether
makes it confusing & perplexed that is theory of jungle.

6M in Management:
-Man-
Machine-
Materials-
Money-
Market-
Method

Meaning of Espiritu De corpse

-Unity is strength

McKinney’s 7s Model:

-Strategy-
Structure-
System-
Style-
Staff-
Shared values-
Skill

78 | P a g e
Pioneer of Z-Theory
Prof William Ouchy in 1981
Z theory:
This is a combination of American management and Japanese management system;
Features-
»Lifetime employment,
»Stable employment,
»High productivity,
»Decision making through open communication
»A great deal of collaboration
»Recognition of mutual dependence

What is the most important function of Management?

Planning; because other functions done on the basis of planning

Define Islamic Management

.Management in the light of Quran and Hadith or Islamic Management is the process of
planning, organizing, leading, and controlling the effort of organizational members and of
using all other organizational resources depending upon the guidance of Allah (SWT) and His
Prophet (SAW) with accountable mentality, integrity, and skill to achieve the predetermined
objectives.

Functions of Management:
Planning, Organizing, Staffing, Leading, Directing, Motivating, Coordinating, Controlling

Management art or science

It has been said that Management is an art struggling to become science, (Terry &Franklin).
So, it can be said that Management is both art and science.

Types of Managers
level manager (conceptual & design skills)

Managerial skill

 Technical skill
 Human skills or Interpersonal skill

79 | P a g e
  Conceptual
 Diagnostic skills
Managerial role:
Interpersonal roles: An interpersonal role means the roles of Figurehead, leader and liaison,
which involve dealing with other people.

Informational roles: Informational Roles mean the roles of Monitor, Disseminator, And
Spokesperson, which involve the processing information.

Decisional role: The roles of Entrepreneur, disturbance handler, resource allocator and
negotiator
Which primarily relates to making decisions.

What is the difference between unity of command and unity of direction?

The principle of unity of command is concerned with functioning of people while unity of
direction is related to the activities.

Unity of Command:
Employees get command from only one given authority. A subordinate (employee) must have
and receive orders from only one superior (boss or manager)

Unity of direction: One head and one plan for a group of activities with the same objective.
All activities which have the same objective must be directed by one manager, and he must use
one plan. This is called Unity of Direction

Management environment:
The elements of environment which affects management process is called management
environment.

What are the types of Management environment?

a) Internal environment; includes-

 Shareholders
 Owners
 Board of directors
 Employee
 Internal culture
b) External environment-
Task environment:

 Competitor

80 | P a g e
  Customer
 Supplier
 Strategic alliance
 Government agency
-General environment:

 Physical,
 Cultural,
 Economic,
 Political,
 Technological,
 Legal,
 International

SWOT means

 Strength
 Weakness
 Opportunity
 Threat

Mission:

The activities to be taken to achieve long term goal. What we do to meetup vision. The basic
function of a business of it

Vision
The ultimate goal of a business is called of its vision. Where we are going that is called vision

Goal
A goal is a future target that an organization wishes to achieve (Bartoli &Martin)

Goal Means the purpose that an organization strive to achieves (Ricky Griffin) Goals are the
ends toward which activity is aimed (Koontz)Specific objectives is called goals.

Objectives
The intended goal which prescribes definite scope and suggests direction to effort of a manager.
Strategies:

Strategy expresses the intention of management about the way to achieve objectives of
organization.
Or, A comprehensive plan for accomplishing an organizational goal. -Griffin

81 | P a g e
Strategic Plan:
Strategic Plans are broad plans developed by top managers to guide the general directions of
the org.

Kinds of Strategy:
»Corporate level strategy
»Business level strategy
»Functional level strategy

Policies
Policies may be defined as the regular process of accomplishing a work, such as selling product
in cash.
Permanent/standing solutions for recurring problem

Procedure
Procedures are plans that establish a required method of handling future activities. They are
chronologically sequences of required actions. They are guides to action rather than to thinking
and they detail the exact manner in which certain activities must be accompanied.

Rules
Rules spell out specific required actions or nonactions, allowing no discretion. They are usually
the simplest type of plan.

Program
Program is a single use plan for a large set of activities.

Budget
A budget is a statement of expected results expressed in numerical terms

What is SMART goal?

Goal should be SMART;

 Specific
 Measurable
 Achievable
 Result oriented
 Time bound
Decision Making
Decision Making is defined as the selection of a course of action among alternatives- Weinrich
and Koontz

82 | P a g e
Functional org.:
Combination or blend of functional and product departmentalization in which there is a dual
command system that emphasizes both inputs and outputs

Departmentalization:
The grouping into departments of work activities that are similar and logically connected.

Authority:
Authority means the right to give orders and the power to exact obedience - Fayol

Line Authority:
Formal Authority based on the hierarchical positions in the chain of command.

Power is much broader than authority (Legal right to command)

Responsibility:
The obligation to carry out duties and achieve goals related to a position- Bartoli &martin

Centralization
Centralization tends to concentrate decision making at the top of the org. (Terry and Franklin)

Decentralization
Dispersion of power and decision making to successively lower levels of the org. (Mosely)

83 | P a g e
 BIN – 109

Business Statistics (CC)

Q-1: What is Statistics?

Statistics is the discipline that concerns the collection, organization, analysis, interpretation,
and presentation of data.

Q-2: What are the Types of Statistics?

The two main branches of statistics are:

i. Descriptive Statistics: Through graphs or tables, or numerical calculations, descriptive
statistics uses the data to provide descriptions of the population.
ii. Inferential Statistics: Based on the data sample taken from the population, inferential
statistics makes the predictions and inferences.

Q-3: What is Measure of Central Tendency?

In statistics, a central tendency is a central or typical value for a probability distribution.

Colloquially, measures of central tendency are often called averages.

Q-4: What is Mean?

Mean is the average of the given numbers and is calculated by dividing the sum of given
numbers by the total number of numbers. Mean = (Sum of all the observations/Total number
of observations).

Q-5: What is Median?

The middle number; found by ordering all data points and picking out the one in the middle (or
if there are two middle numbers, taking the mean of those two numbers). How do I calculate
median?

If there is an odd amount of numbers, the median value is the number that is in the middle, with
the same amount of numbers below and above. If there is an even amount of numbers in the
list, the middle pair must be determined, added together, and divided by two to find the median
value.

Q-6: What is Mode?

The mode is the value that appears most frequently in a data set. A set of data may have one
mode, more than one mode, or no mode at all. The mode of a data set is the number that occurs
most frequently in the set. To easily find the mode, put the numbers in order from least to
greatest and count how many times each number occurs. The number that occurs the most is
the mode.

84 | P a g e
Q-7: What is Measure of Dispersion?

Dispersion refers to the range of potential outcomes of investments based on historical

volatility or returns. It can be measured using alpha and beta, which calculate risk-adjusted
returns and returns relative to a benchmark index, respectively. Generally speaking, the higher
the dispersion, the riskier an investment is, and vice versa.

Q-8: What do you mean by Absolute Measure of Dispersion?

An absolute measure of dispersion contains the same unit as the original data set. The absolute
dispersion method expresses the variations in terms of the average of deviations of observations
like standard or means deviations. It includes range, standard deviation, quartile deviation, etc.

Q-9: What do You mean by Relative Measures of Dispersion?

The relative measures of dispersion are used to compare the distribution of two or more data
sets. This measure compares values without units. Common relative dispersion methods
include: Co-efficient of Range.

Q-10: What are Moments in Statistics?

Moments are a set of statistical parameters to measure a distribution. Four moments are
commonly used: 1st, Mean: the average. 2d, Variance: Standard deviation is the square root of
the variance: an indication of how closely the values are spread about the mean.

Q-11: What is Skewness?

In probability theory and statistics, skewness is a measure of the asymmetry of the probability
distribution of a real-valued random variable about its mean.

Q-12: What is Kurtosis?

In probability theory and statistics, kurtosis is a measure of the "tailedness" of the probability
distribution of a real-valued random variable. Like skewness, kurtosis describes a particular
aspect of a probability distribution.

Q-13: What is Correlation?

Correlation is a statistical measure (expressed as a number) that describes the size and direction
of a relationship between two or more variables. A correlation between variables, however,
does not automatically mean that the change in one variable is the cause of the change in the
values of the other variable.

Q-14: What is Regression?

A regression is a statistical technique that relates a dependent variable to one or more

independent (explanatory) variables. A regression model is able to show whether changes
observed in the dependent variable are associated with changes in one or more of the
explanatory variables.

85 | P a g e
Q-15: What is Regression Coefficient?

The parameter β (the regression coefficient) signifies the amount by which change in x must
be multiplied to give the corresponding average change in y, or the amount y changes for a unit
increase in x. In this way it represents the degree to which the line slopes upwards or
downwards.

Q-16: What is Probability?

A probability is a number that reflects the chance or likelihood that a particular event will
occur. Probabilities can be expressed as proportions that range from 0 to 1, and they can also
be expressed as percentages ranging from 0% to 100%.

Q-17: What is Sample Space?

In probability theory, the sample space of an experiment or random trial is the set of all possible
outcomes or results of that experiment.

Q-18: What is Conditional Probability?

In probability theory, conditional probability is a measure of the probability of an event

occurring, given that another event has already occurred.

Q-19: What is Expected Value?

In probability theory, the expected value is a generalization of the weighted average.

Informally, the expected value is the arithmetic mean of a large number of independently
selected outcomes of a random variable.

Q-20: What does Bayes' Theorem Mean?

Bayes' Theorem states that the conditional probability of an event, based on the occurrence of
another event, is equal to the likelihood of the second event given the first event multiplied by
the probability of the first event.

86 | P a g e
 BIN – 110

Business Communication (CC)

Q-1: What is Communication?

The root of the word “communication” in Latin is communicate, which means to share, or to
make common. Communication is defined as the process of understanding and sharing
meaning.

Communication is the act of sending information or ideas via speech, visuals, writing or any
other such method.

Q-2: What are the Essential Components of Communication?

i. Source (The source imagines, creates, and sends the message).

ii. Ii. Message (The message8 is the stimulus or meaning produced by the source for the
receiver or audience).
iii. Channel (The channel is the way in which a message or messages travel between
source and receiver).
iv. Receiver (The receiver receives the message from the source, analyzing and
interpreting the message in ways both intended and unintended by the source).
v. Feedback (Feedback is composed of messages the receiver sends back to the source).
vi. Environment (The environment is the atmosphere, physical and psychological, where
you send and receive messages).
vii. Context (The context of the communication interaction involves the setting, scene, and
expectations of the individuals involved).
viii. Interference (Interference is anything that blocks or changes the source’s intended
meaning of the message).

Q-3: What is Business Communication?

Business relations are the connections that exist between all entities that engage in commerce.
That includes the relationships between various stakeholders in any business network, such as
those between employers and employees, employers and business partners, and all of the
companies a business associates with.

Q-4: What are the Principles of Communication?

Principles of Effective Communication – Clarity in Ideas, Appropriate Language, Attention,

Consistency, Adequacy, Proper Time, Informality, Feedback and a Few Others. The chief
purpose of communication is the exchange of ideas among various people working in the
organization.

Q-5: What are the Barriers of Communication?

The process of communication has multiple barriers. The intended communique will often be
disturbed and distorted leading to a condition of misunderstanding and failure of
communication. The Barriers to effective communication could be of many types like

87 | P a g e
linguistic, psychological, emotional, physical, and cultural etc. We will see all of these types
in detail below.

Q-6: What are the Methods of Communication?

i. Written communication: Written communication is any written message that two or
more people exchange. Written communication is typically more formal but less
efficient than oral communication. Examples of written communication include:
Emails, Text messages.
ii. Verbal communication: In the literal sense, verbal communication is oral
communication with words that you or others speak out loud.
iii. Visual communication: Visual communication is the use of visual elements to convey
ideas and information which include but are not limited to signs, typography, drawing,
graphic design, illustration, industrial design, advertising, animation, and electronic
resources.
iv. Audiovisual communication: Audio visual communication means communication by
which an individual is able to see, hear, and communicate with a remotely located
individual in real time using electronic means.
v. External communications: External communications are the processes responsible for
communicating with people and entities outside your organization. These include
customers, businesses, suppliers, partners, investors, government agencies, and law
enforcement.
vi. Internal communication: Internal communication is the function responsible for
effective communications among participants within an organization.
vii. Formal communication: Formal communication refers to the flow of official
information through proper, predefined channels and routes. The flow of information
is controlled and needs deliberate effort to be properly communicated.
viii. Informal communication: Informal communication refers to the communication that
flows without following the formal defined path. An informal communication system
is also known as grapevine. Under informal communication, a piece of information
flows in all directions without paying any heed to the level or authority.

Q-7: What is a Communication Network?

A communication network refers to the method that employees pass on information to other
employees in an organization.

Q-8: What is Interpersonal Communication?

Interpersonal communication is the communication where exchange of ideas and information

happens between two or more people by way of any channel. This can be face to face, online,
over the phone, or in written forms as well.

Q-9: What is Intra-personal Communication?

Intra-personal communication is the communication done with oneself. Included are the
thoughts, assessments, contemplations, and feelings that are associated with one’s inner
communication.

Q-10: What is Mass Communication in Business Enterprises?

88 | P a g e
Mass communication (or communications) can be defined as the process of creating, sending,
receiving, and analyzing messages to large audiences via verbal and written media. It is an
expansive field that considers not only how and why a message is created, but also the medium
through which it is sent.

BIN – 201

Operation of Life & Non-Life Insurance

Q-1: What is Life Insurance?

Life insurance is a contract in which an insurer, in exchange for a premium, guarantees payment
to an insured's beneficiaries when the insured dies.

Q-2: What is Cash Value of Policy?

Cash values are sums payable to policyholders who choose to discontinue their insurance;
automobile policies never do, some life insurance policies – term policies — do not provide
cash values. Cash values increase year by year; the amounts are shown in the policies.

Q-3: How is Mortality Risk Covered?

Life insurance covers the mortality risk, the financial uncertainty associated with dying.
Basically, life insurance protects against the risk of dying too soon. That is, the primary
financial risk from the viewpoint of the family is that death may cut off their source of income
while the income is still needed, especially for raising children. Life insurance transfer the
mortality risk to an insurance company, the insurance company, handling a large number of
similar risks, computes the premiums it must charge on the basis of records of large groups of
people.

Q-4: Why are Life Insurance Policies Not Contracts of Indemnity?

i. No attempt is made to measure the actual loss resulting from the policyholder’s death.
ii. A life insurance company cannot subrogate against another party responsible for an
insured’s death.
iii. Life insurance policies do not contain other insurance provisions.

Q-5: What is Term Insurance and its Classification?

i. Term life insurance provides death protection for a stated length of time.

ii. Renewable Term policy: the policy can be renewed at the option of insured without
showing evidence of insurability or in other word, regardless of the state of insured’s
health.

89 | P a g e
 iii. Convertible term policy: these policies give the insured the option of converting the
coverage to a whole life or endowment policy, again without evidence of insurability.

Q-6: What are the Limitation of Term Insurance Policy?

i. Expire at the end of their term.

ii. Increasing costs.
iii. Absence of cash values.

Q-7: What is Endowment Insurance?

It pays a stated amount if the insured dies during a specified period of time or pays the same
amount if the insured is living at the end of the period. Unlike term policies, endowment
policies have cash value.

Q-8: What is Whole Life Insurance?

Whole life insurance provides lifetime protection by means of level premium, cash value
policies. In terms of both cost and amount of cash value, whole life occupies the middle ground
between term and endowment. These policies are single premium whole life policy, limited
payment whole life, straight life etc.

Q-9: Who is Beneficiary?

The beneficiary is the person or other entity named by the policy holder to receive the proceeds
of the policy after the death of the insured.

Q-10: Who is the Contingent Beneficiary?

A contingent beneficiary frequently is named. This person receives the policy proceeds if the
primary beneficiary is no longer living when the insured dies.

Q-11: What is Grace Period?

The grace period allows a number of days, usually 31 days to elapse after the due date. If the
premium is paid during this period, the policy remains in force.

Q-12: What is Reinstatement?

If an insured person fails to pay the premium due to various circumstances and as a result the
insurance policy gets terminated, then the insurance coverage can be renewed. This process of
putting the insurance policy back after a lapse is known as reinstatement.

Q-13: What is an Incontestable Clause?

An incontestability clause is a provision in a life or disability insurance policy that prevents the
insurance company from cancelling the policy based on misstatements in the policy application
after the insurance has been in effect for a certain period of time, usually two years.

Q-14: What is Suicide Clause?

90 | P a g e
If an insured dies by suicide during the first two years of policy coverage, the beneficiary
receives only the premiums that had been paid until that time. After the policy has been in force
for two years, it applies to suicide just as it does to death resulting from other causes. The
purpose of the suicide clause is to prevent the insuring of people who plan to kill themselves.

Q-15: What are Non-forfeiture Provisions?

Cash value of policies that have been in force for at least a year or two cannot expire without
value. A non-forfeiture clause is a provision in an insurance policy that guarantees the insured
will receive some benefit, even if they cancel their policy or cannot pay their premiums. This
clause can be helpful if the policyholder experiences financial difficulties and can no longer
afford to pay their premiums. Some insurance policies that may have non-forfeiture clauses
include disability insurance policies, permanent life insurance policies and some long-term care
insurance policies. The clause can be beneficial to policyholders, as it ensures they will not
lose all of their investment if they fail to pay for their policy or have to cancel for another
reason.

Q-16: What is Life Annuities?

Life annuity is a series of payments that continues for as long as the payee or the insured person
or beneficiary.

Q-17: What is Waiver of Premium?

This option states that future premiums will not have to be paid if the insured becomes totally
and permanently disabled before a stated age usually 60 or 65.

Q-18: What is Auto Insurance?

Auto insurance is a contract between you and the insurance company that protects you against
financial loss in the event of an accident or theft. In exchange for your paying a premium, the
insurance company agrees to pay your losses as outlined in your policy.

Q-19: Do Auto Owners Get Medical Payment Coverage?

The auto owner can receive payment for medical expenses arising out of an accident. Coverage
is for medical expenses for the named insured and family members hurt in any auto and other
persons that are hurt while occupying a covered auto.

Q-20: What is Uninsured and Underinsured Motorists Coverage?

If an insured person is legally entitled to recover damages from the owner or operators of a
motor vehicle who has not purchased auto liability insurance, whose insurer is insolvent or
denies coverage, or who is a hit-and-run driver, uninsured motorists coverage allows the
insured to recover damages from his or her own insurer up to the policy.

Q-21: What is Risk?

Risk is the chance something harmful or unexpected could happen.

91 | P a g e
Q-22: What is Loss?

In insurance, a loss is an unexpected reduction or disappearance of economic value.

Q-23: What is Peril?

A peril is the cause of a loss. Commonly insured perils include fire, theft, explosion and illness.

Q-24: What is Hazard? Describe Physical Hazard, Moral Hazard and Morale Hazard.

A hazard is a condition that increases the likelihood of loss due to a particular peril.

i. Physical Hazards: Physical hazards are actions, behaviors, or conditions that cause or
contribute to peril. Smoking is considered a physical hazard because it increases the
chance of a fire occurring. It also is considered a physical hazard in regard to health
insurance because it increases the probability of severe illness.
ii. Moral Hazard: A moral hazard is a situation in which a person with insurance takes
greater risks than they normally would without insurance, because they know their
insurer will foot the bill if something bad happens.
iii. Morale Hazard: Morale hazard describes the same kind of behavioral change that
might occur when a person knows insurance will cover them, but in this case, it's
subconscious. The critical difference between moral hazard and morale hazard is
conscious vs. subconscious, which speaks to the intent of the covered party.

Q-25: Why Insurance is not gambling?

However, buying insurance is actually very different from gambling. When we enter into a
gambling engagement, such as buying a lottery ticket or putting money in a slot machine, we
create a risk of loss that did not previously exist. In other words, there was no risk of losing
money to gambling until we bought the lottery ticket or put the money in the slot machine.
Conversely, the risk of financial loss from other causes already exists whether we purchase
insurance or not. For example, my home faces the same risk of being burned down by a fire
whether I buy homeowners insurance or not. If I do not have homeowners insurance, I am faced
with the possibility of having to pay completely out of my pocket to rebuild my home in the
event of a fire.

BIN – 202

Principles of Marketing (CC)

Q-1: What is Marketing?

Marketing is the process by which companies engage customers, build strong customer
relationships, and create customer value in order to capture value from customers in return

Q-2: What are Market Offerings?

Some combination of products, services, information, or experiences offered to a market to

satisfy a need or a want. Market offerings are not limited to physical products. They also

92 | P a g e
include services—activities or benefits offered for sale that are essentially intangible and do
not result in the ownership of anything. Examples include banking, airline, hotel, retailing, and
home repair services.

Q-3: What is Marketing Myopia?

The mistake of paying more attention to the specific products a company offers than to the
benefits and experiences produced by these products.

Q-4: What is a Market?

A market is the set of actual and potential buyers of a product or service. These buyers share a
particular need or want that can be satisfied through exchange relationships.

Q-5: What is the Production Concept of Marketing?

The production concept holds that consumers will favour products that are available and highly
affordable. Therefore, management should focus on improving production and distribution
efficiency. This concept is one of the oldest orientations that guides sellers.

Q-6: What is the Product Concept?

The product concept holds that consumers will favour products that offer the most in quality,
performance, and innovative features. Under this concept, marketing strategy focuses on
making continuous product improvements.

Q-7: What is the Selling Concept?

The idea that consumers will not buy enough of the firm’s products unless the firm undertakes
a large-scale selling and promotional effort.

Q-8: What is the Social Marketing Concept?

The idea that a company’s marketing decisions should consider consumers’ wants, the
company’s requirements, consumers’ long-run interests, and society’s long-run interests.

Q-9: What is Customer Perceived Value?

Customer perceived value is defined as what your customers believe that they stand to gain or
benefit from purchasing from your brand compared to the price they pay.

Q-10: What is Customer Satisfaction?

Customer satisfaction is defined as a measurement that determines how happy customers are
with a company’s products, services, and capabilities. Customer satisfaction information,
including surveys and ratings, can help a company determine how to best improve or change
its products and services.

93 | P a g e
Q-11: What is Customer Relationship Management?

Customer relationship management is the overall process of building and maintaining

profitable customer relationships by delivering superior customer value and satisfaction. It
deals with all aspects of acquiring, engaging, and growing customers.

Q-12: What is Strategic Planning?

Strategic planning is the process of developing and maintaining a strategic fit between the
organization’s goals and capabilities and its changing marketing opportunities.

Q-13: What Is Market Penetration?

Market penetration is a measure of how much a product or service is being used by customers
compared to the total estimated market for that product or service. Market penetration can also
be used in developing strategies employed to increase the market share of a particular product
or service. Market penetration can be used to determine the size of the potential market. If the
total market is large, new entrants to the industry might be encouraged to gain market share or
a percentage of the total number of potential customers in the industry.

Q-14: What is Market Diversification?

Market diversification is a strategy in which a company seeks growth by adding products and
markets of a kind unrelated to its existing products and markets.

Q-15: What Is a Value Chain?

A value chain is a series of consecutive steps that go into the creation of a finished product,
from its initial design to its arrival at a customer's door. The chain identifies each step in the
process at which value is added, including the sourcing, manufacturing, and marketing stages
of its production.

Q-16: What Is a Marketing Strategy?

A marketing strategy refers to a business’s overall game plan for reaching prospective
consumers and turning them into customers of their products or services. A marketing strategy
contains the company’s value proposition, key brand messaging, data on target customer
demographics, and other high-level elements.

Q-17: What Is Market Segmentation?

The process of dividing a market into distinct groups of buyers who have different needs,
characteristics, or behaviors and who might require separate marketing strategies or mixes is
called market segmentation.

Q-18: What is Market Targeting?

Market targeting involves evaluating each market segment’s attractiveness and selecting one
or more segments to enter.

94 | P a g e
Q-19: What is Market Positioning?

Positioning is arranging for a product to occupy a clear, distinctive, and desirable place relative
to competing products in the minds of target consumers. Marketers plan positions that
distinguish their products from competing brands and give them the greatest advantage in their
target markets.

Q-20: What Is a Marketing Mix?

A marketing mix includes multiple areas of focus as part of a comprehensive marketing plan.
The term often refers to a common classification that began as the four Ps: product, price,
placement, and promotion.

Q-21: What Is SWOT Analysis?

SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to

evaluate a company’s competitive position and to develop strategic planning. SWOT analysis
assesses internal and external factors, as well as current and future potential.

Q-22: What Is a Marketing Environment?

A marketing environment encompasses all the internal and external factors that drive and
influence an organization's marketing activities.

Q-23: What is the Micro-environment of Marketing?

The micro-environment refers to the forces that are close to the company and affect its ability
to serve its customers. It influences the organization directly.

Q-24: What is the Macro-environment of Marketing?

Macro environment factors which consist of external forces. These external factors influence
the company’s marketing strategy to a great length. The external environment factors are
uncontrollable and the company finds it hard to tackle the external factors.

Q-25: What is Complex Buying Behavior?

Complex buying behavior occurs when the consumer is highly involved with the purchase and
when there are significant differences between brands.

Q-26: What is Habitual Buying Behavior?

Habitual buying behavior occurs under conditions of low-consumer involvement and little
significant brand difference.

Q-27: What is the Institutional Market?

The institutional market consists of schools, hospitals, nursing homes, prisons, and other
institutions that provide goods and services to people in their care.

95 | P a g e
Q-28: What is Market Segmentation?

Market segmentation involves dividing a market into distinct groups of buyers who have
different needs, characteristics, or behaviors and who might require separate marketing
strategies or mixes.

Q-29: What is Market Targeting?

Market targeting (or targeting) consists of evaluating each market segment’s attractiveness and
selecting one or more market segments to enter.

Q-30: What is Competitive Advantage?

It means an advantage over competitors gained by offering greater customer value either by
having lower prices or providing more benefits that justify higher prices.

Q-31: What are Convenience Products?

A convenience product is a consumer product or service that consumers normally buy

frequently, immediately and without great comparison or buying effort.

Q-32: What are Shopping Products?

Shopping products are products that the customer usually compares on attributes such as
quality, price and style in the process of selecting and purchasing. Thus, a difference between
the two types of consumer products presented so far is that the shopping product is usually less
frequently purchased and more carefully compared. Therefore, consumers spend much more
time and effort in gathering information and comparing alternatives.

Q-33: What are Specialty Products?

The products and services with unique characteristics or brand identification for which a
significant group of consumers is willing to make a special purchase effort.

Q-34: What are Unsought Products?

Unsought products are those consumer products that a consumer either does not know about or
knows about but does not consider buying under normal conditions. Thus, consumers do not
think about these products under normal circumstances, at least not until they need them.

Q-35: What is the Product Line?

A product line is a group of products that are closely related because they function in a similar
manner, are sold to the same customer groups, are marketed through the same types of outlets,
or fall within given price ranges. For example, Nike produces several lines of athletic shoes
and apparel, and Marriott offers several lines of hotels.

Q-36: What Is the Product Life Cycle?

The term product life cycle refers to the length of time a product is introduced to consumers
into the market until it's removed from the shelves. This concept is used by management and
by marketing professionals as a factor in deciding when it is appropriate to increase advertising,
reduce prices, expand to new markets, or redesign packaging.

96 | P a g e
Q-37: What is Price?

Price is the amount of money that has to be paid to acquire a given product.

Q-38: What is Good Value Pricing?

Good-value pricing is a strategy that offers the right combination of quality and good service
at a fair price.

Q-39: What is Value-added Pricing?

Attaching value-added features and services to differentiate a company’s offers and charging
higher prices refers to Value-added pricing. Value-added pricing differentiates products by
adding features or services that your competitors don't have and that customers will pay more
for.

Q-40: What Is the Break-Even Point (BEP)?

The break-even point for a trade or investment is determined by comparing the market price of
an asset to the original cost; the break-even point is reached when the two prices are equal.

Q-41: What is Break-even Pricing?

Break-even pricing is an accounting pricing methodology in which the price point at which a
product will earn zero profit is calculated. In other words, it is the point at which cost is equal
to revenue.

Q-42: What Is Competitive Pricing?

Competitive pricing is the process of selecting strategic price points to best take advantage of
a product or service based market relative to competition.

Q-43: What Is Penetration Pricing?

Penetration pricing is a marketing strategy used by businesses to attract customers to a new

product or service by offering a lower price during its initial offering. The lower price helps a
new product or service penetrate the market and attract customers away from competitors.
Market penetration pricing relies on the strategy of using low prices initially to make a wide
number of customers aware of a new product.

Q-44: What is Product Line Pricing?

Product line pricing involves the separation of goods and services into cost categories in order
to create various perceived quality levels in the minds of consumers.

Q-46: What is Psychological Pricing?

Psychological pricing is the business practice of setting prices lower than a whole number. The
idea behind psychological pricing is that customers will read the slightly lowered price and
treat it lower than the price actually is.

Q-47: What Is Promotional Pricing?

97 | P a g e
Promotional pricing is a sales strategy in which brands temporarily reduce the price of a product
or service to attract prospects and customers. By lowering the price for a short time, a brand
artificially increases the value of a product or service by creating a sense of scarcity.

BIN – 203

BUSINESS MATHEMATICS 2

Q-1: What is Business Mathematics?

Business Math always deals with profit or loss. The cost of a product is fixed by taking into
consideration it’s profit, margin, cash discount, trade discount, etc. Business mathematics is
used by commercial companies to record and manage business works. Commercial businesses
use maths in departments of accounting, inventory management, marketing, sales forecasting
and financial analysis.
Q-2: Describe Some Basic Terms in Business Mathematics.
i. Selling Price: The market price is taken to sell a product.
ii. Cost Price: The original price of the product is the cost price.
iii. Profit: If the selling price is more than the cost price, the difference in the prices is the
profit.
iv. Loss: If the selling price is less than the cost price, the difference in the prices is the
loss.
v. Discount: The reduced amount in the selling price of a product.
vi. Simple Interest: Simple interest is that interest which is counted against the capital
amount or the portion of the main amount that remains unpaid.
vii. Compound Interest: Compound interest is the investment rate that increases
exponentially.

Q-3: Give Some Formulas Used in Business Mathematics.

i. Net Income = Revenue – Expense
ii. Assets = Liabilities + Equity
iii. Equity = Assets – Liabilities
iv. Cost of Goods Sold= Beginning inventory + Purchase during the period – Ending
inventory
v. Break-Even Point = Fixed cost / (Sales Price per unit – variable cost per unit)
vi. Current Ratio = Current Assets / Current Liabilities
vii. Profit Margin = (Net Income/ Revenue) × 100
viii. ROI = [(Invest gain – Cost of Investment)/ Cost of Investment] × 100
ix. Markup Percentage = [(Revenue- COGS)/COGS] × 100
x. Selling Price using Markup = (COGS × markup percentage) + COGS
xi. Inventory Shrinkage = [(Recorded Inventory – Actual Inventory)/ Recorded Inventory]
× 100

98 | P a g e
Q-4: What are the Uses of Mathematics in business?

In order to known a business it requires skill more than the developing a product or providing
a service. If a business has to survive ad succeed it needs to look after the finances and make
necessary arrangements for it to prosper as well. Understanding business mathematics is
important to maintain profitable operations and accurate keeping of records. It is required right
from the start for pricing products/services till the end when we need to check if the budget
was met. Let’s look at situations where business mathematics is required:

i. Production costs calculation: Before one formally starts production and establishes
its business it is very important to estimate the costs that would be incurred in relation
to the manufacturing such as the cost of raw materials, machinery, rent, administrative
expenses etc. In addition to these basic expenses there are other associated costs such
as marketing, warehousing, interest and repayment of loans etc. Once all he expenses
relating to production have been included I would be easy to estimate the profit from it
to sustain and remain competitive in the market. Accurately determining the cost
associated with each item will make the base for the business strong.
ii. Price determination: When you have successfully determined the costs, the next task
is to price the products correctly so that it generates right amount of cash flows for
future requirements of the business. Charging the correct selling price would ensure
that the product remains profitable.
iii. Profit Measurement: These require determining the net profit by subtracting the
operating costs from the total amount of sales/revenue during a period of time. What
also needs to deducted are the tax, depreciation, discount expenses. This helps to find
out if the products are being charged enough to continue the business operations and
expand.
iv. Financial Analysis: You need to project the revenue and expenses of a business if we
need to analyze the financial health of a business. We need to do sensitivity analysis of
how an increase or decrease in sales figure or pricing could affect the business. It helps
in determining how each employee contributes to the business and how I would affect.
Using business mathematics helps in making these interpretations ad take the business
to a higher level.

Q-5: What is Integration?

In mathematics, an integral assigns numbers to functions in a way that describes displacement,

area, volume, and other concepts that arise by combining infinitesimal data. The process of
finding integrals is called integration.

Q-6: What are the Economic Application of Integration?

Integration helps us to find out the total cost function and total revenue function from the
marginal cost. It is possible to find out consumer's surplus and producer's surplus from the
demand and supply function. Cost and revenue functions are calculated through indefinite
integral.

Q-7: What is Differential equation?

99 | P a g e
In mathematics, a differential equation is an equation that relates one or more unknown
functions and their derivatives. In applications, the functions generally represent physical
quantities, the derivatives represent their rates of change, and the differential equation defines
a relationship between the two.

Q-8: Briefly Describe Arithmetic Progression & Geometric Progression.

The differences between every two consecutive terms are all the same in an arithmetic
progression (AP), whereas the ratios of every two consecutive terms are all the same in a
geometric progression (GP).

Q-9: How to Calculate Present Value?

The present value formula is PV=FV/(1+i)n, where you divide the future value FV by a factor
of 1 + i for each period between present and future dates.

Q-10: How to Calculate Future Value?

In general, the future value of a sum of money today is calculated by multiplying the amount
of cash by a function of the expected rate of return over the expected time period. In its most
basic form, the formula for future value (FV) is FV= PV*(1+i)^n, where “PV” equals the
present value, “i” represents the interest rate and “n” represents the number of time periods.

Q-11: What is Simple Interest?

Simple interest is a quick and easy method of calculating the interest charge on a loan. Simple
interest is determined by multiplying the daily interest rate by the principal by the number of
days that elapse between payments.

Q-12: What is Compound Interest?

Compound interest refers to interest payments that are made on the sum of the original principal
and the previously paid interest. An easier way to think of compound interest is that is it
“interest on interest,” where the amount of the interest payment is based on changes in each
period, rather than being fixed at the original principal amount.

Q-13: What is Annuity?

In investment, an annuity is a series of payments made at equal intervals. Examples of annuities

are regular deposits to a savings account, monthly home mortgage payments, monthly
insurance payments and pension payments.

Q-14: What is Ammortization?

Amortization is an accounting technique used to periodically lower the book value of a loan or
an intangible asset over a set period of time. Concerning a loan, amortization focuses on
spreading out loan payments over time. When applied to an asset, amortization is similar to
depreciation.

100 | P a g e
 BIN – 204

MACROECONOMICS (CC)
Q-1: What is GDP?

Gross domestic product (GDP) is the total monetary or market value of all the finished goods
and services produced within a country’s borders in a specific time period.

Q-2: What is GNP?

GNP measures the output of a country's residents regardless of the location of the actual
underlying economic activity.

Q-3: What are the Factors of Production?

Factors of production are resources that are the building blocks of the economy; they are what
people use to produce goods and services. Economists divide the factors of production into
four categories: land, labor, capital, and entrepreneurship.

Q-4: What Is Fiat Money?

Fiat money is a government-issued currency that is not backed by a physical commodity, such
as gold or silver, but rather by the government that issued it. The value of fiat money is derived
from the relationship between supply and demand and the stability of the issuing government,
rather than the worth of a commodity backing it. Most modern paper currencies are fiat
currencies, including the U.S. dollar, the euro, and other major global currencies.

Q-5: How Do Central Banks Control the Supply of Money?

To ensure a nation's economy remains healthy, its central bank regulates the amount of money
in circulation. Influencing interest rates, printing money, and setting bank reserve requirements
are all tools central banks use to control the money supply. Other tactics central banks use open
market operations and quantitative easing, which involve selling or buying up government
bonds and securities.

