Management of Financial Service (EDL 307)-Semester III
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1st Module Assessment
Case Study
Financial system refers to a set of complex and closely connected or interlinked financial institutions or organised and unorganised financial markets, financial instruments and services which facilitate the transfer of funds.
Financial institutions are the intermediaries which facilitate smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return. Financial institutions also provide services to entities seeking advice on various issues ranging from restructuring to diversification plans.
Financial reforms of the 1990s were initiated with an objective to eliminate the financial despotism and create an efficient, productive and profitable financial sector. The Economic reforms best describe the post – 1991 consequences of various economic practices, as it ushered in substantial transformation and liberalization of the Indian financial system.
In November 2009, India purchased 200 tonnes of gold valued at Rs $6.7 billion (Rs 31, 380 crore) from the International Monetary Fund (IMF) . RBI bought nearly half of the gold sold by IMF under the latter’s limited gold sales programme. By purchasing the gold, RBI now has more gold than the European Central Bank, thus becoming the 11th largest gold holder among various Central Banks, marking a remarkable turnaround from the crisis of 1991, when India had to airlift its gold to pledge for a loan. In 1991, when India faced its worst ever balance of payment (BoP) crisis, it had no alternative but to pledge 67 tonnes of gold to the Union Bank of Switzerland and Bank of England to raise a loan of $605 million. It intended to shore up its dwindling foreign exchange reserves, which were at a low of $1.2 billion in January 1991.
The stabilization component in the 90’s was aimed at reducing the balance of payment deficit. The steps were towards reducing the rate of fiscal growth, monetary tightening and curbing the excess demand on Indian foreign exchange reserves, which was supported by devaluation of India currency.
Reforms in the Banking Sector During the early 1970s and 1980s, monetary policy had become almost non-existent. India followed a system of credit allocation, administered and differential interest rates for different purposes and automatic monetization of fiscal deficit. Also, financial repression was through pre-emption of banks’ resources – both in terms of the statutory holding of Government Securities (Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)). These mechanisms distorted the interest rate mechanism and adversely affected the profitability of the banks by the end of 1980 and also their viability.
Question-1: A merchant bank is a financial institution conducting money market activities and:
a. Lending
b. Underwriting and financial advice
c. Investment service
d. All of the above
Question 2. Consider the below statements: 1. The foreign investment, which includes foreign direct investment (FDI) and foreign institutional investment (FII), has increased from about US $ 100 million in 1990-91 to US $ 467 billion in 2012-13. 2. There has been an increase in the foreign exchange reserves from about US $ 6 billion in 1990-91 to about US $ 304 billion in 2013-14. 3. India is one of the largest foreign exchange reserve holders in the world.
a. 1 and 2 only
b. 2 and 3 only
c. 1 and 3 only
d. All are correct
Question 3. Developmental activities of merchant banking:
a. Sources of funds forever
b. Expanding industry and trade
c. Leaving a widening gap unbridged between supply and demand of investible funds.
d. All of the above
Question 4. Financial institutions are the intermediaries which facilitate smooth functioning of the financial system by ………..
a. Making investors
b. Borrowers meet
c. Both a and b
d. Perform a duty
Question 5. Formal merchant banking activity in India was originated in______.
a. 1978
b. 1969
c. 1769
d. 1987
Question 6. India pledge …………. of gold to the Union Bank of Switzerland and Bank of England to raise a loan of $605 million.
a. 167 tonnes
b. 7 tonnes
c. 67 tonnes
d. 17 tonnes
Question 7. What is the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities?
a. Finance
b. System
c. Market
d. All the above
Question 8. when India faced its worst ever balance of payment (BoP) crisis.
a. 1991
b. 1978
c. 1987
d. 1998
Question 9. Which of the following are correct regarding growth during the reform period? 1. The growth of agriculture declined. 2. The service sector reported fluctuation. 3. The growth of industrial sectors has gone up. 4. The growth during this phase was mainly driven by the growth in the service sector.
a. 1, 2 and 3 only
b. 2 and 4 only
c. 1 and 4 only
d. 1 and 3 only
Question 10. Which of the following are correct with reference to economic reforms (LPG reforms) and public policies? 1. Economic reforms have placed limits on the growth of public expenditure especially in social sectors. 2. The reform policies involving tariff reduction have curtailed the scope for raising revenue through customs duties. 3. In order to attract foreign investment, tax incentives were provided to foreign investors which further reduced the scope for raising tax revenues.
a. 1 and 2 only
b. 2 and 3 only
c. 1 and 3 only
d. All are correct
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2nd Module Assessment
Case Study
Issue management refers to managing issues of corporate securities like equity shares, preference shares and debentures or bonds. It involves marketing of capital issues, of existing companies including rights issues and dilution of shares by letter of offer. Management of issue also involves other issues. The decisions concerning size and timing of the public issue in the light of the market conditions are advised by the merchant bankers.
