$treet is the finance forum of National Institute of Industrial Engineering, Mumbai.

As
one the most active forum of NITIE, Street adds to the financial knowledge of NITIE
community by holding various events like NITIE Finance Conclave and Post Budget
Analysis and conducting knowledge sessions and other interactions.

Finance
Q1) What is debt?
A) An amount of money borrowed by one party from another. Many
corporations/individuals use debt as a method for making large purchases that they
could not afford under normal circumstances. A debt arrangement gives the borrowing
party permission to borrow money under the condition that it is to be paid back at a
later date, usually with interest.
Q2) What are bonds?
A) A debt investment in which an investor loans money to an entity (corporate or
governmental) that borrows the funds for a defined period of time at a fixed interest
rate. Bonds are used by companies, municipalities, states and U.S. and foreign
governments to finance a variety of projects and activities. Bonds are commonly
referred to as fixed-income securities and are one of the three main asset classes, along
with stocks and cash equivalents.

Q3) What are debenture?

A) A type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation of the
issuer. Both corporations and governments frequently issue this type of bond in order
to secure capital. Like other types of bonds, debentures are documented in an
indenture.

Q4) What is equity?

A) A stock or any other security representing an ownership interest. On a company's
balance sheet, the amount of the funds contributed by the owners (the stockholders)
plus the retained earnings (or losses). Also referred to as "shareholders' equity".
Q5) What are stocks/shares?
A) A type of security that signifies ownership in a corporation and represents a claim
on part of the corporation's assets and earnings. There are two main types of stock:
common and preferred. Common stock usually entitles the owner to vote at
shareholders' meetings and to receive dividends. Preferred stock generally does not
have voting rights, but has a higher claim on assets and earnings than the common
shares. For example, owners of preferred stock receive dividends before common
shareholders and have priority in the event that a company goes bankrupt and is
liquidated.
Q6) What are derivatives?
A) A security whose price is dependent upon or derived from one or more underlying
assets. The derivative itself is merely a contract between two or more parties. Its value is
determined by fluctuations in the underlying asset. The most common underlying
assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Most derivatives are characterized by high leverage.
Q7) What are futures?
A) A financial contract obligating the buyer to purchase an asset (or the seller to sell an
asset), such as a physical commodity or a financial instrument, at a predetermined
future date and price. Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a futures exchange.
Some futures contracts may call for physical delivery of the asset, while others are
settled in cash. The futures markets are characterized by the ability to use very high
leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the
underlying asset. For example, a producer of corn could use futures to lock in a certain
price and reduce risk (hedge). On the other hand, anybody could speculate on the price
movement of corn by going long or short using futures.
Q8) What are options?
A) In finance, an option is a contract which gives the buyer (the owner) the right, but
not the obligation, to buy or sell an underlying asset or instrument at a specified strike

price on or before a specified date. The seller has the corresponding obligation to fulfill
the transaction that is to sell or buy if the buyer (owner) "exercises" the option. The
buyer pays a premium to the seller for this right. An option that conveys to the owner
the right to buy something at a specific price is referred to as a call; an option that
conveys the right of the owner to sell something at a specific price is referred to as a put.
Both are commonly traded, but for clarity, the call option is more frequently discussed.
Q9) What are forwards?
A) A customized contract between two parties to buy or sell an asset at a specified price
on a future date. A forward contract can be used for hedging or speculation, although
its non-standardized nature makes it particularly apt for hedging. Unlike standard
futures contracts, a forward contract can be customized to any commodity, amount and
delivery date. A forward contract settlement can occur on a cash or delivery basis.
Forward contracts do not trade on a centralized exchange and are therefore regarded as
over-the-counter (OTC) instruments. While their OTC nature makes it easier to
customize terms, the lack of a centralized clearinghouse also gives rise to a higher
degree of default risk. As a result, forward contracts are not as easily available to the
retail investor as futures contracts.
Q10) What are swaps?
A) Traditionally, the exchange of one security for another to change the maturity
(bonds), quality of issues (stocks or bonds), or because investment objectives have
changed. Recently, swaps have grown to include currency swaps and interest rate
swaps.
If firms in separate countries have comparative advantages on interest rates, then a
swap could benefit both firms. For example, one firm may have a lower fixed interest
rate, while another has access to a lower floating interest rate. These firms could swap
to take advantage of the lower rates.
Q11) What are NPV and IRR?
A) NPV: Net present value (NPV) is the difference between the present value of cash
inflows and the present value of cash outflows. NPV compares the value of a dollar
today to the value of that same dollar in the future, taking inflation and returns into
account. NPV analysis is sensitive to the reliability of future cash inflows that an
investment or project will yield and is used in capital budgeting to assess the
profitability of an investment or project.
IRR: Internal rate of return (IRR) is the discount rate often used in capital budgeting that
makes the net present value of all cash flows from a particular project equal to zero.
Generally speaking, the higher a project's internal rate of return, the more desirable it is