Q-6: Why the Quantity of Money Matters?

The quantity of money circulating in an economy affects both micro- and macroeconomic
trends. At the micro-level, a large supply of free and easy money means more spending by
people and by businesses. Individuals have an easier time getting personal loans, car loans, or
home mortgages; companies find it easier to secure financing, too.

At the macroeconomic level, the amount of money circulating in an economy affects things
like gross domestic product, overall growth, interest rates, and unemployment rate. The central
banks tend to control the quantity of money in circulation to achieve economic objectives and
affect monetary policy.

Q-7: What Is the Monetary Base?

The monetary base of an economy includes all of the physical paper and coin currency in
circulation, plus bank reserves held by the central bank. The monetary base is sometimes

101 | P a g e
referred to as "high-powered money" as it can be expanded through the money multiplier effect
of the fractional reserve banking system.

Q-8: What Are Reserve Requirements?

Reserve requirements are the amount of funds that a bank holds in reserve to ensure that it is
able to meet liabilities in case of sudden withdrawals. Reserve requirements are a tool used by
the central bank to increase or decrease the money supply in the economy and influence interest
rates.

Q-9: What Is Inflation?

Inflation is a rise in prices, which can be translated as the decline of purchasing power over
time. The rate at which purchasing power drops can be reflected in the average price increase
of a basket of selected goods and services over some period of time. The rise in prices, which
is often expressed as a percentage, means that a unit of currency effectively buys less than it
did in prior periods. Inflation can be contrasted with deflation, which occurs when prices
decline and purchasing power increases.

Q-10: What are the Causes of Inflation?

1. Printing and giving away more money to citizens

2. Legally devaluing (reducing the value of) the legal tender currency
3. Loaning new money into existence as reserve account credits through the banking
system by purchasing government bonds from banks on the secondary market (the most
common method)

Q-11: What is Demand-Pull Inflation?

Demand-pull inflation occurs when an increase in the supply of money and credit stimulates
the overall demand for goods and services to increase more rapidly than the economy's
production capacity. This increases demand and leads to price rises. When people have more
money, it leads to positive consumer sentiment. This, in turn, leads to higher spending, which
pulls prices higher. It creates a demand-supply gap with higher demand and less flexible
supply, which results in higher prices.

Q-12: What is Cost-push Inflation?

Cost-push inflation is a result of the increase in prices working through the production process
inputs. When additions to the supply of money and credit are channeled-into commodity or
other asset markets, costs for all kinds of intermediate goods rise. This is especially evident
when there's a negative economic shock to the supply of key commodities.

Q-13: What is the Nominal Interest Rate?

The nominal interest rate is the rate that is advertised by banks, debt issuers, and investment
firms for loans and various investments. It is the stated interest rate paid or earned to the lender
or by an investor.

Q-14: What is the Real Interest Rate?

The real interest rate is the stated interest rate associated with an investment or loan, minus the
inflation rate.

102 | P a g e
Q-15: What Is Hyperinflation?

Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases
in an economy. While inflation measures the pace of rising prices for goods and services,
hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.
Although hyperinflation is a rare event for developed economies, it has occurred many times
throughout history in countries such as China, Germany, Russia, Hungary, and Georgia.

Q-16: What is Imported Inflation?

Imported inflation is a general and sustainable price increase due to an increase in costs of imported
products. This price increase concerns the price of raw materials and all imported products or services
used by companies in a country. Imported inflation is also referred to as cost inflation.

Q-17: What is the Nominal Exchange Rate?

The nominal exchange rate is the relative price of the currencies of two countries.

Q-18: What is the Real Exchange Rate?

The real exchange rate is the relative price of the goods of two countries.

Q-19: What Is the Balance of Payments (BOP)?

The balance of payments (BOP), also known as the balance of international payments, is a
statement of all transactions made between entities in one country and the rest of the world
over a defined period, such as a quarter or a year. It summarises all transactions that a country's
individuals, companies, and government bodies complete with individuals, companies, and
government bodies outside the country.

Q-20: What Is the Current Account?

The current account records a nation's transactions with the rest of the world—specifically its
net trade in goods and services, its net earnings on cross-border investments, and its net transfer
payments—over a defined period, such as a year or a quarter.

Q-21: What is Unemployment?

Unemployment occurs when workers who want to work are unable to find jobs.

Q-22: What Is Frictional Unemployment?

Frictional unemployment occurs with voluntary employment transitions within an economy.
As workers choose to move from one job to another and new workers enter the workforce for
the first time, a temporary period of unemployment is created.

Q-23: What is the Subsistence Wage Level?

The lowest wage upon which a worker and his or her family can survive.

Q-24: What is the IS-LM Model?

103 | P a g e
The IS-LM model, which stands for "investment-savings" (IS) and "liquidity preference-
money supply" (LM) is a Keynesian macroeconomic model that shows how the market for
economic goods (IS) interacts with the loanable funds market (LM) or money market. It is
represented as a graph in which the IS and LM curves intersect to show the short-run
equilibrium between interest rates and output.

Q-25: What Is the Q Ratio or Tobin's Q?

The Q ratio, also known as Tobin's Q, equals the market value of a company divided by its
assets' replacement cost. Thus, equilibrium is when market value equals replacement cost. At
its most basic level, the Q Ratio expresses the relationship between market valuation and
intrinsic value. In other words, it is a means of estimating whether a given business or market
is overvalued or undervalued.

BIN – 205
GENERAL COMMERCIAL LAW (CC)

Q-1: What is Law?

There is no agreed universal definition of this law. It means different things in either social or
physical sciences.

Salmond; defines law as the principles set out by the government enforceable on people to
achieve justice.

Hart; says the law is the coercive instrument for regulating social behavior.

Q-2: What is Commercial Law?

Commercial law also known as business law is the body of law that governs business and
commercial transactions. It is often considered to be a branch of civil law and deals with issues
of both private law and public law.

Q-3: What is a Contract?

A contract is a legally enforceable agreement between two or more parties that creates, defines,
and governs mutual rights and obligations between them. A contract typically involves the
transfer of goods, services, money, or a promise to transfer any of those at a future date.

Q-4: What are the Essential Elements of a Contract?

Even though contracts are infinitely varied in length, terms, and complexity, all contracts must
contain these six essential elements.

i. Offer (An offer refers to a promise that one party makes in exchange for another party's
performance).

104 | P a g e
 ii. Acceptance (In the context of contracts, acceptance refers to one person's compliance
with the terms of an offer made by another.)
iii. Awareness (Often called “a meeting of the minds,” both parties to a contract must be
active participants. They must recognize the contract exists and are freely agreeing to
be bound by that document's obligations. In fact, contracts can be voided if awareness
is not adequately established.)
iv. Consideration (Anything of value promised by one party to the other when making a
contract can be treated as consideration)
v. Capacity (In the context of contract law, the term “capacity” denotes a person's ability
to satisfy the elements required for someone to enter binding contracts. For example,
capacity rules often require a person to have reached a minimum age and to be of sound
mind).
vi. Legality (Legality, in respect of an act, agreement, or contract is the state of being
consistent with the law or of being lawful or unlawful in a given jurisdiction, and the
construct of power).

Q-5: What is a Breach of Contract?

A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding
contract. The breach could be anything from a late payment to a more serious violation, such
as the failure to deliver a promised asset. When a contract has been broken, the party who
suffers by such breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him.

Q-6: What are the Remedies for Breach of Contract?

There are several remedies for breach of contract, such as award of damages, specific
performance, rescission, and restitution. In courts of limited jurisdiction, the main remedy is
an award of damages. Because specific performance and rescission are equitable remedies that
do not fall within the jurisdiction of the magistrate courts, they are not covered in this tutorial.

Q-7: What is meant by Partnership?

"Partnership" is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all. So a partnership is an arrangement where parties,
known as business partners, agree to cooperate to advance their mutual interests. The partners
in a partnership may be individuals, businesses, interest-based organizations, schools,
governments or combinations.

Q-8: What are the Essential Elements of Partnership?

There are 4 essential elements of partnership:

i. That it is the result of an agreement, between two or more persons.
ii. That it is formed to carry on a business.
iii. That the persons concerned agree to share the profits of the business.
iv. That the business is to be carried on by all or any of them acting for all.

Q-9: What are the Rights and Duties of Partners in a Partnership Business?

Rights of a Partner

105 | P a g e
 i. Right to take part in the conduct of the Business
ii. Right to be consulted
iii. Right of access to books
iv. Right to remuneration
v. Right to share profits
vi. Interest on capital
vii. Right to be indemnified
viii. Right to stop the admission of a new partner
ix. Right to retire
x. Right to dissolve the firm

Duties of a Partner
i. To indemnify for fraud
ii. To indemnify for willful neglect
iii. To attend duties diligently without remuneration
iv. To share losses
v. To account for any profit
vi. To account and pay for profits of competing for business

Q-10: What are the Essential Elements of a Contract for the Sale of Goods?

When creating a sales contract (sales agreement, purchase agreement, etc.), regardless of the
goods or service being sold, there are five key elements that are essential to moving deals along
quickly and avoiding problems with the transaction down the road.

i. The Description of Goods: There is nothing that will kill a deal faster than getting the
yes for one thing and then having the wrong quantities, type, model number, weight,
color, size, number of seats, term length, plan, etc.
ii. Delivery Instructions: Be clear about the time and date of delivery, the delivery
location, and which party is responsible for the risk of loss of goods while they’re in
transit.
iii. Inspection Period: The inspection period gives the buyer time to inspect the goods
after delivery and reject any nonconforming goods.
iv. Warranties and Guarantees: Any promises made during the selling process should
be included in the sales contract.
v. Payment Details: Including the price is a no-brainer. But what about the other terms
and conditions of payment? Are there installments or is payment expected in a single
lump sum? Were there accommodations made regarding a payment date, quarterly
versus annual billing, or other agreements to close the sale? Are there special
considerations for a given market?

Q-11: What is a Negotiable Instrument?

A negotiable instrument is a signed document that promises a sum of payment to a specified

person or the assignee. In other words, it is a formalized type of IOU: A transferable, signed
document that promises to pay the bearer a sum of money at a future date or on-demand.

106 | P a g e
Q-12: What are the Types of Negotiable Instruments?

i. Personal checks: Personal checks are signed and authorized by someone who
deposited money with the bank and specify the amount required to be paid, as well as
the name of the bearer of the check (the recipient).
ii. Traveler’s checks: Traveler’s checks are another type of negotiable instrument
intended to be used as a form of payment by people on vacation in foreign countries as
an alternative to the foreign currency.
iii. Money order: Money orders are like checks in that they promise to pay an amount to
the holder of the order. Issued by financial institutions and governments, money orders
are widely available, but differ from checks in that there is usually a limit to the amount
of the order – typically $1,000.
iv. Promissory notes: Promissory notes are documents containing a written promise
between parties – one party (the payor) is promising to pay the other party (the payee)
a specified amount of money at a certain date in the future.
v. Certificate of Deposit (CD): A certificate of deposit (CD) is a product offered by
financial institutions and banks that allows customers to deposit and leave untouched a
certain amount for a fixed period and, in return, benefit from a significantly high interest
rate.

Q-13: What is Dishonor of Negotiable Instrument?

A bill of exchange is said to be dishonored by non-acceptance when the drawee, or one of

several drawees not being partners, makes default in acceptance upon being duly required to
accept the bill, or where presentment is excused and the bill is not accepted.

Q-14: What is Carriage of Goods?

Carriage of goods, in law, the transportation of goods by land, sea, or air. The relevant law
governs the rights, responsibilities, liabilities, and immunities of the carrier and of the persons
employing the services of the carrier.

Q-15: What is Carriage of Goods by Roads?

The contract for international carriage of goods by road shall be embodied in a document
known as a bill of lading, which shall be made out by the carrier at the request of the shipper
when the carrier takes over the goods. The contract shall stipulate the terms of the carriage
operation.

Q-16: What is Carriage of Goods by Sea?

The law of carriage of goods by sea is a body of law that governs the rights and duties of
shippers, carriers and consignees of marine cargo. Primarily concerned with cargo claims, this
body of law combines the international commercial law, the law of the sea and admiralty laws.

Q-17: What is Carriage of Goods by Air?

The act of carrying goods by air, which is normally under a contract between the consignor and
a carrier. Special rules apply if the goods are dangerous.

107 | P a g e
Q-18: What is Insolvency?

In accounting, insolvency is the state of being unable to pay the debts, by a person or company,
at maturity; those in a state of insolvency are said to be insolvent.

BIN – 206

COMPARATIVE BANKING
Q-1: What is Bank?

A bank is a financial institution that accepts deposits from the public and creates a demand
deposit while simultaneously making loans. Lending activities can be directly performed by
the bank or indirectly through capital markets. Banks may also provide financial services, such
as wealth management, currency exchange, safe deposit boxes etc.

Q-2: What is Financial System?

A financial system is a system that allows the exchange of funds between financial market
participants such as lenders, investors, and borrowers. Financial systems operate at national
and global levels. It is the set of global, regional, or firm-specific institutions and practices used
to facilitate the exchange of funds.

Q-3: What are the Functions of Bangladesh Bank as a Central Bank?

i. Formulation and Implementation of Monetary and Credit Policies.

ii. Regulation and Supervision of Banks and Non-Bank Financial Institutions, Promotion
and Development of Domestic Financial Markets.
iii. Management of the Country's International Reserves.
iv. Issuance of Currency Notes.
v. Regulation and Supervision of the Payment System.
vi. Acting As Banker to the Government.
vii. Money Laundering Prevention.
viii. Collection and Furnishing of Credit Information.
ix. Implementation of the Foreign Exchange Regulation Act.
x. Managing a Deposit Insurance Scheme.

Q-4: What is Credit Control? How a Central Bank Controls Credit in the Economy?

Central bank exercises monetary policy to influence rate of interest, money supply and credit-
availability. Central bank use different tools to achieve the objective of controlling the
availability of credit in economy. There are several quantitative tools through which the central
bank monitors liquidity of commercial bank and money supply. These tools help central bank
to keep economy consistent. The different types of quantitative tools and Qualitative tools are
as follows;

Category I. Quantitative or General Methods:

108 | P a g e
 i. Bank Rate Policy: If the Central Bank wants to control credit, it will raise the bank
rate. As a result, the market rate and other lending rates in the money-market will go
up. Borrowing will be discouraged. The raising of bank rate will lead to contraction of
credit. Similarly, a fall in bank rate mil lowers the lending rates in the money market
which in turn will stimulate commercial and industrial activity, for which more credit
will be required from the banks. Thus, there will be expansion of the volume of bank
Credit.
ii. Open Market Operations: The Central Bank purchases and sale not only Government
securities but also of other proper and eligible securities like bills and securities of
private concerns. When the banks and the private individuals purchase these securities
they have to make payments for these securities to the Central Bank.
iii. Variable Cash Reserve Ratio: Under this system the Central Bank controls credit by
changing the Cash Reserves Ratio. For example—If the Commercial Banks have
excessive cash reserves on the basis of which they are creating too much of credit which
is harmful for the larger interest of the economy. So it will raise the cash reserve ratio
which the Commercial Banks are required to maintain with the Central Bank.
Category II. Qualitative or Selective Method of Credit Control:
i. Rationing of Credit: Under this method the credit is rationed by limiting the amount
available to each applicant. The Central Bank puts restrictions on demands for
accommodations made upon it during times of monetary stringency.
ii. Direct Action: Under this method if the Commercial Banks do not follow the policy
of the Central Bank, then the Central Bank has the only recourse to direct action. This
method can be used to enforce both quantitatively and qualitatively credit controls by
the Central Banks. This method is not used in isolation; it is used as a supplement to
other methods of credit control.
iii. Moral Persuasion: This method is frequently adopted by the Central Bank to exercise
control over the Commercial Banks. Under this method Central Bank gives advice, then
request and persuasion to the Commercial Banks to co-operate with the Central Bank
is implementing its credit policies.
iv. Method of Publicity: In modern times, Central Bank in order to make their policies
successful, take the course of the medium of publicity. A policy can be effectively
successful only when an effective public opinion is created in its favour.
Q-5: What is Money Laundering?

Money laundering is the process of concealing the origin of money, obtained from illicit
activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into
a legitimate source.

Q-6: What is the Process of Money Laundering?

Money laundering has three stages: placement, layering, and integration. In the placement
stage, the launderer introduces the illegal profit into the financial system. In the layering stage,
the launderer engages in a series of conversions or movements of the funds to distance them
from their source. Finally, in the integration stage, the funds reenter the legitimate economy.

Q-7: What is Electronic Fund Transfer?

109 | P a g e
Electronic funds transfer is the electronic transfer of money from one bank account to another,
either within a single financial institution or across multiple institutions, via computer-based
systems, without the direct intervention of bank staff.

Q-8: What do you Mean by Automated Clearing House?

An automated clearing house is a computer-based electronic network for processing

transactions, usually domestic low value payments, between participating financial institutions.
It may support both credit transfers and direct debits. An Automated Clearing House or ACH
transaction is an electronic transaction that requires a debit from an originating bank and a
credit to a receiving bank. Transactions go through a clearinghouse that batches and sends them
out to the recipient's bank. Transactions are normally executed on the same day as long as they
are done before 5 p.m.

Q-9: What is Federal Reserve System?

The Federal Reserve System is the central banking system of the United States of America. It
was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a
series of financial panics led to the desire for central control of the monetary system in order
to alleviate financial crises.

Q-10: What is Bank of Japan?

The Bank of Japan (BOJ) is headquartered in the Nihonbashi business district in Tokyo. The
BOJ is the Japanese central bank, which is responsible for issuing and handling currency and
treasury securities, implementing monetary policy, maintaining the stability of the Japanese
financial system, and providing settling and clearing services. Like most central banks, the BOJ
also compiles and aggregates economic data and produces economic research and analysis.

Q-11: What is Reserve Bank of India?

The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body
responsible for regulation of the Indian banking system. It is under the ownership of Ministry
of Finance, Government of India. It is responsible for the control, issue and maintaining supply
of the Indian rupee.

Q-12: What is E-bankikg?

Online banking, also known as internet banking, web banking or home banking, is an electronic
payment system that enables customers of a bank or other financial institution to conduct a
range of financial transactions through the financial institution's website.

Q-13: What Are the Features of a Credit Card?

i. allow the cardholder to spend up to a specified credit limit

ii. offer the account holder an interest-free period
iii. require the account holder to repay at least the minimum amount each month, but charge
interest on the unpaid balance

110 | P a g e
 iv. incur no interest if the bill is paid in full by the specified date

Q-14: What Are the Features of a Debit Card?

i. are issued in conjunction with a bank or building society current account
ii. limit the cardholder to the funds available in that account plus any overdraft, if available

Q-15: What Are the Features of a Charge Card?

i. may require the account holder to pay an annual fee

ii. allow the cardholder a period of credit, but - to avoid additional fees - this must be paid
off in full each month

Q-16: What Are the Features of a Prepaid Card?

i. can be provided pre-loaded - eg for staff to pay expenses

ii. enable businesses to manage and monitor spending
iii. are available in different currencies, so can be used as an alternative to business travel
cards
iv. usually incur various fees and charges

Q-17: What Are the Advantages of E-banking?

In addition to being able to bank at any time, from anywhere, there are other advantages to
banking online. You may also be able to:

i. Pay bills online

ii. Transfer money
iii. Deposit cheques online
iv. Lower your overhead fees

Q-18: What are the Disadvantages of E-banking?

While online banking is always improving, there are some disadvantages for business owners
reliant on immediate and constant access to their banking services.

i. Technology disruptions
ii. Lack of a personal relationship
iii. Privacy and security concerns
iv. Limited services
Q-19: What is Offshore Banking?

An offshore bank is a bank regulated under international banking license, which usually
prohibits the bank from establishing any business activities in the jurisdiction of establishment.
Due to less regulation and transparency, accounts with offshore banks were often used to hide
undeclared income. Offshore banking describes a relationship that a company or individual has

111 | P a g e
with a financial institution outside the country of their residence. This requires opening a bank
account, making deposits, withdrawals, and transfers from that account—the exact same way
you would with a bank account at home.

BIN-207
Principles of Cost and Management Accounting

Q.1-What is cost accounting?

Answer: Cost accounting is the managerial accounting that aims to capture a company’s total
cost of production by assessing the variable costs of each step of production as well as fixed
cost.

The recording of all the costs incurred in a business in a way that can be used to improve its
management.

Q.2- What is Financial Accounting?

Answer: Financial accounting consists of recording, classifying and analyzing the business
transactions so as to facilitate the preparation of profit and loss account for period and also
position statement as on a particular date.

Q.3- What is Cost center?

Answer: A cost center is a location, person or item of equipment for cost may be ascertained
and used for purpose of cost control. When a cost center refers to a location or equipment it is
an impersonal cost center and when it refers to a person or group of persons it is personal cost
center. Legal department, R&D department, accounting department are example of cost center.

Q.4- Define Cost Unit?

Answer: A cost unit refers to the unit of quantity of product, service or time in relation to
which cots may be ascertained or expressed.

Q.5- What does mean the factory overhead?

Answer: It refers to all indirect expenses of the factory. It includes indirect material, rent, rates
and taxes of factory etc.

Q.6- Define Job Costing?

Answer: Job costing system is used where it is desired to ascertain the cost of a job or a specific
order or a batch of finished goods and also profit or loss on each such job. Printers, publishers
and job foundries are used job costing system.

112 | P a g e
Q.7- What is process Costing?
Answer: Where manufacturing is carried out as a continuous process, process costing is used.

Q.8- Define Direct Material and direct wage?

Answer: Direct material is the material which can be conveniently identified with and allocated
to cost centers and cost units.
Direct wage is the wage which can be conveniently identified with cost centers and cost units

Q.9- What is Fixed Cost?

Answer: Fixed cost include only those overhead expenses which remain fixed irrespective of
the level of output. Rent and rates of building salary of works manager etc.

Q.10- Define the semi-fixed or semi- variable cost?

Answer: These include overhead expenses that vary according to output, but not
proportionately. So, these costs partly fixed and partly variable. Example of semi-variable costs
are electricity bill, salary of supervisors etc.

Q.11- Define Centralized Purchase and Decentralized purchase?

Answer: Where there is one purchase department to purchase for all, it is called centralized
purchase. It is suitable when all are production center closely situated.

When there is a purchase department for each production center, it is referred to as

decentralized purchase.

Q.12- What is Economic Order Quantity?

Answer: The economic order quantity refers to that order quantity within in range of possible
order quantities which minimizes total cost per annum for the items purchased.

Q.13- What is BIN Card?

Answer: Bin card is a record maintained in respect of each item of material to show the
quantity in, the quantity out and the quantity in stock after each transaction.

Q.14- What do you mean by Store Ledger?

Answer: When cost office maintains a separate record for each item of material showing the
inward and outward movements of the materials and the balance after each transaction not only
in quantity but in value as well.

Q.15- What is Inventory Turnover?

Answer: Inventory turnover usually expressed as a ratio; indicates the number of times the
inventory is turned over during a particular period.

Q.16- Define regular Labor and Casual labor?

Answer: Labor recruited on the basis of permanent requirements is called regular labor.

113 | P a g e
Labor those engaged on temporary basis as and when required may be termed casual labor.

Q.17- What is Idle Time?

Answer: Idle time represent the time of a worker for which wage id paid but no work is
obtained against the payment.

Q.18- What do you mean by Normal Idle Time and Abnormal idle time?
Answer: Idle time which cannot be avoided and which remains within the normal limit
according to the nature of the industry. Tool setting, tea break, machine adjustments are
example of normal idle time.

Idle time which is not normal and which occurs due to some unexpected reasons. Load
shedding, sudden strike out etc.

Q.19- What is Labor Turnover?

Answer: Labor turnover is defined as the ratio of the number of workers leaving an
organization during a given period to the average number of workers of that organization during
same period.

Q.20- What is Merit Rating?

Answer: Merit rating refers to evaluation of the individual merits of the employees.
Merit rating is done by keeping the performance records of every worker and assessing the
performances in terms of some norms or standards.

Q.21- What is Job Costing?

Answer: Job costing is a costing method used to determine cost of specific jobs, which are
performed according to the customer’s specifications. Labor costs, overhead costs etc.

Q.22- What is Contract Costing?

Answer: Contract costing is a form of specific order costing which applies where work is
undertaken to customer’s special requirements and each order is of a long duration.
Contract costing is the tracking of costs associated with a specific contract with a customer’s.

Q.23- What is Batch Costing?

Answer: Batch costing is the cluster of costs incurred when a group of products or services are
produced, and which cannot be identified to specific products or services within the group.

114 | P a g e
 BIN-208
Advanced Business Statistics

Q.1- What is data and data set?

Answer: Data is information such as facts and numbers used to analyze something or make
decisions. Data are collections of any number of related observations.
A collection of data is called data set.

Q.2- Define sample and populations?

Answer: A sample is defined as a smaller and more manageable representation of a larger
group. A sample is used in statistical testing when the population size is too large for all
members or observations to be included in the test.

In statistics, population is the entire set of items from which you draw data for a statistical
study. It can be a group of individuals, a set of items, etc. It makes up the data pool for a study.

Q.3- What is frequency distribution and relative frequency distribution?

Answer: A frequency distribution is a table that organizes data into classes, that is, into groups
of values describing one characteristics of data.
A relative frequency distribution presents frequencies in terms of fractions or percentage.

Q.4- What is probability distribution?

Answer: In probability theory and statistics, a probability distribution is the mathematical
function that gives the probabilities of occurrence of different possible outcomes for an
experiment.

Q.5- Define discrete and continuous probability distribution?

Answer: A discrete probability can take only a limited number of values, which can be listed.
Discrete probability distributions describe the probability of occurrence of each value of a
discrete random variable in a situation.

A continuous probability distribution is a probability distribution in which, the variable under

consideration is allowed to take on any value within a given range, so it cannot list all the
possible values.

Q.6- What is binomial distribution?

Answer: Binomial distribution is a probability distribution used in statistics that summarizes
the likelihood that a value will take one of two independent values under a given set of
parameters or assumptions.

115 | P a g e
Q.7- What do you mean by bias samples?
Answer: A biased sample is a sample that doesn't accurately reflect all members of the
population. It occurs when a statistician uses a sampling method where some members of the
intended population are more or less likely to be selected.

Q.8- Define various method of random sampling?

Answer: Four random sampling methods are:

 Simple random sampling selects samples by methods that allow each possible sample
to have an equal probability of being picked and each item in the entire population to
have an equal chance of being included in the sample.
 In systematic sampling, elements are selected from the population at a uniform interval
that is measured in time, order or space.
 Stratified random sampling is a method of sampling that involves the division of a
population into smaller subgroups known as strata.
 Cluster sampling is a method of probability sampling where researchers divide a large
population up into smaller groups known as clusters, and then select randomly among
the clusters to form a sample.

Q.9- What is normal distribution?

Answer: Normal distribution, also known as the Gaussian distribution, is a probability
distribution that is symmetric about the mean, showing that data near the mean are more
frequent in occurrence than data far from the mean.

Q.10- Define central limit theorem?

Answer: The relationship between the shape of the population distribution and the shape of
the sampling distributions of the mean is called the central limit theorem. It assures that the
sampling distributions of the mean approaches normal as the sample size increases.

Q.11- What is estimator and estimates?

Answer: An estimator is a sample statistic used to estimate a population parameter.
An estimate is a specific observed value of statistic.

Q.12- What is confidence level and confidence interval?

Answer: Confidence level refers to the percentage of probability, or certainty, that the
confidence interval would contain the true population parameter when you draw a random
sample many times.
A confidence interval, in statistics, refers to the probability that a population parameter will
fall between a set of values for a certain proportion of times.

116 | P a g e
Q.13- What is significance level?
Answer: In statistical test, statistical significance is determined by citing an alpha level or the
probability of rejecting the null hypothesis when the null hypothesis is true.

Q.14- What do you mean by degrees of freedom?

Answer: The degrees of freedom in a statistical calculation represent how many values
involved in a calculation have the freedom to vary.

Q.15- Define hypothesis, null hypothesis and alternative hypothesis?

Answer: A hypothesis is an idea which is suggested as a possible explanation for a particular
situation or condition, but which has not yet been proved to be correct.

A null hypothesis is a type of statistical hypothesis that proposes that no statistical relationship
and significance exists in a set of given observations.

An alternative hypothesis in statistics refers to a proposed statement or argument in the

hypothesis test. It indicates the existence of the statistical relationship between variables and
usually aligns with the research hypothesis.

Q.16- What is type l and type ll error?

Answer: Rejecting a null hypothesis when it is true is called a type l error.
Accepting a null hypothesis when it is false is called type ll error.

Q.17- What do you mean by two-tailed and one-tailed test of hypothesis?

Answer: A two-tailed test of hypothesis states that reject the null hypothesis if the sample
mean is significantly higher than or lower than the hypothesized population mean.
A one-tailed test is a statistical hypothesis test set up to show that the sample mean would be
higher or lower than the population mean, but not both.

Q.18- What is chi-square test?

Answer: A chi-square test is a statistical hypothesis testy used in the analysis of contingency
tables when the sample size is large.

117 | P a g e
 BIN-209
Bangladesh Economics

Q.1- What do you understand by Development?

Answer: Development is the process of improving the quality of human lives and capabilities
by raising people’s levels of living, self-esteem and freedom.

Q.2- What is Economic Development?

Answer: Economic Development is the growth of the standard of living of a nation’s people
from a low-income (poor) economy to high income economy.
When the quality of life is improved, there is more economic development.

In other words, Economic Development involves rise in the level of production in an economy
along with the advancement of technology improvement in living standards and so on.

Q.3- What is Economic Growth?

Answer: Economic Growth is the positive change in the real output of the country in a
particular span of time.

Q.4-What is the basic difference between Economic Growth and Economic Development?
Answer: Economic Growth can be referred to as the increase in the monetary value of all the
goods and services produced in the economy during a time period.

Whereas, Economic Development refers to the process by which the overall health, well-
being, and academic level of the general population of a nation improves. It also refers to the
improved production volume due to the advancement of technology.

Basically, Economic Growth is a quantitative measurement and Economic Development is

both quantitative and qualitative measurement.

One country can show Economic Growth by window-dressing or eye-wash but it cannot
possible to show the Economic Development without proper economic growth and qualitative
development of the economy.

Q.5- Indicators of Economic Growth?

Answer: Indicators of economic growth are:

 GDP
 GNP
 Per Capita Income

Q.6- Basic Indicator of Development?

Answer: Indicators of development are:

118 | P a g e
  Real Income
 Health
 Education

Q.7- Indicators of Economic Development?

Answer: Indicators of economic development are:

 Human Development Index (HDI)

 Human Poverty Index (HPI)
 Life Expectancy Rate
 Infant Mortality Rate
 Gini Coefficient
 Balance of Trade

Q.9- What do you mean by Developed, Developing and Underdeveloped countries?

Answer:

 Developed Countries: Developed countries are countries that have a high quality of
life, a developed economy, and technological infrastructure.
 Developing Countries: Developing countries are countries with a less developed
industrial base a comparatively lower HDI relative to developed countries.
 Underdeveloped Countries: Underdeveloped countries are countries having the
lowest indicators of socioeconomic development, with the lowest HDI ratings.

Q.10- Mention some of the characteristics of Developed & Developing Countries.

Answer: Characteristics of Developed Countries-
 High Per Capita Income
 Low dependency on Agriculture
 Less dependency in foreign trade
 Adequate employment
 Available Capital
 Wide spread education

Characteristics of Developing Countries-

 Lower levels of living and productivity
 Lower levels of human capital
 Higher levels of inequality and absolute poverty
 High population growth
 Greater Social Fractionalization
 Lower levels of Industrialization

Q.11- What are the main characteristics of Bangladesh Economy?

119 | P a g e
Answer: The main characteristics of Bangladesh Economy are:

 Dependency on Agriculture
 Low per capita income
 Lower living standard
 Backwardness of industrialization
 Scarcity of capital
 Misuse of natural resources
 Dearth of education
 Overpopulation
 More inflation
 Unemployment problem
 Dependent on overseas market

Q.12- What are the three core values of Development?

Answer: The three core values of development are:

 Sustenance: The basic goods and services, such as food, clothing, and shelter, that are
necessary to sustain an average human being at the bare minimum level of living.
 Self-esteem: The feeling of worthiness that a society enjoys when its social, political,
and economic systems and institutions promote human values such as respect, dignity,
integrity and self-determination.
 Freedom: A situation in which a society has at its disposal a variety of alternatives
from which to satisfy its wants and individuals enjoy real choices according to their
preferences.

Q.13- What are the four approaches to examine Economic Development?

Answer:

 The linear stages of growth model

 Theories and patterns of structural change
 The international dependence revolution
 The neoclassical, free market counter revolution
Q.14- What do know about Rostow’s Stages of Growth model?
Answer: A theory of economic development, associated with the American economic historian
Walt W. Rostow, according to which a country passes through sequential stages in achieving
development. It is possible to identify all societies, in their economic dimensions, as lying
within one of five categories:

1. The traditional society

2. The precautions for take-off
3. The take-off
4. The drive to maturity, and
5. The age of high mass consumption

120 | P a g e
Q.15- What do you mean by traditional society?
Answer: This stage is characterized by a subsistent, agricultural bases economy, with intensive
labor and low levels of trading, and a population that does not have a scientific perspective on
the world and technology.

1) Preconditions to Take-off: Here, a society begins to develop manufacturing, and

a more national/international, as opposed to regional, outlook.

2) Take-off: Rostow describes this stage as a short period of intensive growth, in

which industrialization begins to occur, and workers and institutions become
concentrated around a new industry.

3) Drive to maturity: This stage takes place over a long period of time, as standards
of living rise, use of technology increases, and the national economy grows and
diversifies.

4) Age of high mass consumption: At the time of writing, Rostow believed that
Western countries, most notably United States, occupied this “developed” stage.
Here, a country’s economy flourishes in a capitalist system, characterized by mass
production and consumerism.

Q.17- What do you know about Harrod-Domar Growth model?

Answer: The Harrod-Domar economic growth model stresses that the importance of savings
and investment as key determinants of growth.

The Harrod-Domar model suggests that the rate of economic growth depends on two things:
a) Level of Savings (higher savings enable higher investment)
b) Capital-output Ratio (A lower capital-output ratio means investment is more
efficient and the growth rate will be higher)

Q.18- What’s the summary of Lewis theory of Economic Development?

Answer: One of the best-known early theoretical models of development that focused on the
structural transformation of a primarily subsistence economy was that formulated by Nobel
laureate W. Arthur Lewis in the mid-1950s.

A theory of development in which surplus labor from the traditional agricultural sector is
transferred to the modern industrial sector, the growth of which absorbs the surplus labor,
promotes industrialization, and stimulates sustained development.

121 | P a g e
Q.19- What is Lorenz Curve?
Answer: Lorenz curve is the graphical representation of the size distribution of income from
perfect equality.

Q.20- What is Gini Coefficient?

Answer: Gini coefficient is an aggregate numerical measure of income inequality ranging from
0 (perfect equality) to 1 (perfect inequality). The higher the value of the coefficient is, the
higher the inequality of income distribution; the lower it is, the more equal the distribution of
income.

Q.21- What is Absolute Poverty?

Answer: Absolute Poverty is the situation of being unable to meet the subsistence essentials
of food, clothing, and shelter.

Q.22- ECNEC stands for?

Answer: ECNEC stands for Executive Committee of National Economic Council.

Q.23- ADP stands for?

Answer: ADP stands for Annual Development Programme.

Q.24- What’s the essence of Malthusian Model?

Answer: The theory suggests that: “By nature human food increases in a slow arithmetical
ratio; man, himself increases in a quick geometrical ratio unless want and vice to stop him. The
increase in numbers is necessarily limited by the means of subsistence Population invariably
increases when the means of subsistence increase, unless prevented by powerful and obvious
checks.”

