Banking Finance Macroeco.pdf

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Introduction to Banking, Finance

and Macroeconomics Basics

October 2010 ZIGEDU Learning Solutions


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Banking

Accounts

Finance

ZIGEDU Learning Solutions. All Rights Reserved. The information contained herein, belonging to ZIGEDU Learning Solutions, is confidential and privileged and is meant for the intended recipient only. You may not copy or disclose to anyone this document or its contents.

acro conomics


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Banking

Accounts

Finance

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Macro Economics


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Question 1

What is Repo Rate, Reverse Repo, Bank Rate, CRR ?

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Answer 1

Repo rate is the rate at which RBI lends money to other banks.

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows moneyfrom banks.

Bank rate, also referred to as the discount rate, is the rate of interest which a

central bank char es on the loans and

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advances that it extends to commercial banks and other financial intermediaries.Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with

RBI. CRR and Interest Rates

(Source: RI) (% per annum)


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Key rates July 3rd 2010 July 27th 2010 Sep 16th 2010

CRR 6.00 6.00 6.00

Repo Rate 5.50 5.75 6.00

Reverse Repo 4.00 4.50 5.00

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Question 2

What is SLR ?

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Question 3

What is the Difference between NEFT and RTGS ?

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Answer 3

RTGS- Real Time Gross Settlement - transfer of money takes place

from one bank to another on a "real time" and on "gross" basis. Thisis the fastest possible money transfer system through the banking

channel.

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NEFT- Net Electronic Fund Transfer - NEFT are electronic fundtransfer modes that operate on a deferred net settlement (DNS)

basis which settles transactions in batches. In DNS, the settlement

takes place at a particular point of time. All transactions are held

up till that time.


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Banking

Accounts

Finance

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Macro Economics


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Answer 4

Fixed Assets are long term like buildings, machines etc.

whereas Current assets are used in day-today transactionswhich is short-term in nature i.e. not more than 1 year.

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Question 5

Explain the difference Between P&L A/c and Balance

Sheet?

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Question 6

What is Nominal Account ?

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Answer 6

Account relating to income, expenses , gains and losses

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Answer 7

Total Assets Total Liabilities

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Question 8

Difference between capital reserve and reserve capital?

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Answer 8

Capital Reserve- Reserve created by the accumulated capital surplus

( not the revenue surplus) of the firm e.g an upward revaluation ofassets by a firm to reflect its assets at the current market values after

appreciation.

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Reserve Capital- Part of the authorized capital of a firm which hasnot yet called up and is available for drawing in case of need.


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Question 9

What is Contra Entry?

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Answer 9

Contra entry refers to entry passed for the transaction

which affects both bank & cash Ledgers and the entryshould be posted to both cash and bank. In Tally Contra

Vouchers included onl Led ers related to Cash and Bank

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& allowed enties related to bank and cash only eg:Transfer from 1 bank to another bank, Depositing to bank,

withdrawing from bank, & transfering of cash to petty

cash.


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Question 10

What is a sweep account ?

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Answer 10

A sweep account is actually a combination of two or more

accounts at a bank or financial institution. It is useful inmanaging a steady cash flow between a

cash account where scheduled a ments are made from

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and an investment account where the cash is able to accruea higher return.


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Question 11

What is capital expenditure?

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Answer 11

They are expenditures creating future benefits. A capital

expenditure is incurred when a business spends moneyeither to buy fixed assets or to add to the value of an

existin fixed asset with a useful life that extends be ond

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the taxable year.


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Question 12

The debit balance of the P&L a/c is shown in which column

of balance sheet?

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Answer 12

Assests

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Question 13

What is Share Premium?

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Answer 13

The share premium account of a company is the capital that

a company raises upon issuing shares that is in excess ofthe nominal value of the shares.

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Question 14

What is consolidated financial statement?

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Answer 14

The combined financial statements of a parent company and its

subsidiaries.Because consolidated financial statements present an aggregated

look at the financial position of a parent and its subsidiaries, they

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enable you to gauge the overall health of an entire group of

companies as opposed to one company's stand alone position.


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Question 15

What is Deffered revenue expenditure?

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Answer 15

Deferred Revenue Expenditures are those expenditures which have

been incurred in an accounting period and they do not create anyassets but their benefit is spread in more than one accounting period.

Eg. Advertisement Cost

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They are debited to a Deferred expenditure account in the non-

current assets area of your chart of accounts. When they become

current, they can then be transferred to the profit and loss account as

normal.


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Banking

Accounts

Finance

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Macro Economics


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Question 16

What is SEBI?

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Answer 16

Securities and Exchange Board of India, which regulates

the security market of India by its formulated rules andregulations.

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Question 17

What is Money market & Capital Market?

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Answer 17

Capital market- long term instruments Eg. Bonds,

debentures, FD, etc.Money Market- Short term Instruments (less than one year).

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.


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Question 18

What is Beta ?