to undertake the project. As such, IRR can be used to rank several prospective projects a
firm is considering. Assuming all other factors are equal among the various projects, the
project with the highest IRR would probably be considered the best and undertaken
first.
Q12) Difference between merger and acquisition?
A) When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition. From a legal point of view, the target
company ceases to exist, the buyer "swallows" the business and the buyer's stock
continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the
same size, agree to go forward as a single new company rather than remain separately
owned and operated. This kind of action is more precisely referred to as a "merger of
equals." Both companies' stocks are surrendered and new company stock is issued in its
place.
Q13) What are IPOs?
A) The first sale of stock by a private company to the public. IPOs are often issued by smaller,
younger companies seeking the capital to expand, but can also be done by large privately
owned companies looking to become publicly traded. In an IPO, the issuer obtains the

assistance of an underwriting firm, which helps it determine what type of security to

issue (common or preferred), the best offering price and the time to bring it to market.
Q14) What are stock splits and reverse stock splits?
A) All publicly-traded companies have a set number of shares that are outstanding on the stock
market. A stock split is a decision by the company's board of directors to increase the number of
shares that are outstanding by issuing more shares to current shareholders. For example, in a 2for-1 stock split, every shareholder with one stock is given an additional share. So, if a company
had 10 million shares outstanding before the split, it will have 20 million shares outstanding
after a 2-for-1 split. A stock's price is also affected by a stock split. After a split, the stock

price will be reduced since the number of shares outstanding has increased. In the
example of a 2-for-1 split, the share price will be halved. Thus, although the number of
outstanding shares and the stock price change, the market capitalization remains
constant.
A corporate action in which a company reduces the total number of its outstanding
shares. A reverse stock split involves the company dividing its current shares by a
number such as 5 or 10, which would be called a 1-for-5 or 1-for-10 split, respectively. A
reverse stock split is the opposite of a conventional (forward) stock split, which
increases the number of shares outstanding. Similar to a forward stock split, the reverse

split does not add any real value to the company. But since the motivation for a reverse
split is very different from that for a forward split, the stocks price moves after a
reverse and forward split may be quite divergent. A reverse stock split is also known as
a stock consolidation or share rollback.
Q15) What are SENSEX and NIFTY?
A) An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the benchmark
index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most
actively-traded stocks on the BSE. Initially compiled in 1986, the Sensex is the oldest
stock index in India. Similarly NIFTY is the benchmark of National Stock Exchange. It is
composed of 50 of the largest and the most actively traded stocks from 24 different
sectors in the NSE
Q16) What is NPA?
A) A classification used by financial institutions that refer to loans that are in jeopardy
of default. Once the borrower has failed to make interest or principal payments for 90
days the loan is considered to be a non-performing asset.

Union Budget 2015 Highlight

1.
2.
3.
4.

No change in tax slabs.

Additional 2% surcharge for the superrich with income of over Rs. 1 crore.
Service tax increased to14 per cent.
Rate of corporate tax to be reduced to 25% over next four years.

5.

AIIMS in Jammu and Kashmir, Punjab, Tamil Nadu, Himachal Pradesh, Bihar and Assam.

6.
7.
8.
9.

IIT in Karnataka; Indian School of Mines in Dhanbad to be upgraded to IIT.

IIM for Jammu and Kashmir and Andhra Pradesh.
Focus on Make in India for quick manufacturing of Defence equipment.
MUDRA bank will refinance micro finance orgs. to encourage first generation
SC/ST entrepreneurs.
10. Visa on Arrival for 150 countries.
11. Forward Markets Commission to be merged with the Securities and Exchange
Board of India

Standard Rates
Repo rate: 7.5% (Decreased from 7.75%)
Reverse repo rate: 6.5% (Decreased from 7%)
Bank rate: 8.5% (Decreased from 8.75%)
Cash Reserve Ratio (CRR): 4% (Decreased from 4.25%)
Statutory Liquidity Ratio (SLR): 21.5% (Decreased from 22 %)
Forex reserve: $338.08 billion

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