122 | P a g e
 BIN-210
Computer in Business

Q.1- Define computer and what are the elements if computer system?
Answer: Computer is an electronic device which is capable of performing a variety of
operations as directed by a set of instruction. This set of instruction is called a computer
programme.
Elements of computer system are:
Hardware, Software, People, Procedures, Data and Connectivity.

Q.2- What do you mean by operating system?

Answer: An operating system is a program that controls the execution of application programs
and act as an interface between the user of a computer and the computer hardware.

Q.3- What is hardware and software?

Answer: Hardware of computer consists of physical component such as keyboard, mouse,
monitor and processor. These are electronic and electromechanical components.

A set of programmes, which is used to work with such hardware is called it’s software. A coded
set of instructions stored in the form of circuits is called firmware.

Q.4- Mention some input and output devices of computer?

Answer: Input devices:

 Keyboard
 Pointing device
 Scanner
 Microphone
 Web camera
 Joystick
Output device:

 Monitor
 Speakers
 Multimedia projector
 Printer
 Plotters

123 | P a g e
Q.5- What is memory and define RAM and ROM?
Answer: Memory is a device or system that is used to store information for immediate use in
a computer or related computer hardware and digital electronic devices.

RAM (Random Access Memory) is the hardware in a computing device where the operating
system (OS), application programs and data in current use are kept so they can be quickly
reached by the device’s processor. RAM is the main memory in computer.
ROM or read only memory is a special type of memory which can only be read and contents
of which are not lost even when the computer is switched off.

Q.6- What is Cache memory?

Answer: Cache memory is a very high-speed semiconductor memory which can speed up the
CPU. Its acts as a buffer between the CPU and the main memory.

Q.7- What do you mean by system software and application software?

Answer: System software consist of a group of programs that control the operations of a
computer equipment including functions like managing memory managing peripherals, loading
storing and is an interface between the application programs and the computer.

Application software are that software which can perform a specific task for the user, such as
word processing, accounting, budgeting or payroll.

Q.8- What is computer language?

Answer: Computer language or programming language is a coded syntax used by computer
programmers to communicate with a computer. Computer language established a flow of
communication between software programs.

Q.9- What is Machine language and Assembly language?

Answer: Machine language or machine code is the native language directly understood by the
computers central Processing Unit or CPU.

Assembly level language is a set of codes that can run directly on the computers processor.
This type of language is most appropriate in writing operating systems and maintaining desktop
applications.

Q.10- What is computer network?

Answer: A computer network is a group of computers linked together so that they can share
resources such as, printers, software programs and documents.

Q.11- Define LAN, MAN, CAN and WAN?

Answer: A local area network (LAN) is a data communication system consisting of several
device such as computers and printers. LAN are usually confined to a limited geographic area.
The Metropolitan Area Network (MAN) is a large-scale network that connect multiple
corporate LANs together.

124 | P a g e
A campus area network (CAN) follows the same principles as a local area network, only on a
larger and more diversified scale.

A wide area network (WAN) is two or more LANs connected together, generally across a wide
geographical area,

Q.12- What does network topology refer?

Answer: Network topology describes the physical and logical relationship of nodes in a
network, the schematic arrangement of the links and nodes, or some hybrid combination
thereof.

Q.13- Define Bus topology, Ring topology and Star topology?

Answer: In bus topology, bus networks use a common backbone to connect all devices. A
single cable, the backbone functions as a shared communication medium that devices attach or
tap into with an interface connector.

In a ring network, every device has exactly two neighbors for communication purposes. All
travel through a ring in the same direction.

A star network features a central connection point called a “hub” that may be a hub, switch or
router. Devices typically connect to the hub with Unshielded Twisted Pair (UTP) Ethernet.

Q.14- What is Intranet and Extranet?

Answer: An internet is a private network utilizing internet type tools, but available only within
that organization.

An extranet is a private network like intranet but partially accessible internal company website
for authorized users physically located outside the organization.

Q.15- What is computers protocol and define Domain name?

Answer: Protocols are rules that are followed by computers as standards of communications
that allow them understand each other.

A domain name is the name by which an individual or organizations chooses to be known on

the internet.

Q.16- Define virus and name three main types of viruses?

Answer: A computer virus is a type of computer program that, when executed, replicates itself
by modifying other computer programs and inserting its own code. Virus is a program which
has been written to interfere with the normal functioning of the computer.
Three main types of viruses are:

 Boot sector virus: It infect the boot sector in the hard disk and affect the partition table.
 File virus: File virus attach with executable files.
 System virus: It infect specific system files.

125 | P a g e
Q.17-What is antivirus? Name some common antivirus software?
Answer: Antivirus is a kind of software used to prevent, scan, detect and delete viruses from
a computer. Once installed, most antivirus software runs automatically in the background to
provide real-time protection against virus attacks.
Some common antivirus software is:

 Bitdefender Antivirus Plus.

 Norton 360 with LifeLock.
 Microsoft defender
 McAfee Antivirus Plus.
 Trend Micro Antivirus+ Security.
 Malwarebytes.

Q.18- What is cybercrime?

Answer: Cybercrime is criminal activity that either targets or uses a computer, a computer
network or a networked device. Or shortly criminal activities carried out by means of computers
or the internet.

Q.19- Define Management Information System and Accounting Information System?

Answer: Management Information System (MIS) is a system that provide the information
necessary to take decisions and manage and Organizations effectively.

Accounting Information System (AIS) identifies, collects, process and communicates

economic information about an entity to a wide variety of users.

Q.20- What is a Pivot Table and Pivot Chart?

Answer: A Pivot Table is an interactive way to quickly summarize large amount of data. It
makes easy way to arrange and summarize complicated data and drill down on details.
A Pivot Chart provides a graphical representation of the data in a Pivot Table.

Q.21- What do you mean by data consolidation?

Answer: Data consolidation means the consolidation of data from multiple sources into a
centralized system. It combines values from multiple ranges into one new range.

Q.22- What is data validation?

Answer: Data validation means checking the accuracy and quality of source data before using,
importing or otherwise processing data.

In computer science, data validation is the process of ensuring data has undergone data
cleansing to ensure they have data quality, that is, that they are both correct and useful.

126 | P a g e
 BIN-301
Corporate and Retail Banking

Q.1- Define Retail Banking?

Answer: Retail banking is when a bank executes transections directly with consumers rather
than corporations or other banks.

Retail banking is a way for individual consumers to manage their money, have excess to credit,
and deposit their money in a secure manner.

Q.2- Define Corporate Banking?

Answer: Corporate banking is the part of the banking industry that deals with corporate
customers. It works directly with business to provide loans, credit, savings account, and
checking accounts which are specifically designed for companies rather than for individuals.

Q.3- What do you mean by Customer loyalty?

Answer: Customer loyalty is both an attitudinal and behavioral tendency to favor one brand
over all others, whether due to satisfaction with the product or service, its convenience or
performance or simply familiarity and comfort with the brand.

Q.4- What is Service Profit Chain Model?

Answer: Service profit chain model are the relationship between the profitability, customer
loyalty, employee satisfaction, loyalty and productivity.

Q.5- What are the characteristics of retail banking?

Answer:

 Multiple products and services: Current account, savings account, personal loans,
debit card and credit card etc.
 Multiple channels of distribution: Bank branches, website and application, kiosk and
call center.
 Multiple consumer groups: Individuals, households, trust, small and medium
enterprises etc.

Q.6- What is Credit card and debit card?

Answer: A card entitling the owner to use funds from the issuing company up to a certain limit.
The card holder of a credit card uses it to buy goods or services.

A card allowing the holder to transfer money electronically from their bank account when
making a purchase. It is work as a combination ATM card and credit card.

127 | P a g e
Q.7- What is MICR check?
Answer: Magnetic Ink Character Recognition (MICR) is a character-recognition technology
used mainly by banking industry to ease the processing and clearance of checks and other check
related activities.

Q.8- What is SMS banking?

Answer: SMS banking is a form of mobile banking. It is a facility used by some bank and other
financial institutions to send message to customer’s mobile phones using SMS messaging or a
service provided by them which enables customers to perform some transactions using SMS.

Q.9- Define Mobile banking?

Answer: Mobile banking refers to the use of a smart phone or other cellular device to perform
online banking tasks while away from home computer, such as monitoring account balances,
bill payment and locating an ATM.

Q.10- What is online banking?

Answer: Online banking also known as internet banking or web banking, is an electronic
payment system that enables customers of a bank or other financial institution to conduct a
range of financial transactions through the financial institution’s website.

Q.11- What is ATM?

Answer: An automated teller machine is an electronic telecommunications device that enables
customers of financial institutions to perform financial transactions, such as cash withdrawals,
deposit, transfer funds, or obtaining account information etc.

Q.12- What are the corporate banking services?

Answer: Working capital finance, trade finance, cash management, salary/payroll account,
corporate loans, term loans etc.

Q.13- Define customer and client?

Answer: Customer is an individual or business that purchases another company's goods or
services.
A client is someone for whom a professional person or organization is providing a service or
doing some work.
Q.14- What is customer retention?
Answer: Customer retention refers to the ability of a company or product to retain its customers
Over a specified period.
Q.15-What do you mean by customer commitment?
Answer: Customer commitment refers to the approach of sales how one is going to promote
ones product or service to guarantee the customer’s commitment of purchase.

128 | P a g e
Q.16- What is customer satisfaction?
Answer: Customer satisfaction is a measurement of a customer's attitude toward a product,
service or a brand.

BIN-302
Financial Management

Q.1- Define financial management?

Answer: Financial management means analyzing financial situations, making financial
decisions, setting financial objectives, formulating financial plans to attain those objectives and
providing effective systems of financial control to ensure plans progress towards the set
objectives.

Q.2- What is corporate finance?

Answer: Corporate finance is the area of finance that deals with the sources of funding,
the capital structure of corporations, the actions that managers take to increase the value of the
firm to the shareholders, and the tools and analysis used to allocate financial resources.

Q.3- What do you mean by capital structure?

Answer: A firm's capital structure refers to relationship between debt and equity finance in its
long-term funding arrangements.

Q.4- Define debt finance and equity finance?

Answer: Debt finance refers to external borrowings such as long-term loans.
Equity finance refers to the fund provided by the firm's owners, the shareholders.

Q.5- Why a firm need proper financial planning?

Answer: The importance of financial planning is to ensure that the right amount of funds is
available at the right time and at the right cost for the level of risk involved to enable the firm's
objectives to be achieved.

Q.6- Mention the financial decision taken by the financial management?

Answer: There are three types of financial decision taken by financial management. They are:

 Investment decision
 Financing decision
 Dividend decision

129 | P a g e
Q.7- Define Investment decision and Financing decision?
Answer: Investment decision refers to selecting and acquiring the long-term and short-term
assets in which funds will be invested by the business.

Financing decisions refer to the decisions that companies need to take regarding what
proportion of equity and debt capital to have in their capital structure.

Q.8- Define capital budgeting?

Answer: Capital budgeting is the process for evaluating and selecting long-term investments
that are consistent with the firms goals of maximizing owners wealth.

Q.9- Define NPV and IRR?

Answer: Net present value (NPV) is the difference between the present value of cash inflows
and the present value of cash outflows over a period of time.

Internal Rate of Return (IIR) is the discount rate that equals the NPV of an investment
opportunity with zero. It is the rate of return that the firm will earn if it invests in the project
and receives the given cash inflows.

Q.10- What is independent project and mutually exclusive project?

Answer: Independent (sometimes called stand-alone) projects are any set of projects in which
choosing one has no impact on our decision to choose another project from that set.

Mutually exclusive projects are investment projects out of which the only one project can be
selected and the selection of this one particular project directly eliminates remaining projects
in a pool.

Q.11- What do you mean by risk- return trade -off?

Answer: Risk-return trade-off means it is only possible to earn higher profit by accepting
higher risk. That means risk and return are positively correlated, an increase in one is
accompanied by an increase in the other.

Q.12- Define risk?

Answer: Risk implies future uncertainty about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from
an investment.

Q.13- What do you mean by required rate of return?

Answer: The required rate of return is the minimum rate of return an investor requires an
investment to earn, given its risk characteristic, for the investment to be considered worthwhile.

Q.14- Define risk averse and risk seekers?

Answer: Investors who have a low-risk propensity that means have a preference for for less
risk are said to be risk averse.

130 | P a g e
Investors who have a high-risk propensity or a positive desire for risk are referred to as risk
seeker.

Q.15- What is portfolio theory?

Answer: Portfolio theory aimed at maximizing the expected rate of return from an investment
portfolio with a given amount of risk or minimizing risk from a particular level of expected
return by striking the right combination of assets in the portfolio
A portfolio is a collection of groups of financial assets and investment tool that are held by an
individual, a financial institution or an investment firm.

Q.16- Define correlation and covariance in portfolio management?

Answer: Correlation is a statistical technique which is used to measure the relationship
between two variables or data series. In portfolio management correlation is used to measure
the relationship between two assets or investment. It measures both the degree and direction of
relationship.

Covariance us a measure if how two assets move together in terms of the degree and magnitude
of the movement.

Q.17- What do you mean by CAPM model?

Answer: The Capital Asset Pricing Model (CAPM) describes the relationship between
systemic risk or the general perils of investing and expecting return for assets, particularly
stocks.

Q.18- Define Systematic risk and Unsystematic risk?

Answer: Systematic risk refers to the risk inherent to the entire market or market segment.
Systematic risk, also known as “un-diversifiable risk,” “volatility” or “market risk,” affects the
overall market, not just a particular stock or industry. Systematic risk cannot be diversified
away.

Unsystematic risk is any risk that is specific to a particular investment and does not affect all
securities in a market. Unsystematic risk can be diversified by efficient portfolio.

Q.19- Define SML and CML?

Answer: The Security Market Line (SML) is a graphical representation of the capital asset
pricing model (CAPM), which reflects the linear relationship between a security’s expected
return and beta, i.e., its systematic risk.
The capital market line (CML) represents portfolios that optimally combine risk and return. It
is a theoretical concept that represents all the portfolios that optimally combine the risk-free
rate of return and the market portfolio of risky assets.

131 | P a g e
Q.20- What do you mean by cost of capital?
Answer: Cost of capital is the minimum rate of return a firm is required to earn on its
investments in order to satisfy investors and to maintain its market value, in other words it is
the investors required rate of return.

Q.21- What Weighted Average Cost of Capital (WACC)?

Answer: Weighted Average Cost of Capital (WACC) is a simple weighted average of the cost
of the individual components. The components are equity capital, including retain earnings and
preference share and debt capital.

Q.22- Which one has lowest cost of capital and why?

Answer: The debt capital has the lowest cost of capital.

Debt is cheaper than equity because interest paid on Debt is tax-deductible, and lenders'
expected returns are lower than those of equity investors (shareholders).

Q.23- What is retained earnings?

Answer: Retained earnings are the proportion of the firm’s after-tax distributable profits which
have not been paid out to shareholders in the form of dividends. They have been reserved within
the firm to finance future investment plans.

Q.24- What is capital structure?

Answer: Capital structure refers to the combination of debt and equity capital which a firm
uses to finance its long-term operations. Capital in this context refers to the permanent or long-
term financing arrangements of the firm.

Q.25- What do you mean by the term optimal capital structure?

Answer: The optimal capital structure of a firm is the best mix of debt and equity financing
that maximizes a company's market value while minimizing its cost of capital. In theory, debt
financing offers the lowest cost of capital due to its tax deductibility.

Q.26- Define financial gearing and operational gearing?

Answer: Financial gearing refers to the way in which the owners of a firm can use debt finance
to ‘gear up' the assets and earnings of the firm. The greater a firm borrowing the greater will
be its financial gearing and its financial risk.

Operating gearing refers to the proportion of fixed cost in a firms total operating cost. The
higher the proportion of fixed costs, the higher the operating gearing and also higher the firm’s
operating or business risk.

Q.27- What is agency problem and agency cost?

Answer: Agency problem is the problem that arises when manager place personal goals ahead
of the goals of the stockholders.

132 | P a g e
Agency cost are the cost arising from agency problem that are borne by the stockholders and
represent a loss of stockholders wealth.

BIN-303
Accounting for Planning and Control

Q.1- What is management accounting?

Answer: Management accounting is the process of identifying, measuring, accumulating,
analyzing, preparing, interpreting and communicating information that helps managers fulfill
organizational objectives.

Q.2- What is financial accounting?

Answer: Financial accounting is the branch of accounting that develops information for
external decision makers, such as stock holders , suppliers, banks and government regulatory
agencies.

Q.3- What is the meaning of management by expectation?

Answer: Management by expectation means concentrating more areas that deviate from the
plan and less on areas that conform with plans and are presumed to be running smoothly.

Q.4- What is budget and performance report?

Answer: A budget is an estimation of revenue and expenses over a specified future period of
time and usually compiled and re-evaluated on a periodic basis.

Performance reports provide feedback by comparing results with plans and by highlighting
variance.

Q.5- What is product life cycle?

Answer: Product life cycle refers to the various stages through which a product passes, from
conception and development to introduction into the market to maturation and finally
withdrawal from the market.

Q.6- Define value chain?

Answer: The value chain refers to the set of business functions or activities that add value to
the products or services of an organizations.

Q.7- What is cost driver?

Answer: Cost driver is a measure of activities that requires the use of resources and thereby
causes cost.

133 | P a g e
Q.8- Define fixed and variable cost?
Answer: A variable cost is change in direct proportion to change in the cist driver.

A fixed cost is a cost which cannot change with the change in the cost driver. Per unit fixed
cost is variable but per unit variable cost is fixed.

Q.9- What is cost volume profit (CVP) analysis?

Answer: Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and
fixed costs affect a firm's profit. Companies can use CVP to see how many units they need to
sell to break even (cover all costs) or reach a certain minimum profit margin.

Q.10- Define Break Even Point (BEP) and contribution margin?

Answer: Break Even Point is the level of sales at which revenue equals total cost and net
income is zero.

The contribution margin shows how much additional revenue is generated by making each
additional unit product after the company has reached the breakeven point.

Q.11- What do you mean by margin of safety?

Answer: The margin if safety measures how far sales can fall before loses occur and is the
difference between the level of planned sales and the break event point.

Q.12- What is sales forecast and sales budget?

Answer: A sales forecast is a prediction of sales under a given set of conditions.

The sales budget is the specific sales forecast that is the result of decisions to create the
conditions that will generate a desired level of sales.

Q.13- Define Capital budget, Master budget, Continuous budget and financial budget?
Answer: Capital budget is a budget that details the planned expenditure for facilities,
equipment, new products and other long-term investments.

A master budget is a comprehensive financial planning document that includes all of the lower-
level budgets, cash flow forecasts, budgeted financial statements, and financial plans of an
organization.

Continuous budget is a common form of master budget that adds a month in the future as the
month just ended is dropped.

Financial budget is the part of a master budget that focuses in the effect that the operating
budget and other plans have on cash balances.

Q.14- Define favorable and unfavorable profit variance?

Answer: Favorable profit variance is a variance that occurs when actual profit exceeds
budgeted profit.

134 | P a g e
An unfavorable profit variance is a variance that occurs when actual profit falls below budgeted
profit.

Q.15- What is Static budget and Flexible budget?

Answer: A static budget is a budget that is prepared for only one expected level of activity.
Flexible budget is a budget that adjusts to different levels of activity.

Q.16- What is flexible budget variance?

Answer: Difference between actual results and the flexible budget for the actual level of output
achieved are called flexible budget variance.

Q.17- What is a management control system ?

Answer: A management control system is an integrated set of techniques for gathering and
using information to make planning and control decisions, for motivating employee behavior
and for evaluating performance.

Q.18- Define centralization and decentralization?

Answer: Concentration of decision-making authority only at the highest levels of the
organization is called centralization.

Delegation of decision-making authority to lower levels of the organization is called

decentralization.

Q.19- What is responsibility accounting?

Answer: Responsibility accounting means to identifying what parts of the organization have
primary responsibility for each action, developing performance measures and targets and
designing reports of these measures by responsibility center.

Q.20- Define controllable cost and uncontrollable cost?

Answer: A controllable cost is one that a manager’s decision and action can influence to a
reasonable extent.

An uncontrollable cost in any cost that the management of a responsibility center cannot affect
within a given time span.

135 | P a g e
 BIN-304
Financial Market and Institutions

Q.1- What is financial system?

Answer: Financial system means the collection of markets, institutions, laws, regulations and
techniques through which binds, stocks and other securities are traded, interest rate are
determined and financial service are provided and delivered around the world.

Q.2- What is market?

Answer: Market is an institution or place through which buyers and sellers meet to exchange
goods, service and productive resources.

Q.3- What is financial market?

Answer: Financial Markets include any place or system that provides buyers and sellers the
means to trade financial instruments, including bonds, equities, the various international
currencies, and derivatives. of capitalist economies.

Q.4- What is money market?

Answer: Money Market is a financial market where short-term financial assets having liquidity
of one year or less are traded. It is an institution with temporary surplus of funds meet the needs
of borrowers who have temporary shortage of fund.

Q.5- Who are the supplier and demanders of money market fund?
Answer: Demander of fund:

1. Commercial Bank
2. Non-financial institutions
3. Finance companies
4. Security dealers
5. Central Bank
Supplier of fund:

1. Commercial Bank
2. Non-financial institutions
3. Money market mutual fund
4. Finance companies
5. Central Bank

Q.6- What is capital market?

Answer: A capital market is a financial market in which long-term debt (over a year) or equity-
backed securities are bought and sold.

136 | P a g e
Q.7- Who are the Supplier and demander of capital market fund?
Answer: Demanders of fund

1. Business firm
2. Household
3. Government
Supplier of fund:

1. Pension fund
2. Commercial bank
3. Insurance company
4. Household
5. Savings and loan association

Q.8- What is open and negotiated market?

Answer: Open market means, there have many buyers and sellers and the Securities are sold
on auction to the highest bidder and the Securities are bought and sold any time before they
mature.

Negotiated market means, where corporate Securities are generally sold to one or few buyers
under private contract.

Q.9- What is spot and future market?

Answer: A spot market is one in which assets are traded for immediate delivery.

A future or forward market is designed to trade contracts calling for future delivery of financial
instrument.

Q.10- What is financial assets?

Answer: It is claim against the income or wealth of business firm, household or unit of
government, represented usually by certificate, receipts of other legal documents and usually
created by lending of money. Example, stocks, bonds, insurance policy etc.

Q.11- What is direct and indirect finance?

Answer: Direct finance occur when, borrower and lender meet each other and exchange funds
in return financial assets without the help of a third party to bring them together.

Indirect finance is where borrowers borrow funds from the financial market through indirect
means, such as through a financial intermediary.

Q.12- Define broker and dealer?

Answer: A broker is a person or firm who arranges transactions between a buyer and a seller
for a commission when the deal is executed.
A dealer is an individual or firm who stands ready and willing to buy a security for its own
account or sell from its own account.

137 | P a g e
Q.13- Meaning of loanable fund theory?
Answer: The loanable fund theory, commonly used to explain interest rate movements, suggest
that the market interest rate is determined by the factors that control the supply of and demand
for loanable fund.

Q.14- What is money market securities and what are the popular money market
securities?
Answer: Money market securities are debt securities with a maturity of one year or less.

 Popular money market securities are:

 Treasury bills
 Commercial paper
 Bank certificates & deposit
 Repurchase agreement
 Bankers’ acceptance

Q.15- Define Treasury bill and commercial paper?

Answer: Treasury bill are a short-term financial instrument that are issued by the government
for a maturity of less than one year.

Commercial paper is short term debt instrument issued only by well known, creditworthy firms
and typically unsecured.

Q.16- What is repurchase agreement?

Answer: A repurchase agreement, known as repo, means one party sells securities to another
with an agreement to repurchase the securities at a specified date and price.

Q.17- What is margin trading?

Answer: Margin trading refers to the process whereby the investor borrow money from broker
to buy more securities than they can afford to.

Q.18- What is margin account and margin buying power?

Answer: A margin account is an account offered by brokerage firms that allows investors to
borrow money to buy securities.

Margin buying power is the amount of money an investor has available to buy securities in a
margin account. It is the total cash hold by the investor in brokerage account plus the maximum
margin available to him/ her.

Q.19- Define Margin call?

Answer: A margin call occurs when the value of an investor’s margin account falls bellows
the brokers required amount.

138 | P a g e
Q.20- Define market capitalization and market turnover?
Answer: Market capitalization commonly called market capital, is the market value of a
publicly traded companies outstanding share.
Market turnover refers to the total value of stocks traded during a specific period of time.

Q.21- What is bull market and bear market?

Answer: Bull market is a situation when share price of a company going up aggressively over
a specific period of time.
Bear market is a situation where share price is continuously dropping.

Q.22- Define market order, limit order, stop order and day order?
Answer: A market order is a buy or sell order to be executed immediately at the current market
price.

A limit order is an order to buy a security at no more than a specific price, or sell a security at
no less than a specific price.

A stop order is an order to buy or sell a security once the price of the securities reached a
specified price known as the stop price.

An order is a market or limit order that is in force from the time the order is submitted to end
of the day’s trading session.

Q.23- What do you mean by mutual fund?

Answer: A mutual fund is a company that pools money from many investors and invests the
money in securities such as stocks, bonds, and short-term debt.

Q.24- Define security market index and stock market index?

Answer: A security market index is a means to measure the growth of value of a set of
securities.
A stock index, or stock market index, is an index that measures a stock market, or a subset of
the stock market, that helps investors compare current stock price levels with past prices to
calculate market performance.

Q.25- What is insider information?

Answer: Insider information is a non-public fact regarding a publicly traded company

plans or condition which can provide financial benefits when utilized for buying or selling
shares of that or the securities of other companies.

139 | P a g e
 Course Code: BIN-305
Course Title: Monetary and Fiscal Policy
Q.1- What is monetary policy?
Monetary policy is the policy adopted by the monetary authority of a nation to control either
the interest rate payable for very short-term borrowing (borrowing by banks from each other
to meet their short-term needs) or the money supply, often as an attempt to reduce inflation or
the interest rate, to ensure price stability and general trust of the value and stability of the
nation’s currency.

Q.2- Who conducts monetary policy in the United States?

Decisions about monetary policy are made at meetings of the Federal Open Market Committee
(FOMC). The FOMC comprises the members of the Board of Governors; the president of the
Federal Reserve Bank of New York; and 4 of the remaining 11 Reserve Bank presidents, who
serve one-year terms on a rotating basis.

Q.3- How may monetary policy work with or in conflict with fiscal policy?
Monetary policy addresses interest rates and the supply of money in circulation, and it is
generally managed by a central bank. Fiscal policy addresses taxation and government
spending, and it is generally determined by government legislation.

Q.4- What’s the relationship between inflation and interest rates?

Inflation and interest rates tend to move in the same direction, with one often chasing the other
as they rise and fall. The relationship mirrors basic supply and demand principles. As inflation
falls, so do interest rates. It becomes less expensive to borrow money, thus there’s more money
circulating in the economy.

Q.5- How may an increase in interest rates influence business investment spending and
consumer durable spending?
Interest rates affect the cost of borrowing money over time, and so lower interest rates make
borrowing cheaper - allowing people to spend and invest more freely. Increasing rates, on the
other hand makes borrowing more costly and can reign in spending in favour of saving.

The ultimate effect of interest rate changes primarily depends on the consensus attitude of
consumers as to whether they are better off spending or saving in light of the change.

Q.6- How may a decrease in interest rates influence business investment spending and
consumer durable spending?
Central banks adjust interest rates, either up or down, in order to combat inflation or spur
economic activity when the economy slows. Interest rates affect the cost of borrowing money
over time, and so lower interest rates make borrowing cheaper – allowing people to spend and
invest more freely. Increasing rates, on the other hand makes borrowing more costly and can
reign in spending in favor of saving. The ultimate effect of interest rate changes primarily

140 | P a g e
depends on the consensus attitude of consumers as to whether they are better off spending or
saving in light of the change.

The basis behind interest rate changes as a tool for influencing the economy stems from
Keynesian economic theory refers to two competing economic forces that act on consumers,
and which can be influenced by interest rate levels: the marginal propensity to consume (MPC)
and the marginal propensity to save (MPS). These concepts refer to changes in how much
disposable income consumers tend to spend or save.

Q.7- Would you advocate an easy monetary policy or a tight monetary policy for any
country? Why?
Tight monetary policy, or contractionary monetary policy, typically occurs when a central bank
wants to keep inflation under control. If there has been too much spending and borrowing by
consumers and businesses, the economy can become overheated and that could considerably
raise the price level of goods and services.

Q.8- Define the reserve requirement. Why is it the most powerful and least frequently
used tool of monetary policy?
Reserve requirements are the amount of cash that banks must have, in their vaults or at the
closest Federal Reserve Bank, in line with deposits made by their customers. Set by the Fed’s
board of governors, reserve requirements are one of the three main tools of monetary policy
the other two tools are open market operations and the discount rate.

Banks loan funds to customers based on a fraction of the cash they have on hand. The
government makes one requirement of them in exchange for this ability: keep a certain amount
of deposits on hand to cover possible withdrawals. This amount is called the reserve
requirement, and it is the rate that banks must keep in reserve and are not allowed to lend.

A monetary policy uses different instruments such as open market operations, requirements on
bank reserves and the rate of discounts to achieve macroeconomic goals. However, open
market operations are considered the most important and frequently used tool of the three.

Q.9- Should we change the reserve requirement at this time?

By increasing the reserve requirement, the Federal Reserve is essentially taking money out of
the money supply and increasing the cost of credit. Lowering the reserve requirement pumps
money into the economy by giving banks excess reserves, which promotes the expansion of
bank credit and lowers rates.

Q.10- Define the discount rate.

The discount rate is the interest rate used to determine the present value of future cash flows in
a discounted cash flow (DCF) analysis. This helps determine if the future cash flows from a
project or investment will be worth more than the capital outlay needed to fund the project or
investment in the present.

141 | P a g e
Q.11- Should we change the discount rate at this time?
When analyzing investments or projects for profitability, cash flows are discounted to present
value to ensure the true value of the undertaking is captured. Typically, the discount rate used
in these applications is the market rate.

However, based on circumstances related to the project or investment, it may be necessary to

utilize a risk-adjusted discount rate.

Q.12- What are Open Market Operations (OMO)?

Open market operations (OMO) is the term that refers to the purchase and sale of securities in
the open market by the Federal Reserve (Fed). The Fed conducts open market operations to
regulate the supply of money that is on reserve in U.S. banks. The Fed purchases Treasury
securities to increase the money supply and sells them to reduce it.

By using OMO, the Fed can adjust the federal funds rate, which in turn influences other short-
term rates, long-term rates, and foreign exchange rates. This can change the amount of money
and credit available in the economy and affect certain economic factors, such as
unemployment, output, and the costs of goods and services.

Q.13- Why are open market operations the most frequently used tool of monetary policy?
The most commonly used tool of monetary policy in the U.S. is open market operations. Open
market operations take place when the central bank sells or buys U.S. Treasury bonds in order
to influence the quantity of bank reserves and the level of interest rates. The specific interest
rate targeted in open market operations is the federal funds rate. The name is a bit of a misnomer
since the federal funds rate is the interest rate charged by commercial banks making overnight
loans to other banks. As such, it is a very short term interest rate, but one that reflects credit
conditions in financial markets very well.

The Federal Open Market Committee (FOMC) makes the decisions regarding these open
market operations. The FOMC is made up of the seven members of the Federal Reserve’s
Board of Governors. It also includes five voting members who are drawn, on a rotating basis,
from the regional Federal Reserve Banks. The New York district president is a permanent
voting member of the FOMC and the other four spots are filled on a rotating, annual basis,
from the other 11 districts. The FOMC typically meets every six weeks, but it can meet more
frequently if necessary. The FOMC tries to act by consensus; however, the chairman of the
Federal Reserve has traditionally played a very powerful role in defining and shaping that
consensus. For the Federal Reserve, and for most central banks, open market operations have,
over the last few decades, been the most commonly used tool of monetary policy.

Q.14- How a Central Bank executes Monetary Policy?

The most important function of the Federal Reserve is to conduct the nation’s monetary policy.
Article I, Section 8 of the U.S. Constitution gives Congress the power “to coin money” and “to
regulate the value thereof.” As part of the 1913 legislation that created the Federal Reserve,
Congress delegated these powers to the Fed. Monetary policy involves managing interest rates

142 | P a g e
and credit conditions, which influences the level of economic activity, as described in more
detail below.
A central bank has three traditional tools to implement monetary policy in the economy:
Open market operations
Changing reserve requirements
Changing the discount rate

In discussing how these three tools work, it is useful to think of the central bank as a “bank for
banks”—that is, each private-sector bank has its own account at the central bank. We will
discuss each of these monetary policy tools in the sections below.

Q.15- Does selling or buying bonds increase the Money Supply?

Is it a sale of bonds by the central bank which increases bank reserves and lowers interest rates
or is it a purchase of bonds by the central bank? The easy way to keep track of this is to treat
the central bank as being outside the banking system. When a central bank buys bonds, money
is flowing from the central bank to individual banks in the economy, increasing the supply of
money in circulation. When a central bank sells bonds, then money from individual banks in
the economy is flowing into the central bank—reducing the quantity of money in the economy.

Q.16- Explain why central banks determine (or control) money supply by using discount
rate. Are there any other policy tools which are used by central banks?
One of the main advantages of using the discount rate to manage the money supply is that it
can be changed and take effect quickly. If the economy needs stimulus, the rate can be lowered.
If the economy is showing signs of overheating, the rate can be raised.

The Central Bank also has the power to influence the economy by changing reserve
requirements or buying or selling securities on the open market.

Q.17- Explain the expansionary monetary policy and state it suitability.

Expansionary monetary policy is when a central bank uses its tools to stimulate the economy.
That increases the money supply, lowers interest rates, and increases demand. It boosts
economic growth. It lowers the value of the currency, thereby decreasing the exchange rate. It
is the opposite of contractionary monetary policy.

Expansionary monetary policy deters the contractionary phase of the business cycle. But it is
difficult for policymakers to catch this in time. As a result, you typically see expansionary
policy used after a recession has started.

Q.18- How can a country use monetary policies to control its inflation rates?
Inflation occurs when spending on goods and services outstrips production. Prices can rise
because of supply constraints that increase the cost of producing goods and offering services,
or because consumers, enjoying the benefits of a booming economy, spend their excess cash

143 | P a g e
faster than producers can increase production. Inflation is often the result of some combination
of these two scenarios.

Governments generally try to keep inflation within an optimal range that promotes growth
without dramatically reducing the purchasing power of the currency. In the U.S., much of the
responsibility for controlling inflation falls on the Federal Open Market Committee (FOMC),
a Federal Reserve committee that sets monetary policy to achieve the Fed’s goals of stable
prices and maximum employment.

There are many methods used to control inflation and, while none are sure bets, some have
been more effective and inflicted less collateral damage than others.

Q.19- What factors are necessary for curbing inflation in an economy?

To reduce inflationary pressures the government can increase tax and reduce government
spending. This will reduce AD. Fiscal policy can reduce government borrowing but is likely to
be politically costly as the public dislike higher taxes and cuts to government spending.
 Monetary policy – Higher interest rates. This increases the cost of borrowing and
discourages spending. This leads to lower economic growth and lower inflation.
 Tight fiscal policy – Higher income tax and/or lower government spending, will reduce
aggregate demand, leading to lower growth and less demand-pull inflation.
 Supply-side policies – These aim to increase long-term competitiveness, e.g.
privatization and deregulation may help reduce costs of business, leading to lower
inflation.

Q.20- In an open economy, interest rate changes induced by monetary policy influence?
In general, the effects of monetary policy on economic activity, through a decline or a rise in
(real) interest rates, are as follows.

When interest rates decline, financial institutions can procure funds at low interest rates. This
enables them to reduce their lending rates on loans to firms and households. Given the linkage
between various financial markets, there is a decline in not only financial institutions’ lending
rates but also interest rates at which firms borrow directly from the market, such as in the form
of corporate bond issuance.

