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Concept of money in Finance industry

The article below talks about basics of finance and the terminologies associated with it.

  • What is Currency?
    • Ans: Practical Form of money
  • Mac has earned $50,000 annually for the year 2004. Then next year he will get 10% hike but the inflation for the year 2005 is 20%. What will happen for year 2005?
    • Ans: The living style of Mac degrades in year 2005
  • What is CPI?
    • Ans: Consumer Price Indices
      • Inflation = % increase of CPI last year Vs this year.
  • What is Nominal Rate? What is Real Rate?
    • Ans: Nominal rate is the rate which bank offers and Real rate is,
      • Real rate = Nominal rate – Inflation rate
  • Formulas for present value of money and future value of money.
    • Ans: Future value (FV) = Present Value (PV) * (1+ Interest I) ^ Period (n)
  • What is NPV? What is DCF?
    • Ans:     Net Present Value.
      • Discounted Cash Flow.
      • NPV = – Initial cost – DCFs for the preceding years.
  • What is IRR?
    • Ans: Internal Rate of Return also referred as ‘Yield’
      • It is the rate which makes NPV zero.
  • How do corporate raise capital?
    • Ans: Through Equity and Debts.
      • Equity: Stocks
      • Debts: Bonds, Debentures, Securities and Certificates.
  • Debt is considered senior to Equity. Debts are paid inform of Interest rates called Coupon rates while Equities are paid inform of Dividends.
  • What are Munis?
    • Ans: Bonds issued by municipality. Tax free, most secured but interest rate is lower.
  • What are Treasury Securities?
    • Ans: Treasury bills, notes and Bonds are marketable securities.
      • Treasury bonds are considered as safest investment because they are backed by US government securities and are tax free.
  • What is Zero Coupon Bond?
    • Ans: Zero coupon bonds generate no interest periodically but will be issued at much discount rate form
      • it’s face value.
  • What is CP?
    • Ans: Commercial Paper which is unsecured, short term loans issued by a corporation.

  • What are IPO, SEC & POP?
    • Ans:     IPO: Initial Public Offering
      • SEC: Security and Exchange commission
      • POP: Public Offering Price.
  • Which are stock types?
    • Ans:     Common Stock: Ownership in the company
      • Preferred Stock: No voting rights. Priority over common Stock
  • Which is true about Convertible Preferred stocks from below?
    • Ans:     Can be converted into certain shares of Common stock.
  • What is ADR?
    • Ans:     ADR: American Deposit Receipt. Used to facilitate domestic trading of a foreign stock.
  • What is true about Convertible bonds from below?
    • Ans: Can be converted into certain number of shares after certain time.
  • What are warrants?
    • Ans: Call options.
  • What are Derivatives?
    • Ans:     Means of distributing risk or to hedge (Avoid) and is derived from the value of the underlying asset, index or reference rate.
      • Examples,
  • Forward contract
  • Future contract
    • Hedging
    • Arbitrage.
  • Options
    • Call options : Buy a stock at a certain price on or before certain date
    • Put options: Sell a stock at a certain price on or before certain date

American Options, European options, Long term options (LEAPS: Long-term Equity Anticipation Securities), Exotic Options, Open interest are examples for the types of options.

  • Swaps: Exchange of cash flows or securities for another to change maturity (Bonds) or
          • quality of issues (Stocks or bonds) or due to investment objectives.

Currency Swap

    • Forward Swap
    • Swaptions

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