Banking & Finance Articles - Page 56 of 107

Expectation TheoryThe upward sloping curve or the inverted curve is supported by the Expectation Theory. It states that since investors want the maximum return from their short-term investments, the rate of the short term should increase in the future. Then, we must assume that long-term rates are higher than short-term ones. However, in present value terms, the return from long-term security is equal to the series of short-term securities.Since future values from investments are the same as that of long-term returns, investors will be indifferent in choosing between them. The Expectation Theory assumes that if Capital Markets are efficient, there ... Read More

As we know, there are generally two types of shares − general shares and preference shares. They also have certain differences and some similarities. While the preference shares have some distinct characteristics, it is easy to sort the differences between them.The following features are available with preference shareholding.Preference in ClaimsPreference shareholders have the preference in claims on the assets of a company prior to equity shareholders. The equity shareholders are the owners of the company. Therefore, the preference shareholders have an upper hand while making a claim on the company's dividends and assets before the owners who are ready to ... Read More

Book ValueIn finance, assets are considered at their historical cost rather than present value. Therefore, the price gets depreciated over the years. Sometimes, book value represents net cost minus the amortized value. The book value of debt is represented at its outstanding amount.The difference between book values of assets and liabilities is always equal to net worth or shareholders' funds. Net worth divided by the number of shares gives the value of book value per share. The book value considers cost rather than value. By value, it means the worth of an asset today in terms of its potential advantages ... Read More

Valuation is the process of finding the present value of a business. It can be done in many ways but some factors are needed for valuation, such as the probable future earnings, management structure of the business, the market capitalization of the company’s assets, and its capital budgeting structure composition.Valuation is also done to find out the fair value of a security which a buyer will pay the seller. Intrinsic valuation tells the analysts the investors in the share market whether a stock is under or overvalued and depending on this the future value of the stock is determined.Note − ... Read More

Calculation of the future value of a lump sum may be necessary for many reasons. The investors or lenders may want to know how much they will get for their lump-sum investment after a specific period of time. Knowing the future value is important for the borrower is important too because he or she has to pay the total amount of lump-sum plus any interest on them.Future Value of a Lump-sum AmountWe know that, Future Sum = Principal + Interest Rate on PrincipalSo, for the first year, F1 = P + P x i = P (1+i)F2 = F1 + ... Read More

The procedures and systems used by a firm can be cumulatively termed as financial business processes. These processes may include a simple task as entering a financial entry into the account statement on one hand while, on the other hand, it may also contain complex and hard work to predict the future modes of business.For a company to survive and grow, it must engage in lots of businesses processes at the same time. Therefore, it is implied that the financial managers are equipped with knowledge in subjects they specialize in to rectify complex errors that might creep into the process ... Read More

We can start calculating multi-period compounding right from calculating effective interest rate (EIR).The effective interest rate is given by, EIR = {1+i/m}nxm - 1  ------------------ (1)Where, i is the nominal interest rate, n is the number of years, m is the number of compounding per year.Using equation 1, we get, Fn = A { (1+i/m)nxm - 1} / i/m  ...............................(2)Equation 2 helps us to use the present value of an annuity in the case of a multi-period compounding. Here the discount rate will be i/m and the time horizon is (n × m).Let us consider an example of investment of ... Read More

For achieving success in cutthroat markets, efficient organizations streamline their finance functions in an organized manner. Since the financial objectives reflect in various reports that are handed over to stakeholders, a finance manager must be able to put forward financial information for the laymen as well.Companies need to organize their finance functions for a variety of other reasons as well. Some of these reasons include the profitability of the company. increasing shareholders' value and maximizing wealth. Whatever the reason of organizations, it is the duty of the finance manager to keep the process streamlined.Note − Companies organize the finance functions ... Read More

Although the finance managers found limited access to decision-making in the 1950s, the situation has changed drastically nowadays. Now, a finance manager is the person in the key role to raise and allocate funds according to the company's needs.Raising FundsThe traditional view of financial management has dominated the managers to work within the limits set by the decision-makers in the corporate organization. The finance managers only got attention in the case of promotion, reorganization, expansion, and diversification. The financial managers were called upon to express their knowledge in order to raise the funds.Note − Modern organizations pay more attention and ... Read More

Although both functions are related to finance, there are some distinctive differences between long and short-term financing decisions. Long-term decisions are made for more than a year while short-term decisions are yearly decisions. It is easier to understand when we compare some of the long and short-term decision examples.Note − There are differences between long-term and short-term financial decisions.Long-term DecisionsLong-term decisions often offer the strategy of the businesses. Some types of long term decisions include the following Capital Budgeting is an investment decision where long-term budgets are prepared by companies. There are mainly two considerations in capital budgeting −Evaluating the probable ... Read More