The public issues are managed by the involvement of various agencies i.e., under writers, brokers, bankers, advertising agencies, printers, auditors, legal advisers, registrar to the issue and merchant bankers providing specialized services to make the issue a success. However, merchant bank is the agency at the apex level, who plans, coordinates and controls the entire issue activity and directs different agencies to contribute to the successful marketing of securities.
Issue managers play vital role in fund raising through public issue of securities. Whether through book building (discussed later) or otherwise, their role is catalytic for the making of the issue a success. They are involved from cradle to grave in the issue. Hence companies coming with new issue of capital decide about Issue managers after due diligence and carefully analysing the competence and capabilities of the merchant banker to handle the issue.
Question-1: Categories of securities issue:
a. Public issue
b. Rights issue
c. Private placement
d. All of the above
Question 2. Companies raise funds for the purposes of: 1. Financing new projects 2. Expansion of existing units 3. Modernization & diversification of existing units 4. Organizing long term resources for working capital purposes
a. 1, 2, 3
b. 2, 3, 4
c. 1, 2, 3, 4
d. 1, 3, 4
Question 3. Equity funding is preferable especially when the project is________.
a. Fund intensive
b. Finance intensive
c. Capital intensive
d. Application intensive
Question 4. In simple terms, the management of issues for raising funds through various types of instruments by companies is known as:
a. Lead management
b. Merchant banking
c. Issue management
d. Public management
Question 5. Issue management is an important function of ______ and ______.
a. Merchant banker, lead manager
b. Public banker, Merchant banker
c. Lead banker, Private banking
d. None of the above
Question 6. It is a process by which a demand for the securities proposed to be issued by a body corporate is elicited.
a. Book building
b. Share certificate
c. Promoter issue
d. Circular
Question 7. Post issue management activities include:
a. Analysis of collection
b. Processing of data
c. Issue of refund orders
d. All of these.
Question 8. Pre‐issue management activities include;
a. Lead manager
b. Underwriting
c. Overall supervision
d. None of these.
Question 9. Private placement covers
a. Shares
b. Preference shares
c. Debentures
d. All of the above
Question 10. The _______ has to manage the post-issue activities.
a. Merchant banker
b. Lead manager
c. Bank promoter
d. All of the above
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3rd Module Assessment
Case Study
Fee income is the revenue taken in by financial institutions from account-related charges to customers. Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, account research fees and more.
Financial intermediaries provide services on the basis of non-fund activities also. This can also be called “fee based” activity. They expect more from financial service companies. Hence, a wide variety of service, are being provided under this head they including the following:
(i) Making arrangements for the placements of capital and debt instruments with investments institutions.
(ii) Arrangements of fund from financial institutions for the clients‟ project cost or his working capital requirements.
(iii) Assisting in the process of getting all government and other clearances.
Modern activities
“Besides the above traditional services, the financial intermediaries render innumerable service in recent times. Most of them are in the nature of non-fund based activity. In view of the importance, these activities have been discussed in brief under the head „New financial products and services‟. However, some of the modern services provided by them are given in brief hereunder:”
(i) Rendering project advisory services right from the preparation of the project report till the raising of funds for starting the project with necessary government approval.
(ii) Planning for mergers and acquisitions and assisting for their smooth carry out.
(iii) Guiding corporate customers in capital restructuring.
(iv) Acting as trustees to the debenture-holders.
(v) Recommending suitable changes in the management structure and management style with a view to achieving better result.
Question-1: An acquisition is the same thing as:
a. a spin-off
b. a takeover
c. an amalgamation
d. a merger
Question 2. Fee income is the revenue taken in by financial institutions from account related charges to………
a. Banker
b. Customers
c. Government
d. All the above
Question 3. Functions of financial services exclude ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐.
a. Mobilization of savings
b. Allocation of fund
c. Specialized services
d. Collection of tax.
Question 4. In India Merchant banking along with management of public issues and loan syndication covering activities like- 1. Project counseling, 2. Portfolio management, 3. Investment counseling, 4. Mergers and amalgamation of the corporate firms, 5. Securities and exchange
a. 1, 2, 4, 5
b. 1,2, 3, 5
c. 1, 2, 3, 4
d. 2, 3, 4, 5
Question 5. Most favourable portfolio is proficient portfolio with the………..
a. lowest risk
b. highest risk
c. highest utility
d. least investment
Question 6. The ways in which mergers and acquisitions (M&As) occur do not include:
a. vertical integration
b. diversification
c. horizontal integration
d. conglomerate takeover
Question 7. Which of the following is not a fee‐based financial service?
a. Corporate counseling
b. Lease financing
c. Profit management
d. Issue management.
