Finance Numericals

Bond is a debt instrument which an issuer issues to raise capital from public and pay interest to bond holder for fixed period of time.  Yield Curve: It is curve on graph which shows different interest rate against different time period or maturities time. Types of Yield Curve: There are three main types of yield curve. Normal Yield Curve: This curve shows upward movements of interest rate with increase in time period. It indicates the inflation period will happen in future. If the long term debt instruments shows high yield in comparison to short term debt instruments then it is known as Normal Yield Curve. Inverted Yield Curve: This curve shows downward movements of interest rate with increase in time period. It indicates that there will be recession period will be occurred in near future. When the short term securities show high yield in comparison to long term securities yield then this curve is formed. Flat Yield Curve or Hump Yield Curve: It is a ...

Payout ratio:   The amount paying as dividend to shareholders out of net income is known as payout ratio. The higher ratio shows that more net income is used to pay dividend instead of reinvesting in a business. The lesser ratio shows that company have more retained earnings in comparison to dividend paid to shareholders. Payout ratio is shown in a percentage. Retained earnings means instead of paying dividend to shareholders out of net income, the amount reinvested in a business for future expansion or business operation. Formula: Payout ratio = Dividend per share (DPS) / Earnings per share (EPS) Or Dividend paid in a year / Net income DPS (Dividend per Share) = Total dividend / Number of shares EPS (Earnings per Share) = Earnings after tax & preferred dividend / Number of outstanding shares Retention ratio: It is just opposite of payout ratio. The amount of net income reinvested in a company or retained in a company instead of paying as dividend is know...

Efficient Market Hypothesis (EMH):  This theory is developed by economist Eugene Fama in 1960. The efficient market hypothesis states that the price of securities reflected all the information at any point in time. It is impossible to beat the market because all the information are quickly incorporated into the assets so, there is no any new information which helps the investors to earn any gain from market or forecast any price movement in future. In market investors traded securities with same interest and closely analysing the market to earn any gain from price movements but the securities are traded in fair price in market the chances to gain is impossible. Three degree of efficient market hypothesis: ·          Weak form of efficient market hypothesis ·          Semi-strong form of efficient market hypothesis ·          Strong form of efficie...

Capital Market: It is a market where financial instruments are purchased and sold in long term basis like equity, debentures, bonds etc. It provides a place for investors and companies whether they are private or public to transact. It helps the companies to raise capital and the investors to invest their savings for earning dividend and interest. The capital market helps to provide the long term funds through debentures, bonds etc. Capital market is divided into two: Primary market and Secondary market. Primary market is a market where new shares or debentures are issued to the public. In this market the new and fresh funds are raised by companies or government.  Shares or debentures are issued first time in the market for setting up the new companies operation. The capital raised is used for purchasing the fixed assets. Primary market is also known as New Issue market. In secondary market the existing stocks are issued to raise capital by the company whether it is p...

APR (Annual Percentage Rate):   It is an annual percentage rate charged on mortgage, credit card etc. or earned on investment. It is an annual cost of borrowing the funds. It is a nominal rate or quoted rate that mentioned on a borrowing contract. It is lower than the EAR but higher than the interest rate (current rate of borrowing the amount). APR includes all the fees related to borrowing the funds. EAR (Effective Annual Rate): It is a compound interest rate that charged on borrowing fund or earned on investment. It is higher than APR. It is an amount what you actually pay or receive. As more and more compounding the interest rate the more you will get the EAR. Difference between EAR and APR: ·          EAR is a rate what you really pay or receive while APR is a cost of borrowing the amount. ·          EAR includes compounding interest while APR is based on simple interest. · ...

Capital Market Line: It shows the relationship between risk (standard deviation) and return of risk free asset and market portfolio (All the financial investment available in proportion of they are available in a market). The slope of the Capital Market Line shows the price of market risk. The efficient portfolio is a reward for waiting and bearing a risk of holding that portfolio for specified period. In the above diagram standard deviation is shown in X axis and expected return and risk free asset. The curve shown in the diagram is known as efficient frontier curve.  If the investors prefer less risk then they must lying between risk free asset points to market portfolio point. Between these two points investor can lend money to government by buying treasury bills, government bonds on risk. If the investors are interested in taking more risk to earn high return, then those investors lying beyond the market portfolio point. And beyond the market portfolio point the in...