Advanced Financial Management Bangalore University

1. Differentiate between Money market and capital market

Capital markets and money markets are two different kinds of financial markets. In order to understand the difference between the two, it can be helpful to understand how each market operates. Capital markets are those that provide businesses, firms, governments, and other organizations with securities for long-term financial growth. Money markets, on the other hand, are markets that provide short-term funding for banks and other financial organizations. The primary difference between them is that capital markets are used for long-term financial growth and stability and money markets are used for short-term lending and borrowing.

2. What is concentration banking?

System of banking adopted by a firm in which the organization concentrates banking activities with one bank. Fast consolidation of funds from various geographically distributed regional banks to a single account in the concentration bank avoids complexity of handling multiple bank accounts. An example of a concentration bank can be a company which has multiple chain stores across the country and each store deposits its cash into local banks. The company can set it up so that these funds can be concentrated or deposited into one account, usually called a concentration account, at a concentration bank.

3. What is conservative approach to working capital financing?

As the name itself suggests, under the approach the finance manager does not undertake risk. As a result, all the working capital needs are primarily financed by long term sources and the use of short term sources may be restricted to unexpected and emergency situation only. The working capital policy of a firm is called a conservative policy when all or most of the working capital needs are met by the long term sources and thus the firm avoids the risk of insolvency.

So, under the conservative approach, the working capital is primarily financed by long term sources. The larger the portion of long term sources used for financing the working capital, the more conservative is said to be the working capital policy of the firm. In case, the firm has no temporary working capital need then the idle long term funds can be invested in marketable securities.

4. What is trading on equity ?

Trading on equity is sometimes referred to as financial leverage or the leverage factor. Trading on equity occurs when a corporation uses bonds, other debt, and preferred stock to increase its earnings on common stock. For example, a corporation might use long term debt to purchase assets that are expected to earn more than the interest on the debt. The earnings in excess of the interest expense on the new debt will increase the earnings of the corporation’s common stockholders. The increase in earnings indicates that the corporation was successful in trading on equity. If the newly purchased assets earn less than the interest expense on the new debt, the earnings of the common stockholders will decrease.