In this situation, firms find it easier to procure working capital (funds needed for the payment
of salaries and input costs) and fixed investment funds (funds needed for construction of
factories, stores, etc.), and households also find it easier to borrow funds, such as for purchasing
housing.

As a result, firms’ and households’ economic activity picks up, and this stimulates the
economy. Upward pressure on prices is also generated in turn. Such monetary policy measures,
aimed at stimulating the economy, are called monetary easing.

On the other hand, when interest rates rise, financial institutions must procure funds at higher
interest rates, and raise their lending rates on loans to firms and households. Firms and

144 | P a g e
households find it difficult to borrow funds, which makes their economic activity sluggish.
This, in turn, contains overheating of the economy and exerts downward pressure on prices.

Such monetary policy measures, aimed at containing an overheating of the economy, are called
monetary tightening.

Q.21- What is fiscal policy?

In economics and political science, fiscal policy is the use of government revenue collection
and expenditure to influence a country’s economy.

Fiscal policy refers to how a government manages the economy mainly through its tax and
spending decisions. Every year, the government collects revenue through a variety of sources,
whether through its citizens, businesses, or even borrowing. It must then, in turn, decide on
how best to use that money for the success of the nation as a whole. Common areas where
government spends its money include the military, infrastructure, education, and health care.

Q.22- Types of fiscal policy?

There are two main types of fiscal policy: expansionary and contractionary.
• Expansionary fiscal policy

Expansionary fiscal policy uses tax cuts or increased government spending to regulate the
economy. It is often used in times of recession or economic downturn.
• Contractionary fiscal policy

Contractionary fiscal policy is the opposite of expansionary fiscal policy. It uses higher taxes
and lower government spending to regulate the economy.

Q.23- What Are Examples of Fiscal Policy?

The two major examples of expansionary fiscal policy are tax cuts and increased government
spending. Both of these policies are intended to increase aggregate demand while contributing
to deficits or drawing down budget surpluses.

Q.24- What Are the Main Tools of Fiscal Policy?

Fiscal policy tools are used by governments to influence the economy. These primarily include
changes to levels of taxation and government spending. To stimulate growth, taxes are lowered
and spending is increased. This often involves borrowing by issuing government debt. To cool
down an overheating economy, taxes may be raised and spending decreased.

Q.25- What is the objective of fiscal policy?

The primary objective of the fiscal policy is to regulate the case of economic stability, full
employment and stabilize the growth rate. It is often optimized with monetary policy, including
the banking system, the supply of money in circulation and the management of interest rates.

145 | P a g e
Q.26- What are the challenges of fiscal policy?
An expansionary fiscal policy may end up decreasing aggregate demand because of crowding-
out effect. Increased government borrowing leads to an increase in interest rates, which leads
to a decrease in aggregate demand. The economy may be slow because of shortage of resources
rather than lower demand.

Q.27- What are main advantages of fiscal policy?

Fiscal policy is the use of government spending and taxation to influence the economy.
Governments typically use fiscal policy to promote strong and sustainable growth and reduce
poverty.

Q.28- What are the three big problems with fiscal policy?
Three problems that limit fiscal policy are that it is difficult to increase or decrease the amount
of federal spending, it is difficult to know the current state of the economy let alone predict the
future, and changes take time so results of changes in fiscal policy are delayed.

Q.29- Shortly discuss about the importance and scope of fiscal policy.
Fiscal policy is an important tool for managing the economy because of its ability to affect the
total amount of output produced

Fiscal policy is defined as the policy under which the government uses the instrument of
taxation, public spending and public borrowing to achieve various objectives of economic
policy. Simply put, it is the policy of government spending and taxation to achieve sustainable
growth.

Q.30- How can fiscal policy improve the economy?

Fiscal policy objectives vary. In the short term, governments may focus on macroeconomic
stabilization—for example, spending more or cutting taxes to stimulate an ailing economy or
slashing spending or raising taxes to rein in inflation or reduce external vulnerabilities.

146 | P a g e
 Course Code: BIN-306
Course Title: Bank Information System and E-Banking

Q.1- What is the definition of E-banking?

Electronic banking also known as internet banking is an electronic payment system that enables
customers of a bank or other financial institutions to conduct a range of financial transactions
through the financial institutions website.

Q.2- What do you know about Debit-Point-of-Sale?

An advanced payment system which enables consumers to use an ATM card to pay for goods
and services, electronically debiting the cardholders account and crediting the account of the
merchant.

Q.3- Who are the Stakeholders of E-Banking?

E-banking stakeholder are given below:

1. Banks and Financial Institution: Stakeholders take advantage of e-banking services such
as better branding, reduced transaction costs, greater revenue. When a bank offers e-banking
services, it would be perceived leaders in technology implementation and enjoy a better brand
image. E-banking delivery channels reduce their cost of providing banking products and
services and increased revenues for the banks by selling a diverse range of products and
services.
2. Retail Customer: There are also some benefits that the retail customers expect from e-
banking. Such as, cost reduction, convenience, speed. The cost should reduce in terms of
availing and using various e-banking services and this transaction can be performed with
comfort from anywhere or anytime. Here, the speedy transactions facilitates are available
because the response of the medium is very fast.
3. Corporate bank customer: Corporate customers can get the benefits that are available to
the retail customers with some additional benefits like reduced cost, access to information. Cost
reduction in terms of assessing and using various banking products and services. Here the
corporations will have better access to information because they can check multiple accounts
at the click of button.

Q.4- What do know about Payoneer Master Card?

Payoneer MasterCard is a prepaid debit card provided by Payoneer. The card holder won’t need
a bank account he or she can use the money deposited in the payoneer account, and payoneer
charges a specific amount every year for using this card.

147 | P a g e
Q.5- What is WAP (Wireless Application Protocol) and STK (SIM Toolkit) Banking?

WAP (Wireless Application Protocol) Banking: means assessing banking facilities using
customers GPRS enabled mobile phones. The mobile phone service providers and the bank
jointly provides these services.

STK (SIM Toolkit) Banking: The SIM Application toolkit consist of a set of commands
programmed into the SIM, which defines how the SIM should interact directly outside world. This
enables the SIM to build up an interactive exchange between a network application & the end user.

Q.6- What are the Constraints of E-banking in Bangladesh?

There are many advantage of internet banking. But there are also some disadvantages of internet
banking in the context of Bangladesh. Limitations are as follows:
1. Internet connection
2. Computer know how
3. Server problem
4. Security
5. Loss of human touch

Q.7- What is Plastic Money?

Plastic money is designed for cashless payment and getting cash from one’s bank account
with ATMs all over the world. Varieties of plastic money are: Credit Cards, Debit Cards,
Payment/Pre-paid/Electronic purse cards, Charge Cards, and Store, Budget or Option Cards
etc.
Payment/Pre-paid/Electronic purse cards: These are cards that the customer loads with cash
and then use the cards as an alternative to cash. They are generally used for small purchases or
to buy on the internet.
Charge Cards: This is similar to credit card with a credit limit, however unlike credit card the
account normally has to be settled in full at the end of each month.
Store, Budget or Option Cards: The customers are sent a monthly bill and interest is usually
charged if they do not back all they owe much month.

Q.8- What is Debit card, Credit Card, Visa, and Master Card?

Debit card: A debit card is a plastic payment card that can be used instead of cash when making
purchases. The money is taken directly from customer’s bank account. The card can be used in
ATMs machine to withdraw cash from own bank account.
Credit card: A credit card is a plastic money that you use to buy goods on credit. Credit card
imposes the condition that cardholders pay back the borrowed money plus interest. A credit
card enables its holder to make purchases on a line of credit issued by a financial institution,
usually a bank.
Visa card: A visa card is any type of payment card utilizing the visa network and branded by
visa Inc. cards may include credit, debit or prepaid cards.

148 | P a g e
Master card: A master card is any electronic payment card that uses the master card network
for processing transaction communications. These cards are typically branded with a
MasterCard logo. They can be credit, debit or prepaid cards.

Q.9- What is MICR cheque?

Magnetic ink character recognition code, known in short as MICR code, is a character
recognition of technology used mainly by the banking industry to ease the processing and
clearance of cheque and other documents.
MICR checks are printed must be the CBS1 paper.
Specification:
• Standard size 7.5 inch * 3.5 inch
• Basis weight: 95.0g/m2 (5%)
• Thickness: Min 105 micrometers, Max 130 micrometers.

Q.10- What are the Technologies related to plastic card?

1. Plastic: Plastic card is a plate with standard dimensions (85.6mm x 53.9 mm x 0.76 mm).
Produced from special, mechanic and thermos-resistant type of plastic used to store
information.
2. Magnetic strip and microchip: As electronic data media, the card are divided into magnetic
strip cards and integrated chip (microprocessor) cards. The first ones are called magnetic cards,
the other ones are smart cards or chip cards.
Cards with a magnetic strip are the most widespread today-circulation is over two billions. The
magnetic strip settles down on the back side of a card and according to standard ISO 7811, will
consist of three tracks.
A magnetic strip card the following data is provided:
On a cards face one can find:
• Owner’s name
• Card number
• Card’s validity
• A logo of a card’s issuing bank
• Payment system logo
Some cards have holograms for extra protection.
On the opposite side there are:
• A place for the owner’s signature
• Magnetic stripe
• Owner’s photo
• Logos of ATM networks where the owner can perform operations with card

149 | P a g e
Q.11- How many numbers a card consist of?

Card number consist of 16 digits

• The first six digits- a code of an issuing bank
• The following nine numbers cards bank number ( card account holder)
• The last one control digit.

Q.12- What is Internet banking?

Internet banking is a method of banking in which transactions are conducted electronically via
the internet. It is also known as banking or web banking.

Q.13- What is the comparison between Intranet and Extranet?

Intranet: An intranet is a private secured network designed to facilitate collaboration where

employees can create content, communicate, collaborate, get stuff done and develop the
company culture. Uses internet protocol (HTTP, TCP/IP). Security is high. Configured under
100-security level in firewall. And it is regulated by an organization.

Extranet: An extranet is like an intranet, but also provides controlled access to authorized
customers, vendors, partners or others outside the company. Uses internet technology and
public telecommunication system. Generally uses VPN technology to secured communication
over internet. Medium security level. And it is regulated by multiple organization.

Q.14- What do you know about LAN, MAN, and WAN?

LAN is a group of computers and network communication devices interconnected within a

geographically limited area, such as room, building or campus.
1. They transfer data at high speed.
2. They exist is a limited geographical area.
3. Most based on the Ethernet technology.
4. High degree of connection between computers.

A metropolitan area network (MAN) is a network that interconnects users with computer
resources in a geographic area or region larger than that covered by even a large local area
network (LAN) but smaller than the area covered by a wide area network (WAN).
1. Man is a network designed to extend over an entire city.
2. MAN includes different private LANs connected through cable and router or gateway.
3. FDDI technology is the best suited for MAN.
4. It is bigger than LAN and smaller than WAN.

A WAN can be located entirely within a state or a country or it can be interconnected around
the world.

150 | P a g e
1. They often transfer data at lower speed.
2. They exist in an unlimited geographical area.
3. They usually interconnect multiple LANs.
4. Connectivity and resources especially the transmission media, usually are managed by a
third party carrier, such as telephone line, satellites.

Q.15- What is TCP/IP, WWW, URL, Domain Name, FTP, and HTTP?

TCP/IP: Transmission control protocol/ internet protocol is a suite of communication protocol

used to interconnect network devices on the internet. TCP/IP can also be used as a
communication protocol in a private network (an Intranet or Extranet).
Domain Name: A domain name is ones website name. It is address where internet users can
access ones website. It is used for finding and identifying computer on the internet. Computer
use IP addresses which are series of numbers. However it is difficult for human to remember
string of numbers. If someone type www.yourdomain.com it will go to those website directly.
HTTP: Hyper Text Transfer Protocol is an application protocol for disturbed information
system. It is the foundation for the data communication for the World Wide Web, where
hypertext documents include hyperlinks to other resources that the user can easily access.
Basically it was developed to facilitate hypertext and the World Wide Web.
FTP: File transfer protocol is a standard network protocol used for the transfer of computer
files between a client and a server on a computer network.
URL: A uniform resource locator is a reference to a web resource that specifies its location on
a computer network and a mechanism for retrieving it.
Most web browser display the URL of a web page above the page in address bar.
WWW: World Wide Web commonly known as the web is an information space where
documents and others web resources are identified by uniform resource locator. The resources
of www may be accessed by users by a software application called web browser. English
scientist Tim Berners Lee invented the www in 1989.

Q.16- What is E-commerce?

E-commerce refers to marketing, selling and business over the Internet or in the word, E-
commerce can be defined as a form of business transaction in which the business parties
internet electronically. An electronic market allows sellers and buyers to exchange products
with the help of information technology. In the simplest form, we can say that E-commerce is
the movement of business on the web.

Q.17- What is the comparison between E-commerce and E-business?

E-commerce: Trading of merchandise, over the internet is known as E-commerce. It is Subset.

It requires Website and use Internet.
E-business: Running business using the internet is known as E-business. It is superset.
Requires Website, CRM, and ERP etc. And use Internet, Intranet and Extranet.

151 | P a g e
Q.18- What is B2B and B2C?

Business to Business (B2B): Website following B2B business model sells its product to an
intermediate buyer who then sells the product to the final customer. As an example, a
wholesaler places an order from a company’s website and after receiving the consignment, sells
the end product to final customer who comes to buy the product at wholesalers retail outlet.

Business to consumer (B2C): Websites following B2C business model sells its product
directly to a customer. A customer can view products shown on the website of business
organization. The customer can choose a products and order the same. Website will send a
notification to the business organization via email and organization will dispatch the product
/goods to the customer. In B2C model, a customer goes to the website, selects a catalog, orders
the catalog and an email is sent to business organization. After receiving the order, goods would
be dispatched to the customer.

Q.19- What do mean by Computer Security?

Computer Security is the protection of computer system and information from home, theft and
unauthorized use. Computer security can prevent to stop intruders from even getting into any
part of computer system.
The main concerning area:
Information security consist of three component. These are confidentially, integrity and
availability.

Q.20- What is Cryptography?

Cryptography is the conversion of data into a secret code for transmission over s public
network. Today, most cryptography is digital and the original text is turned into a coded
equivalent called “cipher text” via an encryption algorithm.

Q.21- What are the use of public keys and private keys?

Public key encryption uses two keys that are mathematically related. A key is a random string
such as a number, word or phases that is used in conjunction with an algorithm. For public
key encryption, every user has a pair of mathematically related keys, including:
• A private key, which is kept confidential
• A public key, which is freely given out to all potential correspondents.

Q.22- What is KIOSK Banking?

Kiosk banking allows users to access traditional banking functions such as deposits and
withdrawals, as well as transfer money between accounts and check their balances, all from the
convenience of a kiosk. The primary purpose of kiosk banking is to provide easy access and
accessibility to as many people as possible, regardless of the time of day.

152 | P a g e
 Course Code: BIN-307
Course Title: Taxation

Q.1- What is the definition of Tax?

Tax is the revenue collected by the Government from persons and organizations under different
taxing Acts. In other words, it is a liability imposed upon the assessee who may be individuals,
groups of individuals and other legal entities.
Legal Context: General Meaning i.e. definition: Tax means compulsory payment imposed by
Govt. on persons, products/services and the like under respective • Acts payable by the assessee
as per provisions of concerned Acts.

Q.2- What are the objectives of collecting tax?

The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most
governmental activities must be financed by taxation. But it is not the only goal. In other words,
taxation policy has some non-revenue objectives.

1. Economic Development: One of the important objectives of taxation is economic

development. Economic development of any country is largely conditioned by the growth of
capital formation. It is said that capital formation is the kingpin of economic development. To
overcome the scarcity of capital, governments of these countries mobilize resources so that a
rapid capital accumulation takes place. To step up both public and private investment,
government taps tax revenues.

2. Full Employment: Second objective is the full employment. Since the level of employment
depends on effective demand, a country desirous of achieving the goal of full employment must
cut down the rate of taxes. Consequently, disposable income will rise and, hence, demand for
goods and services will rise. Increased demand will stimulate investment leading to a rise in
income and employment through the multiplier mechanism.

3. Price Stability: Thirdly, taxation can be used to ensure price stability—a short run objective
of taxation. Taxes are regarded as an effective means of controlling inflation. By raising the
rate of direct taxes, private spending can be controlled. Naturally, the pressure on the
commodity market is reduced.

4. Control of Cyclical Fluctuations: Fourthly, control of cyclical fluctuations—periods of

boom and depression—is considered to be another objective of taxation. During depression,
taxes are lowered down while during boom taxes are increased so that cyclical fluctuations are
tamed.

5. Non-Revenue Objective: Finally, another extra-revenue or non-revenue objective of

taxation is the reduction of inequalities in income and wealth. This can be done by taxing the
rich at higher rate than the poor or by introducing a system of progressive taxation.

153 | P a g e
Q.3- Briefly discuss about Adm Smith’s four cannons of Taxation.
1. Canon of Equality: "The subjects of every state ought to contribute towards the support of
the Government, as nearly as possible, in proportion to their respective abilities; that is, in'
proportion to the revenue which they respectively enjoy under the protection of the State." This
canon tries to observe the objective of economic justice.

2. Canon of Certainty: This canon describes that "The tax which each individual is b6Und to
pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the
quantity to be paid, all ought to be clear and plain to the contributor and to every other person,"
The tax-payers should not be subject to arbitrariness and discretion of the tax officials, in which
case there will be a scope for a corrupt tax administration.

3. Canon of Convenience: This canon takes into consideration the interest of the Taxpayer
from the view of payment of tax. It emphasizes that the mode and timings of tax payment
should be, so far as possible, convenient to the tax-payer. This canon recommends that
unnecessary trouble to the tax-payer should be avoided, otherwise various ill-effects may
result.
4. Canon of Economy: Every tax has a cost of collection. It is important that the cost of
collection should be as minimum as possible. It will be useless to impose. Taxes which are too
widespread and difficult to administer. Productivity of taxes has been given importance in this
canon.

Q.4- What do you know about Direct and Indirect Tax?

Direct Tax is a tax where the taxpayer pays directly to the authority imposing the tax. Here, the
taxpayer has to bear the tax and will not be able to transfer this liability to another entity. There are
several types of direct tax like: Income tax, capital gains tax etc.

Direct taxes are levied on taxpayer’s income and profits; however, Indirect taxes are charged on goods
and services. The taxpayers pay the indirect tax to the government via intermediary and thus they are
indirectly paid to the government. There are several types of indirect tax like: Goods and Services Tax
or GST, Custom Duty that means goods and services bringing from abroad etc.

Q.5- Describe Progressive, Proportionate, and Regressive Tax.

1. Progressive Tax: A tax is said to be progressive when, with the increasing income, the
liability not only increases in absolute form but also in a progressive way. Here the tax rate
progressively increases. For example, tax on total income of taka 1, 00,000 is 10% but on Tk.
5, 00,000 1 s 5%. Here tax rate will increase income increases.

2. Proportionate Tax: A tax is said to be proportionate when tax liability i.e quantum of tax
increases in same proportion as income increases. The quantum tax increase with quantum of
income though rate is the same. For example, tax on Tk 1,00,000 is 10% and on Tk. 5,00,000
is also 10%. In the former case tax becomes Tk 10,000 and in the latter Tk. 50,000, Here in
absolute form tax has increased in proportion to rate of increase of income. But the rate has not
progressively increased as was seen in case of progressive tax.

154 | P a g e
3. Regressive Tax: A regressive tax is one where rate of tax decreases as the income, property,
expenditure increases.

Q.6- What is Gift tax and Value Added Tax or VAT?

Gift tax: A person making gift to another person over Tk. 20,000 is considered under Gift tax
Act 1963 and chargeable for gift tax. It is also a direct tax. And this tax was suspended in 1985
but again revived in 1990 and has renamed at Gift tax act 1990.

Value Added Tax or VAT: It is a tax imposed on the added value of product at different stages
in the marketing chain. Added value is the difference between production/purchase costs over
sale value at a point. Value added tax is charged on the added value at a static rate. This is also
an indirect tax and the Govt. of Bangladesh currently earns highest amount of tax revenue from
it.

Q.7- What is the definition of Income Tax?

An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income
or profits earned by them (commonly called taxable income). Income tax generally is computed
as the product of a tax rate times the taxable income. Taxation rates may vary by type or
characteristics of the taxpayer and the type of income. It is a direct tax.

Q.8- What is Tax Holiday?

A tax holiday is a temporary tax break. Governments also use tax holidays as investment
incentives that may exempt a new plant from property taxes for a number of years. Tax holiday
is allowed to industries subject to the relevant rules and procedures set by the National Board
of Revenue (NBR). Presently, it is allowed for 5, 7, 9 and 12 years for industries set up in the
developed, less developed, least developed and special economic zones respectively. The
period of such tax holiday is calculated from the month of commencement of commercial
production. The eligibility of tax holiday is to be determined by the NBR and the
commencement of production is certified by the respective sponsoring agencies.

Q.9- What is the definition of Income?

Income is revenue that an individual or business earns in exchange for providing a good or
service, or through investing capital. Income can come from a variety of sources and may be
taxed at different rates, depending on the source. For individuals, this is primarily in the form
of a wage or salary, but pensions, dividends, interest, and stock options are also sources of
income.

Q.10- What do you know about Total World Income?

Total World Income: The term 'Total World Income' is applicable for non-resident assessee.
For calculating die total income of a non-resident assessee, income received or deemed to be
received and income accrued or arisen or deemed to accrue or arise in Bangladesh are to be
considered. In fact, to get the total world income of a non-resident, the said categories of
income derived outside Bangladesh are added with total income. To determine the rate at which

155 | P a g e
 a non-resident is chargeable on his income earned in the taxable territory, the world income
was necessary to calculate. In other words, the• non-resident assessee previously was to pay
tax on income earned in Bangladeshi at the rate applicable to his total world income. But as tax
rate for non-resident has now fixed at highest tax rate slab (now 30%), the non-resident now
have to pay tax @ 30%.

Q.10- What do you know about Non-assessable, Tax-credit, and Tax free Income?

Non-assessable Income is income you don’t need to pay tax on. A tax credit is an amount of
money that taxpayers can subtract from taxes owed to their government. For many investors,
the interest earned from municipal bonds is not subject to federal income taxes. That income
is tax-free. There are some differences between Non-assessable Income, Tax Credit Income,
and Tax-Free Income. These are as follows –

Non-assessable Income

 It is not included in the total income.

 It has no impact on the determination of total taxable income.
 This type of income does not increase the total taxable income and tax liability.
 The questions of the tax rebate on this category of intact do not arise as it is not included in
total income.
 This type of income has a positive impact on the total taxable income and tax rate.

Tax Credit Income

 It remains in the total income.

 It is considered to determine the net tax liability.
 This type if income influences the minimum taxable limit and increases total income.
 The tax rebate is allowed on this category of income up to the certain limit at a certain rate.
 This type of income has a positive impact on the tax liability of an assessee.

Tax-Free Income

 It remains in the total income.

 It increases the total taxable income and tax rate of the assessee.
 This type of income increases the total taxable income and tax rate.
 A tax rebate is granted at an average rate on the total tax-free income.
 This type of income increases tax rate. But tax rebate is granted at an average rate.

Q.11- What is Non-recurring Income?

The income which does not arise at regular interval is known as Non-recurring income. To be
casual and non-recurring income it should have following conditions:

• It is sudden receipt and uncertain.

156 | P a g e
 • It is not a capital type income under Sec.31.
• It is not earned from business income.
• It is not perquisite in addition to salary.

Q.12- What is the definition of Assessee?

Generally assessee means a tax payer, that is, a person who is to pay tax. In the context of
income tax in Bangladesh, section 2(7) of the Income Tax Ordinance, 198, defines assessee as
a person by whom any tax or other sum of money is payable under the Ordinance and includes:
(a) Person against whom income tax case/proceedings is going on, or income of other person
in respect of which he is assessable or such other person who deems to be assessee.
(b) Person who is required to file income tax return,
(c) Person who desires to be assessed and submits his income tax return.

(d) Person who is deemed to be an assessee or an assessee in default under any provision of
Income Tax Ordinance.
(e) NG0s.
(f) Persons who are required to file tax return under Finance Act from time to dine

Q.13- What is the meaning of Residential Status?

In general residential status means the standing of an individual as to his residence in the
taxable territory and for I-IUF, Firm and Company the standing of the location of their
management and control during relevant income year. Under the income tax law in Bangladesh
and many other countries of the world, income tax is levied on the basis of residential status of
a tax payer. In other words, the tax liability of an assessee depends upon his residential status.

In Bangladesh the Income Tax Ordinance, 1984 provides that an assessee may be resident or
anon resident. Such residential status is determined by the specific provisions of this Ordinance
but not by any provision of other laws of the country. It is not comparable with the citizenship
of a person. A person may be the citizen of a country but, he may not be the resident for income
tax purpose if the conditions of the provisions of the ordinance are not satisfied. As to the
implication of residential status two case decisions are cited here:

(i) The tax liability of an assessee will be determined by, his residential status.
Here the residential status of income year is considered but not that of
assessment year. (Wales Brothers and Co. vs. CIT)
(ii) (ii) It is the responsibility of the assessee to prove that he is a resident or not.
(Bahadur Sheikh vs. CIT, 1963). In other Words, an assessee is to submit
all the relevant documents in support to his residential status to the authority.

If a person is non-resident then his income accrued or arose outside Bangladesh is Non-
Taxable.

157 | P a g e
Q.14- Briefly talk about National Board of revenue.
The National Board of Revenue (NBR) is the central authority for tax administration
in Bangladesh. It is under the Internal Resource Division of Ministry of Finance. NBR is the
authority for tax policies and tax laws in Bangladesh. NBR collects almost 97% of tax revenue
and almost 85% of total revenue for the Government of Bangladesh.

The NBR was established in 1972 through the National Board of Revenue Order, 1972. Later,
the structure of the NBR was amended through Act No 12 of 2009. The NBR has 1 Chairperson
and 8 members - 4 for direct tax and 4 for indirect tax. The secretary of internal resources
division acts as the ex-officio chairman of the Board. There are 45 departments/directorates
under the NBR, of which 25 are related to direct tax and 20 related to indirect tax

Q.15- Briefly talk about Ministry of Finance.

The Ministry of Finance is responsible for over-seeing the function of the financial institutions
of the country and also plans, implement and control public expenditure policies and programs
of the Government. Both fiscal and monetary policies fall under its jurisdiction.
A number of measures have been undertaken by the Government during the nineties to
strengthen the banking system. These include improvement of legal and regulatory framework,
passage of the Bankruptcy Act, 1997 and the Loan Court Amendment Act by Parliament,
enforcement of loan classification guide-lines, recapitalization of nationalized commercial
banks and the formation of Banking Reform Committee.
The Government is keen to correct and remedy past failures and imperfections in the financial
markets. The reforms of the financial sector and trade liberalization are being complemented
by an appropriate foreign exchange measures. An active exchange rate policy to maintain the
competitiveness of the economy is also being followed.
The local currency Taka has been made convertible in all current account transactions. Laws
have been amended to boost private and foreign investment in the financial sector. A number
of stock Exchanges, foreign banks and financial institutions are already active and also fully
operational in the country.
Q.16- What is meant by Assessment year?
The year in which tax is paid is called the “Assessment year” or tax year. According to Section
2 (9) of IT Ordinance, 1984, assessment year means that period of twelve months commencing
on the first day of July every year.

Q.17- What is meant by Income year?

The year of the income for which tax is levied is called 'income year'. In the Income e. Tax Act
of 1922, it was called the previous year. • According to Section l (35) of I.T. Ordinance, 1984,
income year Means the financial year (i.e. the year commencing on 1st July every year)
immediately preceding the assessment year or any other accounting period (not exceeding
twelve months) as adopted by the assessee and ending within the said financial year But there
are some exceptions to the above rule.

158 | P a g e
Q.18- How to Change the Income Year?
The income year once adopted or determined, can be changed only with the consent of the Da
who may impose such terms and conditions as he may think fit while approving the change.
For the purpose of change in income year, application should be made to the! DCT before the
end of such income year.

Q.19- What do you know about minimum tax payable?

The minimum tax is the amount of tax which an assessee must pay at minimum after allowing
rebate & allowances. If after allowing rebate & allowances tax payable is seen to be negative
too, he must pay minimum prescribed tax. Finance Act, 2015 provides minimum tax as follows:

Location of Assessee Minimum Tax in TK

Residing in Dhaka North and south city corporation and

5,000
Chittagong city corporation area.

Residing in other city corporation 4,000

Residing in other areas. 3,000

Q.20- What is the definition or interest on Securities?

According to Section 2 (38) of the Income Tax Ordinance, 1984 defines interest as any sum
payable in any manner in respect of any money borrowed, debt incurred or any credit facility
availed. In such a context interest on securities can be defined as the sum of interest paid or
payable for securities issued by Govt. organizations or securities approved by Govt. or interest
on securities issued by companies or other organizations.

Q.21- What do you know about Tax free Gov. Securities, and Assessable Gov. Securities?
Tax free Govt. securities: Interest on Tax free Govt. Securities are non-assessable. In some
case Govt. may declare certain securities as tax-free. Interest on h under lax-free declared
securities are totally non assessable. In such a case this type of securities can be categorized as
non-assessable Gov. Securities.

Assessable Govt. Securities: Securities issued by the Govt. & not falling under tax free
declared securities can be categorized under assessable Gov. Securities.

Q.22- What is Bond Washing?

Bond washing is the practice of selling a bond just before it pays a coupon payment and then
buying it back once the coupon has been paid. Bond washing previously could result in
apparently tax-free capital gains because after the coupon has been paid, the bond will often
sell for less. However, the practice has been banned in most major jurisdictions.

159 | P a g e
Q.23- What is Annual Value of the House?
Section 24 of the Income Tax Ordinance,' 1984 provides that tax on house property will be
charged on the basis of Annual Value. Annual value may be defined as the sum for which the
property consisting of building, furniture & fixture, land and apartments thereof that might
reasonably be expected to let out from year to year In this case prevailing circumstances such
as locality, demand for house etc., need to be considered. However, under section 2(3) of the
I. T. Ordinance, the term Annual Value in relation to house property means the following:
In respect of let out property:

i) The sum of Municipal estimated annual rent (MV)

ii) The sum of actual annual rent (RV). The higher one.
iii) That is AV = Municipal Value (M. V.) • (Which is assumed based on
estimated annual rent) or Actual Rental Value (R. V.) Whichever is higher

Q.24- What is the definition of Agricultural Income?

As per the various provision of OTI, 1984, generally income generated from any land situated
in Bangladesh or from any other assets used solely for agricultural purposes is consider as
agricultural income.

Q.25- What do you know about Party Agricultural and Partly Business Income?
Section 26 (2) & (3) provides that part of the income from the following heads will be treated
as agricultural income and that Rules 31 and 32 on. T. Rules provides the computation
procedure of the proportion of agricultural and business income from those heads. The rules
are stated below:

Income from Tea Garden

Income from tea garden shall be partly agricultural and partly business if the producer is also
the owner of tea factory. In such a case the sale proceeds of tea constitute partly agricultural
and partly business income.' Here all of the sale proceeds of tea is to be treated as agricultural
income and the rest 40% to be treated as business income

Income from Sugar Mill

Like income from tea garden, the income from sugar mill will also be partly agricultural and
partly business if the owner of sugar cane field is also the owner of the mill or that the mill
itself produces sugar cane for its factory. In this case the market price of sugar cane is deducted
from sale value of sugar. Cost of sugar cane is treated as agricultural income and the difference
between sale value of sugar and market value of sugar cane is treated as business income.

Income from Plantation of Rubber

If the rubber produced in Bangladesh is sold after processing than like tea 60%, of the sale
proceeds is treated as agricultural income and rest 40% is treated as business income.

160 | P a g e
Income from Tobacco
If a tobacco manufacturer produces tobacco itself and use it in its factory than a part of income
from sales proceeds received will be treated as agricultural income and part of it will be treated
as business income: As the rules 31 and 32 do not provide guidance for determination of
proportionate income as to agricultural and business, it is considered logical to follow the rules
applied in case of sugar mill. This cost of raw tobacco will be treated as agricultural income
and the difference between the sales proceed of processed tobacco and raw tobacco will be
treated as business income.

Q.26- What are the characteristics of Agricultural Income?

Analysis of definition, nature and case decisions relevant to agricultural income, following may
be identified as the characteristics of agricultural income:

1. It must come from the agricultural land situated in Bangladesh.

2. It must come from fundamental agricultural work.
3. Marketing of products used by farmers will be the normal procedure.
4. Such income may arise froth adjacent agricultural land.
5. Income may also arise from sale or discarded value of agricultural machines or plant
subject to some ceiling.

Q.27- Define Fully Agricultural Income, Partly Agricultural Income, Typical

Agricultural income, and Ancillary Agricultural Income.
Fully Agricultural Income: crop cultivation, agricultural building, profit on sale of
agricultural machine, etc.

Partly Agricultural Income: Share of income from Tobacco factory, Tea Sits. etc. for
agriculture: when some part of such income is agricultural & other part is business income.

Typical Agricultural income: Income from cattle rearing, dairy, Flower Park, palm tree, etc.
Ancillary Agricultural Income: Some income though not agricultural and fall in the above 3
group yet are regarded as agricultural in broad perspective. Example: income from ferry ghat,
mooring, soil used for brick manufacturing, fishing, royalty for mine. These are non-
agricultural and can be shown as other non-agricultural income just below the agricultural
income or as income from other sources under sec. 33.

161 | P a g e
 Course Code: BIN-308
Course Title: Central Banking Regulations and Supervision.

Q.1- How can a modern central bank deliver a sound and stable economic environment?

A modern central bank can deliver a sound and stable economic environment through
(1) Monetary stability, or safeguarding the value of the currency, whether in terms of low
domestic inflation or stability of the exchange rate; and
(2) Financial stability, or helping the financial system to function smoothly and efficiently in
the allocation of resources in the economy.

Q.2- What are the key functions of a typical modern central bank?

In general, it could be said that a typical modern central bank has five key functions: (1)
issuance of money, (2) conduct of monetary policy, (3) payment systems facilitation, (4) lender
of last resort, and (5) banking supervision.

Q.3- Who are the players of money supply process?

There are three players of money supply process:

1. The central bank: the government agency that oversees the banking system and is
responsible for the conduct of monetary policy; in the United States, the Federal Reserve
System
2. Banks (depository institutions) the financial intermediaries that accept deposits from
individuals and institutions and make loans: commercial banks, savings and loan associations,
mutual savings banks, and credit unions
3. Depositors individuals and institutions that hold deposits in banks

Q.4- What do you know about Reserves, Money Multiplier, and Money Supply?

The money that banks keep on hand or in the vaults and in their accounts at the central bank
constitutes what is known as bank reserves.
When commercial banks keep a part of deposits on hand or in the accounts held with the central
bank as reserves it is called fractional reserve banking.
For example, 5 percent of deposits on hand, then the money creation process has the potential
to multiply the initial amount of base money by 1/0.05 20 times. Here, 20 is called the money
multiplier.
More generically, the money multiplier is 1/ (reserve ratio), where the reserve ratio is the ratio
of reserves to deposits

162 | P a g e
Q.5- What do you mean by Policy Interest Rate and Financial Market operations?

A policy interest rate is a short-term interest rate that a central bank chooses to directly
influence, which gives a signal to the public as to what it sees in terms of future economic
conditions and future price levels.
By raising the policy interest rate, the central bank signals to the public that it wants to tone
down the acceleration of economic activity and tame the rise in the general price level. By
lowering the policy interest rate, the central bank signals to the public that it wants economic
activity to pick up and that it wants to allow a rise in the general price level.

Financial market operations, on the other hand, help ensure that the policy interest rate stays
at or near the level that the central bank wants to keep.

Q.6- What are the forms of Lender-of-Last-Resort Function?

Theoretically, the central bank can assume the lender-of-last-resort function in three main
forms.
First, it can lend liquidity to individual banks.
Second, it can lend liquidity to the market, rather than to specific individual financial
institutions.
Third, it can inject risk capital into troubled banks, which effectively also implies a takeover
of the banks by the government.

