Finance

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 Capital market;- it is a market where securities maturity more than 1 year are traded.Capital market is a medium
term way in order to raise funds.
Primary market ;- The primary market where new issues are firstly offered
Secondary market ;- Sale & purchase securities further is called secondary market
Factors driving capital market
 Performane of domestic companies
 Environmental factors Mansoon
 Macro economic factors –
IIP DATA –totalgoods and services produced in the country
CPI
WPI
GDP
INFLATION
 Political stablity
 Growth prospects of economy
 Investor’s sentiments & risk appetite
Features ofcapital market
No trade barrier
Large no. Of buyers
Free trading
 Financial market
Money market Capital market
Commercial paper Capital market is divided in two parts
Certificate of deposit Primary market Secondary market
Public issue Stock market
Right issue Over the counter market
Repurchase agreements Over the counter is divided into two parts
Banker’s acceptance Swaps & forwards
Mutual funds
Explain Sensex (Followinbox for more details)
Sensex is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.
Sensex is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of
index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The
market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by
the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market
capitalization.

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Understanding Free-float Methodology
Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily
available for trading in the market.
It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not
come to the market for trading in the normal course
Example
Suppose the Index consists of only 2 stocks: Stock A and Stock B.
Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are
available for trading to the general public. These 800 shares are the so-called 'free-floating' shares.
Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-
floating.
Formula for calculating Sensex
No. of shares *price of the stock*free float factors
Market capitalization
The total market value of a company‘s outstanding shares .Market capitalization is calculated by the following formula
Total no. of outstanding shares * Market price per share
Example = If there are 100 outstanding shares & each o/s share is worth of 350 Rs so the total capitalization would be
35000 Rs
Risk of investing in equities
Capital market
It is the market where securities with a maturity of more than one year is traded
Capital market six instruments are
Equity shares
Futures and options (Derivative instruments)
Preference shares
Debentures
Bonds
Swaps
Forwards
Features ofequity shares
Claim on assets
Claim on income

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Right to control
Voting rights
Limited liablity
Introduction to futures
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain
price. But unlike forward contracts,the futures contracts are standardized and exchange traded. To facilitate liquidity in
the futures contracts,the exchange specifies certain standard features of the contract. It is a standardized contract with
standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered,(or
which can be used for reference purposes in settlement) and a standard timing of such settlement.
Futures in layman’s language ;- It is an agreement that say you lock the price at which you are willing to sell or buy the
particular commodity orequity’sfutures at a particular day or before it.
Example you buy a future of wheat ,you look a price of it at a future date suppose say 26 rs /per kg for100 kg & at the
maturity the price of wheat may be 19 or 22 rs you have to buy it for rs 26 rs that is called futures.
The buyer of the futures have to sell it on or before maturity date ,while sellerof a securtity has to buy it back.
The standardized items in a futures contract are:
� Quantity of the underlying
� Quality of the underlying
The date and the month of delivery
� The units of price quotation and minimum price change
� Location of settlement
Options ;- options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price
on or before a certain date.For options there is a premium has to be paid. The premiums are the price of buying the
security or the derivative.
Call option ;- Call holders & put holders are not obligated to buy or sell respectively.they have a choice to exercise their
right if they choose.this limits the risk of buyers of options, so that the most they can ever lose is the premium of their
options.
 Put option ;-- Call writers &put writers (seller) however are obligated to buy or sell.This means that a seller may
be required to make good on a promise to buy or sell.It also implies that option sellers have unlimited
risk,meaning they can lose much more than the price of the options premium.
 At the money ;- for call option & put option=> cost Strike price = Excersize Call option 8600=8600
Put option 8600=8600 cost to cost excluding transaction
 In the money ;- when it is advisible or profitable to excersise the contract ,for call option Strike price > Excersize
price 8600 :8650
For Put option 8700:8600
 Out of the money ;- when it is not advisible or profitable to excercise the contract ,for call option Strike price
<Excersize 8600 :8550,

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For Put option 8800:8700
Difference between call option & put option
Call option Put option
It gives the right to buy but not obligation to buy the
option contracts
It gives right to sell but not obligation to sell the
contract
Limited risk(premium will be lost) Unlimited risk (more then premium can be lost)
Value of an option will increase as the prices of the
underlying increases.
Value of an option decreases as the underlying security
prices increases.
 Factors affecting option prices/Characterstics ofOption’s prices
Stock price
Excercize price
Time to expiry
Volatility in the stock price
Risk free interest rate
Dividends if any expected during life of an option
HEDGE FUNDS
A hedge fund uses a wide range of investment techniques & invest in a wide array of assets to generate higher returns for
a given level of risk than what’s expected of normal investments , In many cases Hedge funds are managed to generate a
consistent level of return regardless of what market does
 A hedge fund has ways to reduce the risk without cutting into investment income, Hedge funds
Why you want to go for hedge fund( You don’t like to confined by stricter rules that MF have to follow & would
appreciate the ability to look for short positions & or use derivatives
Difference between Hedge funds & Mutual funds
Hedge funds Mutual funds
Managers have more freedom in their use of investment
tools
Managers must adhere to the strategy described
There is no limit on fees charged a hedge fund can charge
its investors
Mfs fees & expenses are disclosed are disclosed in detail
Hedge funds unlike mfs are not required to register with
SEC
MF has to be registered under SEC
They can run highly concentrated portfolio The objective is to protect investors investment & hence
diversification is the key principal
Fee charged is 2% Of AUM & 20 % OF PROFIT Annual expenses vary from 2.25 % to 2.5 %
Difference between futures & Forwards
Futures Forwards
They are highly standardized They are privately negotiated
Futures are traded on an exchange They are traded in over the counter market
Futures contracts have clearing houses which guarantee the
transactions
Because forwards contracts are private agreements, there is
always a chance that a party may default
They are settled daily which means that daily changes are
settled day, until the end of the contract
Forwards contracts are settled at the end of the contract

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Say up front that I want to learn more about financial market related things asyou can see most of the things are related
to investment only
When asked about technical analysis,Tell themabout hammer,support & resistance
How do you predict the stock
short term
Will check forthe sectors in which it is trading ( Any good or bad news about the sector)
put to call ratio
Mid term
Its fundamentalslike Cipla ( A company which is there more into indian markets will not be affected based on other
countries policies)
Charts;- It’s chartssupport & resistance,
Long term
P E Ratio
Products it is dealing in
Earnings per share
Profit margins
PEG Ratio
ROCE
Other ways
Company name & its introduction
Sector- Sector ,commodities prices in the market
Fundamental rationale
Technical view(for mid termforcasting)3 months
Key risks (Commodities prices in the market)
Other ways
Peer comparision,
News about the stocks
Any dividend history,splits etc as it affectsits share prices
Fundamentals-> which include Dividends,Splits,Results,Pe Ratio,Roce,Debt-To- Equity Ratio,EPS,CAGR,Shareholding
Pattern,Acquisition,Mergers,Takeovers Etc,Net Profits

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Technical view->Historical performantceby charts,volume in last three months,average trading price 200 days moving
average,.CMP,Market capitalization
What is intrinsic value?
The intrinsic value of a company or an asset based on an underlying perception of its true value including all the aspects
of business in terms of business in terms of both tangible & intangible factors.Additionally ,Intrinsic value is primarily
used in options pricing to indicate the amount an option is in the money.
Intrinsic value ofan option
The intrinsic value for call option is the difference between the underlying stock price & strike price.conversely the
intrinsic value for put option is the difference between the strike price & the underlying stock price
Example ;- If a call option’s strike price is 15 $ & underlying stock’s market price is at 25 $ then the intrinsic value of the
option is 10 $.
Extrinsic value
Extrinsic value measures the difference between market price of an option & its intrinsic value
Example ;- 8600 strike price – intrinsic value 50
What is time value
The portion of an option’s premium that is attributable to the amount of time remaining untill the expiration of the option
contract.
Any premium that is in excess of the options intrinsic value is referred as time value
For equities time value is calculated thru theta
Fixed income security
A fixed income security ,commonly reffered to as a bond or money market security,is a loan made by an investor to a
government or corporate borrower,or issuer,promises to pay a set amount of interest called the coupon ,on a
predetermined basis untill a set date ,the issuer returns the principal amount also called the face value or par value to the
investor on the maturity date
The most common fixed income securities are treasury bonds
Treasury bonds
Corporate bonds
Certificate of deposits
Preferred stocks
Certificate ofdeposit
The CD is a document of title similar to a fixed deposit receipt issued by banks there is no prescribed interest rate on such
CDs it is based on the prevailing market conditions.
Certificate of deposit is a saving certificte with a fixed maturity date ,specified fixed interest rate & can be iissued in
denomination aside from minimum investment requirements.A CDS restricts access to the funds untill the maturity date of
the investment.