Question 8. which of the following service are fee based
a. Underwriting
b. Issue of Demand Draft
c. Credit Card
d. Education loan
Question 9. which of the following service are fund based
a. Locker facility
b. Project preparation
c. Consultancy
d. None of the above
Question 10. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ covers the entire range of services provided by a merchant banker.
a. Project counseling
b. Corporate counseling
c. Credit syndication
d. Market makers
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4th Module Assessment
Case Study
Leasing is a process by which a firm can obtain the use of certain fixed assets for which it must pay a series of contractual, periodic, tax-deductible payments. Leasing is an alternative to purchase that’s used for apartments and houses, automobiles and light trucks, and many types of equipment and machinery.
Hire purchase (HP) or known as installment plan in the United States is an
arrangement whereby a customer agrees to a contract to acquire an asset by paying an initial instalment (e.g. 40% of the total) and repays the balance of the price of the asset plus interest over a period of time. Other analogous practices are described as closed-end leasing or rent to own.
Operating Lease is where the asset is not wholly amortized during the noncancellable period, if any, of the lease and where the lessor does not rely for is profit on the rentals in the non- cancellable period. In this type of lease, the lessor who bears the cost of insurance, machinery, maintenance, repair costs, etc. is unable to realize the full cost of equipment and other incidental charges during the initial period of lease.
Question-1: Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of ……
a. Contractual payment
b. Periodic payment
c. Tax deductible payment
d. All the above
Question 2. One difference between a financial lease and operating lease is that:
a. there is a often a call option in a financial lease.
b. there is often an option to buy in an operating lease.
c. an operating lease is often cancellable by the lessee.
d. a financial lease is often cancellable by the lessee.
Question 3. Securitization is the financial practice of pooling various types of contractual debt such as………..
a. Residential mortgages
b. Commercial mortgages
c. Auto loans or credit card debt obligations
d. All the above
Question 4. The essential elements of a valid contract are …………….
a. Legal obligation
b. Lawful consideration
c. Free consent
d. All the above
Question 5. The television is priced at $10,000. A deposit of 16% on simple interest of 11% per year over 2 year and repayments paid monthly then the additional amount to pay in 24 monthly installments after deposit is
a. $10,248
b. $11,248
c. $13,248
d. $14,248
Question 6. What is an agreement enforceable by law?
a. Hire Purchasing
b. Contract
c. Leasing
d. All the above
Question 7. What is an arrangement whereby a customer agrees to a contract to acquire an asset by paying an initial installment?
a. Hire Purchasing
b. Contract
c. Leasing
d. All the above
Question 8. A refrigerator is priced at $10,000. A deposit of 16% on simple interest of 11% per year over 2 year and repayments paid monthly then the amount of deposit made is
a. $2,000
b. $2,150
c. $1,950
d. $1,600
Question 9. A way to analyze whether debt or lease financing would be preferable is to:
a. compare the net present values under each alternative, using the cost of capital as the discount rate.
b. compare the net present values under each alternative, using the after-tax cost of borrowing as the discount rate.
c. compare the payback periods for each alternative.
d. compare the effective interest costs involved for each alternative.
Question 10. The principal reason for the existence of leasing is that:
a. intermediate-term loans are difficult to obtain.
b. this is a type of financing unaffected by changes in tax law.
c. companies, financial institutions, and individuals derive different benefits from owning assets.
d. leasing is a renewable source of intermediate-term funds.
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5th Module Assessment
Case Study
Consumer finance refers to the division of retail banking that deals with lending money to consumers. This includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime rate.
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is a method used by some firms to obtain cash.
Forfaiting is a means of financing used by exporters that enables them to receive cash immediately by selling their medium-term receivables (the amount an importer owes the exporter) at a discount.