Q.7-What are the roles a central bank performs as bank supervisor?

There are several type of activities such as:

• Licensing of New Banks

• Examination and Monitoring of Commercial Banks’ Operations
• Setting Regulatory Requirements for Commercial Banks
• Enforcement of Laws and Regulations to Ensure Compliance
• Resolutions for Troubled Financial Institutions

Q.8- Explain Exchange Rate Targeting.

Exchange rate targeting is a monetary policy rule under which the central bank promises to
keep the exchange rate within an announced target for a given period.
Under exchange rate targeting the central bank cannot change the money supply at will, lest
the exchange rate move away from the announced target level. Generally speaking, exchange
rate targeting as a monetary policy rule can help the central bank achieve credibility and price
stability if the central bank pegs the value of its currency to that of a large country that has a
good record of price stability.

163 | P a g e
Q.8- Explain Money Supply Growth Targeting.

• As the name suggests, a money growth targeting rule requires that the central bank set a target
rate for growth of the money supply. According to this rule, if the central bank keeps money
supply growth at a target rate that is consistent with that of real economic activity, then inflation
should be relatively low and stable.
• In the 1970s, central banks around the world had to grapple with the effects of the breakdown
of the Bretton Woods system. While many central banks decided to keep their exchange rates
fixed to the U.S. dollar or the German mark, by the 1980s a number of advanced economy
central banks, including those of the United States and Germany, had adopted money growth
targets as a guide for their monetary policy actions.

Q.9 Describe the Taylor Rule: A Stylized Model of the Risk Management Approach

The hypothesis made by Taylor received popular attention because it seemed to approximate
the Federal Reserve's monetary policy actions reasonably well. The hypothesis became known
as the Taylor rule, which can be expressed as the formula

Where i is the policy interest rate at time t,

πt is the inflation rate,
πt* is the desired rate of inflation,
rt* is the assumed equilibrium real interest rate,
yt is the actual GDP growth rate,
yt* is the GDP growth rate at full potential,
and an and ay are the relative weights that the central bank assigns to keeping inflation at the
target rate and getting the actual GDP growth rate to its full potential.

According to this equation, the Federal Reserve would raise the policy interest rate when
inflation is above the desired rate or when GDP growth rate is beyond its full potential.
When inflation is below the desired rate or when GDP growth rate is below its full potential,
then the Federal Reserve would lower the policy interest rate.

Q.10 Describe Inflation Targeting.

• Inflation targeting is a monetary policy regime under which the central bank aims to keep the
inflation rate within a specified target over a specified time frame. An inflation-targeting
central bank often uses a short-term interest rate (known as the policy interest rate) as the key
tool to adjust monetary conditions in the economy in a forward-looking manner, so that
inflation, or more specifically the forecast for inflation, is kept within target.
• Inflation targeting as a monetary policy regime rests upon two pillars: transparency and
accountability.

164 | P a g e
•Transparency is conveyed through the public announcement of the inflation target that the
central bank tries to achieve, as well as the reasons behind each of the central bank's monetary-
policy decisions with respect to achieving the target. Accountability is conveyed through the
fact that the central bank is accountable if the inflation target is missed.
• With transparency and accountability, the credibility of the central bank in maintaining
monetary stability through its conduct of monetary policy is enhanced.

Q.11- What is the meaning of financial stability?

Financial stability is a condition in which an economy's mechanisms for pricing, allocating,

and managing financial risks (credit, liquidity, counterparty, market, etc.) are functioning well
enough to contribute to the performance of the economy.

Q.12- What is the meaning of macroeconomics?

Macroeconomics is the study of whole economies--the part of economics concerned with large-
scale or general economic factors and how they interact in economies. The Federal Reserve
closely examines macroeconomics because its goals--maximum sustainable employment and
stable inflation--are measured and achieved on an economy wide level, not on an individual
level.

Q.13- What is the meaning of Credit Control?

Credit control means adjustment of volume credit to suit the needs of the various sectors of the
economy. And the objectives of Credit Control are:
1. To maintain stability in the internal price level.
2. To maintain stability in the exchange rate.
3. To maintain stability in the money market of the economy.
4. To eliminate or to reduce the vagaries of business cycles by controlling and regulating the
supply of credit.
5. To maximize income, employment and output in the economy.
6. To meet financial requirements of the economy not only during normal times but also during
the emergency or war.
7. To promote economic growth.

Q.14- What is Bank Rate?

Bank rate is the rate charged by the central bank for lending funds to commercial banks. Bank
rate, also known as discount rate.

Q.15- What do you mean by Open-Market-Operations?

Open market operations refer to central bank purchases or sales of government securities in
order to expand or contract money in the banking system and influence interest rates

165 | P a g e
Q.16- Briefly talk about Bangladesh Bank.

Bangladesh Bank, the central bank and apex regulatory body for the country's monetary and
financial system, was established in Dhaka as a body corporate vide the Bangladesh Bank
Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971.
At present it has ten offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra,
Rajshahi, Sylhet, Barisal, Rangpur and Mymensingh in Bangladesh; total manpower stood at
5807 (officials 3981, subordinate staff 1826) as on March 31, 2015.

Q.17- Briefly talk about Bangladesh Automated Cheque Processing Systems (BACPS).

Since inception in October, 2010 BACPS is the only state-of-the art cheque clearing facility. It
uses the Cheque Imaging and Truncation (CIT) technology for electronic presentment and
payment of paper-based instruments (i.e. cheque, pay order, dividend & refund warrants, etc.)
BACPS operates in a batch processing mode. Transactions received from the banks during the
day are processed and settled at a pre-fixed time.
Under BACPS umbrella High Value (HV) Cheque Clearing (Cheque amounting Tk. 5, 00, 000
or above) and Regular Value (RV) Cheque clearing are operated.
At present HV presentment cutoff time is at 12:00 and the return cutoff is at 15:00 while for
RV clearing presentment cut off time is at 12:30 and return cut off is at 17:00.

Q.18- Briefly talk about Bangladesh Electronic Funds Transfer Network (BEFTN)

Incepted in February 2011, BEFTN was country's first paperless electronic inter-bank funds
transfer system. It facilitates both credit and debit transactions, as a lead over cheque clearing
system.
This network can handle credit transfers such as payroll, foreign and domestic remittances,
social security payments, company dividends, bill payments, corporate payments, government
tax payments, social security payments and person to person payments.
At the same way it accommodates debit transactions like utility bill payments, insurance
premium payments, Club/Association payments, EMI payment etc. Most of Govt. salary, social
benefits, all social safety net payments and other government payments are processed through
BEFTN.

Q.19- Briefly talk about National Payment Switch Bangladesh (NPSB)

Operational since 2012, NPSB is meant for establishing interoperability among participating
banks for their account and card based transactions. Currently, it caters interbank Automated
Teller Machines (ATM), Point of Sales (POS) and Internet Banking Fund Transfer (IBFT)
transactions while the Mobile Financial Services interoperability is under active consideration.
51 Banks are now interconnected through NPSB for their ATM transactions. Currently, three

166 | P a g e
types of interbank ATM transaction (i.e. cash withdrawal, balance enquiry and mini statement)
could be done through NPSB. As of October 2018, 50 banks are interoperable for POS
transactions and 19 banks are interconnected for their IBFT transactions.
There is transaction limit for IBFT. The maximum value of each transaction is 50,000 and the
frequency is maximum 5 times a day and not more than 2, 00, 000 taka per day. It is mandatory
for the participating banks to ensure Two Factor Authentications (2FA) for any online/e-
commerce/inter banking/card not present transactions.

Q.20- Briefly talk about Real Time Gross Settlement System (RTGS)

To facilitate real time settlement of high value time critical payments BB introduced
Bangladesh Real Time Gross Settlement (BD-RTGS) system during October 2015.
It opened a new dimension for the banks and for the corporate to settle their payments instantly,
at the same time individual customers are also availing this service for settling their large value
transactions.
Out of 11,000 scheduled bank branches 7,000 are connected till June 2018 with BD-RTGS
system and the number is increasing gradually.

Q.21- What do you know about Deposit Insurance System?

Deposit Insurance Systems is a measure to protect bank depositors, in full or in part, from
losses caused by a bank's inability to pay its debts when owing. Deposit Insurance Systems is
one of the components of financial safety net that is meant to promote financial stability.
The objectives of DIS are:
• Enhance public confidence,
• Enhance stability of the financial system,
• Increase savings and encourage economic growth, enhancing more propitious
bank services.

Q.22- What do you know about CAMELS Rating System?

CAMELS is a recognized international rating system that bank supervisory authorities use in
order to rate financial institutions according to six factors represented by its acronym.
Supervisory authorities assign each bank a score on a scale. A rating of one is considered the
best, and a rating of five is considered the worst for each factor.
CAMELS rating are a supervisory tool to assess and review the financial soundness of the
banking companies. It helps Bangladesh Bank (BB) to remain always vigilant over the banks
and identify those banking companies which have problems and require close supervision.
“CAMELS” acronym stands for "Capital adequacy, Asset quality, Management, Earnings,
Liquidity, and Sensitivity."
Meaning of Composite Rating under CAMELS Rating Analysis:

167 | P a g e
 Course Code: BIN-309
Course Title: Security Analysis and Portfolio Management

Q.1- What are the phases of portfolio management?

There are five phases of portfolio management:

1. Security analysis: Security analysis refers to analyzing the value of securities like
shares and other instruments to assess the business's total value, which will be useful
for investors to make decisions. There are three methods to analyze the value of
securities – fundamental, technical, and quantitative analysis.
2. Portfolio analysis: Portfolio Analysis is the process of reviewing or assessing the
elements of the entire portfolio of securities or products in a business. The review is
done for careful analysis of risk and return.
3. Portfolio selection: Portfolio selection aims to assess a combination of securities from
a large quantity of available alternatives. It aims to maximize the investment returns of
investors. According to Markowitz (1952), investors must make a trade-off between
return maximization and risk minimization.
4. Portfolio revision: The process of addition of more assets in an existing portfolio or
changing the ratio of funds invested is called as portfolio revision. The sale and
purchase of assets in an existing portfolio over a certain period of time to maximize
returns and minimize risk is called as Portfolio revision.
5. Portfolio evaluation: The portfolio performance evaluation involves the determination
of how a managed portfolio has performed relative to some comparison benchmark.
Performance evaluation methods generally fall into two categories, namely
conventional and risk-adjusted methods.

Q.2- What is the meaning of Investment?

An investment is an asset or item acquired with the goal of generating income or appreciation.
Appreciation refers to an increase in the value of an asset over time. When an individual
purchases a good as an investment, the intent is not to consume the good but rather to use it in
the future to create wealth.
By investment, economists mean the production of goods that will be used to produce other
goods. This definition differs from the popular usage, wherein decisions to purchase stocks
(see stock market) or bonds are thought of as investment.

168 | P a g e
Q.3- What are the characteristics of Investment?
All investments are characterized by certain features. Let us analyze these characteristic
features of investments.

Return
All investments are characterized by the expectation of a return. In fact, investments are made
with the primary objective of deriving a return. The return may be received in the form of yield
plus capital appreciation. The difference between the sale price and the purchase price is capital
appreciation. The dividend or interest received from the investment is the yield. Different types
of investments promise different rates of return.

Risk
Risk is inherent in any investment. This risk may relate to loss of capital delay in repayment of
capital, non-payment of interest, or variability of returns. While some investments like
government securities and bank deposits are almost riskless, others are more risky. The risk of
an investment depends on the following factors. The longer the maturity period, the larger is
the risk.

Safety
The safety of an investment implies the certainty of return of capital without loss of money or
time. Safety is another feature which an investor desires for his investments. Every investor
expects to get back his capital on maturity without loss and without delay.

Liquidity
An investment which is easily saleable or marketable without loss of money and without loss
of time is said to possess liquidity. Some investments like company deposits, bank deposits,
P.O. Deposits, etc. are not marketable. Some investment instruments like preference shares and
debentures are marketable, but there are no buyers in many cases and hence their liquidity is
negligible. Equity shares of companies listed on stock exchanges are easily marketable through
the stock exchanges.

An investor generally prefers liquidity for his investments, safety of his funds, a good return
with minimum risk or minimization of risk and maximization of return.

Q.4- What is the difference between Investment and Speculation?

The main difference between speculating and investing is the amount of risk involved.
Investors try to generate a satisfactory return on their capital by taking on an average or below-
average amount of risk. Speculators are seeking to make abnormally high returns from bets
that can go one way or the other.

Q.5- What is the difference between Investment and Gambling?

One of the key differences between investing and gambling is diversification. Investing
provides you with the opportunity to spread your risk across all asset classes, whereas gamblers
throw their capital into a single pot with no loss mitigation strategy.

169 | P a g e
Q.6- What do you mean by financial market?
Financial Markets include any place or system that provides buyers and sellers the means to
trade financial instruments, including bonds, equities, the various international currencies, and
derivatives. Financial markets facilitate the interaction between those who need capital with
those who have capital to invest.

Q.7- What is book building meaning?

Book building is the process by which an underwriter attempts to determine the price at
which an initial public offering (IPO) will be offered. The process of price discovery involves
generating and recording investor demand for shares before arriving at an issue price.

Q.8- What is primary or new issue market?

The primary market is where companies issue a new security, not previously traded on any
exchange. A company offers securities to the general public to raise funds to finance its long-
term goals. The primary market may also be called the New Issue Market (NIM).

Q.9- What do you mean by underwriting?

Underwriting is the process through which an individual or institution takes on financial risk
for a fee. This risk most typically involves loans, insurance, or investments. An underwriter is
any party, usually a member of a financial organization that evaluates and assumes another
party's risk in mortgages, insurance, loans, or investments for a fee in the form of a commission,
premium, spread, or interest.

Q.10- What do you know about private placement?

A private placement is a sale of securities privately by a company to a selected group of
investors. The securities are normally placed, in a private placement, with the institutional
investors, mutual funds or other financial institutions. The terms of the issue are negotiated
between the company and the investors. A formal prospectus is not necessary in the case of
private placement. Underwriting arrangements are also not required in private placement, as
the sale is directly negotiated with the investors. This method is useful to small companies and
closely held companies for issue of new securities, because such companies are unlikely to get
good response from the investing public for their public issues. They can avoid the expenses
of a public issue and also have their shares sold.

Q.11- What is OTC market and Exchange-traded market?

Over-the-counter markets are those in which participants’ trade directly between two parties,
without the use of a central exchange or other third party. OTC markets do not have physical
locations or market-makers.

An exchange is a marketplace where securities, commodities, derivatives and other financial

instruments are traded. The core function of an exchange is to ensure fair and orderly trading
and the efficient dissemination of price information for any securities trading on that exchange.

170 | P a g e
Q.12- Discuss about different type of Orders.
Market Orders
In a market order, the broker is instructed by the investor to buy or sell a stated number of
shares immediately at the best prevailing price in the market. In the case of a buy order, the
best price is the lowest price obtainable; in the case of a sell order, it is the highest price -
obtainable. When placing a market order, the investor can be fairly certain that the order will
be executed, but he will be uncertain of the price until after the order is executed.

Limit Orders
While placing a limit order, the investor specifies in advance the limit price at which he I wants
the transaction to be carried out. In the case of a limit order to buy, the investor specifies the
maximum price that he will pay for the share; the order has to be executed only at the limit
price or a lower price. In the case of a limit order to sell shares, the investor specifies the
minimum price he will accept for the share and hence, the order has to be executed only at the
limit price or a price higher to it. Thus for limit orders to purchase shares the investor specifies
a ceiling on the price, and for limit orders to sell shares the investor specifies a floor price.

Limit orders are generally placed "away from the market" which means that the limit price is
somewhat removed from the prevailing market price. In the case of a limit order to buy, the
limit price would be below the prevailing price and in the case of a limit order to sell, the limit
price would be above the prevailing market price. The investor placing limit orders believes
that his limit price will be reached and the order executed within a reasonable period of time.
But the limit order may remain unexecuted.

There are certain special types of orders which may be used by investors to protect their profits
or limit their losses. Two such special kinds of orders are stop orders (also known as stop loss
orders) and stop limit orders.

Stop Orders
A stop order may be used by an investor to protect a profit or limit a loss. For a stop order, the
investor must specify what is known as a stop price. If it is a sell order, the stop price must be
below the market price prevailing at the time the order is placed. If it is a buy order, the stop
price must be above the market price prevailing at the time of placing the. order. If,
subsequently, the market price reaches or passes the stop price, the stop order will be executed
at the best available price. Thus, a stop order can be viewed as a conditional market order,
because it becomes a market order when the market price reaches or passes the stop price.

Stop Limit Orders

The stop limit order is a special type of order designed to overcome the uncertainty of the
execution price associated with a stop order. The stop limit order gives investor the opportunity
of specifying a limit price for executing the stop orders: the maximum price for a stop buy
order and the minimum price for a stop sell order. With a stop limit order, the investor specifies
two prices, a stop price and a limit price. When the market price reaches or passes the stop

171 | P a g e
price, the stop limit order becomes a limit order to be executed within the limit price. Hence, a
stop limit order can be viewed as a conditional limit order.

Day Orders
A day order is an order that is valid only for the trading day on which the order is placed If the
order is not executed by the end of the day, it is treated as cancelled. All orders are ordinarily
treated as day orders unless specified as other types of orders.

Week Orders
These are orders that are valid till the end of the week during which the orders are placed. They
expire at the close of the trading session on Friday of the week, unless they are executed by
then.

Month Orders
These are orders that are valid till the end of the month during which the orders are placed.
Month orders expire at the close of the trading session on the last working day of the month.

Open Orders
Open orders are orders that remain valid till they are executed by the brokers or specifically
cancelled by the investor. They are also known as good till cancelled orders or GTC orders.
However, brokers generally seek periodic confirmation of open orders from the investors.

Fill or Kill Orders

These orders are also known as FoK orders. These orders are meant to be executed
immediately. If not executed immediately, they are to be treated as cancelled.

Q.13- What do you know about Speculation?

Speculation involves trading a financial instrument involving high risk, in expectation of
significant returns. The motive is to take maximum advantage from fluctuations in the market.
Description: Speculators are prevalent in the markets where price movements of securities are
highly frequent and volatile.

Q.14- What do you know about Long-buy and Short-Sale?

Long-Buy
If a speculator feels that a security is underpriced or that a security which is correctly priced at
the moment is likely to show a rising trend, then he would like to buy the security for the
purpose of selling it at a higher price when the price rises as anticipated. The speculator in this
case is said to take a long position with respect to that security. He is not interested in taking
delivery of the security, but intends to sell it off as quickly as possible to gain some profit.
Hence, he would not like to hold his long position for an extended period. He would like the

172 | P a g e
mispricing to be corrected at the earliest, preferably, on the same day. Such kind of a
speculative activity is known as long buy.

Short Sale
On the contrary, if a speculator estimates that a security is overpriced and its price is likely to
decline shortly, he would like to sell the security at the current price and buy it sometime later
when the price declines so as to deliver the security sold at the time of settlement of the trade.
Ordinarily, a person sells securities which he owns. Here, the speculator is selling a security
which he does not own or possess in the hope that he would be able to deliver the security on
the due date by buying it at a lower price within a short period of time. He hopes to gain some
profit in the transaction. The speculator in this case is taking a "short position" with respect to
the security by engaging in a 'short sale'. Fundamentally, a short sale is the sale of a security
that is not owned by the seller at the time of the transaction. A short seller has to cover up his
position or eliminate the deficiency by buying the security sometime in the near future. He will
be able to make a profit out of the short sale transaction only if he is able to buy the security at
a lower price. If the price of a security moves up against his anticipations, he will suffer a loss.

Speculation involves high amount of risk. The speculators take long or short positions on the
basis of their estimation or speculation about the future movement of prices. If the prices of
securities do not move in the expected directions within a short time, the speculators
suffer losses.
Q.15- What do you mean by Lame Duck and Stag?
Lame Duck
A lame duck is a bear who has made a short sale but is unable to meet his commitment to
deliver the securities sold by him on account of rise in prices of securities subsequent to the
short sale. He is said to be struggling like a lame duck.

Stag
A stag is a trader who applies for shares in the new issues market just like a genuine investor.
A stag is an optimist like the bull and expects a rise in the prices of securities that he has applied
for. He anticipates that when the new shares are listed in the stock exchange for trading, they
would be quoted at a premium, that is, above their issue price. As soon as the stag receives the
allotment of shares, he would sell them at the stock exchange at the higher price and make a
profit. A stag is said to be a premium hunter. The stag however, suffer a loss if prices of the
new shares do not rise as anticipated when they are listed for trading.

Q.16- What is Margin Trading?

Margin trading—also known as buying on margin—allows you to use leverage to boost your
purchasing power and make larger investments than you could with your own resources. But
when you buy stock with borrowed money, you run the risk of racking up higher losses.

173 | P a g e
For example, if you have an initial margin requirement of 60% for your margin account, and
you want to purchase $10,000 worth of securities, then your margin would be $6,000, and you
could borrow the rest from the broker.

Q.17- What is Fundamental analysis?

Fundamental analysis is a method applied to determining the value of a stock or security.
It involves an analysis of a company's management, business model, financial ratios, financial
statements, and other metrics. Fundamentals could also refer to economic conditions,
macroeconomic data, and industry trends.

Q.18- What is the meaning of Technical Analysis?

A technical analyst believes that share prices are determined by the demand and supply forces
operating in the market. These demand and supply forces in turn are influenced by a number
of fundamental factors as well as certain psychological or emotional factors. Many of these
factors cannot be quantified. The combined impact of all these factors is reflected in the share
price movement. A technical analyst therefore concentrates on the movement of share prices.
He claims that by examining past share price movement’s future Share prices can be accurately
predicted. Technical analysis is the name given to forecasting techniques that utilize historical
share price data. A technical analyst looks at the past share price data to see if he can establish
any patterns. He then looks at current price data to see if any of the established patterns are
applicable and, if so, extrapolation can be made to predict the future price movement. The basic
premise of technical analysis is that prices move in trends or waves which may be upward or
downward. It is believed that the present trends are influenced by the past trends and that the
projection of future trends is possible by an analysis of past price trends. A technical analyst,
therefore, analyses the price and volume movements of individual securities as well as the
market index. Thus, technical analysis is really a study of past or historical price and volume
movements so as to predict the future stick price behavior.

Q.19- What do you know about Dow Theory?

Whatever is generally being accepted today as technical analysis has its roots was formulated
by Charles H. Dow, who was the editor of the Wall Street Journal in U.S.A. The theory was
presented in a series of editorials in the Wall Street Journal during 1900-1902.Charles Dow
formulated a hypothesis that the stock market does not move on a random basis but is
influenced by three distinct cyclical trends that guide its direction. According to Dow Theory,
the market has three movements and these movements are simultaneous in nature. These
movements are the primary movements, secondary reactions and minor movements. The
primary movement is the long range cycle that carries the entire market up a down. This is the
long-term trend in the market. The secondary reactions act as a restraining force on the primary
movement. These are in the opposite direction to the primary movement and last only for a
short while. These are also known as corrections. For example, when the market is moving
upwards continuously, this upward movement will be interrupted by downward movements of
short durations. These are the secondary reactions. The third movement in the market is the
minor movements which are the day-to-day fluctuation in the market. The minor movements
are not significant and have no analytical value as they are of very short duration. The three

174 | P a g e
movements of the market have been compared to the tides, the waves and the ripples in the
ocean. According to Dow theory, the price movements in the market can be identified by means
of a line chart (Fig: 11.1).

In this chart, the closing prices of shares or the closing values of the market index may be
plotted against the corresponding trading days.

The primary trend of the market is upwards but there are secondary reactions in the opposite
direction. Among the three movements in the market, the primary movement is considered to
be the most important.
The primary trend is said to have three phases in it, each of which would be interrupted by a
counter move or secondary reaction which would retrace about 33-66 percent of the earlier
rise or fall.

Q.20- How many types of prices we see each trading day in the market?
Charting represents a key activity in technical analysis, because graphical representation is the
very basis of technical analysis.
In the market on each trading day, four prices are important. These are

1. The highest price of the day,

2. The lowest price of the day,
3. The opening price (first price of the day) and
4. The closing price (last price of the day).

Of these four prices again, the closing price is by far the most important price of the day because
it is the closing price that is used in most analysis of share prices.

Q.21- What do you know about Line chart, Bar Chat, and Japanese Candlestick Charts?
Line Chart
It is the simplest price chart. In this chart, the closing prices of a share are plotted on the XY
graph on a day to day basis. The closing price of each day would be represented by a point on

175 | P a g e
the XY graph. Al these points would be connected by a straight line which would indicate the
trend of the market.

Bar Chart
In this chart, the high price, the lowest price and the closing price of each day are plotted on a
day-to-day basis. A bar is formed by joining the highest price and the lowest price of a
particular day in a vertical line. The top of the bar represents the highest price of the day, the
bottom of the bar represents the lowest price of the day and a small horizontal hash on the right
of the bar is used to represent the closing price of the day. Sometimes, the opening price of day
is marked as a hash on the left side of the bar.

Japanese Candlestick Charts

The Japanese candlestick chart shows the highest price, the lowest price, the opening price and
the closing price of shares on a day-to-day basis. The highest price and the lowest price of a
day are joined by a vertical bar. The opening price and closing price of the day which would
fall between the highest and the lowest prices would be represented by a rectangle, so that the
price bar chart hooks like a candlestick. Thus, each day's activity is represented by a

176 | P a g e
candlestick. There are mainly three types of candlesticks, viz., the white, the black and the doji
or neutral candlestick.

A white candlestick is used to represent a situation where the price of the day is higher than
the opening price.

A black candlestick in used when the closing price of the day is lower than the opening price.
Thus, a white candlestick indicates a bullish trend while a black candlestick indicates a bearish
trend.

A doji candlestick is the one where the opening price and the closing price of the day are the
same.

Q.22- What do you know about Elliot Wave Theory?

There are many theories which seek to explain the behavior of the stock market. One such
theory is the Elliot Wave theory (formulated by Ralph Elliot). The theory was formulated in
1934 by Elliot after analyzing seventy-five years of stock price movements and charts. From
his studies he concluded that the market movement was quite orderly and followed a pattern of
waves. A wave is a movement of the market price from one change in the direction to the next
change in the same direction. The waves are the result of buying and selling impulses emerging
from the demand and supply pressures on the market. Depending on the demand and supply
pressures, waves are generated in the prices. According to this theory, the market moves in
waves. A movement in particular direction can be represented by five distinct waves.

Of these five waves, three waves are in the direction of the movement and are termed as impulse
waves. Two waves are against the direction of the movement and are termed as corrective
waves or reaction waves. Waves 1, 3 and 5 are the impulse waves and waves 2 and 4 are the
corrective waves. Figure 11.13 illustrates the wave theory of Elliot. The wave 1 is upwards and
wave 2 corrects the wave 1. Similarly, waves 3 and 5 are those with an upward impulse and
wave 4 corrects wave 3.

177 | P a g e
Corrections involve correcting the earlier rise. Thus, wave 2 would correct the rise of wave 1;
wave 4 would correct the rise of wave 3 and after the completion of wave 5, there would come
a correction which would be labelled ABC. This correction would be in three waves in which
waves A and C will be against the trend and wave B will be along the trend. This ABC
correction following the fifth wave would correct the entire rise from the start of wave 1 to the
end of the fifth wave. It would be greater in dimension than either the second or fourth
corrective wave. One complete cycle consists of waves made up of two distinct phases, bullish
and bearish. Once the full cycle of waves is completed after the termination of the 8 wave
movement, there will be a fresh cycle starting with similar impulses arising out of market
trading. The Elliot wave theory is based on the principle that action is followed by reaction.
Although the wave theory is not perfect and there are many limitations in its practical use, it is
accepted as one of the tools of technical analysis. The theory is used for predicting the future
price changes and in deciding the timing of investment.

Q.23- What is the difference between Fundamental and Technical analysis?

Fundamental analysis tries to estimate the intrinsic value of a security by evaluating the
fundamental factors. This is a tedious process and takes a rather long time to complete the
process. Technical analysis studies the price and volume movements in the market and by
carefully examining the pattern of these movements, the future price of the stock is predicted.
Since the whole process involves much less time and data analysis, compared to fundamental
analysis, it facilitates timely decision. Fundamental analysis helps in identifying undervalued
or overvalued securities. But technical analysis helps in identifying the best timing of an
investment, i.e. the best time to buy or sell a security identified by fundamental analysis as
undervalued or overvalued. Thus, technical analysis may be used as a supplement to
fundamental analysis rather than as a substitute to it. Neither of them is perfect nor complete
by itself. Technical analysis has several limitations. It is not an accurate method of analysis. It
is often difficult to identify the patterns underlying stock price movements. Moreover, it is not
easy to interpret the meaning of patterns and their likely impact on future price movements.

178 | P a g e
 Course Code: BIN-310
Course Title: International Business and Banking

Q.1- What do you know about Globalization, Globalization of Market, and Globalization
of Production?
Globalization refers to the shift toward a more integrated and interdependent world economy.
Globalization has several facets, including the globalization of markets and the globalization
of production.
The globalization of markets refers to the merging of historically distinct and separate
national markets into one huge global marketplace. Falling barriers to cross-border trade have
made it easier to sell internationally.
The globalization of production refers to the sourcing of goods and services from locations
around the globe to take advantage of national differences in the cost and quality of factors of
production (such as labor, energy, land, and capital). By doing this, companies hope to lower
their overall cost structure or improve the quality or functionality of their product offering,
thereby allowing them to compete more effectively.

Q.2- Briefly discuss about World Trade Organization.

The World Trade Organization (like the GAT T before it) is primarily responsible for policing
the world trading system and making sure nation-states adhere to the rules laid down in trade
treaties signed by WTO member states. The WTO has over 160 members representing 98 per
cent of world trade. Over 20 countries are seeking to join the WTO. Thereby giving the
organization enormous scope and influence. The WTO is also responsible for facilitating the
establishment of additional multinational agreements between WTO member states.

Q.3- Briefly discuss about GATT.

The General Agreement on Tariffs and Trade (GATT) covers international trade in goods. The
workings of the GATT agreement are the responsibility of the Council for Trade in Goods
(Goods Council) which is made up of representatives from all WTO member countries. The
current chair is Mr. Etienne OUDOT DE DAINVILLE (France). Twenty-three countries signed
the Final Act of the General Agreement on Tariffs and Trade (GATT) on 30 October 1947 after
a period of intensive negotiations. The lead negotiators had profoundly disagreed on the level
of ambition to be achieved by the negotiations but finally overcame their differences. The
Goods Council has 10 committees dealing with specific subjects (such as agriculture, market
access, subsidies, anti-dumping measures and so on). Again, these committees consist of all
member countries. Also reporting to the Goods Council are a working party on state trading
enterprises, and the Information Technology Agreement (ITA) Committee.

179 | P a g e
Q.3- Briefly discuss about IMF and World Bank.
The International Monetary Fund and the World Bank were both created in 1944 by 44 nations
that met at Bretton Woods, New Hampshire. The IMF was established to maintain order in the
international monetary system; the World Bank was set up to promote economic development.
In the more than six decades since their creation, both institutions have emerged as significant
play errs in the global economy. The World Bank is the less controversial of the two sister
institutions. It has focused on making low-interest loans to cash-strapped governments in poor
nations that wish to undertake significant infrastructure investments (such as building dams or
roads).
The IMF is often seen as the lender of last resort to nation-states whose economies are in
turmoil and whose currencies are losing value against those of other nations. During the past
two decades, for example, the IMF has lent money to the governments of troubled states,
including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Bangladesh and
Turkey. IMF loans come with strings attached, however; in return for loans, the IMF requires
nation-states to adopt specific economic policies aimed at returning their troubled economies
to stability and growth. These requirements have sparked controversy. Some critics charge that
the IMF's policy recommendations are often inappropriate; others maintain that by telling
national governments what economic policies they must adopt, the IMF, like the WTO, is
usurping the sovereignty of nation-states.

Q.4- Briefly discuss about United Nations.

The United Nations was established October 24, 1945, by 51 countries committed to preserving
peace through international cooperation and collective security. Today nearly every nation in
the world belongs to the United Nations; membership now totals 191 countries. When states
become members of the United Nations, they agree to accept the obligations of the UN Charter,
an international treaty that establishes basic principles of international relations. According to
the charter, the UN has four purposes: to maintain international peace and security, to develop
friendly relations among nations, to cooperate in solving international problems and in
promoting respect for human rights, and to be a center for harmonizing the actions of nations.
Although the UN is perhaps best known for its peacekeeping role, one of the organization's
central mandates is the promotion of higher standards of living, full employment, and
conditions of economic and social progress and development all issues that are central to the
creation of a vibrant global economy. As much as 70 percent of the work of the UN system is
devoted to accomplishing this mandate. To do so, the UN works closely with other international
institutions such as the World Bank. Guiding the work is the belief that eradicating poverty and
improving the well-being of people everywhere are necessary steps in creating conditions for
lasting world peace.
Q.5- What is Foreign Direct Investment?
Foreign direct investment (FDI) is a category of cross-border investment in which an investor
resident in one economy establishes a lasting interest in and a significant degree of influence
over an enterprise resident in another economy.

180 | P a g e
Q.6- Why is globalization important?
Globalization changes the way nations, businesses and people interact. Specifically, it changes
the nature of economic activity among nations, expanding trade, opening global supply chains
and providing access to natural resources and labor markets. Mainly Globalization is the word
used to describe the growing interdependence of the world's economies, cultures, and
populations, brought about by cross-border trade in goods and services, technology, and flows
of investment, people, and information.

Q.7- What do you know about pure market economy, command economy and mixed
economy?
In the pure market economy, all productive activities are privately owned, as opposed to being
owned by the state. The goods and services that a country produces are not planned by anyone.
Production is determined by the interaction of supply and demand and signaled to producers
through the price system. If demand for a product exceeds supply, prices will rise, signaling
producers to produce more. If supply exceeds demand, prices will fall, signaling producers to
produce less. In this system consumers are sovereign. The purchasing patterns of consumers,
as signaled to producers through the mechanism of the price system, determine what is
produced and in what quantity. In a pure command economy, the government plans the goods
and services that a country produces, the quantity in which they are produced, and the prices at
which they are sold.

Between market economies and command economies can be found mixed economies. In a
mixed economy, certain sectors of the economy are left to private ownership and free market
mechanisms while other sectors have significant state ownership and government planning.
Mixed economies were once common throughout much of the world, although they are
becoming much less so. Until the 1980s, Great Britain, France, and Sweden were mixed
economies, but extensive privatization has reduced state ownership of businesses in all three
nations. A similar trend occurred in many other countries where there was once a large state-
owned sector, such as Brazil, Italy, and India (there are still state-owned enterprises in all of
these nations). In mixed economies, governments also tend to take into state ownership
troubled firms whose continued operation is thought to be vital to national interests.

Q.8- What do you know about common law, civil law, and theocratic law?

Common Law
The common law system evolved in England over hundreds of years. It is now found in most
of Great Britain's former colonies, including the United States. Common law is based on
tradition, precedent, and custom. Tradition refers to a country's legal history, precedent to cases
that have come before the courts in the past, and custom to the ways in which laws are applied
in specific situations. When law courts interpret common law, they do so with regard to these
characteristics. This gives a common law system a degree of flexibility that other systems lack.
Judges in a common law system have the power to interpret the law so that it applies to the
unique circumstances of an individual case.

181 | P a g e
Civil Law
A civil law system is based on a detailed set of laws organized into codes. When law courts
interpret civil law, they do so with regard to these codes. More than 80 countries, including
Germany, France, Japan, and Russia, operate with a civil law system. A civil law system tends
to be less adversarial than a common law system, since the judges rely upon detailed legal
codes rather than interpreting tradition, precedent, and custom. Judges under a civil law system
have less flexibility than those under a common law system. Judges in a common law system
have the power to interpret the law, whereas judges in a civil law system have the power only
to apply the law.