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Preferred stock;- Preferred stock derives its name from the fact that it has certain preferences over the junior common
stock—preferred stock is paid cash dividends before any can be distributed to the common stockholders , and in the event
of liqidating the business,preferred stock is redeemed before any money is returned to the common stockholders but after
the bondholders,
It is a Hybrid security because it has features of ordinary shares & debentures
It has following features
Fixed dividends ;- Preference shares are also called fixed income security because it provides constant income to investors
Participation features;-In some cases they have participation features
Convertibility – they can be converted into common shares.
Priority;- They have priority over bondholders
Voting rights ;- It does not have any voting rights
Difference between Preference shares & Equity shares
PREFERNCE SHARE Equity shares
Preference shares are paid dividend before the equity
shareholders
Equity shareholders are paid dividend after the dividend
paid to the pref shareholders
Rate of dividend is fixed Rate of dividend is decided be board of directors
Preference shares can be converted into equity shares Equity share can’t be converted
Preference shares don’t have right to participate in mgt of
company
Equity shares have this right
At the time of winding up of the company pref.
shareholders are paid first
On winding up equity share capital is repaid after pref share
capital is paid up
Bond
A bond is a debt instrument in which an investor gives money to an entity (Typically corporate or government ) which
borrows the funds for a defined period of time at availiable or fixed rate of interest rate.onds are used by companies
,muncipalities,states,governments to raise money & finance a variety of projects & activities.
Owners of bonds are debt holders or creditors of the issuer bonds are commonly referred to as fixed income securities
Howdoes bond work
The issuer issues a bond that contractually states that the interest rates that will be paid & the time at which the loan
principle amount will be repaid or paid back
Why Bonds ussually come at par value at the end ofmaturity ?
If interest rates drop to 4 % ,the bond will continue paying out 5 % ,Making it more attractive option.On the other hand,If
interest rates rises upto 6 % ,the coupon rate 5 % is no longer attractive the bond prices will decrease ,selling at a discount
will make profit for him untill its effective rate is 6 %.
Because of this mechnism ,bonds prices will move inversely with interest rates.
Characterstics ofa bond
Coupon rate Fixed or floating rate of interest is paid for bonds which will be predefined
Face value;- It is the money amount the fund will be worth at its maturity
Coupon date;- It is the date the bond holder will makr interest payments
Maturity date ;- It is the date on which bond will mature

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Types ofbonds
Corporate Bonds
A company can issue bonds just as it can issue stock Large corporations have a lot of flexibility as to how much debt they
can issue: the limit is whatever the market will bear Generally, a short-term corporate bond has a maturity of less than five
years,intermediate is five to years and long term is more than years
Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a
government The upside is that they can also be the most rewarding fixed-income investments because of the risk the
investor must take on The company's credit quality is very important: the higher the quality, the lower the interest rate the
investor receives
Variations on corporate bonds include convertible bonds, which the holder can convert into stock, and callable bonds,
which allow the company to redeem an issue prior to maturity
Zero coupon bonds
Zero coupon bonds are the bonds issued at a discount and there is no interest rate for the given bond. They are bought or
issued a lower price than its face value. And at the maturity date it will be repaid in full amounts
(zeros) pay no regular interest They are issued at a substantial discount to par value, so that the interest is effectively
rolled up to maturity (and usually taxed as such) The bondholder receives the full principal amount on the redemption date
Convertible Bonds
A convertible bond or convertible note or convertible debt is a type of bond that the holder can convert into specific no. of
shares. A convertible bond may be redeemed for a predetermined amount of the company's equity at certain times during
its life, usually at the discretion of the bondholder Convertibles are sometimes called "CVs"
Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions
For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the
company's share price is somewhat overvalued To avoid this negative impression, the company may choose to issue
convertible bonds, which bondholders will likely convert to equity should the company continue to do well
From the investor's perspective, a convertible bond has a value-added component built into it: it is essentially a bond with
a stock option hidden inside Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade
the bond into stock
Callable Bonds
Callable bonds, also known as "redeemable bonds," can be redeemed by the issuer prior to maturity Usually a premium is
paid to the bond owner when the bond is called
The main cause of a call is a decline in interest rates If interest rates have declined since a company first issued the bonds,
it will likely want to refinance this debt at a lower rate In this case,the company will call its current bonds and reissue
new, lower-interest bonds to save money
Inflation linked bonds ( these are the bonds where the principal is indexed to inlation,they are thus designed to cut out
the inflation risk of an investment)
Term Bonds
Term bonds are bonds from the same issue that share the same maturity dates Term bonds that have a call feature can be
redeemed at an earlier date than the other issued bonds A call feature,or call provision, is an agreement that bond issuers
make with buyers This agreement is called an "indenture," which is the schedule and the price of redemptions, plus the
maturity dates
Some corporate and municipal bonds are examples of term bonds that have -year call features This means the issuer of the
bond can redeem it at a predetermined price at specific times before the bond matures
A term bond is the opposite of a serial bond, which has various maturity schedules at regular intervals until the issue is
retired

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Amortized Bonds
An amortized bond is a financial certificate that has been reduced in value for records on accounting statements An
amortized bond is treated as an asset,with the discount amount being amortized to interest expense over the life of the
bond If a bond is issued at a discount - that is, offered for sale below its par (face value) - the discount must either be
treated as an expense or amortized as an asset
As we discussed in Section , amortization is an accounting method that gradually and systematically reduces the cost
value of a limited life, intangible asset Treating a bond as an amortized asset is an accounting method in the handling of
bonds Amortizing allows bond issuers to treat the bond discount as an asset until the bond's maturity (To learn more about
bond premium amortization, Premium Bonds: Problems And Opportunities)
Adjustment Bonds
Issued by a corporation during a restructuring phase, an adjustment bond is given to the bondholders of an outstanding
bond issue prior to the restructuring The debt obligation is consolidated and transferred from the outstanding bond issue to
the adjustment bond This process is effectively a recapitalization of the company's outstanding debt obligations, which is
accomplished by adjusting the terms (such as interest rates and lengths to maturity) to increase the likelihood that the
company will be able to meet its obligations
If a company is near bankruptcy and requires protection from creditors (Chapter ), it is likely unable to make payments on
its debt obligations If this is the case,the company will be liquidated, and the company's value will be spread among its
creditors However,creditors will generally only receive a fraction of their original loans to the company Creditors and the
company will work together to recapitalize debt obligations so that the company is able to meet its obligations and
continue operations, thus increasing the value that creditors will receive
Junk Bonds
A junk bond, also known as a "high-yield bond" or "speculative bond," is a bond rated "BB" or lower because of its high
default risk Junk bonds typically offer interest rates three to four percentage points higher than safer government issues
Junk bonds are fixed income instruments that carry a credit rating of BB or lower by standard & poor or Ba or below by
Moody’s investor’s service
Angel Bonds
Angel bonds are investment-grade bonds that pay a lower interest rate because of the issuing company's high credit rating
Angel bonds are the opposite of fallen angels, which are bonds that have been given a "junk" rating and are therefore
much more risky
An investment-grade bond is rated at minimum "BBB" by S&P and Fitch, and "Baa" by Moody's If the company's ability
to pay back the bond's principal is reduced,the bond rating may fall below investment-grade minimums and become a
fallen angel
Floating rate notes
Floating rate bonds are the bonds which have a comparable ratio with the money market ref. rate & they are also termed
as variable coupon. Such as Libor,Mibor
(FRNs,floaters) have a variable coupon that is linked to a reference rate of interest,such as LIBOR or Euribor For
example the coupon may be defined as three month USD LIBOR + % The coupon rate is recalculated periodically,
typically every one or three months.
High-yield bonds (junk bonds) are bonds that are rated below investment grade by the credit rating agencies As these
bonds are more risky than investment grade bonds, investors expect to earn a higher yield
Convertible bonds let a bondholder exchange a bond to a number of shares of the issuer's common stock These are known
as hybrid securities, because they combine equity and debt features
Inflation-indexed bonds Inflation linked bonds are the bonds where the prisipal is intexed to inflation.They are thus
designed to cut out the inflation risk of an investment In inflation indexed bonds the principal amount and the interest
payments are indexed to inflation The interest rate is normally lower than for fixed rate bonds with a comparable maturity

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(this position briefly reversed itself for short-term UK bonds in December ) However,as the principal amount grows, the
payments increase with inflation
Value of a bond = (i1/1+ I ) +(i2/1+i) +(1n/1+i)+ (P/1 +i)^n
70/1.07 + 65.42/1.07+61.14/1.07+ (1000/1.07)^3
65.1+61.1+58+816.6
So the value become 1001 rs it is almost at par value or no profit or no loss so it is not advisable to take such a project
which is at par or at break even
i denotes interestin number , n = number of years,P = principal, I = interest in %
Perpetualbonds are also often called perpetuities or 'Perps' They have no maturity date The most famous of these are the
UK Consols, which are also known as Treasury Annuities or Undated Treasuries Some of these were issued back in and
still trade today, although the amounts are now insignificant Some ultra-long-term bonds (sometimes a bond can last
centuries: West Shore Railroad issued a bond which matures in (ie th century) are virtually perpetuities from a financial
point of view, with the current value of principal near zero
Bearer bond –It is an official certificate issued without a named holder In other words, the person who has the paper
certificate can claim the value of the bond Often they are registered by a number to prevent counterfeiting, but may be
traded like cash Bearer bonds are very risky because they can be lost or stolen Especially after federalincome tax began in
the United States, bearer bonds were seen as an opportunity to conceal income or assets.The issuing company neither
registers the owner of the stock nor tracks transfers of ownership.
The company disburse dividends to bearer shares when a physical coupon is presented to the firm.
Registered bond – It is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or by a
transfer agent It is the alternative to a Bearer bond Interest payments, and the principal upon maturity, are sent to the
registered owner
A government bond, also called Treasury bond, is issued by a national government and is not exposed to default risk It is
characterized as the safest bond, with the lowest interest rate A treasury bond is backed by the “full faith and credit” of the
relevant government For that reason, for the major OECD countries this type of bond is often referred to as risk-free
Municipal bond is a bond issued by a state,city, local government, or their agencies Interest income received by holders
of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are
issued, although municipal bonds issued for certain purposes may not be tax exempt
War bond is a bond issued by a country to fund a war
Serial bond is a bond that matures in instalments over a period of time In effect,a $,, -year serial bond would mature in a
$, annuity over a -year interval
Revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues
generated by a specified revenue-generating entity associated with the purpose of the bonds Revenue bonds are typically
"non-recourse", meaning that in the event of default, the bond holder has no recourse to other governmental assets or
revenues
Climate bond is a bond issued by a government or corporate entity in order to raise finance for climate change mitigation-
or adaptation-related projects or programmes
Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation In case of
bankruptcy, there is a hierarchy of creditors First the liquidator is paid, then government taxes,etc The first bond holders
in line to be paid are those holding what is called senior bonds After they have been paid, the subordinated bond holders