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Answer 18

Risk is differentiated as systematic risk or undiversifible risk

and unsystematic risk or diversifible risk. Diversifible risk iswhat which can be minimized by diversification but

s stematic risk is market risk which is not ossible to

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diversify. The sensitivity of stock with the market is definedas systematic risk or beta of the stock.


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Question 19

What is Interim Dividend?

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Answer 19

Interim Dividend Is Defined As The Declaration Of The

Dividend By The Company Before The Annual GeneralMeeting.

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Question 20

What is Hedging ?

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Answer 20

Hedging can be defined as a strategy to take minimize the exposure

towards the risk.Risk can be defined as probability of unexpectedoutcome from expected outcome.Risk could be any of as interest rate

risk,default risk,currency risk,rising price,etc.Hedging is defined as

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.

be done by forward,future,option,swaps.Heding offset the loss in spotmarket with the equal gain in the future market if it is perfect hedge.


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Question 21

The market closed at _____ on 19th Oct 2010 ?

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Answer 21

19,983

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Answer 22

A derivative is a financial instrument that derives or gets it

value from some real good or stock. Typically, the sellerreceives money in exchange for an agreement to purchase

or sell some ood or service at some s ecified future date.

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Question 23

Types of Derivative Instruments?

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Question 24

What is Call Option ?

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Answer 24

Calls give the buyer the right but not the obligation to buy

a given quantity of the underlying asset, at a given priceon or before a given future date.

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Question 25

What is Put Option ?

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Answer 25

Buyer Of Put Otion Get The Right But It Is Not An

Obligation To Sell The Underlying Asset Before TheExpiration Of Option If It Is European Option And Not

Between The Ex iration If It Is American O tion.

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Q 26


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Question 26

What is the difference between Merger and Acquisition?

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A 26


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Answer 26

When one company takes over another and clearly established itself as the new

owner, the purchase is called an acquisition. From a legal point of view,

the target company ceases to exist, the buyer "swallows" the business and thebuyer's stock continues to be traded.

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In the pure sense of the term, a merger happens when two firms, often of about

the same size, agree to go forward as a single new company rather than remainseparately owned and operated. This kind of action is more precisely referred to

as a "merger of equals." Both companies' stocks are surrendered and new

company stock is issued in its place. For example, both Daimler-Benz and

Chrysler ceased to exist when the two firms merged, and a new company,DaimlerChrysler, was created.


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Merger Acquisition

The case when two companies (often of

same size) decide to move forward as a

single new company instead of operating

The case when one company takes over

another and establishes itself as the new

owner of the business.


business separately.

The stocks of both the companies are

surrendered, while new stocks are issued

afresh.

The buyer company swallows the business

of the target company, which ceases to

exist.

For example, Glaxo Wellcome andSmithKline Beehcam ceased to exist and

merged to become a new company, known

as Glaxo SmithKline.

Dr. Reddy's Labs acquired Betapharmthrough an agreement amounting $597

million.

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Question 27

What is NPV?

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Answer 27


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Answer 27

The present value of an investment's future net cash flows

minus the initial investment. If positive, the investment shouldbe made (unless an even better investment exists),

otherwise it should not.

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Answer 28


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Answer 28

Options generally have lives of up to one year. The

majority of options traded on exchange have maximummaturity of nine months, longer dated options are called as

warrants and are enerall traded over-the-counter

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Question 29


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Question 29

What is the difference between Subsidiary & a Company?

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Answer 29


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Answer 29

Subsidiary is a separate entity created out of a parent

company with at least 51 % holding of the parentcompany.

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Question 30


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Question 30

What is subordinated debt?

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Answer 30


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Answer 30

A loan (or security) that ranks below other loans (or

securities) with regard to claims on assets or earnings.

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Question 31


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Question 31

What do you understand by bonus shares?

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Answer 31


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Answer 31

A bonus share is a free share of stock given to

current/existing shareholders in a company, based upon the numberof shares that the shareholder already owns at the time of

announcement of the bonus. While the issue of bonus shares increases

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,

value of the company. Although the total number of issuedshares increases, the ratio of number of shares held by each

shareholder remains constant


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Banking

Accounts Finance

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Macro Economics


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Answer 32


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ROI reveals the earning capacity of the capital employed

in the business. It is calculated as:Profit before interest and taxation/capital employed*100

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Question 33


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What is Inflation ?

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Question 34


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What is the difference between Real and Nominal GDP?

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Answer 34


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First of all, the term GDP stands for Gross Domestic Product, and it is

defined as the cost of all the services and goods that are available

in a country. Nominal GDP indicates the present-time prices of the

types of services available, and the goods produced, whereas, Real

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.

The formula to calculate Real GDP is:Nominal GDP/GDP Deflator x 100

Question 35


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What is the difference between (1)Real and Nominal

Money and (2) Real and Nominal Interest?

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Answer 35


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Nominal money is related to the measure of counting. Nominal figure is what is written on the bill. where

as real money relates to it's purchasing power.for eg: If 10 units in nominal money can buy 2 chocolates

in 1980 and 1 chocolate in 2000, in the same way, 10 units of nominal money is 10units of real money

in 1980 and 5 units of real money in 2000. (2) Real Interest Rate = Nominal Interest Rate -

Inflation

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Illustration: Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We

pay $100 at the beginning of the year and get $106 at the end of the year. Thus the bond pays aninterest rate of 6%. This 6% is the nominal interest rate, as we have not accounted for inflation.