Theocratic Law
A theocratic law system is one in which the law is based on religious teachings. Islamic law is
the most widely practiced theocratic legal system in the modem world, although usage of both
Hindu and Jewish law persisted into the twentieth century. Islamic law is primarily a moral
rather than a commercial law and is intended to govern all aspects of life.10 The foundation
for Islamic law is the holy book of Islam, the Quran, along with the Sunnah, or decisions and
sayings of the Prophet Muhammad, and the writings of Islamic scholars who have derived rules
by analogy from the principles established in the Quran and the Sunnah.

Q.9- What is Democracy?

Democracy, literally, rule by the people. The term is derived from the Greek dēmokratia,
which was coined from dēmos (“people”) and kratos (“rule”) in the middle of the 5th
century BCE to denote the political systems then existing in some Greek city-states,
notably Athens.

Q.9- Definition of Culture, Values, Norms, and Society?

Culture is a system of values and norms that are shared among a group of people and that
when taken together constitute a design for living. By values we mean abstract ideas about
what a group believes to be good, right, and desirable. Put differently, values are shared
assumptions about how things ought to be. By norms we mean the social rules and guidelines
that prescribe appropriate behavior in particular situations. We shall use the term society to
refer to a group of people who share a common set of values and norms. While a society may
be equivalent to a country, some countries harbor several societies (i.e., they support multiple
cultures), and some societies embrace more than one country.

Q.10- Why is culture so important in business?

Because it helps employees understand the dynamics of their organization, find a common
purpose between colleagues, adapt to working practices, share ideas and communicate
feedback and concerns. A strong culture can also have an external impact, and it can influence
an organization’s brand perception. Some say company culture refers to the mission statement
of a business, along with the values and beliefs upheld by its founders.

182 | P a g e
Q.11- What do you know about individualism and collectivism?
Individualism emphasizes personal goal pursuit and autonomy. People who are more
collectivistic view the self as overlapping with and interconnected to others. Collectivism
emphasizes maintaining relationships and social harmony. For example, workers in an
individualist culture are more likely to value their own well-being over the good of the group.
Contrast this with a collectivist culture where people might sacrifice their own comfort for the
greater good of everyone else.

Q.12- What is Ethics? Briefly discuss about Ethical Issues in International Business.
Ethics is a system of moral principles that includes ideas about right and wrong, and how people
should (or should not) behave in general and specific cases. Many of the ethical issues in
international business are rooted in the fact that political systems, law, economic development,
and culture vary significantly from nation to nation. What is considered normal practice in one
nation may be considered unethical in another. Because they work for an institution that
transcends national borders and cultures, managers in a multinational firm need to be
particularly sensitive to these differences. In the international business setting, the most
common ethical issues involve employment practices, human rights, environmental
regulations, corruption, and the moral obligation of multinational corporations.

Q.13- What do you mean by ethical dilemma?

Shortly, an ethical dilemma (ethical paradox or moral dilemma) is a problem in the decision-
making process between two possible options, neither of which is absolutely acceptable from
an ethical perspective.

Q.14- What is Mercantilism?

Mercantilism was an economic system of trade that spanned the 16th century to the
18th century. Mercantilism was based on the principle that the world's wealth was static, and
consequently, governments had to regulate trade to build their wealth and national power.
Many European nations attempted to accumulate the largest possible share of that wealth by
maximizing their exports and limiting their imports via tariffs. Its goal was to increase the
supply of a state's gold and silver with exports rather than to deplete it through imports. It also
sought to support domestic employment.

Q.15- Briefly discuss about absolute advantage theory.

Absolute advantage, economic concept that is used to refer to a party’s superior production
capability. Specifically, it refers to the ability to produce a certain good or service at lower cost
(i.e., more efficiently) than another party. (A “party” may be a company, a person, a country,
or anything else that creates goods or services.) The concept of absolute advantage was first
introduced in 1776 in the context of international trade by Adam Smith, a Scottish philosopher
considered the father of modern economics. In his monumental work An Inquiry into the Nature
and Causes of the Wealth of Nations, he argued that, in order to become rich, countries should
specialize in producing the goods and services in which they have absolute advantage and

183 | P a g e
engage in free trade with other countries to sell their goods. A country’s resources would
therefore be utilized in the best possible way—in the production of goods and services in which
the country has a productivity advantage compared with other countries—and national wealth
would be maximized. Smith proposed that thesis as an alternative to the then prevalent view
called mercantilism, which favored strict government control on international trade and relied
on the principle that countries should produce as much of everything as possible. Over time,
Smith’s view came to be known as the absolute advantage theory of trade and was the dominant
trade theory until David Ricardo, a 19th-century English economist, developed the theory
of comparative advantage.

Q.16- Briefly discuss about comparative advantage theory.

Comparative advantage is an economy's ability to produce a particular good or service at a
lower opportunity cost than its trading partners. Comparative advantage is used to explain
why companies, countries, or individuals can benefit from trade. When used to describe
international trade, comparative advantage refers to the products that a country can produce
more cheaply or easily than other countries. While this usually illustrates the benefits of trade,
some contemporary economists now acknowledge that focusing only on comparative
advantages can result in exploitation and depletion of the country's resources. The law of
comparative advantage is popularly attributed to English political economist David
Ricardo and his book On the Principles of Political Economy and Taxation written in 1817,
although it is likely that Ricardo's mentor, James Mill, originated the analysis.

Q.17- Briefly discuss about Heckscher-Ohlin Theory.

Heckscher-Ohlin theory, in economics, a theory of comparative advantage in international
trade according to which countries in which capital is relatively plentiful
and labor relatively scarce will tend to export capital-intensive products and import labor-
intensive products, while countries in which labor is relatively plentiful and capital relatively
scarce will tend to export labor-intensive products and import capital-intensive products. The
theory was developed by the Swedish economist Bertil Ohlin (1899–1979) on the basis of work
by his teacher the Swedish economist Eli Filip Heckscher (1879–1952). For his work on the
theory, Ohlin was awarded the Nobel Prize for Economics (the Sveriges Riksbank Prize in
Economic Sciences in Memory of Alfred Nobel) in 1977.

Some countries are relatively well-endowed with capital: the typical worker has plenty of
machinery and equipment to assist with the work. In such countries, wage rates generally are
high; as a result, the costs of producing labor-intensive goods—such as textiles, sporting goods,
and simple consumer electronics—tend to be more expensive than in countries with plentiful
labor and low wage rates. On the other hand, goods requiring much capital and only a little
labor (automobiles and chemicals, for example) tend to be relatively inexpensive in countries
with plentiful and cheap capital. Thus, countries with abundant capital should generally be able
to produce capital-intensive goods relatively inexpensively, exporting them in order to pay for
imports of labor-intensive goods. In the Heckscher-Ohlin theory, it is not the absolute amount
of capital that is important; rather, it is the amount of capital per worker. A small country like
Luxembourg has much less capital in total than India, but Luxembourg has more capital per

184 | P a g e
worker. Accordingly, the Heckscher-Ohlin theory predicts that Luxembourg will export
capital-intensive products to India and import labor-intensive products in return.

Q.18- Briefly discuss about The Leontief Paradox.

Leontief’s first study was based on computation from input output tables constructed for the
year 1947. Me computed for various industries the direct and indirect capital and labour
required to produce a given dollar value of output. He then calculated the effects on capital and
labour use of a given reduction in both U.S. imports and exports so that the relative commodity
composition of exports and imports remained the same. The conclusion was that the given
value of U.S. exports embodied less capital and more labour than would be required to expand
domestic output to provide an equivalent amount of competitive imports. Expressed inversely,
U.S. import replacement industries required more capital relative to labour than did U.S. export
industries.

The Leontief conclusion that in the international division of labour, the U.S. specialized in
labour intensive rather than capital intensive goods contradicted the widely accepted view
derived from the H.O. theory. Since it was not doubted that the U.S. was relatively capital
abundant and relatively labour deficient, it would seem that, following the theory, exports
should be capital intensive and import labour intensive. At first, there was no dispute over the
H.O. proposition rather there was dispute over the particular empirical contradiction presented
by Leontief.

Q.19- Briefly discuss about The Product Life-Cycle Theory.

The product life-cycle theory suggests that trade patterns are influenced by where a new
product is introduced. In an increasingly integrated global economy, the product life-cycle
theory seems to be less predictive than it once was.
Q.20- What does new trade theory suggest?
New trade theory states that trade allows a nation to specialize in the production of certain
goods, attaining scale economies and lowering the costs of producing those goods, while
buying goods that it does not produce from other nations that are similarly specialized. By this
mechanism, the variety of goods available to consumers in each nation is increased, while the
average costs of those goods should fall. New trade theory also states that in those industries
where substantial economies of scale imply that the world market will profitably support only
a few firms, countries may predominate in the export of certain products simply because they
had a firm that was a first mover in that industry.

Q.21- What do you mean by Acquisition and Green-field Investments?

When businesses decide to expand their operations to another country, one of the more
vexing dilemmas they face is whether to create a new operation in a foreign country using a
so-called green field investment, or to directly purchase an existing company in a foreign
country through an international acquisition.

185 | P a g e
While both methods will usually accomplish the goal of extending a company's operations to
a new foreign market, there are several reasons why a company might choose one over the
other. One of the biggest considerations in expanding abroad is the regulatory and compliance
rules that a company may need to research and adhere to. Acquiring an existing company may
prove to make an international business expansion easier in this regard or a parent company
may desire to build out the new infrastructure on their own. Either way, there will be a
multitude of costs and projections to consider with both types of investments.

Q.22- Why Foreign Direct Investment?

Foreign direct investment (FDI) is made when a business takes controlling ownership in a
company, sector, individual, or entity in another country. Through FDI, foreign companies are
directly involved with day-to-day tasks from the other country, resulting in a transfer of
money, knowledge, skills, and technology. Benefits of FDI:

Economic development stimulation:

 FDI can stimulate a target country’s economic development and create a more
conducive environment for companies, the investor, and stimulate the local community
and economy.

Easy international trade:

 Countries usually have their own import tariffs, which makes trading rather difficult.
A lot of economic sectors usually require presence in the international makerts to
ensure sales and goals are met. FDI makes all of these international trade aspects a lot
easier.

Employment and economic boost:

 FDI creates new jobs and more opportunities as investors build new companies in
foreign countries. This can lead to an increase in income and more purchasing power
to locals, which in turn leads to an overall boost in targeted economies.

Tax incentives:

 Of course — taxes. Foreign investors receive tax incentives that are very beneficial
regardless of your selected field of business. Everybody loves a tax write-off.

Development of resources:

 The development of human capital resources is a big advantage of FDI. The skills
gained by the workforce through training increases the overall education and human
capital within a country. Countries with FDI are benefiting by developing their human
resources all while maintaining ownership.

186 | P a g e
Resource transfer:

 Foreign direct investment allows for resource transfers and the exchanges of
knowledge, technologies, and skills.

Reduced costs:

 Foreign direct investment can reduce the disparity between revenues and costs. With
such, countries will be able to make sure that production costs will be the same and
can be sold easier.

Increased productivity:

 The facilities and equipment provided by foreign investors can increase a workforce’s
productivity in the target country.

Increase in a country’s income:

 Another big advantage of foreign direct investment is the increase of the target
country’s income. With more jobs and higher wages, the national income normally
increases which promotes economic growth. Large corporations usually offer higher
salary levels than what you would normally find in the target country, which can lead
to an increment in income.

Q.23- What do you mean by Value Creation?

Value Creation is the process of turning labor and resources into something that meets the
needs of others. That includes, for example, farmers growing crops, workers building
something in a factory, as well as other intangible goods like computer code and creative ideas.

Q.24- What do you mean by Economies of Scale?

Economies of scale are cost advantages reaped by companies when production becomes
efficient. Companies can achieve economies of scale by increasing production and lowering
costs. This happens because costs are spread over a larger number of goods.

Q.25- What do you mean by Exporting and Importing? What are the advantages and
disadvantages of Exporting and Importing?
Exporting goods and services refer to sending them from the home country to a foreign
country. Similarly, Importing goods and services means purchasing or bringing them from
the foreign market to the home country. This is the easiest way a firm can get into
international business, as it requires almost no investment in setting up a production unit in
a foreign country, only distribution channels are made to successfully import or export goods.

187 | P a g e
Advantages of Importing and Exporting:

1. Easiest and Simplest: Exporting and Importing is the easiest way to enter into the
international market as compared to any other modes of entry. Here, there is no need to set
up and manage any business unit abroad, which makes the process easier.
2. Less Investment: Less investment is required in the case of exporting/importing as it is
not mandatory for the enterprise to set up a business unit in the country they are dealing with.
3. Less Risky: If there is no investment or very less investment required in
exporting/importing in the foreign country, the firm is free from many risks involved in
foreign investment.
4. Availability of Resources: As the resources are unevenly scattered around the globe, it is
very important for every country to export/import goods around the globe, as no nation can
be 100% self-sufficient.
5. Better Control: Exporting/Importing can provide better control over the trade, as there is
very less involvement in the foreign country. Everything is controlled by the home country
and there is no need to set up a unit in the foreign country.

Disadvantages of Importing and Exporting:

1. Extra Cost: Since goods are to be sent to different nations, there is some extra cost,
incurred in packaging and transportation of goods, which is a major limitation.
2. Regulations: Different countries have different policies for foreign trade, and sometimes
it becomes difficult for a company to comply with the rules and regulations of each country
they are dealing with.
3. Domestic Competition: The companies involved in exporting/importing have to face
severe competition in the domestic country due to the presence of domestic sellers.
4. Country’s Reputation on Stake: Goods that are exported to different countries are subject
to quality standards. If any goods that are of low quality are exported to any other country,
the reputation of the home country becomes questionable.
5. Documentation: Exporting/Importing requires obtaining licenses and documentation for
foreign trade from every country, which can become frustrating at times.
6. Multitasking: Managing business across different countries involves a lot of multitasking,
which can be hectic for a company.

Q.26- What is Turnkey Projects?

A turnkey project is one which is designed, developed and equipped with all facilities by a
company under a contract. It is handed over to a buyer when it becomes ready to operate
business. Obviously, the company responsible for building a turnkey project does it for the cost
as agreed in the contract. The work of the company includes design, fabrication, installation,
aftermarket support and technical service for the turnkey project.

188 | P a g e
Q.27- What do you mean by Licensing and Franchising?
Franchises and licenses are both business agreements in which certain brand aspects are shared
in exchange for a fee. However, a franchising agreement pertains to a business’s entire brand
and operations, while a licensing agreement only applies to registered trademarks. Franchises
typically work best for service-based businesses, while licenses are more conducive to product-
based businesses. A licensee has more control over how they run their business compared to a
franchisee, whose business will be dictated by the franchise owner (franchisor). However, a
franchisee will also receive significant guidance and training from the franchisor.
While franchising and licensing have some similarities, they are two very different agreements
that mean different things for both you and your brand. In this franchising vs. licensing
comparison, we’ll explain the differences between the two, as well as the pros and cons of each.

Q.28- What is Joint Ventures?

A joint venture (JV) is a business arrangement in which two or more parties agree to pool their
resources for the purpose of accomplishing a specific task. This task can be a new project or
any other business activity.

Each of the participants in a JV is responsible for profits, losses, and costs associated with it.
However, the venture is its own entity, separate from the participants’ other business interests.

Course Code: BIN-401

Course Title: Investment and Merchant Banking
Q.1- What is Investment Banking?

Investment banking is a type of banking that organizes large, complex financial transactions
such as mergers or initial public offering (IPO) underwriting. These banks may raise money
for companies in a variety of ways, including underwriting the issuance of new securities for
a corporation, municipality, or other institution. They may manage a corporation's IPO.
Investment banks also provide advice in mergers, acquisitions, and reorganizations.

Q.2- Who are the Main Investment Banks?

The main banks, also known as the bulge bracket banks in investment banking, are:
 Bank of America Merrill Lynch
 Barclays Capital
 Citi
 Credit Suisse
 Deutsche Bank
 Goldman Sachs
 J.P. Morgan

189 | P a g e
  Morgan Stanley

Q.3- What types of services are offered by the Full-service banks?

Full-service banks offer the following services:

Underwriting–Capital raising and underwriting groups work between investors and
companies that want to raise money or go public via the IPO process. This function serves the
primary market or “new capital”.
Mergers & Acquisitions (M&A)–Advisory roles for both buyers and sellers of businesses,
managing the M&A process start to finish.
Sales & Trading–Matching up buyers and sellers of securities in the secondary market. Sales
and trading groups in investment banking act as agents for clients and also can trade the firm’s
own capital.
Equity Research–The equity research group research, or “coverage”, of securities helps
investors make investment decisions and supports trading of stocks.
Asset Management–Managing investments for a wide range of investors including institutions
and individuals, across a wide range of investment styles.

Q.4- What are the ten steps of Merger and Acquisitions?

Q.5- Briefly discuss about four groups of experts that regularly engaged with investment
banking activities.

Traders: execute orders to buy and sell securities on the financial markets.

190 | P a g e
Brokers: offer advice to investors, informing them about investment opportunities in order to
generate securities transactions.
Analysts: support these efforts by conducting research on market and corporate developments,
assessing whether a particular security is correctly priced or not.
Corporate bankers, finally, advise and assist top managers in the creation of new securities,
for instance, in connection with mergers, acquisitions and other situations where companies
wish to raise capital.
These four groups of experts typically perform their tasks side by side within the same
organization, which may or may not be called an investment bank.

Q.6- Investment Banking Versus Commercial Banking

First, by the late 1970s, the prohibitions on securities underwriting by commercial banks were
partially relaxed. Investment banks underwrite municipal general obligation bonds, industrial
development bonds, corporate issues etc. Second, as financial markets, both investment banks
and commercial banks became players, also became competitors. Example of the emergence
of a major new market is the introduction of over-the-counter derivative instruments-
principally swaps and other "notional contracts. Advice on asset/liability management, risk
management, and liquidity management etc. financial institutions to formulate strategies
involving both advice and instruments, called structured solutions. Third, the commercial
banking community had sole access to Central Bank’s open market operation. This allows a
bank to borrow another bank's excess reserves, held within the Central Bank, on an overnight
basis.
The investment banking community, on the other hand, had no access to this market. This took
the form of a market in repurchase agreements. Investment banks have access to a very liquid
repo market and can use it for short-term financing at very low cost. Fourth, the development
of real estate operations and mortgage products by investment banks and the development of
commodity and equity swap operations by commercial banks.

Q.7- What are the types of Investment Banks?

There are two basic types of investment bank: full-service and boutique.
Full-service institutions or shops provide the full range of investment banking services,
engage in all kind of activities, including underwriting, trading, merger and acquisition (M&A),
merchant banking, securities services, investment management, and research.
Boutique houses or only boutiques, on the other hand, specialize in just a few services.
Boutiques are also sometimes called specialty shops. Some specialize in M&As, some in
financial institutions, and some in Silicon Valley business.

Q.8- What do you know about bulge bracket?

The largest firms are often called the bulge bracket-a term which derives from the tendency
of these firms' names to be printed larger and bolder on public offering announcements (called
tombstones) and on the front pages of prospectuses.

191 | P a g e
The bulge bracket, also known as the special bracket, consists of about 10 firms.
After the bulge bracket firms is the second tier of middle sized firms, known as the major
bracket, and then the third tier of small firms, called the sub majors and regionals.

Q.9- Who are the clients of Investment Banks?

Investment banks’ clients include:

Governments–Investment banks work with governments to raise money, trade securities, and
buy or sell crown corporations.

Corporations–Bankers work with both private and public companies to help them go public
(IPO), raise additional capital, grow their businesses, make acquisitions, sell business units,
and provide research for them and general corporate finance advice.

Institutions–Banks work with institutional investors who manage other people’s money to
help them trade securities and provide research. They also work with private equity firms to
help them acquire portfolio companies and exit those positions by either selling to a strategic
buyer or via an IPO.

Q.10- Definition of Industry Structure.

Industry structure is defined as the basic, underlying characteristics that shape the competitive
strategy for a group of firms producing products that are close substitutes for each other.

Q.11- Investment Banking Firms

Investment banks can be ranked in three major areas:
1. Corporate underwriting
2. International underwriting
3. Municipal underwriting

Corporate Underwriting:
Corporate underwriting can involve individual stocks and debt securities, including
government, corporate, or municipal bonds.

International Underwriting:
International firms are ranked based on international bonds, Eurobonds, international loans and
note-issuance facilities, and international equities.

Municipal Underwriting:
Municipal underwriters are ranked based on total long-term negotiated issues, long-term
competitive issues, tax issues, long-term general obligation issues, and the following negotiated

192 | P a g e
issues education, housing, electric and power, health care, transportation, and water, sewer and
gas.

Q.12- Briefly talk about the Revenues and Expenses of Investment Banks.
Commissions: Brokerage accounts, mutual fund, sales etc.

Interest and Dividends: Margin lending effects of interest rate spreads, net carrying costs and
accrued interest from trading positions, etc.

Principal Transaction: Trading activity (equity, fixed income, foreign exchange, etc.),
hedging strategies, revenues from mortgage-backed securities, swaps, and derivative securities,
etc.
Investment Banking: Underwriting private placements, management for mergers and
acquisitions, restructuring, refinancing, advisory services, etc.

Interest cost: The investment banking industry are highly liquid and highly leveraged in
nature.

The major source of financing is Repurchase Agreements, which are generally used to finance
the firm's securities inventory. This is a very liquid and well collateralized source of funds.

The major secondary source of short-term funds varies across firms, but all firms have many
alternative sources of funds: commercial paper, bank lines of credit, secured loans, etc.

Q.13- Briefly discuss about the Organizational Structure of Investment Banks.

Three forms of organizations in the investment banking industry:
i. The partnership
ii. The conglomerate unit
iii. The public firm.

The Partnership:
A partnership is a firm owned by two or more persons who share in the profits of the firm. A
partner is a part owner of the firm. All partnerships have at least one general partner who is
responsible for the daily operations and functions of the business, and who is liable for the
firm's operations.

The Conglomerate Unit:

Many investment banking firms were acquired or sold by other investment banking or financial
institution firms.

In the conglomerate, the management of the investment bank is answerable to the parent firm.
Most of the above acquisitions were to complement or support the main activities of the parent
company.

The Public Firm:

193 | P a g e
In a public firm, the investment bank management is answerable to the owners-the
shareholders. The transformation of investment banks to publicly owned firms is one of the
biggest changes in the investment banking industry.

Q.14- What do you know about merger or consolidation?

A merger refers to the absorption of one firm by another. The acquiring firm retains its name
and identity, and it acquires all of the assets and liabilities of the acquired firm. After a merger,
the acquired firm ceases to exist as a separate business entity.

i.e. A firm + B firm = A firm (or B firm)

A consolidation is the same as a merger except that an entirely new firm is created. In a
consolidation, both the acquiring firm and the acquired firm terminate their previous legal
existence and become part of the new firm.

i.e. A firm + B firm = C firm (new firm)

Q.15- What do you mean by acquisition of stock?

The acquisition takes place when the financially strong entity acquires the entity which is less
strong financially by acquiring shares worth more than fifty percent. The acquisition example
includes Amazon's purchase of whole foods in 2017 for $13.7 billion. In addition, the company
AT&T bought Time Warner Inc.

Q.16- What do you mean by acquisition of assets?

An asset acquisition strategy is when one company buys another company through the process
of buying its assets, as opposed to a traditional acquisition strategy, which involves the
purchase of stock.

Q.17- Briefly write about the classification of acquisition.

Financial analysts have typically classified acquisitions into three types:

1. Horizontal acquisition: Here, both the acquirer and acquired are in the same industry.

2. Vertical acquisition: A vertical acquisition involves firms at different steps of the

production process. The solar panel industry has seen a large number vertical acquisitions.

3. Conglomerate acquisition: The acquiring firm and the acquired firm are not related to each
other. Conglomerate acquisitions are popular in the technology arena. For example, by 2015,
Google had acquired more than 170 companies since 2003. Google acquired Android in 2005.

194 | P a g e
Q.18- What do you mean by takeover?

Takeover is a general and imprecise term referring to the transfer of control of a firm from one
group of shareholders to another. A firm that has decided to take over another firm is usually
referred to as the bidder. The bidder offers to pay cash or securities to obtain the stock or assets
of another company. If the offer is accepted, the target firm will give up control over its stock
or assets to the bidder in exchange for consideration (i.e., its stock, its debt, or cash). Takeovers
can occur by acquisitions, proxy contests, and going- private transactions. Thus, takeovers
encompass a broader set of activities than acquisitions.

Q.19- What is Synergy?

Synergy is the concept that the combined value and performance of two companies will be
greater than the sum of the separate individual parts. Synergy is a term that is most commonly
used in the context of mergers and acquisitions (M&A).

Q.20- Where does this magic force Synergy come from?

Increases in cash flow create value. We define CF as the difference between the cash flows at
date t of the combined firm and the sum of the cash flows of the two separate firms. From the
chapters about capital budgeting, we know that the cash flow in any period t can be written as:

CF = Rev- Costs, Taxes, - Capital Requirements, -

Where Rev. is the incremental revenue of the acquisition; Costs, is the incremental costs of the
acquisition; Taxes is the incremental acquisition taxes; and Capital Requirements, is the
incremental new investment required in working capital and fixed assets. The possible sources
of synergy fall into four basic categories: revenue enhancement, cost reduction, lower taxes,
and lower capital requirements.

Q.21- How diversification reduces unsystematic risk?

To see this, recall unsystematic risk. We know unsystematic risk can be diversified away
through mergers. However, the investor does not need widely diversified companies such as
General Electric to eliminate unsystematic risk. Shareholders can diversify more easily than
corporations by simply purchasing common stock in different corporations. Thus,
diversification through conglomerate merger may not benefit shareholders.

Q.22- Definition of corporate charters.

The corporate charter refers to the articles of incorporation and corporate by laws governing a
firm. Among other provisions, the charter establishes conditions allowing a takeover. Firms
frequently amend charters to make acquisitions more difficult.

195 | P a g e
Q.23- Briefly talk about Golden parachute, Poison pills, Green mill and Standstill
agreement, White Knight and white squire.

Golden Parachutes: Golden parachutes will deter takeovers by raising the cost of acquisition.
A large payment or other financial compensation guaranteed to a company executive should
the executive be dismissed as a result of a merger or takeover. However, some authorities point
out that the deterrence effect is likely to be unimportant because a severance package, even a
generous one, is probably a small part of the cost of acquiring a firm. In addition, some argue
that golden parachutes actually increase the probability of a takeover. The reasoning here is
that management has a natural tendency to resist any takeover because of the possibility of job
loss. A large severance package softens the blow of a takeover, reducing management's
inclination to resist.

Poison Pills: The poison pill is a sophisticated defensive tactic that Martin Lipton, a well-
known New York attorney, developed in the early 1980s. Since then a number of variants have
surfaced, so there is no single definition of a poison pill. As the name "poison pill" indicates,
this tactic is analogous to something that is difficult to swallow or accept. A company targeted
for such a takeover uses the poison pill strategy to make its shares unfavorable to the acquiring
firm or individual. If anyone shareholder buys 20% of the company's shares, at which point
every shareholder (except the one who possesses 20%) will have the right to buy a new issue
of shares at a discount. If every other shareholder is able to buy more shares at a discount, such
purchases would dilute the bidder's interest, and the cost of the bid would rise substantially.
Knowing that such a plan could be activated, the bidder could be disinclined to take over the
corporation without the board's approval, and would first negotiate with the board in order to
revoke the plan Poison pills significantly raise the cost of acquisitions and create big
disincentives to deter such attempts completely. Poison pills are formally known as shareholder
rights plans. Dilution of this magnitude causes some critics to argue that poison pills are
insurmountable.

Greenmail and Standstill Agreements: Managers may arrange a targeted repurchase to

forestall a takeover attempt. In a targeted repurchase, a firm buys back its own stock from a
potential bidder, usually at a substantial premium, with the proviso that the seller promises not
to acquire the company for a specified period. Critics of such payments label them greenmail.
A standstill agreement occurs when the acquirer, for a fee, agrees to limit its holdings in the
target. As part of the agreement, the acquirer often promises to offer the target a right of first.
Refusal in the event that the acquirer sells its shares. This promise prevents the block of shares
from falling into the hands of another would be acquirer.

White Knight and White Squire: A firm facing an unfriendly merger offer might arrange to
be acquired by a friendly suitor, commonly referred to as a white knight. The white knight
might be favored simply because it is willing to pay a higher purchase price. Alternatively, it
might promise not to lay off employees, fire managers, or sell off divisions.

196 | P a g e
Management instead may wish to avoid any acquisition at all. A third party, termed a white
squire, might be invited to make a significant investment in the firm, under the condition that
it vote with management and not purchase additional shares.

Q.24- What is the definition of merchant banker?

The Notification of the Ministry of Finance defines a merchant banker as,

"any person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities as manager, consultant,
advisor or rendering corporate advisory service in relation to such issue management."

Q.25- What is the definition of merchant banking?

\A merchant bank is a financial institution that conducts underwriting, loan services, financial
advising, and fundraising services for large corporations and high-net-worth individuals
(HWNIs). Merchant banks specialize in international trade, providing services for
multinational corporations.

Q.26- Briefly discuss about the nature of Merchant banking.

The services of a merchant banker could cover -project counselling and pre-invest nent
activities,
- Feasibility studies, project reports, design of capital structure,-issue management and
underwriting,

- Loan syndication, mobilization of funds from non-resident Bangladeshis',

- Foreign currency finance,

- Mergers, amalgamations and takeovers, venture capital, buy-back and

- Public deposits.

Q.27- Briefly talk about the code of conduct of merchant banker.

The code of conduct stipulates that in the performance of duties, merchant banker should act
in an ethical manner, inform the client that he is obliged to comply with the code of conduct,
render high standard of service and exercise due diligence, not to indulge in unfair practices,
not to make misrepresentations, give best advice, not to divulge confidential information about
the clients, endeavor to ensure that true and adequate information is provided to investors.
Finally merchant bankers have to deal adequately with complaints from investors. Merchant
bankers should not be a party in respect of issue of securities, -creation of false market,
-price rigging or manipulation or pass price sensitive information,

197 | P a g e
-to abide by all rules, regulations, guidelines, resolutions issued by the Government of
Bangladesh and BSEC from time to time.

Q.28- What are the General obligations and responsibilities of merchant bankers?

Maintenance of books of accounts, records and documents: merchant bankers have to keep and
maintain

 a copy of the balance sheet,

 a copy of the auditor's report and
 a statement of financial position,

Merchant bankers should inform BSEC where the accounts, records and documents are
maintained. Merchant bankers have to furnish annually to BSEC copies of balance sheet, profit
and loss account etc. Merchant bankers are required to submit BSEC half yearly working
results with a view to monitor their capital adequacy. Books, records and documents should be
preserved for five years. Merchant bankers should execute an agreement with the issuing
company setting out their mutual rights, liabilities and obligations relating to such issue and in
particular to disclosures, allotment and refund.

Q.29- What is trading?

Trade refers to the voluntary exchange of goods or services between economic actors. Since
transactions are consensual, trade is generally considered to benefit both parties. In finance,
trading refers to purchasing and selling securities or other assets.

Q.30- What do you know about Proprietary and Institutional trading?

Investment banks typically have both proprietary trading operations and institutional trading
operations.
Proprietary trading is trading that is done for the investment bank's own account. Institutional
trading is undertaken for the benefit of institutional clients of the investment bank and can be
done on a profit-sharing or management fee basis. Proprietary trading and institutional trading
are often handled by distinct groups within the investment bank order to avoid even the
appearance of a conflict of interest.

Q.31- What is Speculation?

Speculation means, quite simply, to take a position in anticipation of a change in price levels.
(This can mean a change in absolute price levels or in relative price levels.)
Thus, if a speculator thinks that a price will rise, she buys the instrument, hoping to sell it later
at a higher price.

198 | P a g e
If the speculator believes that a price will fall, she sells the instrument short, hoping to buy it
back later at a lower price.

Q.32- Briefly talk about short side and long side of the market.

Professional speculators operate on the short side of the market with the same ease with which
they operate on the long side of the market. In some markets, such as futures and options, this
is possible because the long side and the short side of the market are perfectly symmetric. In
other markets, such as the bond markets, it is possible because a well-developed repurchase
agreement (repo) market provides access to securities to be used for short sales.

Q.33- Briefly explain that speculators are forecasters not manipulators.

Speculators are basically forecasters who act upon their forecasts in order to earn a return.
Keep in mind that true speculators do not see themselves as having control over prices. Rather,
prices are determined by the interaction of supply and demand. If prices rise when the
speculator is long or fall the speculator is short, then the speculator profit from a correct
forecast. If prices fall when the speculator is long or rise when the speculator is short, then the
speculator suffers a loss from an incorrect forecast. The best forecast can go astray due to
exogenous shocks: fires, floods, earthquakes, and so on. Clearly, speculators must bear risk.
Sometimes, for whatever reasons, an individual or a group acquires the power to manipulate a
market. Such individuals are not speculator. They are market manipulators. By definition, a
manipulator is one who uses his private power to bring about a rise or a fall in prices in such a
fashion as to produce personal gain at the expense of others who are not parties to the
manipulation. Manipulation of markets is inherently evil, in the sense that it undermines
confidence in the pricing system and interferes with the efficient allocation of resources. For
these reasons, market manipulation is also often illegal.

Q.34- Speculator’s gain comes from a non- speculator’s expenses. Do you agree?

Yes, I agree with this. Speculators also often get bad press when they reap honest profits. The
non-speculator concludes that the speculator's gain came at the non- speculator's expense,
because the non-speculator is paying higher prices for gasoline or heating oil. The non-
speculator is often unable to distinguish cause from effect. The speculator gathered and
analyzed the information which led him to conclude that the price of oil would have to rise in
order to clear the market. On the basis of that analysis, he bought oil. The speculators who lose
do not ordinarily get much press, and their losses do not carry the same weight as the profits of
the successful speculators in the minds of the non-speculators.

Q.35- Speculative buying and selling increase market responsiveness. Do you agree?

Yes, I also agree with this. While the buying and selling activities of individual speculators
rarely have more than a negligible impact on market prices, the cumulative or aggregate effect
of speculative buying and selling can have a very significant effect. This is not, however, bad.

199 | P a g e
Speculative buying and selling are usually in response to information acquisition and analysis,
and any price changes that subsequently result should represent movement toward market
clearing. In the absence of speculation, market prices would respond more slowly and delays
would mean less efficiency in resource reallocation.

Q.36- Briefly talk about the speculative methods.

Speculative methods of price analysis are generally divided into two broad categories called
fundamental analysis and technical analysis.
Despite the fact that users of one method often disavows the other, these two schools of thought
are not mutually exclusive.
Fundamental analysts examine all information that bears on the underlying economic
relationship-supply and demand-that ultimately determine all prices. They gather information
on domestic and foreign production, read government reports, interpret BB policy, estimate
input costs and usage rates, monitor technological developments, analyze demographic data,
and so on.
Technical analysis takes a very different approach to forecasting future Prices. The technician
argues that the fundamentalist simply cannot gather enough private information to consistently
outperform the market. Instead, the technician focuses on one specific category of information
called transactions data. Transactions data are any information associated with the record of
past transactions (including the most recent ones). Transactions data consist of such things as
transactional prices, trading volume, open interest, short interest, specialists' positions, odd-lot
transactions, and so on.

Q.37- What do you know about absolute value trader?

An absolute value trader is a trader who believes that the price of an asset is too high or too
low and who takes an outright (unhedged) position in the asset. These traders are often said to
position securities based on their "view".
Suppose that an investment bank's research department, which analyzes securities on both a
fundamental and a technical basis, concludes that a stock is undervalued and is positioned to
move higher in the near term, the research department issues a report to this effect.

Q.38- What do you know about relative value trading?

Relative value trading is an investment strategy where one or more securities are traded in
relation to another. Let's assume that an investor likes a particular stock but is uncertain if the
recent stock market rally will continue.

Q.39- What do you mean by Arbitrage?