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are paid As a result, the risk is higher Therefore, subordinated bonds usually have a lower credit rating than senior bonds
The main examples of subordinated bonds can be found in bonds issued by banks, and asset-backed securities The latter
are often issued in tranches The senior tranches get paid back first, the subordinated tranches later Covered bonds are
backed by cash flows from mortgages or public sector assets Contrary to asset-backed securities the assets for such bonds
remain on the issuers balance sheet
Exchangeable bonds allows for exchange to shares of a corporation other than the issuer
Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other
assets Examples of asset-backed securities are mortgage-backed securities (MBS's), collateralized mortgage
obligations (CMOs) and collateralized debt obligations (CDOs)
Which of the following statements is true regarding an investment in mortgage-backed securities?
a There is little default risk
b The stated maturity is generally years
c They receive a fixed payment per month
d All of the above are true
Stocks Bonds
They have equity stake in the company They have a creditor stake in the company
Being creditor of the company they have a creditor stake in
the company & paid before stock holders of the company
They are paid after bond holders
Bond have definite term or maturity They are typically outstanding indefinitely
The shareholder/Stake holders have voting rights They do not carry voting rights
In case of insolvency or liquidations the equity shareholders
will be paid after bondholders
At the liquidation they will be paid before shareholders
Difference between mutual funds & Shares
Mutual funds Shares
They are not much volatile They are volatile
Mfs are known to deliver good returns,So you can expect
handsome returns from mutual funds but not unbelievable
like stock returns
Those requires analysis ,Patience& belieif in what you have
picked
Monitoring in MFS is relatively low because the job of
monitoring is done by fund manager who is paid to filter
through fluctuations
Investing in shares is a personal affairs,even in case of long
term investment you might have to keep an eye on every
quarter or yearly results
Mfs are known for the SIP SIP does not work that good in case of shares
Types of debentures
 On the basis of Security
 Secured Debentures
 Unsecured Debentures

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 On the basis of Convertibility
 Convertible Debentures
 Nonconvertible Debentures
 On the basis of Negotiability
 Registered Debentures
 Bearer Debentures
 On the basis of Permanence
 Redeemable Debentures
 Irredeemable Debentures
Key Differences between Bonds and Debentures
The following are the major differences between bonds and debentures:
1. A financial instrument issued by the government agencies, for raising capital is known as Bonds A financial
instrument issued by the companies whether it is public or private for raising capital is known as Debentures
2. Bonds are backed by assets Conversely, the Debentures may or may not be backed by assets
3. The interest rate on debentures is higher as compared to bonds
4. The holder of bonds is known as bondholder whereas the holder of debentures is known debenture holder
5. The payment of interest on debentures is done periodically whether the company has made profit or not while
accrued interest can paid on the bonds
6. The risk factor in bonds is low which is just opposite in case of debentures
7. Bondholders are paid in priority over debenture holders at the time of liquidation
Risks in investing in shares;-
Diversification;- If you invest in single or two stocks then if any bad news comes in about the same stock it may result in
a great loss & in case of mutual funds risk is diversified & portfolio is also diversified so less risk is there.
Awareness;-People are not aware about stocks or equity shares when people are not aware that means they will invest in
some illiquid stocks which may result in losses greatly & people get stuck for the stocks for years.
1. Difference between bonds & stocks
Indentures— An indenture is a formal debt agreement that establishes the terms of a bond issue,
Covenants --while covenants are the clauses of such an agreement Covenants specify the rights of bondholders and the
duties of issuers, such as actions that the issuer is obligated to perform or is prohibited from Difference between OTC &
Exchange traded instruments
Over the counter ;For OTC derivatives the contract between the two parties are privately negotiated & traded between
the two parties directly,therefore the contract can be trailor maidto the parties likings
Disadvantages

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The value of your derivatives is as gooods as the creditworthiness of your counter party If your counterparty goes bust
,your derivatives becomes worthless It is very hard to pass the derivatives to a third party because the contract is already
signed between the two original arties
Exchange traded insturments ;- For ETI derivatives,the situation is different,they are traded via an intermediatary the
exchange,which Is a strong institution with deep pockets
For example if Tom sells an ET Derivative to Dick,the exchangeacts as a buyer to the buyer or Tom,& A Seller to Dick
The advantage of such an agreement is
They are standardized contracts
There is no counter party risksbetween market participants for example if Tom has no need to fear IF Dick defaults on the
contract ,it is exchange that has to bear the consequences
Roles ofcustodian ;-
Maintaining books of accounts on behalf of clients
Safegaurding financial assets
Call money – Money lent for 1 day is called call money
Notice money ;- Money lent for more than 1 day but lessthan 15 days is called notice money
Term money ;- Money lent for more than 14 days is called term money
T bills or treasury bills are sold by the governments
A short tem credit instrument guaranteed by a bank is called as banker’s acceptance market
The distribution of firms’ capital between debt & equity is its ;-Capital structure
Governments never issue shares because it does not want to sell its ownership claims
The _____ value of a bond that the issuer must pay at maturity .Ans ;- Face value
Investments avenues & there average returns per year
Equity MF –> 12 TO 20 %
Balanced funds - > 8% -15 %
EPF & PPF ;- 8.70
Bonds- 7-9 %
Foreign overseas mf- 8-15 %
Valuation of investment avenues
Calculation of fair value ,stock/shares/other investment avenues
PE ratio comparision ( It should be compared with company with similar characterstics & can be compared with industry
pe ratio)

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MUTUAL FUNDS
A mutual fund is a pool of investment is a pool of saving of a number of investors who share a common financial goal, the
money thus collected & invested in equities, debentures, & other securities Regulation All mutual funds need to be
registered under SEBI So its surveillance is under SEBI’S directives
A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of
investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by
money managers,who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A
mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds are considered by many to be a "set it and forget it" investment (the official term would be a buy-and-hold
investment). That's because a mutual fund involves the safety-in-numbers factor. They include not one security, but many,
so they tend to be less volatile than many individual stocks.
Related question Objectives of mutual funds study
 To check mutual funds schemes available in the market
 To compare various mf vs shares
 To know awareness about the mfs
 To assess perception of investors towards mutual funds
What is NAV?
NAV= Assets ofthe bonds – Liabilities ofthe bonds /No ofunits outstanding
 How do you calculate NAV
Calculating the Net Asset Value ofa Fund
Net asset value (NAV)is significant only for open-end mutual funds. It is a simple calculation - just take the current
market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares
outstanding. Thus, if a fund has total net assets of $50 million and there are one million shares of the fund, then
the NAV is $50 per share. (Fund liabilities include items such as fees owed to investment managers.)
For closed-end funds, share value is determined in the secondary markets (the formal exchanges) where the shares are
traded. The NAV of a closed-end fund is the price per share multiplied by the total number of shares. Obviously, the value
of a closed-end mutual fund changes continuously throughout the trading day.
It is the value of Mutual fund at which a mf unit can be bought or sold
Concepts ofMutual Funds
Step 1 -Many investors with common financial objectives pool their money
Step 2- Investors, on a proportionate basis allot the units for the sum contributed to the pool
Step 3- The money collected from investors is invested in shares,debentures,& other securities
Step 4- The fund manager realizes gains or losses & collects dividends or interests
Schemes examined
Axis equity fund
Axis mid cap fund(Dividends)
Axis mid cap fund(growth)
Axis gold etf

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Axis focused 25(g) funds
L&t gilt fund
Types of mutual funds available now days
On OCT 6th
SEBI has announced new guidelines categorizing MF can be divided in 5 ways
Equity funds ;- These funds invests in stocks.These funds aim to grow faster than money market or fixed income
funds,so there is usually a higher risk that you could lose money. You can choose from different types of equity funds
including those that specialize in growth stocks ( which usually don’t pay dividends),income funds (which includes the
companies that pay large dividends),value stocks ,large cap stocks,mid cap stocks,small cap stocks or combination of
these.
Debt funds (Fixed income funds or bonds or Gilt funds ) ;- These funds buys investments that pay a fixed rate of return
like government bonds,investment grade ,corporate bonds,high yield corporate bonds.They aim to have money coming
into the fund on a regular basis,mostly through interest that the fund earns.High yield bond corporate bond funds are
generally riskier than funds that hold government & investment grade bonds.
Hybrid funds (Balanced funds);- These funds invest in a mixture of equities & fixed income securities.they try to balance
the aim of achiving higher returns against the risk of losing money.Most of these funds follow a formula to split money
among the different types of investments.They tend to have more risk than fixed income funds ,but less risk than pure
equity funds.Aggressive funds hold more equities & fewer bonds while conservative funds hold fewer equities relative to
bonds.
Solution oriented fund ;- As the name suggests these are trailor made funds or according to the choice investor has
made.
Others ;- Others could be
Money market funds
Index funds
Investors
Fund
manager
Securities
Returns

 Page 16
Fund of funds
Speciality funds
Mfs according to investment objective funds
Findings
Investors are mainly concerned about risk factors of mfs
There are various mfs schemes available about which common man is not aware of
 Formulas & concepts
Classification of ratios
Profitability ratio
Liquidity ratios
Solvency ratios
Profitabilty ratio
Gross profit ratio: it indicates the efficiency of the production/trading operations
( Gross profit =Net income –COGS)
Gross profit
-------------------X 00
Net income
Net profit ratio: it indicates net margin on sales
net profit /net income (Net profit = operating expenses- tax –interest -& all the other expenses )
Net profit
--------------- X 00
Net income
Return on share holders’ funds: it indicates measures earning power of equity capital
Profits available for Equity shareholders
-----------------------------------------------X 00
Average Equity Shareholders Funds
Return on investment (Return on capital employed ROCE ) = Profit before interest & tax & Dividend / Capital
employed
 Why net profit is recorded in liablity account