Question-1: A factor affecting the growth of Venture Capital (VC) finance
a. Culture and environment
b. Interest rates
c. Easing stock market barriers (wrong answer)
d. Increased business banking finance
Question 2. A trade agreement in which a domestic firm accepts whiskey for full payment on a sale of computer equipment is an example of __________.
a. export factoring
b. forfeiting
c. a scene from the classic movie “Animal House”
d. counter trade
Question 3. Amer is an exporter who has sold outright their accounts receivable to another institution. This is an example of __________.
a. export factoring
b. forfeiting
c. striding
d. counter trade
Question 4. Cash is the life blood of any business. Cash flow is defined as
a. The ability to pay off the bills on time
b. The system in which the cash is handled in an organization
c. A system in which cash is distributed among the departments
d. The ability to generate cash by utilizing the assets
Question 5. Credit management is an important tool used by finance managers. Credit management means
a. Managing the cash of the organization for the operational activities
b. To lend money to the borrower for more than a year
c. Granting money on credit basis while considering all the terms on which it is being granted on
d. Managing the credit system
Question 6. The person who is having goods in his/her possession known as
a. brokers
b. middlemen (wrong)
c. factors
d. agents
Question 7. What is a plastic card issued by a financial institution that allows its user to borrow pre-approved funds at the point of sale in order to complete a purchase?
a. Consumer finance
b. Credit card
c. Hard money
d. All the above
Question 8. What is the trading or selling a bill of exchange prior to the maturity date at a value less than the par value of the bill?
a. Vehicle financing
b. Hard money
c. Credit card
d. Bills Discounting
Question 9. What refers to the division of retail banking that deals with lending money to consumers?
a. Consumer finance
b. Credit card
c. Hard money
d. All the above
Question 10. Which of the following is not a reason for international investment?
a. To provide an expected risk-adjusted return in excess of that required.
b. To gain access to important raw materials.
c. To produce products and/or services more efficiently than possible domestically.
d. International investments have less political risk than domestic investments.
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Assignment 2
Case Study
Before beginning the services of merchant bankers in India, the capital issues were managed and controlled by the managing agency houses as “Issue Houses”. The services included were managing issue of securities, advising on the capital restructuring, providing underwriting activities, arranging finance from various institutions, preparing prospectus and listing of issues in the stock exchanges* 2. Though merchant banking activity was initiated in about three decades ago, it was only in 1992 when SEBI was formed and the rules and regulations regarding merchant banking activities were redesigned for a more disciplined performance of these entities. The concept merchant banking assumed a serious concern only after SEBI thought it positively as a very important intermediary in the functioning of the capital markets and also performing other financial services.
The merchant banks in India basically have concentrated their activities on the following services:
1- Corporate counselling
2- Project counselling and pre-investment studies.
3- Credit syndication and project finance.
4 -Capital issue management.
5 -Underwriting of capital issues.
6- Portfolio management.
7 -Venture capital financing.
8 -Lease finance.
Question-1: A merchant bank is a financial institution conducting money market activities and?
a. Lending
b. Underwriting and financial advice
c. Investment service
d. All of the above
Question 2. Banks implement the RBI’s _______ policies.
a. Monetary
b. Credit
c. Commercial
d. Both a and b
Question 3. Financial services through the network of elements such as ________, serve the needs of individuals, institutions and Corporate.
a. Financial institutions
b. Financial markets
c. Financial instruments
d. All of the above
Question 4. Formal merchant banking activity in India was originated in______?
a. 1978
b. 1969
c. 1769
d. 1987
Question 5. In India Merchant banking along with management of public issues and loan syndication covering activities like?
a. Project counseling
b. Portfolio management
c. Investment counseling
d. All of the above
Question 6. The criteria for authorization of merchant bankers includes: 1. Professional qualification in finance, law or business management 2. Infrastructure like adequate office space, equipment and manpower 3. Employment of two persons who have the experience to conduct business of merchant bankers 4. Capital adequacy 5. Past track record, experience, general expectation and fairness in all transaction
a. 1, 2, 4, 5
b. 2, 3, 4, 5
c. 1, 2, 3, 4, 5
d. None of the above
Question 7. The early growth of merchant banking in the country is assigned to the_______?
a. FEMA
b. Foreign Exchange Regulation Act, 1973
c. Securities Contracts Act
d. Income-tax Act
Question 8. The four categories of merchant bankers issued by SEBI: Minimum net worth for first category is ______, second category is ______ and third category is ______.
a. Rs.1 crore, Rs. 50 lakhs, Rs.20 lakhs
b. Rs.20 lakhs, Rs.1 crore, Rs.50lakhs
c. Rs.2 crore, Rs.50lakhs, Rs.25lakhs
d. None of the above
Question 9. The term ‘Merchant Bank’ is used in?
a. United Kingdom
b. United States
c. India
d. Non of the above
Question 10. In India, merchant-banking activity was originated with the merchant banking division set up by the __________?
a. Barclays bank
b. Grind lays bank
c. Yes bank
d. None of the above
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