Arbitrage is routinely defined as the simultaneous taking of positions in two or more markets
in order to exploit pricing aberrations among them. “Those who practice arbitrage are often
called, in market slang, arbs. The strategies employed by arbs are some of the most complex

200 | P a g e
imaginable and often involve very sophisticated mathematics, lightning speed in execution,
and considerable computer power. Program trading is one example. It is not surprising that
those who develop and practice the more complex arbitrage strategies are often described as
"quant jocks."

Q.40- Discuss about different type of Arbitrage.

Spatial arbitrage
Spatial arbitrage is the simplest form of arbitrage. In spatial arbitrage, also known as
geographic arbitrage, the arbitrager looks for pricing discrepancies across geographically
separate markets.
For example, suppose that a bond dealer in San Francisco is offering al bond at 102-15/32 and
a dealer in New York is bidding 102-17/32 for the same bond.
For whatever reason, the two dealers have not spotted the aberration in the prices, but the arb
does. The arb immediately buys the bond from the San Francisco dealer and sells it to the New
York dealer.
Temporal Arbitrage: Program Trading
Temporal arbitrage is arbitrage across time. It involves buying an asset for immediate delivery
and selling it for later delivery in order to exploit a price discrepancy between the cash price
and the forward price. The forward transaction is most often accomplished with a futures
contract. The strategy can also be reversed. That is, we can sell the cash asset (short) for
immediate delivery and buy the futures contract. This strategy is widely used by investment
banks and other securities firms to exploit pricing discrepancies between cash stock prices and
stock index futures prices. The strategy is often called program trading. The term "program
trading" is sometimes used more broadly to describe a number of mechanical trading
techniques. A more precise description is cash/index arbitrage.
Risk Arbitrage
Risk arbitrage is associated with mergers and other forms of corporate ownership
restructurings. Most, if not all, major investment banks and many specialty shops have risk
arbitrage departments or operations. As originally used, the term risk arbitrage meant to buy
the stock of a target firm in a takeover and to sell the stock of the acquiring firm.

Q.41- Briefly discuss about dealer vs. broker.

A dealer in securities is really little different from a dealer in anything else. A dealer buys and
sells. In both cases, she is transacting for her own account, that is, she is a principal in the
transactions. The difference between the bid (buying price) and ask (called her ask price or
offer price) prices is called the bid-ask spread. Because the transactions a dealer makes are for
her own account, she bears the risk that the value of the securities might change while she holds
them. This is called price risk. A broker in securities is not a principal to the transactions in
which he is involved when he is acting in the capacity of a broker. Instead, he is acting as an
agent on behalf of his customers. For his role as an agent, the broker collects a commission on
each transaction he makes. Because he is not a principal to the transactions, the broker does
not bear any price risk. A dealer may serves as both broker and dealer.

201 | P a g e
Q.42- Provide definition of credit risk, call risk, prepayment risk, purchasing power risk,
tax rate risk.

Credit risk (the risk that the issuer's credit worthiness may deteriorate),
Call risk (the risk that the issuer may choose to retire the issue prior to maturity),
Prepayment risk (similar to call risk but applicable to mortgage-type debt securities),
Purchasing power risk (loss of purchasing power as a consequence of inflation) and
Tax rate risk (the risk that the tax treatment of an issue might change due to a change in the
tax law).

Q.43- Write Short notes on Bucket shops, Boiler rooms, Churning, Suitability, Front
running, and Poor fills.

Bucket shops: Bucket shops are securities firms, usually small, that take customer orders but
do not immediately execute them. Instead, they wait to see if the price moves away from the
price stipulated in the customer's order, and only if it does do they fill the order. The customer
is told it was filled at the stipulated price, and the difference accrues to the bucket shop. For
example, suppose that a stock is trading around $40. A customer places an order to buy at $40.
As it happens, the order could be filled, but the firm does not execute the order. Later, the price
declines to $39-1/2. Observing this, the Firm fills the order by buying the stock at 39-1/2, and
reports the fill to the customer at $40. The customer pays a commission and loses another one-
half point besides. This practice is banned by the NASD.

Boiler rooms: Boiler room operations are firms that use high-pressure sales tactics to sell
securities, often too naive investors. The securities, which might be a new issue or a seasoned
issue, are touted with exaggerated claims of their probability of succeeding. In the worst cases,
the securities are nonexistent, or a firm is created for the purpose of issuing worthless securities.
When a new issue is being pushed, boiler room sales personnel will often get an extraordinary
percentage of the offering price. For example, the boiler room, acting as "underwriter," might
take half of the offering price or more. Investors should always be wary of "once in a lifetime"
deals, "sure things" or any other claim that sounds to good to be true it probably is.

Churning: Churning refers to excessive trading of a customer's account when the primary
motivation for the trading is to earn commissions or bid-ask spreads for the broker/dealer.
Churning is much more likely to occur in accounts in which the client has granted the broker
discretionary trading authority, but it can also occur in nondiscretionary accounts if the client
routinely takes the broker/dealer's advice.
Churning is difficult to prove because it rests on motivation. As a general rule, to prove
churning, a client must demonstrate an inordinate number of trades involving the purchase and
sale of securities within an unreasonably short period of time with no obvious economic
rationale.

Suitability: As part of the "know your customer" doctrine, brokers have an obligation to limit
their investment recommendations and to limit purchases of securities on behalf of customers

202 | P a g e
to those securities that are appropriate for the customers. This is particularly important in the
case of discretionary accounts. Securities that are appropriate for a particular customer are
described as "suitable." It is important that the client fully understand the potential risks of the
investments recommended to him or purchased on his behalf, and that the securities purchased
be reasonable investments for that client.

Front running: Front running, also known as trading ahead of a customer, refers to
transactions made by a securities firm for its own trading accounts in anticipation of trades that
are to be made by a client. For example, if a broker/dealer receives an order to buy a large
number of shares of stock or a significant amount of the par on a bond issue, the broker/dealer
has reason to believe that the order will likely drive up the price. In anticipation of this, the
broker/dealer may buy the stock or the bonds for its own account prior to filling the order for
the customer. Then, as it fills the order for the customer and the price rises, the broker/dealer
sells out its own position at the higher price. Front running is specifically prohibited by the
rules and regulations of the securities industry. Importantly, it is sometimes possible to engage
in intermarket front running. For example, a broker/dealer might take a large order to buy stock
from an institutional client. If that stock is a component of an important market index and if
futures contracts trade on that stock index, then the broker/dealer might buy stock index fumes
in anticipation of its client buying the stock. This is a grayer area than front running, but it is
generally considered unethical.

Poor fills: A broker/dealer is entrusted by his customer to fill an order at the best possible
price. This obligation passes from the account representative to the floor broker. There have
been instances in which floor brokers, working in concert with floor traders trading for their
own accounts, have deliberately transacted on behalf of customers at disadvantageous prices.
This particular type of illegal trading at the expense of the public customer created a scandal
in the futures industry in the late 1980s. To see how this might occur, suppose that a customer
gives his account representative a market order to buy 10 T-bond futures contracts. At the time,
the contract is bid at 94-27/32 and asked at 97-28/32. Because the order is a market order, the
floor broker is authorized to pay as much as is necessary to fill the order immediately. Now
suppose that, after receiving the order, the floor broker signals to a floor trader with whom the
floor broker is in cahoots. This is to let the floor trader know that the floor broker is holding a
market order. The floor broker then calls for asks and receives a variety of offer prices from
97-28/32 to 97- 30/32. His collaborator, the floor trader, offers to sell for 97-29/32. Of course,
the floor broker should take the 97-28/32 offer, but instead he takes his collaborator's 97-29/32
offer. The floor trader then immediately turns to the other floor traders who offered to sell at
97-28/32 and takes their offer to close out his position. Thus, the floor trader goes short at 97-
29/32 and offsets this transaction at 97-28/32, thereby picking up 1/32 ($31.25 per contract) on
each of ten contracts. The public customer, of course, pays for this in the form of a higher
transaction price.

203 | P a g e
 Course Code: BIN-402
Course Title: Business Research Methods

Q.1- What is research?

Research, is simply the process of finding solutions to a problem after a thorough study and
analysis of the situational factors. Research is one of the ways to find answers to one’s
questions.

Q.2- What is business research?

Business research is a process of acquiring detailed information of all the areas of business and
using such information in maximizing the sales and profit of the business. Such a study helps
companies determine which product/service is most profitable or in demand.

Q.3- What do you mean by applied research and basic or pure research?
Applied research aims at finding a solution for an immediate problem facing a society or an
industrial/business organization Applied research deals with solving practical problems and
generally employs empirical methodologies. Applied research refers to scientific study and
research that seeks to solve practical problems.

Pure research involves developing and testing theories and hypothesis that are intellectually
challenging to the researcher but may or may not have practical application at the present time
or future. Pure research is also concerned with the development, examination, verification and
refinement of research methods, procedures, techniques and tools that form the body of
research methodology.

Q.4- What are the differences between inductive and deductive theory?
Inductive reasoning works the other way, moving from specific observations to broader
generalizations and theories. Informally, we sometimes call this a “bottom up” approach.
Conclusion is likely based on premises.
Deductive reasoning works from the more general to the more specific. Sometimes this is
informally called a “top down” approach. Conclusion follows logically from premises.

Q.5- Briefly describe different types of research methods from the objective of the study
and from the Mode of enquiry used in conducting the study.
From the objective of the study:
Descriptive Research: A descriptive study attempts to describe systematically a situation,
problem, phenomenon, service or programme, or provides information about, say, the living
conditions of a community, or describes attitudes towards an issue.

204 | P a g e
Exploratory Research: A study is undertaken with the objective either to explore an area
where little is known or to investigate the possibilities of undertaking a particular research
study.

Correlational Research: A correlational study is to discover or establish the existence of a

relationship/association/interdependence between two or more aspects of a situation.

Explanatory Research: Attempts to clarify why and how there is a relationship between two
aspects of a situation or phenomenon.

From the Mode of enquiry used in conducting the study:

Quantitative Research: Quantitative research is based on the measurement of quantity or
amount. It is applicable to phenomena that can be expressed in terms of quantity.

Qualitative Research: Qualitative research is defined as a market research method that

focuses on obtaining data through open-ended and conversational communication.

Q.6- What is mixed methods research?

Mixed methods research: ‘Mixed methods’ is a research approach whereby researchers
collect and analyze both quantitative and qualitative data within the same study.

Q.7- The problem of identification stage is perhaps more critical in the research process
than the problem solution stage.” Would you agree with this statement?
The problem definition stage is probably the most important stage in the research process
because it involves several interrelated steps. One it ascertains the decision maker's objectives.
That is, the purpose for conducting the research and what the decision maker hopes to
accomplish. Also, it narrows broad and vague ideas into manageable specific difficulties to
solve. In other words, it helps decision makers zoom in on the right questions to be answered.
Two it gives background analysis of the problem in view. That is, it points to where the
problem is located, how it fits with current developments, and what the current environment
is, which is crucial when working out whether a solution will actually work or not. Three it
isolates and identifies the problem rather than the symptoms. That is, it gets to the center of
the problem to be solved so that possible solutions can be generated.

Q.8- What are the research process?

There are 8 stages to the research process. Each stage is important, but some hold more
significance than others.
Stage 1: Selection of Topic
Stage 2: Reviewing the Literature
Stage 3: Development of Theoretical and Conceptual Frameworks
Stage 4: Clarification of the Research Question
Stage 5: Research Design
Stage 6: Data Collection

205 | P a g e
Stage 7: Data Analysis and discussion of the findings
Stage 8: Drawing Conclusions

Q.9- What is a literature review?

A literature review is an overview of the previously published works on a specific topic. The
term can refer to a full scholarly paper or a section of a scholarly work such as a book, or an
article. Either way, a literature review is supposed to provide the researcher/author and the
audiences with a general image of the existing knowledge on the topic under question.

Q.10- What are the sources of the research problem?

There are several sources of research problems some are: Interviews, Personal Experiences,
Deductions from Theory, Interdisciplinary Perspective, and Relevant Literature.

Q.11- What do you know about FINER or PICOT methods for outlining research criteria
used in the construction of a research question?
The FINER method can be a useful tool for outlining research criteria used in the construction
of a research question. This method detailed below:
F – Feasible
• Adequate number of subjects
• Adequate technical expertise
• Affordable in time and money
• Manageable in scope
I – Interesting
• Getting the answer intrigues investigator, peers and community
N – Novel
• Confirms, refutes or extends previous findings
E – Ethical
• Amenable to a study that institutional review board will approve
R – Relevant
• To scientific knowledge
• To clinical and health policy
• To future research
PICOT method tends to be used to frame questions used in evidence-based studies, such
as medical studies.
• Detailed below:
• P – Patient (or Problem)
• I – Intervention (or Indicator)
• C – Comparison group
• O – Outcomes
• T – Time

206 | P a g e
Q.12- What is a theoretical framework?
The theoretical framework is the structure that can hold or support a theory of a research study.
The theoretical framework introduces and describes the theory that explains why the research
problem under study exists.

Q.13- What is the hypothesis?

A hypothesis is an educated guess, based on the probability of an outcome. A hypothesis
(plural hypotheses) is a precise, testable statement of what the researcher(s) predict will be the
outcome of the study. It is stated at the start of the study.

Q.14- What is the null and alternative hypothesis?

A null hypothesis denoted by H0, will predict that there will be no significant relationship
between the two test variables. For example, you can say that “The study will show that there
is no correlation between marriage and happiness.”

An alternative hypothesis, denoted by H1 or Ha, challenges the null hypothesis and states that
there is a relationship

Q.15- What are the errors in testing a hypothesis?

There are two types of errors:

• Rejection of a null hypothesis when it is true. This is known as a Type I error.

• Acceptance of a null hypothesis when it is false. This is known as a Type II error.

Q.16- Discuss about structured, semi-structured, and unstructured interviews.

Structured Interview: It is the base-level interview that is generally short and is verbally
administered. It lacks depth, but structured interviews are helpful when the researcher requires
some basic information and is time bound.
Semi-structured Interviews: The researcher has more freedom in a semi structured interview
to explore the relevant subject matter. It involves questions on the scope of the areas required
and intended to be explored.
Unstructured Interviews: It involves in-depth questioning and discussion to collect and
analyze a broad range of information. It is more time-consuming. Type of methods used to
collect information via Interview are: Face-to-face: A popular mode of interview, face-to-face
interviews have the advantage of detailed discussion between the researcher and the participant.
The response rate in a face-to-face interview is often higher, even if it is time-consuming and
expensive. The quantitative data collected is also detailed.

Q.17- Which should you choose between an interview and a questionnaire?

When collecting data for a study, researchers often choose to use questionnaires because they
are cost-effective, time-efficient and easy to evaluate objectively. In spite of these benefits,
questionnaires have many deficiencies. As such, researchers often choose to use interviewers

207 | P a g e
over questionnaires, as personal interviews can provide more information about the test
subject's answers while providing the same sort of statistical precision. So, if I have sufficient
time and enough money to collect data I will choose interview method to collect data.

Q.18- What is observation research?

Observation research is a qualitative research technique where researchers observe
participants’ ongoing behavior in a natural situation. The purpose of this type of research is to
gather more reliable insights. In other words, researchers can capture data on what participants
do as oppose to what they say they do.

Q.19- What is the focus group discussion (FGD)?

Type of qualitative research where small homogenous groups of people are brought together
to informally discuss specific topics under the guidance of a moderator
Purpose: to identify issues and themes, not just interesting information, and not “counts”.

Q-20- What is research proposal?

A research proposal is a formal and structured document proposing a research project with
research objectives, plan of execution, enlisting expected challenges, briefing on required
equipment or facilities and funding grants. Proposals are evaluated on the cost and potential
impact of the proposed research, and on the soundness of the proposed plan for carrying it out.

Q.21- What are the contents of a research proposal?

Stage 1: Selection of Topic
Stage 2: Reviewing the Literature
Stage 3: Development of Theoretical and Conceptual Frameworks
Stage 4: Clarification of the Research Question
Stage 5: Research Design
Stage 6: Data Collection
Stage 7: Data Analysis and discussion of the findings
Stage 8: Drawing Conclusions

Q.22- What are the contents of a research report?

The various sections of a research report are:
1. Summary: The entire objective along with the overview of research are to be included
in a summary which is a couple of paragraphs in length.
2. Introduction: This section should answer an integral question: “What is the current
situation of the goal?”
3. Research Methodology: This section needs to be highly informative with each aspect
of research discussed in detail. Information needs to be expressed in chronological order
according to its priority and importance. Researchers should include references in case
they gained information from existing techniques.

208 | P a g e
 4. Results based on Analysis: A short description of the results along with calculations
conducted to achieve the goal will form this section of results.
5. Research Discussion: The results are discussed in extreme detail in this section along
with a comparative analysis of reports. While writing research reports, the researcher
will have to connect the dots on how the results will be applicable in the real world.
6. Conclusion: Conclude all the research findings along with mentioning each and every
author, article or any content piece from where references were taken.

Q.23- What are the difference referencing system used in the research report?
There are several different styles of referencing:
• APA.
• MLA.
• Oxford.
• Harvard.
• Chicago.
• MHRA
• OSCOLA
• Vancouver

Q.24- What is plagiarism?

Plagiarism is presenting someone else's work or ideas as your own, with or without their
consent, by incorporating it into your work without full acknowledgement. Copying large
pieces of text from a source without citing that source. Copying from a source but changing a
few words and phrases to disguise plagiarism.

Auditing for Financial Service Institutions

BIN-403
 What is assurance?
An assurance engagement is: 'An engagement in which a practitioner
expresses a conclusion designed to enhance the degree of confidence of
the intended users other than the responsible party about the outcome of the
evaluation or measurement of a subject matter against criteria.
 What is Audit?
An audit is an official examination of the accounts of an entity (by an auditor)
 There are five elements of an assurance engagement:
I. the three parties involved
1. the practitioner (i.e. the reviewer of the subject matter who provides the
assurance)
2. – the intended users (of the information)

209 | P a g e
 3. – the responsible party (i.e. those responsible for the subject matter)
II. An appropriate subject matter
III. Suitable criteria, against which the subject matter is evaluated/measured
IV. Sufficient appropriate evidence
V. A written assurance report in an appropriate form.
 Types of assurance engagement:
I. Reasonable
1. Sufficient appropriate evidence.
2. Conforms in all material respects.
3. Positively
II. Limited
1. Sufficient appropriate evidence.
2. Is plausible in the circumstances.
3. Negatively.
 Objective of a review of financial statements:
The objective of a review of financial statements is to enable an auditor
to state whether, on the basis of procedures which do not provide all the evidence requ
ired in an audit, anything has come to the auditor’s attention
that causes the auditor to believe that the financial statements are not prepared in acc
ordance with the applicable financial reporting framework.
 Expectations gap:
Some users incorrectly believe that an audit provides absolute assurance;
that the audit opinion is a guarantee the financial statements are 'correct'. This and oth
er misconceptions about the role of an auditor are referred to as the 'expectations gap'.
 Limitations of an audit:
The limitations audit mean that it is not possible to provide 'absolute' assurance.
 The need for regulation:
I. Harmonisation
II. On audit quality
III. Ethical code
 Auditing standards:
I. International Audit and Assurance Standards Board (IAASB).
II. International Standards on Auditing (ISAs)
III. IFAC code of Ethics.
 Who may act as auditor?
I. A member of a Recognized Supervisory Body (RSB), e.g. ACCA, and allowed
by the rules of that body to be an auditor or
II. Someone directly authorized the state
 Who may not act as auditor?
Excluded by law: The law in most countries excludes those involved with managing
the company and those who have business or personal connections with them from
auditing that company.
 Who appoints the auditor?

210 | P a g e
 I. Jurisdictions the members (shareholders) of the company.
II. The directors.
 The auditor’s rights:
I. Access to the company’s books and records at any reasonable time.
II. To receive information and explanations necessary for the audit.
III. To receive notice of and attend any general meeting of members of the
company.
IV. To be heard at such meetings on matters of concern to the auditor.
V. To receive copies of any written resolutions of the company.
 The auditor's duties:
i. To audit the financial statements, and provide an opinion on whether the
financial statements
 The need for professional ethics:
1. Trust is built by knowledge.
2. Needs to be independent and objectivity.
3. To improve the image of the profession.
 Conflicts of interest:
Professional accountants should always act in the best interests of the client. However,
where conflicts of interest exist, such as when a firm acts for competing clients (which
is common) the firm’s work should be arranged to avoid the interests of one being
adversely affected by those of another and to prevent a breach of confidentiality.
 Preconditions for an audit:
i. Determine whether the financial reporting framework to be applied in
the preparation of the financial statements is appropriate.
ii. Obtain the agreement of management that it acknowledges and
understands its responsibilities.

 Engagement letters – main considerations: The engagement letter will be sent before
the audit. It specifies the nature of the contract between the audit firm and the client and
minimizes the risk of any misunderstanding of the auditor’s role.
 The contents of the engagement letter:
i. The objective and scope of the audit
ii. The responsibilities of the auditor
iii. The responsibilities of management
iv. The identification of an applicable financial reporting framework

 The importance of risk assessment:

To obtain reasonable assurance, the auditor shall obtain sufficient appropriate evidence
to reduce audit risk to an acceptably low level.
 Audit risk:
Audit risk is the risk that the auditor expresses an inappropriate audit opinion.
 What is a misstatement?

211 | P a g e
 A difference between the amount, classification, presentation, or disclosure of reported
financial statement item and the amount, classification, presentation, disclosure that is
required for the item to be in accordance with the applicable financial reporting
framework.
 What is materiality?
Misstatements, including omissions, are considered to be material if they, individually
or in the aggregate, could reasonably be expected to influece the economic decisions
of users taken on the basis of the financal statements.
 How is materiality determined?
I. The circumstances surrounding the entity
II. Both the size and nature of misstatements
III. The information needs of the users as a group.
 Performance materiality:
The amount set by the auditor at less than materiality for the financial statements as a
whole to reduce to an appropriately low level the probability that the aggregate of un
corrected and undetected misstatements exceeds materiality for the financial statemen
ts as a whole.'
 Audit risk classification:

 Inherent risk:
Inherent risk is the risk of a material misstatement in the financial statements because
of the nature of the industry, entity or the nature of the item itself.
 Control risk:
Control risk may be high either because the design of the internal control system is
insufficient in the circumstances of the business or because the controls have not been
applied effectively during the period.
 Detection risk:
Detection risk is the risk that the procedures performed by the auditor to reduce audit
risk to an acceptably low level will not detect a misstatement that exists and that could
be material.
 Professional scepticism:
Professional scepticism is: 'An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to fraud or error, and critical
assessment of audit evidence.
 Interim audits:

212 | P a g e
 Interim audits can be completed part way through a client’s accounting year.
 Final audit
The final audit takes place after the year-end and focuses on the remaining tests and
areas that pose significant risk of material misstatement.
 What is fraud?
Fraud is an intentional act by one or more individuals among management, those
charged with governance, employees or third parties, involving the use of deception to
obtain an unjust or illegal advantage.
 Audit evidence:
To design and perform audit procedures in such a way to enable the auditor to obtain
sufficient appropriate audit evidence to be able to draw reasonable conclusions on
which to base the auditor's opinion.’
 The definition of sampling:
The application of audit procedures to less than 100% of items within a population of
audit relevance such that all sampling units have a chance of selection in order to
provide the auditor with a reasonable basis on which to draw conclusions about the
entire population.
 Audit software:
Audit software is used to interrogate a client's system. It can be either packaged,
off-the-shelf software or it can be purpose written to work on a client's system.
 Control environment:
The control environment includes the governance and management function of an
organisation. It focuses largely on the attitude, awareness and actions of those
responsible for designing, implementing and monitoring internal controls.
 The audit report:
The auditor forms an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.
 What is corporate governance?
Corporate governance is the means by which a company is operated and controlled.
 The difference between a unitary board of directors and a two-tier board?
Unitary: Single board of directors. Monitored by subcommittees and non-
executive directors.

Two boards: Executive board

Monitored by supervisory board consisting of employees, investors etc.

SME and Micro Finance

BIN-404
 Definition of SME
Small Enterprise refers to the firm/business which is not a public limited company and
complies the following criteria:

213 | P a g e
 Definition of Medium Enterprise
Medium Enterprise refers to the establishment/firm which is not a public limited
company and complies the following criteria

 Steps/Measures taken by Bangladesh Bank for SME Development

I. Dedicated Desk
II. SME Service Centre
III. Priority shall be given to small entrepreneurs.
IV. Group security/social security may.
V. Training programs shall be arranged for the entrepreneurs.
 Grace Period:
A grace period is a set length of time after the due date during which payment may be
made without penalty.
 Methods of Monitoring of SME Credit:
I. Monitoring in the Head Office of the Central Bank.
II. Monitoring in the Branch Offices of the Central Bank.
III. Monitoring by the Head Offices of the Banks.
 What is microfinance?
Microfinance refers to financial services for poor and low-income clients. Although
most attention has been on the provision of small loans, microfinance in fact also
includes the provision of other basic financial services such as savings, money transfer
and insurance for poor people.
 The two main mechanisms for the delivery of financial services to such microfinance
clients are:
I. Relationship-based banking for individual entrepreneurs and small businesses;
and
II. Group-based models, where several entrepreneurs come together to apply for
loans and other services as a group.
 Who is microfinance aimed at?
Microfinance is usually aimed at economically active poor and low-income people who
have limited or no access to the services provided by formal financial intermediaries
such as banks.

214 | P a g e
 Why has microfinance become so popular?
Primarily because it has been proven that microfinance is a long-term and sustainable
solution to alleviating poverty.
 Microfinance standards and principles
I. Poor people need not just loans but also savings, insurance and money transfer
services.
II. Microfinance must be useful to poor households: helping them raise income,
build up assets and/or cushion themselves against external shocks.
III. "Microfinance can pay for itself." Subsidies from donors and government are
scarce and uncertain and so, to reach large numbers of poor people,
microfinance must pay for itself.
IV. Microfinance means building permanent local institutions.
V. Microfinance also means integrating the financial needs of poor people into a
country's mainstream financial system.
VI. "The job of government is to enable financial services, not to provide them."
VII. "Donor funds should complement private capital, not compete with it."
VIII. The key bottleneck is the shortage of strong institutions and managers." Donors
should focus on capacity building.
IX. Interest rate ceilings hurt poor people by preventing microfinance institutions
from covering their costs, which chokes off the supply of credit.
X. Microfinance institutions should measure and disclose their performance—both
financially and socially.
 Microfinance vs microcredit:
Microfinance is a broad category of services, which includes microcredit. Microcredit
is provision of credit services to poor clients. Microcredit is one of the aspects of
microfinance and the two are often confused. Critics may attack microcredit while
referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad
range of microfinance services, it is difficult to assess impact, and very few studies have
tried to assess its full impact. Proponents often claim that microfinance lifts people out
of poverty, but the evidence is mixed.
 The Grameen approach has broken all barriers for reaching the poor with credit by
introducing the following critical steps:
I. Target the poor people, mainly women who bear the burden of poverty.
II. Accept primarily women as clients who repay loans on time, invest monies for
productive purposes and spend income to improve the quality of life of family
members; the process empowers them (women) as well;
III. Groups of 5 persons are formed and 30-50 members form a Kendra/centre,
which is the organizational structure in a para/village where bank staff visits to
make transactions;
IV. Procedures for loan applications and other administrative steps have been
simplified to suit the poor.
V. All financial transactions are made in public to eliminate any possibility of
corruption.

215 | P a g e
 Microfinance Operations in Bangladesh:
I. Grameen Bank
II. BRAC
III. ASA
IV. Proshika
V. BURO BD
VI. TMSS
VII. SSS
VIII. DISA
 Weaknesses of the Grameen Bank Model:
I. Setting up a Grameen bank requires putting up a huge mega structure that
involves huge costs.
II. It involves too much of external subsidy which is not replicable as the bank has
not oriented itself towards mobilizing peoples’ resources.
III. The repayment system of 50 weekly equal instalments is not practical because
the poor do not have a stable job.
IV. Pressure for high repayment drives members to money lenders
V. The interest rate charged by the Grameen bank is by far higher than those
charged by conventional banks.
 Microcredit Regulatory Authority:
Microcredit Regulatory Authority is the central body to monitor and supervise
microfinance operations of non-governmental organizations of the Republic of
Bangladesh. It was created by the Government of People's Republic of Bangladesh
under the Microcredit Regulatory Authority Act.

Financial Derivatives and Risk Management

BIN-405
 Define Derivative?
A derivative can be defined as a financial instrument whose value depends on (or
derives from) the values of other, more basic, underlying variables.
 Exchange Traded Markets:
A derivatives exchange is a market where individual’s trade standardized contracts that
have been defined by the exchange.
 Electronic Markets:
Electronic trading has led to a growth in high-frequency and algorithmic trading. This
involves the use of computer programs to initiate trades, often without human
intervention, and has become an important feature of derivatives markets.
 Over the Counter Market:

216 | P a g e
 Over-the-counter or off-exchange trading or pink sheet trading is done directly between
two parties, without the supervision of an exchange.
 Forward Contracts:
Forward contracts is an agreement to buy or sell an asset at a certain future time for a
certain price. It can be contrasted with a spot contract, which is an agreement to buy or
sell an asset almost immediately. A forward contract is traded in the over-the-counter
market—usually between two financial institutions or between a financial institution
and one of its clients.
 Payoffs from Forward Contracts:
In general, the payoff from a long position in a forward contract on one unit of an asset
is
ST - K
Where K is the delivery price and ST is the spot price of the asset at maturity of the
contract.

The payoff from a short position in a forward contract on one unit of an asset is
K - ST
These payoffs can be positive or negative.
 Future Contract:
Futures contract is a standardized legal contract to buy or sell something at a
predetermined price for delivery at a specified time in the future, between parties not
yet known to each other. The asset transacted is usually a commodity or financial
instrument.
 Options:
An options contract offers the buyer the opportunity to buy or sell—depending on the
type of contract they hold—the underlying asset. Two types of option
I. Call option: A call option gives the holder the right to buy the underlying asset
by a certain date for a certain price.
II. Put option: A put option gives the holder the right to sell the underlying asset
by a certain date for a certain price.
 Exercise price or strike price:
The price in the contract is known as the exercise price or strike price.
 Expiration date or maturity:
The date in the contract is known as the expiration date or maturity.
 American options:
American options can be exercised at any time up to the expiration date.
 European options:
European options can be exercised only on the expiration date itself.
 Participants in options markets:
I. Buyers of calls
II. Sellers of calls
III. Buyers of puts
IV. Sellers of puts.

217 | P a g e
 Buyers are referred to as having long positions; sellers are referred to as having
short positions. Selling an option is also known as writing the option.

 Three broad categories of traders:

I. Hedgers: Hedgers use derivatives to reduce the risk that they face from potential
future movements in a market variable.
II. Speculators: Speculators use them to bet on the future direction of a market
variable
III. Arbitrageurs: Arbitrageurs take offsetting positions in two or more instruments
to lock in a profit.
 Definition of Hedgers:
A trader or commodity producer who places a trade in order to protect against price
fluctuations in commodities or financial instruments.
 Term of Speculators:
Speculators are sophisticated investors or traders who purchase assets for short periods
of time and employ strategies in order to profit from changes in its price.
 Term of Arbitrageur:
Arbitrager is someone who buys currencies, securities, or commodities on one country's
market in order to make money by immediately selling them at a profit on another
country's market.
 Closing out Positions:
Closing out a position means entering into the opposite trade to the original one.
 Asset:
Asset is a commodity, there may be quite a variation in the quality of what is available
in the marketplace.
 Contract Size:
Contract size specifies the amount of the asset that has to be delivered under one
contract.
 Delivery Arrangements:
The place where delivery will be made must be specified by the exchange.
 Delivery Months:
The exchange must specify the precise period during the month when delivery can be
made. For many futures contracts, the delivery period is the whole month.
 Price Quotes:
The exchange defines how prices will be quoted.
 Price Limits and Position Limits:
If in a day the price moves down from the previous day’s close by an amount equal to
the daily price limit, the contract is said to be limit down. If it moves up by the limit, it
is said to be limit up. A limit move is a move in either direction equal to the daily price
limit.

Position limits are the maximum number of contracts that a speculator may hold.
 Market order:

218 | P a g e
 Market trade be carried out immediately at the best price available in the market.
 Limit order:
A limit order specifies a particular price. The order can be executed only at this price
or at one more favourable to the investor.
 Stop order or stop-loss order:
A stop order or stop-loss order also specifies a particular price. The order is executed
at the best available price once a bid or offer is made at that particular price or a less
favourable price.
 Stop–limit order:
A stop–limit order is a combination of a stop order and a limit order. The order becomes
a limit order as soon as a bid or offer is made at a price equal to or less favourable than
the stop price.
 Market-if-touched (MIT) order:
A market-if-touched (MIT) order is executed at the best available price after a trade
occurs at a specified price or at a price more favourable than the specified price.
 Forward vs Future Contracts:

 What is a premium in Option market:

In the options market, a contract is written giving the buyer of the contract the right
(option) to purchase or sell a particular security at a fixed price for a period of time.
The seller agrees to deliver if the contract owner elects to buy, or to purchase if the
contract owner elects to sell. For agreeing to the terms of the contract, the seller receives
a fee, which in options is called the premium.
 How to determine Option Premium:
The three basic factors that determine an option premium are:
1. Intrinsic Value: Intrinsic value is a option’s arithmetically determinable value
based on the strike price of the option and the market value of the underlying
stock
2. Time Value: Time value reflects the fact that the longer the option has to run
until expiration, the greater the premium should be. This is perfectly logical.
The right to buy or sell a stock for two months should be worth more than the
same privilege for only one month
3. Volatility: Volatility is also easy to understand. Higher the volatility higher the
risk and higher the risk, higher the premium.

219 | P a g e
 Tools of Options Derivatives:
These four tools are known as options derivatives.
1. Delta: An options delta is used to measure the anticipated percentage of change
in the premium in relation to a change in the price of the underlying security.
2. Gamma: Gamma measures the expected change in the delta factor of an option
when the value of the price of the underlying security rises
3. Theta: The theta derivative attempts to measure the erosion of an option’s
premium caused by the passage of time
4. Vega: Vega is concerned with the volatility factor of the underlying stock. We
have pointed out that the volatility varies among different securities. Vega
measures the amount by which the premium will rise when the volatility factor
of the stock increase.
 Definition of SWAPS:
A swap can be defined as the exchange of one stream of future cash flows with another
stream of cash flows with different characteristics. A swap is an agreement between
two or more people/parties to exchange sets of cash flows over a period in future.
 Swaps can be divided into two types:
1. Currency Swaps: The currency swap is an agreement between two parties to
exchange (swap) payments or receipts in one currency for payment or receipts
in other currency.
2. Interest Rate Swaps: An interest rate swap is an agreement whereby one party
exchanges one set of interest rate payment for another rate over a time period.
 Definition of Swaption:
A swaption is an option granting its owner the right but not the obligation to enter into
an underlying swap. While options can be traded on a variety of swaps, the term
“swaption” typically refers to options on interest rate swaps.
 Definition of equity derivatives:
An equity derivative’s value will fluctuate with change in its underlying asset’s equity,
which is usually measured by share price change in the price of the index.
 Classification of equity derivatives:

1. Index Futures: It is a future contract with the index as the under lying asset.
There is no underlying security or stock, which is to be believed to fulfil the
obligations as index futures are cash settled. They can be used for hedging
against an existing equity position, or speculating on future movements of the
index.
2. Stock Future: A stock future contract is a standardized contract to buy or sell a
specific stock at a future date at an agreed price. The contract derives its value
from the underlying stock.