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Ans ;- Because it is a amount left which need to be distributed to the shareholder (In form of dividends or any
other way such as bonus) Therefore business’s liablities remains the same & shareholder’s equity in the business
will increase.
The profit or net income belong to the owner of sole proprietorship or to the stockholders of a corporation,The
owner’s or stockholder’s equity is reported on liablity side (with retained earnings) of the balancesheet
Operating profit ratio =Operating profit /net income( Operating profit – (operating expenses )R & D expenses –dep-
amortisation)
Earning per Equity share (EPS): it shows the amount of earnings attributable to each equity share
Profits available for Equity shareholders
----------------------------------------------
Number of Equity shares
Dividend yield ratio: it shows the rate of return to shareholders in the form of dividends based in the market price of
the share,A financial ratio that indicates how much a company pays out in dividends how much a company pays out in
dividends each year relative to its share price
Annual Dividend per share
---------------------------- X 00
Market price per share
Price earnings ratio: it a measure for determining the value of a share May also be used to measure the rate of return
expected by investors
It is the ratio for valuing a company that measures its current share price relative to its per share earnings
OR it is the ratio indicating how much an investor is willing to pay based on its current earnings
FuLL CONCEPT;- The price earning ratio indicates the dollar /rupee amount an investor can expect to invest in a
company in order to receive one dollar of that company’s earnings.This is why the pe ratio is called earnings multiple
because it shows how much an investor is willing to pay based on per dollar of earning
Example ;-If a company were trading currently trading at a multiple of 20(pe ratio =20 ) The interpretation is an investor
is willing to pay 20 dollar for 1 dollarof earning
Market price of share (MPS)
------------------------------------ X 00
Earnings per share (EPS)
 How pe ratio can misled
 How does PE Ratio of a firm will change after stock split
There is no effect on a stock’s pe ratio when it splits
Earning per share trailing twelve months =45.15

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Price /earnings ratio = Stock price/EPS= 650/45.15
14.4
Post split 650/7 = 92.86
Earning per share = Stock price /EPS
92.86/6.45
14.4
Conclusion math tell us P/E ratio pre /post Split
Liquidity or solvency ratio
Solvency liquidity ratio are both termed to an enterprise’s state of financial health but some notebale
differences.Solvency refers to an enterprise’s capacity to meet its long term financial commitments. Liquidity refers to
enterprise’s ability to pay short term obligations.
What would happen if liquidity ratio is less then 1
Ans ;- A ratio under 1 indicates that a company’s liablities are greater than its assets & suggests that the company would
be unable to pay off its obligations if they come due at that point. A current ratio below 1 is ussually is not a good sign.
Current ratio: it measures short-term debt paying ability
Current Assets
------------------------
Current Liabilities
Quick Ratio: The ratio termed as ‘liquidity ratio’ The ratio is ascertained y comparing the liquid assets to current
liabilities.
The quick ratio measures a company’s ability to meet its short term obligations with its most liquid assets & therefore
excludes inventory from its current assets.it is also known as acid test ratio.
Liquid Assets(current assets – inventories)
------------------------
Current Liabilities
Cash & cash equivalents + marketable securities + account receivables
------------------------
Current liablities
Solvency ratio
Debt-Equity Ratio: it indicates the percentage of funds being financed through borrowings; a measure of the extent of
trading on equity
The ratio indicates the degree of financial leverage being used by the business & includes both short term & long term
debt.

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A rising debt to equity ratios implies higher interest rate expenses & beyond a certain point ,it may attract company’s
credit rating making it more expensive to raise debt
Total Long-term Debt
---------------------------
Shareholders’ funds
Debt to assets Total debts/total assets
This ratio quantifies the percentages of a company’s assets that have been financed with debt( short term & long term)
Interest coverage ratio
Operating income (EBIT)
------------------------
Interest expense
This ratio measures companies’ ability to meet the the interest expense on its debt with its operating income,which is
equivalent to its earning before interest & taxes
Put call ratio
The put call ratio is an indicator ratio that provides information about trading volume of put option to call option.
Technical trades use the put –call ratio as an indicator of performance & as a barometer of overall market sentiment.
Interpretation-> One way to interpret the put call ratio is to say that
1. If the ratio is higher than 1 it suggests that the ratio is higher than 1 ,It suggests that traders are buying more put
then calls in option segment.
2. Another way of interpretation is higher rartio means it time to sell & a lower ratio means it is time to buy.
The higher the ratio the better the company’s ability to cover interest expense
 IPO PROCESS
A brief note on the promoters * management
Company profile
Copy of annual report for three years
Copy of draft offer documents
Memorundum & article of association
 Hedgers;- An investor who is aiming to reduce the level of risk is ussually called hedger
 Speculator ;-Usually try to protect price movements & enter into respective postions in order to maximise their
gains ,we can say that the speculators are risk takersi
 Arbitrageurs ;- They usually participate in an excessively rapid environmentmwith the decisions taken in the blink
of an eye sometimes the price of the commodity may be below or exceed its price in the derivatives market
Arbitrageaurs usually took to dispose of such imperfactions & ineffecianciesin the marketthey also play key role in
increasing market liquidity
 Who is a scalper?
 Scalper represents another type of trader who play a crucial role in the economic functioning of the equities and
futures market They are the individuals who engage in continuous buying and selling of securities on their own
behalf they work on low marginsbut their continuous trading makes good profits on their investment

 Page 20
 Repurchase agreement- A purchase agreement or Repo for short is a type of short term loan much used in money
markets where by the seller of the security agrees to buy it back at specified price & time
The seller pays an interest called repo rate while buying back the securities
 Strong rupee will benefit which of the country(AMBA RESEARCH,ONGC,INFOSYS,Answer the ONGC
as hey are the importers & has to pay less money for purchasing Raw material
 Among those which one is developing nation (Singapore,Japan,china,US,Ans China)
 American option;- It is followed in INDIA ,In this option one can excersize the contract anytime before the expiry
of the contract
 European option;- It can be exercized only at maturity,its theoritical price of option is calculated by BLACK
SCHOLE MODEL
Relationship between futures & spot prices /Spot-futures parity formula
The price difference between spot & future price is called or leads to spot –futures parity.
The spot future parity arises due to variable such as interest rate,dividends,time to expiry etc.
In a very loose sense it is simply is a mathamatical expression to equate the underlying price & its its
corresponding futures price.this is also known as futures price formula
Futures price ;-
Formula ;- Spot price * 1+ rf (x/365) –d
Spot price = price trading in equity market
Rf = risk free rate ( It can be taken as a proxy as 91 day’s trasury bill for short term liquidity)
X= no. of days to expiry
D= dividend in most of the time while calculating values it is taken as 0 & it is expected company did not expect
any dividend during the period of calculation say for example 7 days to expiry so the company is not giving any
dividends in next 7 days so its value is kept as 0
Fair value or intrinsic value = the value derived from the predetermined formula
Futures price = 2299 ( 7 days to expiry)
Far month calculations
No. of days to expiry = 80 days
= 2280.5* ( 1 + 8.3528 % *(80/365)
=2322
So we can say that the value is at fair future value is at premium or at over valued
So it can be inferred as sell in the futures market
Other round we can when fair price is lower then spot futures then it is said to be at discount
* When futures prices are higher than spot price it is called as contango.
Calander spread= In a calander spreads , we attempt to extract & profit from the spread created between two
futures contracts of the same underlying but different expiries.
In common paralance
Premium = contango
Discount =backwardization
Characterstics offutures /factors affecting futures
Organized exchanges ;- Unlike forwards contracts which are traded in an over the counter market,futures are
traded on organized exchanges.
Standardization ;- In case of forwards currency contracts ,the amount of commodity to be delivered & the
maturity date are negotiated between the buyer & seller & can be tailor made to buyer’s requirements,
Where as in the futures contract both these are standardized by the exchange on which contract is traded.
Clearing house;- The exchange acts as a clearing house to all the contracts stuck on the trading floor
Margins ;- The exchange requires that the margins must be deposited with the clearing house by a member who
enters into a futures contract
Actual delivery is rare ;- In futures contracts actual delivery takes place rarely.
CAPM or Capital assetpricing model
Method of defining expected market return of the security is known as CAPM

 Page 21
If the expected rate of return is more then minimum standards the project or inestment is selected otherwise
rejected
Formula Expected return = Rf +B(Rm-Rf)
Rf= risk free rate
B=Beta of the portfolio
Rm=risk of market or Market return
 Participants in secondary market
Brokers / members of stock exchange
Portfolio manager
Investment advisors
Share transfer agent
Depository participants
 Types ofrisk
Systematic risk (Inflation risk,interest rate risk,market risk,foreign exchange risk,Political risk)
Unsystematic risk (Controllable risk,business risk,financial risk/credit risk,oprerational risk)
Spot price ;- The price at which security can be bought & sold
 Floating rate bonds ;- Typicaly the rates are based on either federal funds rate or libor plus n an added amount say
LIBOR + %
For example ;- A rate is quoted as Libor + 5 % suppose LIBOR stands at % the new rate would be 5 %
 Difference between floating rate bonds & Fixed rate bonds
The main difference is that the coupon rates are fixed in fixed rate bondswhile in floating rates bond it would be
based on Either LIBOUR/MIBOR
SAY if Government of india isues bonds paying 9% coupon or interest during entire tenure of bond it is called
fixed rate against that inflation indexed bond is a floated rate bond where RBI pays X % ,say % over CPI & WPI
to the bond holder
So this CPI or WPI figures would be different every year in most cases & hence coupon payment also varies
 Distinguish between Financial accounting & managerial accounting
 Owner’s capital ;- the capital given by a shareholders in a business firm/ company is known as owner’s capital
 Long term liablities ;- Any liablities which is kept for a longer period of time is known as long term liablities
Liablities not due within the next months such as loans & debentures are called long term liablitiesthey are also
known as long term debtor Non-current liablities
 Current liablities;- which are due or repaid are called current liablities
 Contigent liablities ;- A contigent liablity that may arise /occur depending on the outcome of an uncertain event,
It is recorded in accounting records if the contigent is probale & the amount of the liablity can be reasonably
estimated
Examples are
The outcome of a law suit
 Contigent asset
A contigent is a possible asset that may arise because of gain that is contigent on future event that are not in
entity’s control
 Retained earnings;-Retained earnings represents the corporation’s cumulative earnings that have not been
distributed to its stockholders,
Retained earnings refers to the percentages of net earnings not paid out as dividends,but retained by the company
to be reinvested in its core business or to pay debt
Amount of retained earnings of a balancesheet is reported as separate line item in the stockholder’s equity section
of a balancesheet
 What is the purpose of the cash flow statement
The purpose of cash flow statement is to provide information about company’s gross receipt & gross payments for
a specified period of time
Capital expenditure ;- any expenditure which is incurred in aquiring or increasing the value of a fixed asset is termed as
capital expenditure ,such as ,the amount spent on the purchase or errection of building,Plant,furniture etc