Whenever people speak of the interest rate they're talking about the nominal interest rate, unless they

state otherwise.

Now suppose the inflation rate is 3% for that year. We can buy a basket of goods today and it willcost $100, or we can buy that basket next year and it will cost $103. If we buy the bond with a 6%

nominal interest rate for $100, sell it after a year and get $106, buy a basket of goods for $103, we

will have $3 left over. So after factoring in inflation, our $100 bond will earn us $3 in income; a real

interest rate of 3%.

Question 36


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What is GDP? What is Indias current GDP and growth

rate ?

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Answer 37


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The marginal propensity to consume (MPC) is an empirical metric that quantifies induced consumption,

the concept that the increase in personal consumer spending (consumption) that occurs with an increase

in disposable income (income after taxes and transfers). For example, if a household earns one extra

dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the

household will spend 65 cents and save 35 cents.

Mathematically, the marginal propensity to consume (MPC) function is expressed as the derivative of

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e consump on unc on w respec o sposa e ncome .

where C is the change in consumption, and Yis the change in disposable income that produced the

consumption.

For example, suppose you receive a bonus with your paycheck, and it's $500 on top of your normal

annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend$400 of this marginal increase in income on a new business suit, your marginal propensity to consume

will be 0.8 ($400 / $500).

Macro Economic Indicators


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Indicators Figure

1 ()

201011

$ 245.2

(. 11,32, )


( 2010) 13. %

( 24 ,2010)

$ 21.

201011( 200

2010)

$ 5.1 ( 2,41 )

2010

$ 1.4

(. ,5,0 )

2010

$ 2.

(. 1,3,211 )

Question 38


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Difference between GDP and GNP?

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Answer 38


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GDP is the market value of everything produced within a

country; GNP is the value of what's produced by acountry's residents, no matter where they live.

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Articles


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How India calculates inflation

Rising inflation was the most recent ticklish political issue that hit the

Manmohan Singh government. But was inflation rising because of

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price rise in essential commodities? Or was it because of

the erroneous method of calculating inflation?

Some economists assert that Indias method of calculating inflation

is wrong as there are serious flaws in the methodologies used by

the government.


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Economists V Shunmugam and D G Prasad working with Indias

largest commodity bourse the Multi Commodity Exchange

have come out with a research paper arguing that the government

urgently needs to shift the method of calculating inflation.

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Saying that there are serious flaws in the present method of

calculating inflation, the paper India should adopt methodologies indeveloped economies.


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So how does India calculate inflation? And how is it

calculated in developed countries?

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n a uses e o esa e r ce n ex o ca cu a e

and then decide the inflation rate in the economy.Most developed countries use the Consumer Price Index

(CPI) to calculate inflation.


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Wholesale Price Index (WPI)

WPI was first published in 1902, and was one of the more economic indicators available

to policy makers until it was replaced by most developed countries by the Consumer Price

Index in the 1970s.

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WPI is the index that is used to measure the change in the average price level of goodstraded in wholesale market. In India, a total of 435 commodities data on price level is

tracked through WPI which is an indicator of movement in prices of commodities in all

trade and transactions. It is also the price index which is available on a weekly basis with

the shortest possible time lag only two weeks. The Indian government has taken WPI as an

indicator of the rate of inflation in the economy.


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Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a

specified set of goods and services purchased by consumers. It is a price index

that tracks the rices of a s ecified basket of consumer oods and services

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providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living

index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in

time, so that all other values of the index are a percentage relative to this one.


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Economists Shunmugam and Prasad say it is high time that India abandoned WPI and

adopted CPI to calculate inflation.

India is the only major country that uses a wholesale index to measure inflation. Most

countries use the CPI as a measure of inflation, as this actually measures the increase in price

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t at a consumer wi u timate y ave to pay or.

CPI is the official barometer of inflation in many countries such as the United States, the

United Kingdom, Japan, France, Canada, Singapore and China. The governments there

review the commodity basket of CPI every 4-5 years to factor in changes in consumption

pattern, says their research paper.

It pointed out that WPI does not properly measure the exact price rise an end-consumer will

experience because, as the same suggests, it is at the wholesale level.


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But why is India not switching over to the CPI method of calculating inflation?

Finance ministry officials point out that there are many intricate problems from shifting fromWPI to CPI model.

First of all, they say, in India, there are four different types of CPI indices, and that makes

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switching over to the Index from WPI fairly risky and unwieldy. The four CPI series are: CPI

Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural labourers; and CPIRural labour.

Secondly, officials say the CPI cannot be used in India because there is too much of a lag in

reporting CPI numbers. In fact, as of May 21, the latest CPI number reported is for March

2006.

The WPI is published on a weekly basis and the CPI, on a monthly basis.

And in India, inflation is calculated on a weekly basis.

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