220 | P a g e
 3. Index option: This an option contract where the option holder has the call or put
option on the index.
4. Stock option: Stock option is an option contract where the option holder has the
right, but not the obligation, to buy or sell the particular stock on or before a
specified date at a stated price.
 Terminology commonly used terms in the Index Futures market:
1. Contract Size: is the value of the contract at a specific level of index. It is
denominated by the product of the index level and the multiplier.
2. Multiplier: It is a pre-determined value, used to arrive at the contract size. It is
the price per index point.
3. Tick size: It is the minimum price difference between two quotes of similar
nature.
4. Contract Month: It is the month in which the contract will expire. – Expiry Day:
It is the last day on which the contract is available for trading.
5. Open Interest: It is the total outstanding long or short position in the market at
any specific point in time. As total long outstanding positions in the market
would be equal to total short positions, for calculation of open interest, only one
side the contracts is counted.
6. Volume: It is the number of contracts traded during a specific period of time
during a day, during a week or during a month.
7. Long position: It is the outstanding/unsettled purchase position at any point of
time.
8. Short position: It is the outstanding/unsettled sales position at any point of time.
9. Open position: It is the outstanding/unsettled long or short position at any point
of time.
 Interest rate derivatives:
An interest rate derivative is a derivative where the underlying asset is the right to pay
or receive a (usually notional) amount of money at a given interest rate. The interest
rate derivatives market is the largest derivatives market in the world.
 Classification of interest rate derivatives:
1. Interest Rate Swap: It is an agreement between two parties where one stream of
future interest payments is exchanged for another based on a specified principal
amount. It is a cash-settled OTC derivative. The most popular interest rate
swaps are fixed-for-floating swaps under which cash flows of a fixed rate loan
are exchanged for those of a floating rate loan.
2. Interest rate cap/floor: An interest rate cap is a derivative in which the buyer
receives payments at the end of each period in which the interest rate exceeds
the agreed strike price and an interest rate floor is a derivative in which the
buyer of the floor receives money if on the maturity of any of the floor, the
reference rate fixed is below the agreed strike price of the floor.
3. Interest Rate Swaption: It is an option to enter an interest rate swap. In exchange
for an option premium, the buyer gains the right but not the obligation to enter
into a specified swap agreement with the issuer on a specified future date.

221 | P a g e
 I. Payer Swaption: A swap option giving the holder the right to pay a
fixed rate and receive a floating rate in an interest rate swap.
II. Receiver Swaption: It gives the right but not the obligation to enter
into an Interest rate future. It is a financial derivative with an interest-
bearing instrument as the underlying asset. For example, Treasury-bill
futures, Eurodollar futures etc.
 Leap:
Leap the acronym for Long-term Equity Anticipation Securities are options having a
maturity of up to three years.

Islamic Finance and Banking

BIN-406
 What is Riba?
The practice of charging financial interest or a premium in excess of the principal
amount of a loan.

The Arabic term riba refers to excess, addition and surplus, while the associated verb
implies “to increase, to multiply, to exceed, to exact more than was due, or to practice
usury.”
 Shari’ah recognizes two forms of riba;
I. Riba al - nasiah deals with riba in money - to - money exchanges, where the
exchange is delayed or deferred and gives rise to an additional charge, as
practiced in today’s fi nancial transactions.
II. Riba al - fadl is more subtle and deals with hand - to - hand or barter exchange.
 Four characteristics define the prohibited interest rate:
I. It is positive and fixed ex ante;
II. It is tied to the time period and the amount of the loan;
III. Its payment is guaranteed regardless of the outcome or the purposes for
which the principal was borrowed; and
IV. The state apparatus sanctions and enforces its collection
 Why riba is prohibited?
Lending on riba was prohibited because this was an act of ingratitude and considered
to be unjust, since money was not created to be sought for its own sake, but for other
objectives.
 Commercial vs. Productive Loans
i. The practice of lending on the basis of riba for agricultural purposes is well
documented. Considering that the economy during that time was primarily an
agricultural economy, it is reasonable to conclude that riba- based loans for non
- consumption purposes existed and were subject to the prohibition.
 Excessiveness or Compounding Only?

222 | P a g e
 Do not devour interest doubled and redoubled,” often leads to the misunderstanding
that the prohibition is for a compounded rate of interest and does not apply to other
forms of simple, fair or legal rates
 How Riba Violates Islam’s Principles of Property Rights?
i. The property rights that are a result of the combination of an individual’s labor
and natural resources
ii. Rights or claims to the property that is obtained through exchange, remittances
of what Islam recognizes as the rights of those less able to utilize the resources
to which they are entitled, outright grants, and inheritance.
 What is Gharar?
Lack of information disclosure between to parites. Gharar can be defined as a situation
when either party to a contract has information regarding some element of the subject
of the contract, which is withheld from the other party, and/or the subject of contract is
something over which neither party has control.
 What is Qimar?
Gambling.
 What is Mysir?
Games of chance involving deception.
 What is Financial Instruments?
A financial instrument is also a contract, whose terms and conditions define the risk -
and - return profile of the instrument.
 Islamic Financial System.

 Four types of Instrument

 What is transactional contracts?

Transactional contracts deal with the real - sector economic transactions that facilitate
the exchange, sale and trade of goods and services
 What is financing contracts?

223 | P a g e
 Financing contracts offer ways to create and extend credit, facilitate financing of
transactional contracts, and provide channels for capital formation and resource
mobilization between investors and entrepreneurs.
 What is intermediation contracts?
Intermediation contracts is to facilitate an efficient and transparent execution of
transactional and financial contracts. Intermediation contracts provide the economic
agents with a set of tools to perform financial intermediation as well as to offer fee -
based services for economic activities.
 What is social-welfare contracts?
Social - welfare contracts are contracts between individuals and the society to promote
the well - being and welfare of the less privileged.
 What is sale contracts?
Sale contracts are viewed considering the subject of sale or the underlying asset.
 Sale can be of five types
i. Bay’— sale of a property or commodity (moveable or immoveable) to another person
for a price
ii. Sarf— sale by exchange of money for money on the spot
iii. Sale by barter — exchange of goods for goods, in which neither is a money payment
iv. Bay’ al - dayn— sale of debt or liability
v. Bay’ al - salam (sale by immediate payment against future delivery) and Bay’ al -
istisnah (sale on order).
 Sales contracts fall into the following categories:
i. Spot cash sale: The purchaser is under an obligation to pay the agreed purchase
price at the time of concluding the contract
ii. Installment sale: Where payment is deferred and is to be made in instalments
iii. Lump sum payment payable in the future: This mode of payment is valid if the
date of payment is predetermined and is applicable to all types except bay’ al -
salam.
iv. Bay’ al - arabun: Here, a portion of the full sale price is paid in good faith as
earnest money. If the buyer decides not to complete the sale, this advance
payment is forfeited to the seller.
v. Deferred payment contracts (bay’ al - muajjil): This contract allow for the
payment for a product in installments or in a lump sum.
 Definition of Bay al-salam:
Bay’ al - salam contracts are similar to conventional forward contracts in their function,
but have different payment arrangements. The buyer pays the seller the full negotiated
price of a specific product which the seller promises to deliver at a specified future date.
 Definition of Ijarah:
Ijarah contract is a contract of sale, but it is not the sale of a tangible asset; rather, it is
a sale of the usufruct (the right to use the object) for a specified period of time.
 Definition of Istisna:
The istisna’ contract is suitable for facilitating the manufacture or construction of an
asset at the request of the buyer. Once the manufacturer undertakes to manufacture the

224 | P a g e
 asset or property for the buyer, the transaction of istisna’ comes into existence. Both
parties (namely, the buyer and the manufacturer) agree on the specifications and price
of the asset to be manufactured.
 Definition of Murabahah:
Murabahah is one of the most popular contracts of sale used for purchasing
commodities and other products on credit. The concept is that a financier purchases a
product — a commodity, raw material, etcetera — on behalf of an entrepreneur who
does not have the capital to do so. The murabahah was originally a sales transaction in
which a trader purchased a product required by an end - user and sold it to the end -
user at a price that was calculated using an agreed profit margin over the costs incurred
by the trader.
 Definition of Tawarruq:
It’s known as “reverse mudarabah,” the tawarruq is a mechanism for borrowing cash
by undertaking two separate transactions. In a typical tawarruq transaction, a person
buys a commodity or goods from the seller on credit, on the understanding that the price
will be paid, either in installments or in full, in the future.
 Definition of Musharakha:
A musharakah or shirakah can be defined as a form of partnership where two or more
people combine either their capital or labor to share the profits and losses, and where
they have similar rights and liabilities.
 Islamic Financial System:
The Islamic financial system proposes a sound banking system which operates without
debt and promotes financing of the real economy. The risk - sharing nature of the system
means that stock markets play a vital role and are expected to form a large segment of
the system.
 Concept of Two-window Model:
The two - windows model divides the liabilities side of the bank’s balance sheet into
two windows; one for demand deposits (transactions balances) and the other for
investment balances. The choice of the window is left to the depositors. This model
requires a 100-percent reserve for the demand deposits but stipulates no reserve
requirement for the second window.
 Concept of Two- tier Mudarabah:
This model is so called because the contract is utilized on each side of the bank’s
balance sheet and integrates the assets and liabilities. It envisages depositors entering
into a contract with a bank to share the profits accruing to the bank’s business.
i. The first tier of the contract is between the investor (analogous to a depositor)
and the bank, where investors act as suppliers of funds to be invested by the
bank, which acts as the mudarib on their behalf.
ii. The second tier represents the mudarabah contract between the bank, as supplier
of funds, and the entrepreneurs, who are seeking funds and agree to share profits
with the bank according to a certain percentage stipulated in the contract.
 Concept of Wikala Model:

225 | P a g e
 This model is based on the contract of wikala where an Islamic bank acts purely as
wakil (agent/representative) of the investors and manages funds on their behalf on the
basis of a fixed fee. The terms and conditions of the wikala contract are to be determined
by mutual agreement between the bank and the clients.
 Concept of Nature of Fiduciary Responsibilities:
The agency theory has generated considerable interest in financial economics, including
Islamic banking. In an agency relationship, one party (the principal) contracts with
another party (the agent) to perform some actions on the principal’s behalf, and the
agent has the decision - making authority.Both parities are fully disclose all fact that
are related to contract.
 Islamic Bank is Universal Bank:
The structure of a hypothetical Islamic bank or financial intermediary combines the
activities of commercial and investment banking. Conventional commercial bank, such
a financial intermediary can raise funds as deposits and invest them in low - risk, high
- quality, investment - grade trade financing or asset - backed securities. an investment
bank, it can offer underwriting services, asset management through specialized
mudarabah funds and other advisory services such as research about financial markets,
the maintenance of benchmarks, portfolio management, and risk management.
 Concept of Shari’ah Board:
Islamic banking is the existence of a Shari’ah board that comprises religious scholars
and the influence this board exerts on the operations of the bank. Islamic banks cannot
introduce a new product without the prior permission and approval of their Shari’ah
board and, depending on the affiliation of the religious scholars on the board to any
particular school of jurisprudence, this can determine the success or failure of a product
with its target clients.
 Concept of Concentrated Banking:
Islamic banks tend to be concentrated in their deposit base or asset base, often
concentrating on a few select sectors and avoiding direct competition.
This concentration of the deposit or asset base can also be viewed as a lack of
diversification, which increases their exposure to risk.
 Concept of Capital Adequacy Requirement for IFIs:
Capital - adequacy standards for banks with the objectives of promoting soundness and
stability in the international banking system. The determination of capital adequacy is
a two - step process.
i. The measurement of risk exposures of the assets based on the risk weights.
ii. The regulatory capital available to support the risk is measured.
 Determination of Risk Weights:
Risk weights to assign to different asset classes depends on the contractual relationship
between the bank and the borrower. For conventional banks, a majority of assets are
debt - based, whereas for Islamic banks the assets range from trade financing to equity
partnerships; this fact changes the nature of risks.
 Financial risk of Islamic Bank:

226 | P a g e
 Financial risks are the exposures that result in a direct financial loss to the assets or the
liabilities of a bank.
 Credit risk of Islamic Bank:
Credit risk is the potential risk that a counterparty will fail to make payments on its
obligations in accordance with the agreed terms.
 Market Risk of Islamic Bank:
Market risk for a financial institution arises in the form of unfavorable price movements
such as yields (rate - of - return risk), benchmark rates (interest rate risk), foreign
exchange rates (FX risk), equity and commodity prices (price risk) which have a
potential impact on the financial value of an asset over the life of the contract.
 Mark - up risk of Islamic Bank:
Islamic banks are exposed to mark - up risk as their mark - up rate used in murabahah
and other trade - financing instruments is fixed for the duration of the contract while
the benchmark rate may change. This means that the prevailing mark - up rate in the
market may increase beyond the rate the bank had fixed in a contract and therefore the
bank is unable to benefit from any increase.
 Price risk of Islamic Bank:
Bay’ al - salam, Islamic banks are exposed to commodity price volatility during the
period between the delivery of the commodity and the sale of the commodity at the
prevailing market price.
 Leased Asset - value Risk of Islamic Bank:
In the case of an operating ijarah, the bank is exposed to market risk over the life of the
contract arising from a reduction in the residual value of the leased asset at the expiry
of the lease term or, in the case of early termination, due to default.
 Securities Price Risk of Islamic Bank:
With an increasing market for Islamic bonds (sukuk), Islamic banks invest a portion of
their assets in marketable securities. A fixed-income security, the prices go down as
yields go up and vice versa.
 Equity Investment Risk of Islamic Bank:
IFIs are exposed to equity investment risk in profit/loss - sharing investments on the
assets side. These include partnership - based mudarabah and musharakah investments.
 Business Risks of Islamic Bank:
Business risk includes the risk of becoming insolvent as a result of having insufficient
capital to continue operations.
 Rate - of - Return Risk of Islamic Bank:
The rate - of - return risk stems from the uncertainty in the returns earned by Islamic
banks on their assets.
 Treasury Risks of Islamic Bank:
Treasury risks include those arising from cash management, equity management, short
- term liquidity management, and assets - and - liabilities management (ALM).
Generally, responsibility for the risk management function of a financial institution falls
to the treasury and therefore any inability to manage risks properly can be a risk itself.
 Liquidity Risk of Islamic Bank:

227 | P a g e
 Liquidity risk results when the bank’s ability to match the maturity of assets and
liabilities is impaired.
 ALM Risk of Islamic Bank:
Assets-and-liabilities management (ALM) risk is a balance - sheet mismatch risk
resulting from the difference in maturity terms and the conditions of a bank’s portfolio
on its assets and liabilities sides.
 Hedging Risk
Hedging risk is the risk of failure to mitigate and manage different types of risks. This
increases the bank’s overall risk exposure.
 Governance Risks
Governance risk refers to the risk arising from a failure in governing the institution,
negligence in conducting business and meeting contractual obligations, and from a
weak internal and external institutional environment, including legal risk, whereby
banks are unable to enforce their contracts.
 Operational Risk:
The risk of loss resulting from the inadequacy or failure of internal processes, as related
to people and systems, or from external risks.
 Fiduciary Risk:
Fiduciary risk is the risk that arises from an institution’s failure to perform in
accordance with explicit and implicit standards applicable to its fiduciary
responsibilities.
 Transparency Risk:
Transparency is defined as “the public disclosure of reliable and timely information that
enables users of that information to make an accurate assessment of a bank’s financial
condition and performance, business activities, risk profile and risk - management
practices.”
 Shari’ah Risk:
Shari’ah risk is related to the structure and functioning of the Shari’ah boards at the
institutional and systemic level.
 Reputation Risk:
Reputation risk or “headline risk” is the risk that the trust of the clients is damaged by
irresponsible actions or behaviour on the part of the bank.

Bank Credit Management.

BIN-407
 Definition Credit Risk:
Credit risk is the risk resulting from uncertainty in counterparty’s ability or willingness
to meet its contractual obligations. Credit risk relates to the possibility that loans will

228 | P a g e
 not be paid or that investments will deteriorate in quality or go into default with
consequent loss to the bank.
 The major drivers of credit risks are:
i. Default risk
ii. Recovery risk
iii. Spread risk
iv. Concentration risk
v. Correlation risk
 Credit Risk major drivers
a. Default risk: Obligor fails to service debt obligations due to borrower specific
or market-specific factors
i. Recovery risk: Recovery post default is uncertain as the value of the
collateral changes unexpectedly
ii. Spread risk: Credit quality of obligor changes leading to fall in the
market value of the loan
iii. Concentration risk: Over-exposure to an individual borrower, group,
entity or segment
iv. Correlation risk: Common risk factors between different borrowers,
industries or sectors which may lead to simultaneous defaults.
 Key Drivers of Credit Risk:

 Borrower Level Risk vs. Portfolio Risk

Borrower-specific risk can be measured by using credit rating (e.g. borrower-specific
PD and facility-specific LGD) and tracking the borrower-rating movements. Portfolio
risk arises from the composition of or concentration of bank’s exposures to many assets
to various sectors.
 The Difference between Regulatory Capital and Economic Capital:

229 | P a g e
 Vicious Cycle of Capital Problem:

 Credit risk management framework:

i. Identify the risks
ii. Measure the risks
iii. Manage/control the risks
iv. Monitor the risks
 The sound practices of credit risk management specifically address the following areas:
i. Establishing an appropriate credit risk environment
ii. Operating under a sound credit-granting process

230 | P a g e
 iii. Maintaining an appropriate credit administration, measurement and monitoring
process
iv. Ensuring adequate controls over credit risk
 Causes of credit risk:

 Need for credit risk analysis:

i. Prudence
ii. Increase in Bankruptcies
iii. Increase in Competition
iv. Volatility of Collateral/Asset Values
v. Poor Asset Quality
 Challenges of credit risk analysis:
i. Reliability of the Data
ii. Profitability/Business Considerations
iii. Unpredictable Future
iv. Reliability of Risk Models
 Elements of credit risk analysis:
i. Character
ii. Capital
iii. Capacity
iv. Conditions
v. Collateral
 Credit risk management objectives:
i. Maximizing benefits from potential credit opportunities
ii. Pricing credit risk adequately
iii. Minimizing bad loans.
iv. Adherence to credit policies
v. Maintenance of a reliable database
 Credit risk culture:
Credit culture is a set of values and beliefs shared by people in credit risk management.
 Stages of Credit Risk Management in Financial Intermediaries;
i. Nature and Purpose of the Credit
ii. Type of Credit Facility
iii. Capacity to Borrow

231 | P a g e
 iv. Security
v. Analyse Borrower’s Financial Status:
vi. Forecasting the Repayment Capacity
vii. Profitability
 Risk Matrix:

 Business cycle:
An economy is not static and undergoes different periods or stages of economic growth,
widely known as the business cycle.
 Stage of business cycle:
i. Recession: In this stage of the cycle, economic activities slow down with rising
unemployment, slowing sales and reducing corporate profits.
ii. Trough: Things look like they are at their worst with high levels of
unemployment, general gloom, the lowest production levels in the recent history
of the economy, bottomed out stock market, bankruptcies of banks and other
financial intermediaries due to heavy bad loans, etc. being some of the
symptoms.
iii. Recovery: Things begin to look a little better, with business confidence
returning and economic activity picks up.
iv. Peak: The economy puts up a very strong performance with low unemployment
levels. Markets get heated up with price levels under pressure
 External factor that are effected credit risk:
i. Economic conditions
ii. Inflation and deflation
iii. Balance of payments and exchange rates
iv. Political
v. Fiscal policy
vi. Monetary policy
vii. Demographic factors
viii. Regulatory framework
ix. Technology
x. Environment issues
 Industry Life Cycle:
i. Pioneering Stage
ii. Rapid Growth Stage
iii. Maturity Growth
iv. Stabilization
 Types of industry risks:

232 | P a g e
 i. Risks emanating from external environment
ii. Industry specific risks
iii. Risks emanating from industry drivers.
 Industry and business cycles:
i. Cyclical Industry: An industry that moves in tandem with business cycles is
generally known as a cyclical industry.
ii. Non-Cyclical: These industries are not impacted by cycles. Food, utilities and
the pharmaceutical industry are some of the sectors considered to be non-
cyclical, the main reason being that the end products of non-cyclical industries
are essentials of life.
iii. Counter-Cyclical: Some industries are even classified as counter-cyclical,
which means that demand goes up when other industries are declining or hitting
rock bottom in cycles.
 Definition of credit rating:
Credit ratings represent an opinion on the inherent credit quality of a borrower and act
as a summary of diverse risk factors to indicate the default probability of the borrower.
 Types of scoring models:
i. Custom Models
ii. Generic Models
 Definition of probability of default(PD):
Probability of default is the statistical percentage probability of a borrower defaulting,
usually within a one year time horizon. PD is directly linked to the Credit Risk Grades.
 Ratings are unique systems developed to provide an easy way to understand credit risk.
1. Credit ratings are of two types
(i) external ratings and
(ii) (ii) internal ratings

 Internal rating systems:

Internal rating systems deployed by banks and financial institutions (FIs) differ from
organization to organization, but the ultimate goal and credit risk analysis fundamentals
remain the same.
 Rating system is the ratings definition:
i. Highest Quality . . . AAA ∙
ii. Very Good Quality . . . AA ∙

233 | P a g e
 iii. Good Quality . . . A ∙
iv. Medium Quality . . . BBB ∙
v. Lower Medium Quality . . . BB ∙
vi. Poor Quality . . . B
vii. Speculative Quality . . . C ∙
viii. Default . . . D
AAA represents the highest quality of credit exposure (viz. low credit risk), while D
represents high credit risk. Usually certain notations like ‘+’ or ‘−’ or numerals such as
1, 2, 3 are affixed to the alphabetical mentioned above to highlight the distinctions in
credit risk under each grade.
 The Merton Model:
The Merton Model assumes that the value of the equity in the firm is dependent upon
the future value of the firm less future external liabilities. The higher the distance
between the assets and liabilities, the lower the PD.
The value of the equity in a firm is calculated as follows as per the Merton formula:
𝑉𝐸 = 𝑉𝐴𝑁(𝑑1) − 𝑒−𝑟(𝑇−𝑡) DN(𝑑2)
Where,
VE = value of equity
VA = value of the firm
D = debt of the firm N (d1) and N (d2) = normal distribution variable.

 Migration risk:
Migration risk means the tendency of a single customer or group of customers to move
towards a lower risk grade. It signifies the deterioration in creditworthiness and
highlights the increase in credit risk.
 Loss given default (LGD):
When a default occurs, the immediate concern is how much is recoverable. It is better
if the credit asset is recovered to its full book value in which no credit loss will arise.
LGD% = 1 − recovery rate
 Exposure at default (EAD):
EAD represents the expected level of usage of the facility utilization when default
occurs. Theoretically, as the maturity increases, risk increases, hence the probable credit
loss also increases.
 Expected loss (EL):
If it defaults, a certain percentage of its value will be lost, known as LGD. If we multiply
the PD times the LGD, the result is the asset’s EL. This is what we would expect to lose
on average over a long period of time on such credit risk grades.

234 | P a g e
 Provisioning:
Unexpected losses occur due to actual defaults. Most of the default situations trigger
negotiations with the obligor with the aim of full settlement. Whilst all defaults do not
lead to credit loss, the probability of credit loss in the instance of a default is high,
inasmuch as the default itself mostly highlights the liquidity crisis of the obligor.
i. Firm-level or specific provisions.
ii. General or portfolio-level provisions.

 Portfolio-level provisioning:
Many financial institutions maintain general provisions on portfolios well in advance,
as a prudent measure, towards future possible credit losses, where a customer account
or a specific credit asset is yet to be identified.

Econometrics and Business Forecasting

BIN-408

 What Is Econometrics?
Econometrics, the result of a certain outlook on the role of economics, consists of the
application of mathematical statistics to economic data to lend empirical support to the
models constructed by mathematical economics and to obtain numerical results.
 Methodology of Econometrics:
1. Statement of theory or hypothesis.
2. Specification of the mathematical model of the theory.
3. Specification of the statistical, or econometric, model.
4. Obtaining the data.
5. Estimation of the parameters of the econometric model.
6. Hypothesis testing.

235 | P a g e
 7. Forecasting or prediction.
8. Using the model for control or policy purposes.
 Types of Econometrics:
Econometrics may be divided into two broad categories: theoretical econometrics and
applied econometrics. In each category, one can approach the subject in the classical or
Bayesian tradition.
 Regression analysis:
Regression analysis is concerned with the study of the dependence of one variable, the
dependent variable, on one or more other variables, the explanatory variables, with a
view to estimating and/or predicting the (population) mean or average value of the
former in terms of the known or fixed (in repeated sampling) values of the latter.
 Statistical versus Deterministic Relationships:
In statistical relationships among variables we essentially deal with random or
stochastic variables, that is, variables that have probability distributions. In functional
or deterministic dependency, on the other hand, we also deal with variables, but these
variables are not random or stochastic.
 Types of Data:
Three types of data may be available for empirical analysis: time series, cross-section,
and pooled (i.e., combination of time series and cross-section) data.
1. A time series is a set of observations on the values that a variable takes at
different times.
2. Cross-section data are data on one or more variables collected at the same point
in time.
3. In pooled, or combined, data are elements of both time series and cross-section
data.
 The Classical Linear Regression Model: The Assumptions Underlying the Method of
Least Squares:
1. Linear Regression Model
2. Fixed X Values or X Values Independent of the Error Term
3. Zero Mean Value of Disturbance u
4. Homoscedasticity or Constant Variance of ui
5. No Autocorrelation between the Disturbances
6. The Number of Observations n Must Be Greater than the Number of
Parameters to Be Estimated
7. The Nature of X Variables
 Properties of Least-Squares Estimators: The Gauss–Markov Theorem:
1. It is linear, that is, a linear function of a random variable, such as the
dependent variable Y in the regression mode.
2. It is unbiased, that is, its average or expected value, E(βˆ 2), is equal to
the true value, β2.
3. It has minimum variance in the class of all such linear unbiased
estimators; an unbiased estimator with the least variance is known as
an efficient estimator.

236 | P a g e
 Some of the properties of r are as follows:
1. It can be positive or negative, the sign depending on the sign of the
term in the numerator of Equation 3.5.13, which measures the sample
covariation of two variables.
2. It lies between the limits of −1 and +1; that is, −1 ≤ r ≤ 1.
3. It is symmetrical in nature; that is, the coefficient of correlation
between X and Y(rXY ) is the same as that between Y and X(rY X ).
4. 4. It is independent of the origin and scale; that is, if we define X∗i =
aXi + C andY∗i = bYi + d, where a > 0, b > 0, and c and d are constants,
then r between X∗ and Y∗is the same as that between the original
variables X and Y.
5. If X and Y are statistically independent (see Appendix A for the
definition), the correlation coefficient between them is zero; but if r =
0, it does not mean that two variables are independent. In other words,
zero correlation does not necessarily imply independence.
6. It is a measure of linear association or linear dependence only; it has
no meaning for describing nonlinear relations. Thus in Figure 3.10(h),
Y = X2 is an exact relationship yet
7. Although it is a measure of linear association between two variables,
it does not necessarily imply any cause-and-effect relationship.
 Properties of OLS Estimators under the Normality Assumption:
1. They are unbiased.
2. They have minimum variance. Combined with 1, this means that they
are minimum variance unbiased, or efficient estimators.
3. They have consistency,that is, as the sample size increases
indefinitely, the estimators converge to their true population values.
 The Nature of Dummy Variables:
Dummy variables can be incorporated in regression models just as easily as quantitative
variables. As a matter of fact, a regression model may contain regressors that are all
exclusively dummy, or qualitative, in nature. Such models are called Analysis of
Variance (ANOVA) models. Variables that assume such 0 and 1 values are called
dummy variables.
 The Nature of Multicollinearity:
The term multicollinearity is due to Ragnar Frisch.3 Originally it meant the existence
of a “perfect,” or exact, linear relationship among some or all explanatory variables of
a regression model. For the k-variable regression involving explanatory variables X1,
X2, ... , Xk (where X1 = 1 for all observations to allow for the intercept term), an exact
linear relationship is said to exist if the following condition is satisfied:
λ1X1 + λ2X2 + ···+ λk Xk = 0
Where λ1, λ2, ... , λk are constants such that not all of them are zero simultaneously.
 The Nature of Heteroscedasticity:
The important assumptions of the classical linear regression model is that the variance
of each disturbance term ui , conditional on the chosen values of the explanatory

237 | P a g e
 variables, is some constant number equal to σ2. This is the assumption of
homoscedasticity, or equal (homo) spread (scedasticity), that is, equal variance.
Symbolically,

Diagrammatically, in the two-variable regression model homoscedasticity.

 The Nature of the Autocorrelation:
The term autocorrelation may be defined as “correlation between members of series of
observations ordered in time [as in time series data] or space [as in cross-sectional data].
In the regression context, the classical linear regression model assumes that such
autocorrelation does not exist in the disturbances ui . Symbolically,

Bank Treasury Management.

BIN-409

 Definition of treasury management:

Treasure management means "To plan, organise and control cash and borrowings so as
to optimise interest and currency flows, and minimise the cost of funds " or in other
words "the handling of all financial matters, the generation of external and internal
funds for business, the management of currencies and cash flows, and the complex
strategies, policies, and procedures of corporate finance"
 Objectives of treasury management:
1. Availability of funds in right quantity
2. Availability of funds at right time
3. Deployment of Funds in right quantity
4. Deployment of funds at right time.
 Nominal Yield:
Coupon rate is the rate of interest payable per annum per tk 100/- or the face value. If
the purchase price is different from the face value then the return is equal to (coupon
rate/purchase price) x 100. This return is called the normal yield.
 Real Yield:
Nominal yields deflated by the index of inflation rate, such as WPI or CPI will give real
yields, which reflect the true purchasing power of the return on these securities.
 Net Yield:
Nominal yields adjusted for the tax rate or payment of relevant taxes at which deduction
of tax at source takes place are called the net yield.
 Definition of business finance:
“Business finance is that business activity which concerns with the acquisition and
conversation of capital funds in meeting financial needs and overall objectives of a
business enterprise.”

238 | P a g e
 Definition of financial management:
Financial management is an integral part of overall management. It is concerned with
the duties of the financial managers in the business firm. Financial management “is the
operational activity of a business that is responsible for obtaining and effectively
utilizing the funds necessary for efficient operations.”
 Treasury Department:
The treasury department is responsible for a company’s liquidity. The treasurer must
monitor current and projected cash flows and special funding needs, and use this
information to correctly invest excess funds, as well as be prepared for additional
borrowings or capital raises.
 Role of the treasury department:
1. Cash forecasting
2. Working capital management
3. Cash management
4. Investment management
5. Treasury risk management
 Loan Covenants:
The treasurer should have an excellent knowledge of the loan covenants imposed on
the company by its banks, and be in frequent communication with them regarding any
approaching covenant violations.
 Treasury Metrics:
1. Earnings Rate on Invested Funds
2. Borrowing Base Usage Percentage
 Cash transfer methods:
1. Check payments.
2. Wire transfers
3. ACH payments
4. Letters of credit
5. Procurement cards
6. Company check
 Value Dating:
Value date is the presumed date of receipt of the cash by the bank.
 Mail float:
There is a delay while the payment is delivered through the postal service, which is the
mail float.
 Processing float:
The supplier must deposit the check at its bank; the time from when the supplier
receives the check and deposits it is the processing float.
 Availability float:
The time between when the check is deposited and when it is available to the recipient
is availability float.
 Presentation float:

239 | P a g e
 The time between when the check is deposited and when it is charged to the payer’s
account is the presentation float.
 Cash forecasting:
Cash forecasting is the process of forecast how much cash are needed for in future.
 Bullwhip effect:
When a company runs into a materials or capacity shortage and informs its customers
that they are being put on an allocation basis. The customers immediately ramp up their
order quantities so they can lock in a greater proportion of the company’s output over
a longer time horizon, which forces the company to increase its capacity to meet the
unexpected demand; once the company starts meeting the larger orders and eliminates
its shipment allocations, customers promptly shrink their planning horizons, find that
they now have plenty of inventory for their immediate needs, and rescind most
outstanding orders. The company has just been the victim of the bullwhip effect.
 Cash concentration:
Cash concentration, where the cash in multiple accounts is pooled. Pooling can be
achieved either through physical sweeping (where cash is actually moved into a
concentration account or master account) or notional pooling (where funds are not
actually transferred, but balance information is reported as though physical sweeping
had occurred).
Bank Liquidity Management
BIN: 410

 What do we know about liquidity?

Liquidity thus is neither an amount nor a ratio. It rather expresses the degree to which
a bank is capable of fulfilling its respective obligations. Liquidity represents the
capacity to fulfil all payment obligations as and when they fall due – to their full extent
and in the currency required.
 How to look at liquidity:

 Natural and artificial liquidity:

Natural in this sense relates to flows from maturing assets or liabilities. Artificial
liquidity is created through the capacity to transform an asset into cash before the
maturity date is reached.
 Definition of liquidity risk:

240 | P a g e
 Liquidity risk represents the danger of not being able to fulfil payment obligations,
whereby the failure to perform is followed by undesirable consequences.
 The relationship between solvency and liquidity:
A positive status of solvency is a precondition for being liquid. As liquidity, in contrast
to solvency, is solely cash related, it is possible to be solvent and illiquid at the same
time.
 Determinants of liability funding:
Liability funding is determined by the behavioural attitudes of the types of lenders.
They may respond to name or institution as well as market-related conditions.
 Secondary liquidity or marketable assets:
Secondary liquidity reserves combine the stock of marketable assets that the bank or
institution holds. The term ‘secondary’ declares marketable assets as the second most
liquid asset class. In volume terms it is much bigger than primary liquidity.
 Liquidity related to solvency:
Liquidity related to solvency refers to cash payments when they fall due. Solvency on
this understanding is not the critical point and reflects our previous statement that
solvency is a precondition for liquidity and is given and reasonably assured.
 Situation-specific liquidity:
Situation-specific liquidity, concentrates on securing short-term and thus imminent
payment obligations. Due to the short timeframe, cash at hand and instantly available
is the key, as there might not be sufficient time to create the necessary means.
 Dynamic liquidity:
Dynamic liquidity tries to overcome the deficiency of relying solely on booked
transactions.
 ‘Drivers’ and ‘brakes’ in financial equilibrium:
Drivers: Growth and profitability: These elements tend to be maximised
for the benefit of long-term success.
Brakes: Security/risk and liquidity: These limit the maximisation of the
‘drivers’. Through them, management protects ‘drivers’ to reach excessive and
destabilising levels.
 The term ‘danger related to liquidity:
1. Neglected: that is, outside of one’s own control.
2. Risk: the deviation is quantifiable based on probability.
3. Uncertainty: it cannot be assessed and quantified.
 Key factors of financial equilibrium for banks:
1. Profit/loss.
2. Risk
3. Flow of cash
4. Liquidity
5. Capital
6. Rating
 The concept of downside risk (VAR)

241 | P a g e
 VAR is defined as: the estimated, maximum loss occurring either in a single position
or within a portfolio. It is assumed to happen under normal circumstances, within a
specific time frame or holding period, and with a defined probability. VAR as such is
predictable as well as considered and thus qualifies for the category risk. Before
entering deeper into the subject, we will try to understand the function of VAR in
comparison with liquidity.
 A basic understanding of LAR:
The maximum loss of liquidity which is not exceeded under the assumption of a defined
probability in percentage points (the confidence level) within a defined period.
 Liquidity policy and its elements:
Policy scope and frame
• Defining terms
• Authorities and responsibilities
• Methods and tools
• Scenarios and concepts employed
• Limits and limit structures
• Reports and reporting frequency
• Contingency planning.
 Define Gaps;
Gaps can present themselves not only negatively but also positively, they represent a
neutral statement of reality without judgement.
 Expected liquidity exposure (ELE):
Expected liquidity exposure (ELE): This is based on contractually and therefore legally
agreed transactions. s. Any legally binding contract has two parts which are at the
disposition of the parties involved: namely, amount and date of payment. The expected
flows of cash can be of a deterministic or stochastic nature.
 Balance-sheet liquidity (BSL):
BSL indicates to what extent the bank is able to cover a potential liquidity shortfall by
making use of its liquidity reserves. One refers to marketable assets which can either
be liquidated or serve as instruments for repo transactions etc., like bonds, equities and
loans eligible for securitisation.
 Available net liquidity (ANL):
Available net liquidity (ANL): This is determined from the sum of the previous tools
taken together.

242 | P a g e