 Page 22
Revenue expenditure ;- Any expenditure the full benefit of which is received during one accounting period is termed as
revenue expenditure
SWAP
Swaps are financial instruments /agreements to exchange cash flows,swaps can be based on interest rates ,foreign
currencies etc.
A swap is a derivative contract through which two parties exchange financial instruments.these instruments can
be almost anything ,but most swaps involve cash flows based on a notional principal amount that both parties
agree to.
Interest rate swap
Currency swap
Credit default swap
Plain vanilla swap
 Credit default swap ;- A credit default swap is a particular swap designed to transfer the credit exposure of fixed
income products between two or more parties
Example ;- Aditya has 00 rs ,B wants 00 rs as a loan where B has been Rated BB rating which is not a good
rating so the party Azhar has come to the picture who has been given AA rating
So Azhar gives the assurance tha money will be paid according to terms on the maturity surely
Because Azhar has AA rating Party Aditya has given the loan to Party B
Aditya is getting 0 % interest over the loan ,In which % is given to Azhar for thee assurance given about the
loan so 9 % interest is earned by Aditya & % is by Azhar
The whole concept is known as Credit default swap
 Plain vanilla swap ;-In this SWAP party agrees to pay floating rate of interest & party b agrees to pay fixed rate
of interest as they have mentioned in the agreement
 Format of trading account & profit and loss account
 Format of balance sheet
 Format of trial balance
 Format of income statement
What items are considered liquid assets
A liquid asset is cash on hand or an asset that can be readily converted tocashor is similar to cash itselfbecause the asset
can be sold with little or no impact on its value.
Liquid assets are the assets which can be converted into cash within a year
Investments are considered liquid assets because they can be readily liquidated for example shares of stock,bonds,money
market funds & mutual funds are considered liquid asset.
What are the items which may be considered as non liquid assets
An example of non liquid asset is a real Estate investment because it can take months for a person or company to receive
cash from sale.
If a company wants to sell the property quickly ,the value of the property can result in loss.
Gross profit ;- Gross profit is the difference between revenues earned & cost of goods sold for a given period of time .
Example ;- if you sell $ 100 worth of widgets & if cost you 75 $ to product then the Gross profit is 15 $.
Gross profit is the first component in income statement operating income /operating profit is second.
Operating profit / EBIT /Operating income/EBITDA

 Page 23
It is referred as earnings before interest and tax,Operating profit represents the earning power of the company with regard
to revenues generated from ongoing operations.Operating profit gives an indication of the current operational profitabilty
of the business & allows a comparision of profitabilty between different companies after removing ot expenses.
The profit earned from firms’ core business operations is called operating profit so a a shoe company’s operating profit
will be the profit earned from solely selling shoes.
Operating profit does not include any profits earned from investments & interests ,
It is also known as operating income ,PBIT,EBIT
Net profit /Net income
The word net means after all the deductions therefore the profit after all the deduction have been called net profit
Net profit /Net revenue = Total revenue-total cost
Examples Total =operating + non operating revenues & gains=60000
Total operating + non operating exp./ losses= 40000
Net profit =total revenues –total cost =60000-40000 Net profit or net revenue/net income
Profit before tax
Profit before tax deducts all expenses from revenue including interest & operating expenses ,excluding tax.PBT gives
investors a good idea about the company’s profits every year
Profit after tax
Profit after tax also referred as the bottom line,is a measure of the profitabilty of the company after deducting all the
expenses.
Net worth
It is the difference between a company’s total assets –totalliablities ,its is also known as shareholder’s equity.

 Page 24
Book value
Book value = Assets – Liablities
Wherein assets = assets are what the company ownslike factory ,building products,what ca company owns that can sell it
can sell for money ,Liablities a company owes debt mortgage payments these would be examples of liablities
So basically when you are looking if the company close down pay ,sold everything they had and paid off all the things
they had & paid off all the things the financial payments they needed to fulfill paid off paid out all their debt all their
mortgage payments how much would they be left with,sell verything pay off everything what’s that number ; that number
is what we call book value
Example of book value
Price of company A is 18 $
Assets =80 million
Liablities = 5 million
Assets – liablities =book value
80-75= 5 million
So lets say this company has say 5 million shares so book value per share would be book value /share
So think the company close down tommorow they have paid off all their debt their mortgage payments they would be at
75 million but 75 million is not owned by 1 person this is owned by 5 million person so you divide that 75million shares
by 5 million shares so you get 15 $ So this is a good deal for an investor paying 18 dollars for a book value of 15 dollars.
Or the book value is 15 dollars
So If the company lquidiate or sell off every thing what they are going pay out to an investor is 15 $.
(what I feelis evry quarter book value is calculated)
So if we are comparing book value to its current price then it would be called over valued which could be one of the factor
while determining whether the stock is undervalued or over valued
I have noticed the term “diluted share” used more frequently in financial reports. What is a diluted share and
how did this term evolve. — Lloyd J.
What is the meaning of diluted shares
A: Companies have taken a lot of flak recently for watering down their financial reporting, but in this case reporting
on dilution means giving you more information — not less.
In this context, “dilution” refers to the effect of adding more shares to the pool of stock that is already trading in the
open market. For example, if you own stock in a company with 1 million shares trading at $10 each, and the
company decides to issue another 1 million shares, you’re holdings would be “diluted” by those new shares. Since
the company hasn’t done anything to increase its value, the stock would drop to $5. It’s not much different than what
happens to your savings when the government starts printing too much money.
Extra shares can be issued for a variety of reasons, but one common source is “convertible preferred shares” — a
special class of stock that allows the holder to convert those shares to common stock. (Preferred shares, which often
pay a special dividend, are really more like bonds than stocks.)
How to value a stock
1 Earning per share =Net income /O.S. shares
2 Profit margins = Net profit margins= Net income /revenue

 Page 25
3 Return on equity =Net income /shareholder’s equity
4. PEG ratio = Stock’s PE ratio/Growth over 12 months
5. Book value comparision to its CMP price = 214 vs 298 for vedanta as on 15 -12- 17
The book value tells if company liquidiates the price paid to its shareholders is called as book value
Providend fund ;- It gives the lump sum payment at he time of exit from the organization.in providend fund 12 %
of basic salary is retained ,and another 12 % is paid by the company.
Pension fund;- A pension fund have both the elements which are a lump sum,monthly payments
Red tapism ;- Rad tape is an idom refers that refers to excessive regulation or rigid conformity to formal reules that
is considered redundant or beuracratic & hinders or prevents action or decrision making.it is usually applied to
govt,corporations & other large organisation.
A struggle to get burecratic approvals ,struggle to get certificates sometimes may be birth certificate or even for
death certificates as well.everyone in the system is asking for ‘ mujhe kya milega’.
Contango ;- It occurs when the current future price of an asset ( in futures market) is higher that the current spot
price of the underlying assets
If the quoted future price is higher than the spot price ,the commodity is contago.
For example ;- An airline company ,which requires vast amounts of oil in order to operate ,may be afraid that oil
prices will go up in the future.To hedge against that possibility that Future oil prices will increase so much that the
airline will be forced out of business ,the business ,the airline may buy future contracts to lock in the price of oil at
its future prices,even if the futures prices is higher than the spot prices ,the airline does not want to be caught in a
situation where oil goes up even more than the futures market expected.
Backwardization;- If the crude oil is trading at 100$ per barrel,but the price of delivery in six months is 110 per
barrel,that market will be contango. On the other hand ,if crude oil is trading at 100 $ per barrel for delivery right
now & the six month contract is trading at 95 $ per barrel then the market will be called as backwardization
Authorized capital
Authorized caiptal is the total value which will be the maximum amount company can allot to the investors or in
public.
Paid up capital
Suppose a company has authorized capital of 50000 rs.It has allowed 20000 worth of shares in the pyublic it is paid
up capital
Corporate action – The initiation taken by a corporate entity that brong in a change to its stock,it is initiated by board of
directors & approved by company’s shareholders
Corporate action is formed by following ways
Right issue
Buyback of shares
Splits
Bonus shares
Dividends
Offer for sale
FPO
CAGR
Right issue

