FINANCIAL MANAGEMENT 2009

2. Types of debentures? 

Debentures are divided into different categories on the basis of:

(1) Convertibility of the instrument (2) Security
Debentures can be classified on the basis of convertibility into:

· Non Convertible Debentures (NCD): These instruments retain the debt character and can not be converted in to equity shares

· Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.

· Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company.

· Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue.

On basis of Security, debentures are classified into:

· Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of either the principal or interest amount, his assets can be sold to repay the liability to the investors

· Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor has to be along with other unsecured creditors of the company

3. Features of Term Loans

a) MATURITY – The maturity period of term loans is typically longer in case of sanctions by financial institutions in the range of 6-10 years in comparison to 3-5 years of bank advances. However, they are rescheduled to enable corporate borrowers tide over temporary financial exigencies.

b) NEGOTIATED – The term loans are negotiated loans between the borrowers and the lenders. They are akin to private placement of debentures in contrast to their public offering to investors.

c) SECURITY – Term loans typically represent secured borrowing. Usually assets, which are financed with the proceeds of the term loan, provide the prime security. Other assets of the firm may serve as collateral security.

d) INTEREST PAYMENT AND PRINCIPAL REPAYMENT – The interest on term loans is a definite obligation that is payable irrespective of the f

inancial situation of the firm.

5. Cash Budget Mean?

An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities.

8. Acceptance Rule of Project:

A project can be accepted if NPV is positive i.e. NPV > 0; 

Can be ejected when NPV is negative i.e. NPV < 0. If NPV = 0, a project may be accepted.

NPV = 0 implies that project generates cash flows at a rate just equal to the opportunity cost of capital.

The NPV method can be used to select between mutually exclusive projects; the one with the higher NPV should be selected.

13. A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year[1], as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt).

The primary market is that part of the capital markets that deals with the issuance of new securities.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM).

·       In a primary issue, the securities are issued by the company directly to investors.

·       The company receives the money and issues new security certificates to the investors.

·       Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.

·       The primary market performs the crucial function of facilitating capital formation in the economy.

·       The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public."

·       The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

ü Initial public offering;

ü Rights issue (for existing companies);

ü Preferential issue.

The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold

A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges - such as the New York Stock Exchange and the NASDAQ are secondary markets.

A newly issued IPO will be considered a primary market trade when the shares are first purchased by investors directly from the underwriting investment bank; after that any shares traded will be on the secondary market, between investors themselves. In the primary market prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security.