 Page 26
This is A second IPO for a select group of people( existing shareholders) the right issue could be an indication of a
promisingnew development in the company ,It refers to offering additional shares to the current shareholders of the stock.
This is done by companies to raise capital for further expansion which provide its existing shareholders the right to buy
the stock at discounted rates than price making it more lucrative.
 Adjustments for Rights Issues
When a company, included in the compilation of the index, issues right shares,the free-float market capitalization
of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price.
An offsetting or proportionate adjustment is then made to the Base Market capitalization.
Buyback ofshares
A buy back can be seen as method for a company to invest in itself by buying shares from the investors in the market.
Buyback reduces number of shares outstanding in the market,there could be many reasons why corporate choos to buy
back shares,these are listed below,
Buyback is an action in which company offers to buys back its stock from the current share holders at an attractive price.
The reason is to reduce the shares outstanding in the market or to reduce the stake of shareholders in company
Improve the profitability /Earnings on per share basis
To consolidate their stake in the company
To present other companies from taking over
To show the confidence of the promotors about the company
To support the share price from declining
To company will do it only when it is cheaper / below its intrinsict/fair value.
 Stock Split and Reverse Spilt:A corporate action in which a company’s existing shares are divided into multiple
shares. For Ex. A company with 100 shares of stock price Rs 50 per share (100*50 = 5000). The company splits it
shares 2 for 1. There are now 200 shocks for Rs 25 each (200*25 = 5000) . The reason why companies split their
stock is to make them more affordable to investors because stock price reduces after it is split. Likewise, reverse
split increases the stock price while reducing number of outstanding shares.
Primary motive of splits
The primary motive is to make shares seem more affordable to small investors even though underlying value of the
company is not changed
 Bonus share;- It is an additional dividend given to the shareholders that can be in cash or in the form of stock.
When companies have outstanding performance with surplus profit, they may decide to issue bonus to the
shareholders.
Primary motive of bonus shares
Company may prefer to give bonus shares rather than cash dividend as a method of providing income to
shareholders because bonus shares increases share capitalof the company ,the company is perceived as being
bigger than really it is ,making it more attractive to investors
Adjustments for Bonus Issue
When a company, included in the compilation of the index, issues bonus shares,the market capitalization of that
company does not undergo any change. Therefore,there is no change in the Base Market capitalization; only the
'number of shares' in the formula is updated.
 Spin-Offs: Spin off means a company breaking up itself into smaller units. The creation of an independent
company through the sale or distribution of new shares of an existing business/division of a parent company.

 Page 27
 Dividend Payouts:Dividend is the payment made to the investor for sharing the profits a company has made.
 Mergers and Acquisitions:Mergers is a event where two or more companies merge into one aiming to be more
competitive and for more profitability. Likewise Acquisition means a bigger company acquiring a smaller one for
further expansion.
 MERGER;- Mergers generally refers to a circumstances in which the assets & liablities of a company are vested
into another company The merging entity loses its identiy
Horizontal merger ;- Any ENTITIES merging which are the competitors or in competiting businesses ,which are
same stage of industrial process A horizontal merger takes a company closer towards monopoly by eliminating a
competitor & establishing a stronger presence in the market
Example ;- Kotak aquired INGvaishya bank
Vodafone aquired tata tele services
Vertical merger;- it refers to the combination of two entities of different stages of industries or production
process for ex;- a company engaged in construction business with a company engaged in production of brick or
steel would lead to vertical integration
rewliance & flag telecom group
conglomerate merger;- A merger between firms that are involved into totally unrelated business activites is
callsed conglomerate merger
Reason ;- Utilization for finanical resources
L& t merge into voltas ltd
Concentric merger ;- A merger of firms which are into similar types of business
Generally these are the merger between entities in the same general industry or somewhat inter related
 Amalgamation ;- Amalgamation is the union of two or more companies made with an intention to form a new
company ,
It is an agreement between two or more companies to consolidate their business activities by establishing a new
company having a separate legal existence
Ex;- Maruti motors operating in india & suzuki based Japan amalgamated to form a new company called Maruthi
suzuki india ltd
Amalgmation vs acquisition
WHEN A COMPANY takes over control of another company establishes itself as owner ,the transaction or
process is called as acquisition
When two or more companies joins together to consolidate & form a new company in an effort to have larger
customer base ,larger market share & posibally more profits ,the process is called amalgamation
Amalgamation is between equals whereas Acquisition is between unequals or unequal sizes
Offer for sale;- the company wants to dilute their ownership so issue its ownership further at a discount price say about 5
% is called offer for sale
Followon public offering ;-,An fpo is essentially a stock issue of suppliment shares made by a company that is already
listed on the exchange
How does bonus of 1; 2 affect the equity holdings or f & o positions
L & T goes ex-bonus in the ratio 1;2 ON 13 JULY 2017
It means bonus 1 share is issued at Rs 0, for every two shares held in demat account of all eligible shareholders.
Effect on holding ;- When a bonus is issued the share price drops ,In case of 1 ;2 the adjustment will be (1+2/2) so the
multiplier would be 1.5 ,so if you held LT shares at an average price of 1500 ,the price of each share after bonus would
adjust to 1500/1.5= 1000 you will be given 1 share at rs 0 for two shares held there by maintaining your overall
investment value. Suppose the investor held 100 shares now he will have 150 shares now.
So total value of investment portfolio would be same as 150000(100*1500) vs 150000 (150*1000)
Note ;- A bonus issue only increases liquidity not your investment value

 Page 28
P & L drop
Untill the bonus shares are credited to the demat accounts ,it will show a decrease of approximately 33 % ,Once the bonus
shares are credited of an avg price of 0 ,your p & l account in the portfolio will be credited to its correct value.
You will receive an SMS from CDSL when your Bonus shares are credited to your demat which could take upto 2 weeks
Effects on f & o positions
Option strike prices are divided by the factor 1.5 ,A strike price of 1800 becomes 1200.
F & O lot sizes are multiplied by factor of 1.5 ,the Old lot size of 500 will be multiplied by 1.5 & will be revised to a new
market lot size of 750.
Record date;- On the basis of day which is alloted like 29th
is record date means the investor who holds the share on that
day will be alloted the bonus share
What is dividend
It is a payment made by a company to its shareholders usually as a distribution of profits,when a company makes profits it
can re invest into business or it can distribute to its current shareholders by way of dividends
Dividend Yield
WHAT IT IS:
Dividend yield is a stock's dividend as a percentage of the stock price.
The formula for dividend yield is:
Dividend Yield = Annual Dividend / Current Stock Price
For example, let's assume you own 500 shares of Company XYZ, which pays $1.10 per share in annual dividends. If the
current stock price is $12.00, then using the formula above we can calculate that the dividend yield on Company XYZ
stock is:
$1.10 / $12.00 = .0916 = 9.2%
Note that there is an inverse relationship between yield and stock price. For example, if the stock price rose to $15, the
yield would be $1.10/$15 or 7.3%. The 500 share investment would be worth $7,500 (vs. $6,000 originally) but the yield
on the investment would fall from 9.2% to 7.3%.
Further note that the dividend stays the same,meaning even though the stock price falls (or rises), you still receive $1.10
per share (unless the company changes the dividend).
For example If a stock has paid an annual dividend of Rs 22 & cmp is 440 ,the dividend yield is 5 %
Indication ;-If the dividend yield is low ,A share is relatively higher than the dividend paid & hence the stock may be
undervalued this means positive decline in the future.
Possible example 22/500 =4.4
High dividend yield means it is undervalued
WHY IT MATTERS:

 Page 29
Dividend yields are a measure of an investment’s productivity, and some even view it like an "interest rate" earned on an
investment.
A security's dividend yield can also be a sign of the stability of a company and often supports a firm's share price.
Normally, only profitable companies pay out dividends. Therefore,investors often view companies that have paid out
significant dividends for an extended period of time as "safer" investments. Thus, should events occur which are
detrimental to the share price, the allure of the dividend combined with the stability of the company can support the price
somewhat.
Why do companies pay a dividend,while other companieesdon’t
Dividends are the corporate earnings that a company pass on to their shareholders
There are a number of reasons why a corporation might not to choose to pass some of its earnings on as dividends
A company that is still growing rapidly usually won’t pay dividendsbecause it want to invest as much as possible into
further growth
Even a mature firm that belives it will do a better job of increasing its share price by reinvesting its earnings will choose
not to pay dividends
Companies that don’t pay dividends might use the money to start new project,aquire new assets,repurchase some of their
shares or even buy out other company.
Also,the choice to not pay dividends may be more beneficial to investors from a tax perspective ,dividends are taxable to
investors as ordinary income
 Effects ofdividends on the futures prices
When the company announces the dividends before the ex-dividend dates the prices will go up ( in greed of dividends )
when dividend record date is over the next day or next few days the stock prices will go down.
In case the dividends are lower than the other companies then the other companies or lower in amount then it might not
give much fluctuations
By investopedia
If a company announces a higher than normal dividend ,public sentiments tends to soar.
* The declaration of a dividend naturally encourages investors to purchase stock.Because investors know that they will
receive a dividend if they purchase the stock before ex dividend date ,they are willing to pay premium (extra amount )
this causes the prices of a stock go up or increase in the days leading up to the ex dividend date.
On the ex dividend date ,the exchange reduces the price of the stock by the amount of dividend to account for fact that
new investors are not eligible to receive dividends & are these for not willing to pay a premium ,so share prices comes
down because of more selling of shares ,or may be because of short sell based on news.
* An investor should always choose a company which gives regular dividends not a company which gives dividend
sometime not gives other time because these could be because of conning or deceiting people.
Put call ratio
Capital budgeting
Introduction

 Page 30
An efficient allocation of capital Is most important finance function in modern times. It involves decisions to commit the
firm’s long term assets. Capitalbudgeting or investment decisions are of considerable importance to the firm, since they
tend to determine its value by influencing its growth, profitability & risk.
Nature of investment decisions
Investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions.
A capital budgeting decision may be defined as the firm’s decision to invest its current funds most efficiently in the long –
term assets in anticipation of an expected flow of benefits over a series of years.
Importance ofinvestment decisions
1. They influence the firm’s growth in the long run
2. They affect the risk of the firm
3. They involve commitment of large amount of funds
4. They are irreversible
Types ofinvestment decisions
Expansion of existing business
Replacement & modernization
Capital budgeting techniques
1. Discounted cash flow
 Net present value
 Internal rate of return
 Profitability index
2. Non discounted cash flow
 Payback
 Discounted cash back
 Accounting rate of return
 NPV(Net present value)
It Is the method of calculating present value of a project or an investment as on today.
Present value always decreases as and when rate or interest or R is increased
Example 100 rs worth today is may be 98 rs after two years down the line.
Formula NPV=C1 /(1=r)^1 +C1/(1+r)^2 + C1/(1=r)^n
Acceptance criteria

 Page 31
Accept if NPV >0
Reject if NPV<0
May accept if NPV=0
Evaluation of the NPV
Time value
Maximizing shareholder’s funds
Measure of true profitability
 Internal rate of return
It takes same formula to calculate Cash flow assessment or present value of a sum
IRR=C1 /(1=r)^1 +C1/(1+r)^2 + C1/(1=r)^n
Acceptance rule
Accept if opportunity cost of capital or rate of return is higher than required rate of return
R>k
R= rate of return on investment calculated
Where in k is required rate of return or cost of capital
OR opportunity cost = Suppose if we take another investment or project into consideration which one is better this is
known as opportunity cost of capital
Accept if NPV >0
Reject if NPV<0
May accept if NPV=0
 Profitability index
It is the ratio of present value of cash inflows,at the required rate of return,to the intitiial cash outflow of the investment. It
is also know as benefit –cost ratio
PI=Annual cash iinflow /initial cash outflow or outlay
In Another words= pv of cash inflows/initial cash outlay
Acceptance = if ratio is more than 1 as it shows project is in benefit over the cost of project for ex 2:1
For the cost of 1 benefit is 2 or 100 %
Non discounted cash flow
 Pay back period

 Page 32
Pay back is the number of years required to recover the original cash outlay invested in a project.
PAY BACK PERIOD=Initial investment /annual cash inflow
Acceptance- If period is lower it better for the company after reaching BREAK EVEN POINT it is profit on the
investment
 Accounting rate ofreturn
Accounting rate of return is also known as average rate of return which gives the financial ratio used in capital budgeting.
The ratio takes time value of money factor which calculates the return & net income can be generated from the purposed
capital investment.
Other words
The accounting rate return, also known as the return on investment, uses accounting information, as revealed by financial
statements,to measure profitability of an investment.
The accounting rate of return is the ratio of the average after tax profit divided by the average investment
PAT OR EAT /Average investment
Alternatively, it can be found out by dividing the total of the investment’s book values after depreciation by the life of the
project.
Book value after depreciation /life of the project
ARR=Average investment /Average investment
Acceptance rule
This method will accept all those projects whose ARR is higher than the minimum rate established by the management &
reject those projects which have ARR less than the minimum rate.
Higher rank would a project as number one if it has highest ARR & lowest rank would be assigned to the project with
lower ARR.
What is owner’s equity?
Owner’s equity is also known as capital of the business, it is a claim of the owner or shareholder of the business against
the assets of the business .it is also known as shareholder’s funds
It is shown in liabilities side in the balancesheet
Total equity –equity of creditor = Owner’s equity
Acid test ratio-it is a liquidity ratio which measures the ability of a company touse its near cash or quick asstes to
extinguish its current liabilities
Acid test ratio -Current assets- inventory /current liabilities
List of things which come under intangible asstes
Patent
Goodwill
Copyrights

 Page 33
Trademarks
Brandnames
Domain names etc
Mention what does financial statement ofa company includes
Balancesheet
Income statement
Equity statement
Cash flow statement
Why financial reports are prepared
1. Tax return ;- They are prepared to determine the amount of tax for the period as required by income tax,pay roll
& property tax laws.
2. Accounting reports keep managers informed about what’s going on & the financial position of the
business.These accounting reports are absolutely essential to help managers control the persormance of a
business.Identifyproblems as they come due & plan the future course of action.
3. External financial statements – The accounting reports & financial statements are prepared to show the financial
position of the company to outsiders who need to stayinformed about the business’s financial affairs.These people
may have invested capital in the business.These statements may help the following people such as
creditors,auditors,shareholders,Governments etc.
What does a liability? What does it include?
Liablity can be defined as an obligation towards another company or party
It cludes
Accounts payable
Interest & dividends payable
Bonds payable
Short term loans
Consumer deposits
Reserves for federaltaxes
Difference between depreciation & amortization
Depreciation Amortisation
It refers to prorating a tangible asset’s cost over that assets
life for example,A patent on a piece of medical equipment
usually have 17 years.
In intangible ,It refers to prorating the cost of an intangible
asset over the assets life.For example patents are provided
for 10 years so it will divide the cost for 10 years annually
either compounded or on equal amount basis
Depreciation cost is calculated in the terms of intangible It is calculated in terms of intangible asstets like

 Page 34
asstet like furniture,building etc goodwill,trademark,patents etc
Example;- A car worth 3000 rs has estimated life of 10
years after that it will have no value in the market.The cost
or loss in value throught this 10 years is known as
depreciation.
Example-Pharma company spent 20million dollar on a
Drug patent with usful life of 20 years the amortized value
would be 2 million each year.
What are the three factors that can affect your cash flow & business profitability?
CASH FLOW FROM OPERATINGACTIVITIES- Cash flow from operating activities focuses on cash inflow & outflow
from a companies main business activities of buying & selling merchandise, providing services etc.It will also include the
other activities included in next pages
Cash flow from Investment activities- Any kind of investment commonly long term is known as investment activities
Example Purchase or sale of plant and machinery, bonds, shares etc
CASH FROM FINANCINGACTIVITIES- Any provisions made to aquire these assets will be financing activities like
interests, dividends, money paidout or borrowed in order to finance the projects.
Cash flow statements
It is a statement showing changes in cash position of the firm from one period to another,It explains inflow & outflow of
cash over period of time.The inflows may occur from sale of goods,sale of assets,receipts from
debtors,interest,dividend,rent,issue of new shares& debentures,raising of loans,short term borowings etc.
Cash flow from operating activities
Net profit 10000
(-) Depreciation (500)
(+) Loss on sale of goods 300
(-) gain on sale of goods (200)
(-) Dividend received (300)
(-)Interest received (400)
Trade receivable 000
Other receivable 000
OPERATING PROFIT 9300
(+)Decrease in current assets 400
(+)Increase in current liabilities 300
(-)Increase in current assets (-500)
(-)Decrease in current liabilities (-400)
Cash generated from operating activities 9100
(-) income taxes paid (-500)
Net cash from operating activities 8600
Cash flow from investing activities 10100
Receipts from sale of assets 10000
(-) Purchase of fixed assets -1500
Dividend received 500

 Page 35
Sale of investment 1000
(-) Purchase of investments -1200
Interest received 1300
Net cash flowfrom investing activities 10100
Cash flow from financing activities 800
Proceeds from issuance of share capital 500
Proceeds from long term borrowings 1500
(-) Interest paid -200
(-) Dividend paid -300
(-) Repayment on borrowing -200
Net cash flowfrom financing activities 800
Net increase in cash & cash equivalents 500
Cash & cash equivalents at beginning period 600
Cash & cash equivalents at the end ofperiod 1900
Note ;- If dividend & interest is received it is under investment but if it is paid under financing activities
Note ;-Cash from operating activities
Add loss on sale of goods,decrease in CA & increase in CL because we have deducted in previous statements like ( Profit
& loss account Most probably not sure)
Decrease dividends received ,interest recived ,increase in Current assets & Decrease in CL because We have taken into
P/L statements.
Income tax is direct expense so it will decrease in cash
Is it possible for a company to showpositive cash flows but be in grave trouble?
Two such examples are
It involves lack of revenues going into pipeline
It involve unsustainable improvements in working capital, a company is selling inventory & delaying payables
Table ofDifference between Funds FlowStatement and Cash FlowStatement
Basis of
Difference
Funds FlowStatement Cash FlowStatement
1. Basis of
Analysis
Funds flow statement is based on broader
concept i.e. working capital.
Cash flow statement is based on narrow concept i.e.
cash,which is only one of the elements of working
capital.
2. Source Funds flow statement tells about the various
sources from where the funds generated with
various uses to which they are put.
Cash flow statement starts with the opening balance
of cash and reaches to the closing balance of cash
by proceeding through sources and uses.
3. Usage Funds flow statement is more useful in
assessing the long-range financial strategy.
Cash flow statement is useful in understanding the
short-term phenomena affecting the liquidity of the

 Page 36
business.
4. Schedule of
Changes in
Working
Capital
In funds flow statement changes in current
assets and current liabilities are shown
through the schedule of changes in working
capital.
In cash flow statement changes in current assets and
current liabilities are shown in the cash flow
statement itself.
5. End Result Funds flow statement shows the causes of
changes in net working capital.
Cash flow statement shows the causes the changes
in cash.
6. Principal of
Accounting
Funds flow statement is in alignment with the
accrualbasis of accounting.
In cash flow statement data obtained on accrual
basis are converted into cash basis.
Advantages ofCash FlowStatement
1. It shows the actualcash position available with the company between the two balance sheet dates which funds flow
and profit and loss account are unable to show. So it is important to make a cash flow report if one wants to know about
the liquidity position of the company.
2. It helps the company in accurately projecting the future liquidity position of the company enabling it arrange for any
shortfall in money by arranging finance in advance and if there is excess than it can help the company in earning extra
return by deploying excess funds.
3. It acts like a filter and is used by many analyst and investors to judge whether company has prepared the financial
statements properly or not because if there is any discrepancy in the cash position as shown by balance sheet and the cash
flow statement,it means that statements are incorrect.
Disadvantages ofCash FlowStatement
1. Since it shows only cash position, it is not possible to deduce actual profit and loss of the company by just looking at
this statement.
2. In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss etc…, and
therefore limiting its use. Cash flow statement advantages & disadvantages
Fund flow statement
A Funds flow statement is prepared to show changes in the assets,liabilities and equity between two balance sheet dates,
it is also called statement of sources and uses of funds. It states changes in working capital of business in relation to the
operations in one time period The advantages of such a financial statement are many fold.
Some ofthese are:
1. Funds flow statement reveals the net result of Business operations done by the company during the year.
2. In addition to the balance sheet,it serves as an additional reference for many interested parties like analysts, creditors,
suppliers, government to look into financial position of the company.
3. The Fund Flow Statement shows how the funds were raised from various sources and also how those funds were
deployed by a company, therefore it is a great tool for management when it wants to know about where and from what
sources funds were raised and also how those funds got utilized into the business.
4. It reveals the causes for the changes in liabilities and assets between the two balance sheet dates therefore providing a
detailed analysis of the balance sheet of the company.

 Page 37
5. Funds flow statement helps the management in deciding its future course of plans and also it acts as a control tool for
the management.
6. Funds flow statement should not be looked alone rather it should be used along with balance sheet in order judge the
financial position of the company in a better way.
Disadvantages ofFund FlowStatements
Funds flow statement has many advantages; however it has some disadvantages or limitations also.
Let’s look at some ofthe limitations offunds flow statement.
1. Funds Flow statement has to be used along with balance sheet and profit and loss account for inference of financial
strengths and weakness of a company it cannot be used alone.
2. Fund Flow Statement does not reveal the cash position of the company, and that is why company has to prepare cash
flow statement in addition to funds flow statement.
3. Funds flow statement only rearranges the data which is there in the books of account and therefore it lacks originality.
In simple words it presents the data in the financial statements in systematic way and therefore many companies tend to
avoid preparing funds flow statements.
4. Funds flow statement is basically historic in nature, that is it indicates what happened in the past and it does not
communicate anything about the future, only estimates can be made based on the past data and therefore it cannot be used
the management for taking decision related to future.Conclusion
We can conclude that shorter the period is cash flow is more relevant & longer the planning period is more relevant is
fund flow statement
Why following items are added to profit to calculate cash flowfrom operating activities ?
Depreciation--is added because it is a non cash expense so it will increase cash in cash flow statement
Loss on sale of a fixed asset-- is added because it is a non cash expense so it will increase cash in cash flow statement
Goodwill writtern off--is added because it is a non cash expense so it will increase cash in cash flow statement
State two objectives ofcash flowstatements
 It is prepared to assess deviation of cash & cash equivalents
It helps in formulating dividend policy
What are cash equivalents?
Cash equivalents means short term & highly liquid investments,which can be converted into cash without any loss in
value& they present no change in value. Generally assets which can be converted into cash within three months are
known as cash equivalents.classify the following types of activities in a financing a company
Purchase of machinery –Cash outflow in investing a company
Issue of share capital –cash infllow infinancing activities
Reciept of interest – cash inflow in financing activities

 Page 38
Sale of long term investment –cash inflow from investment activities
Redemption of debentures – cash outflow in financing activities
Why finanicial statements are prepared?
 knowing the profitablity of the business
 knowing the solvency of the business
 judging he growth of the business
 judging the growth of the business
 judging the earings capacity of the business
 forcasting & preparing budgets
 communicating with different parties
 making with other firsms
Parties interested in financial analysis
 Management
 Investors
 Creditors
 Government
 Employees
 Taxation authorities
 Other parties
Ratio analysis
Ratio analysis is an art of determining relationship between different component of financial statement so as to afford a
meaningful understanding of profitabilty & solvency of the business concern.
Objectives of ratio analysis
 Simplyfication of data
 Estimation of business earnings
 Judging Managerial efficiency
 Solvency determination
 Making comparison
 Formulation of budget & policies

 Page 39
 Forcasting
What is balancesheet?
What is the difference between profit & oss statement & income expenditure statement?
What is cash flow statement?
What are changes in equity?
What is fund flow statement?
What is working capital?
For all the statements prepare a format (Check the yellow book)
LIBOR ;London interbank offer rate
Short sell ;- He has shortsell shares that he currently does not hold
Beta ;- it is a measure of the volatility or systematic risk,of a security or a portfolio in comparision to the market as a
whole,Beta is used in capital asset pricing model which calculate return of investment based on its beta (Other details
can be found in blue book)
What is beta & how it is calculated
It is a measure to calculate systematic risk only. it is used in fundamental analysis to determine the voltality of an asset of
or portfolio in relation to overall market.
It is used in Capital asset prising model which calculates expected return of an investment & expected market return
𝛽= E(Rs)-Rf/E(Rm)-Rf
𝛽=Beta
Rs = Expected return on investment
Rm=Expected market return
Rf=Risk free rate
Accept =If beta is less than 1 then the investment is less volatile than the market or benchmarkbut when the beta is more
than 1 it means it is more volatile than the market
A greater beta or more than 1 represents the stock is volatile tends to move up & down with the market
Systamatic risk arise due to
Interest rate risk
Inflation risk
Political risk
It is not specific to a sector
Alpha
It is an excess return on an investment based on all the other things like beta remaining the same

 Page 40
Alpha is the excess return an investment produces compared to a benchmark
It gauges investment performance given its price risk or volatility as compared to other investments
If alpha is positive the investment has outperformed & should be seen as selected
If it is not positive than it has underperformed & should not be undertaken
 Delta;- It is measured as a measure of volatality,A measure of the likelihood that an option will be in the money
on the expiration day
Formula ; Change in the premium/ change in price unit of underlying asset
 Gamma;- The Gamma represents the amount by which an option delta would move in response to a unit change
in the response to a unit change in the underlying stock price or index
Formula; Change in delta/change in unit price
 Theta;- the theta is obtained by considering value of an option as a funstion of time when all other parameters of
pricing model remain constant
Formula; change in option premium/change in time to expiry
 Vega ;- Vega measure the rate of change of the value of an option with regard to value of an option with regard to
volality of the underlying stock
Formula =change in option premium/change in volatility
Howto calculate option prices ofEuropean call option using black scholes model?
Black scholes model
It was developed by fisher black,Robert Morton ,& Myron scholes in 1973
It is used to determine theoretical price of European call option
It takes following formula to calculate option prices
Variation in stock/Underlying price
Time value of money( risk free rate)
Time to expiry
Option strike price
Assumptions
The option is European & can only be excersized only at expiry
The option is European & can be excersized only at expiry
No dividends are paid out during life of an option
There is no transaction cost
The risk free rate (Time value of money) & the volatility are known & constant

 Page 41
That the returns on the underlying are normally distributed
Limitations
It may be noted that the black school option pricing model works well for the options that are near the money & options
with next striking price on either side of the stock price. However it does not yield satisfactory results for the options that
are deep in the money or out of the money.
Examples of bonds
IFRC tax free bonds
Issue size-40000 cr
7.29 %
Nhai tx free bonds
3300 cr
7.29 for 15 yrs
7.69 for 20 years
List of credit rating agencies
Crisil limited
ICRA –Investment information & credit rating agencies
CARE-Credit analysis & research ltd
Brick work rating india pvt ltd
SME Rating india private ltd
Thomson reuters
Why to prefer bonds over shares
What are the types of bonds?
Tell me about Zero coupon bonds, what is point to get zero coupon bonds?
What are credit rating agencies?
Types of credit rating agencies
What are mutual funds & how does it work?
Examples of bonds
NHAI Rate of interest 7.29 & 7.69 –IFRC,NHAI It depends based on Maturity
What is GDP? What does it denote?
What is Repo rate? & reserve repo rate?

 Page 42
Credit rating agencies
It is a company that assigns credit rating, which rates a debtors ability to pay back debt by making timely interest
payments & the likelihood of default.An agency may rate the credit worthiness of issuers of debt obligations.
The debt instruments rated by CRA’s include Govt bonds, corporate bonds, Certificate of deposits, Muncipal bonds,
Preferred stocks& collaterized securities such as mortgage backend securities etc.
Rating given are AAA,Aaa,AA,Aa2,A,BBB,Baa2,BB,CCC
Q: What is a deferred tax liability and why might one be created?
A: Deferred tax liability is a tax expense amount reported on a company’s income statement that is not actually paid to the
IRS in that time period, but is expected to be paid in the future. It arises because when a company actually pays less in
taxes to the IRS than they show as an expense on their income statement in a reporting period.
Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income
between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes
payable to the IRS.
Green field investment ;- It occurs when a parent company begins a new venture in a country outside of where company is
headquartered
Brownfield investment investment ;- It occurs when a company or governement purchases an existing facility to begin
new production
WACC;- Weighted average cost of capital ;- The cost of buying a set of equity and debt is called weighted average cost
of capital.Foe example ;- You take a debt of say 100 rs may be 5 rs you are paying as cost of it which you pay.
In other words ;- it is the average rate of return a company expects to compensate all its investors. It includes all the
sources of capital,including common stock,preferred stock,bonds & any other long term debtare included in WACC
calculations.
WHY WACC MATTERS:
It's important for a company to know its weighted average cost of capital as a way to gauge the expense of funding future
projects. The lower a company's WACC, the cheaper it is for a company to fund new projects.
A company looking to lower its WACC may decide to increase its use of cheaper financing sources. For
instance, Corporation ABC may issue more bonds instead of stock because it can get the financing more cheaply. Because
this would increase the proportion of debt to equity, and because the debt is cheaper than the equity, the company's
weighted average cost of capital would decrease
Interpretation ;- from the company’s perspective the lower is the cost of capital the better for the company
Example ;- capital is 100 which is being financed from equity & debt ,suppose 70 rs is taken from equity shareholders &
30rs is being taken from creditors ,
Cost of equity is 10% ,cost of debt is 7 %
So the WACC would be = 0.7*10%+ 0.3*7%
=.07+0.021
=0.091

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