404b --financial inst.docx

7/23/2019 404B --financial inst.docx

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COMMERCIAL BANK

A commercial bank is a fnancial institution that is authorized by law toreceive money rom businesses and individuals and lend money to them.Commercial banks are open to the public and serve individuals, institutions,

and businesses. A commercial bank is almost certainly the type o bank youthink o when you think about a bank because it is the type o bank thatmost people regularly use.

Banks are regulated by ederal and state laws depending on how they areorganized and the services they provide. Commercial banks are alsomonitored through the Federal eserve !ystem.

FunctionsA commercial bank is authorized to serve the ollowing unctions"

eceive deposits # take money in rom individuals and businesses $calleddepositors%

&isburse payments # make payments upon the direction o itsdepositors, such as honoring a check

Collections # a bank will act as your agent to collect unds rom another

bank payable to you, such as when someone pays you by check drawnon an account rom a di'erent bank

(nvest unds in securities or a return

!aeguard money # banks are considered a sae place to store your

wealth

)aintain and service savings and checking accounts o its depositors

)aintain custodial accounts # accounts controlled by one person but or

the beneft o another person, such as a trust account

*here are more actions, o course, and fner categories within this broadview. Commercial banks may o'er other services such as brokeringinsurance contracts, giving investment advice and so on. *hey also provide awide variety o loans and o'er other credit vehicles like cards and overdrats.+owever, the common theme among these activities is that they are aimedat providing a fnancial service to an individual or business.

(1) Primary Function:1. Acceptin !epo"it":

(t is the most important unction o commercial banks.

*hey accept deposits in several orms according to reuirements o di'erentsections o the society.


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#$e main %in&" o' &epo"it" are:

(i) Current Account !epo"it" or !eman& !epo"it":

#$e"e &epo"it" re'er to t$o"e &epo"it" $ic$ are repaya*e y t$e

an%" on &eman&:

-. !uch deposits are generally maintained by businessmen with the intentiono making transactions with such deposits.

. *hey can be drawn upon by a cheue without any restriction.

/. Banks do not pay any interest on these accounts. ather, banks imposeservice charges or running these accounts.

(ii) Fi+e& !epo"it" or #ime !epo"it":

Fi0ed deposits reer to those deposits, in which the amount is deposited withthe bank or a f0ed period o time.

-. !uch deposits do not en1oy cheue#able acility.

. *hese deposits carry a high rate o interest.

Ba"i" !eman& !epo"it" Fi+e& !epo"it"

Cheueacility

*hey are cheueable deposits.*hey are non#cheueabledeposits.

(nterestpayments

*hey do not carry any interest.*hey carry interest which variesdirectly with the period o time.

2umber otransactions

*he depositor can make anynumber o transactions ordeposit or with drawl o money.

&epositor generally makes onlytwo transactions" $i% &eposit o)oney in the beginning3

$ii% 4ithdrawal o money onmaturity.

(iii) ,a-in !epo"it":

#$e"e &epo"it" comine 'eature" o' ot$ current account &epo"it"an& +e& &epo"it":


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-. *he depositors are given cheue acility to withdraw money rom theiraccount. But, some restrictions are imposed on number and amount owithdrawals, in order to discourage reuent use o saving deposits.

.*hey carry a rate o interest which is less than interest rate on f0ed

deposits. (t must be noted that Current Account deposits and saving depositsare cheuable deposits, whereas, f0ed deposit is a non#cheuable deposit.

/. A&-ancin o' Loan":

*he deposits received by banks are not allowed to remain idle. !o, aterkeeping certain cash reserves, the balance is given to needy borrowers andinterest is charged rom them, which is the main source o income or thesebanks.

!i0erent type" o' *oan" an& a&-ance" ma&e y Commercia* an%"are:

(i) Ca"$ Cre&it:

Cash credit reers to a loan given to the borrower against his current assetslike shares, stocks, bonds, etc. A credit limit is sanctioned and the amount iscredited in his account. *he borrower may withdraw any amount within hiscredit limit and interest is charged on the amount actually withdrawn.

(ii) !eman& Loan""

&emand loans reer to those loans which can be recalled on demand by the

bank at any time. *he entire sum o demand loan is credited to the accountand interest is payable on the entire sum.

(iii) ,$ortterm Loan":

*hey are given as personal loans against some collateral security. *he moneyis credited to the account o borrower and the borrower can withdraw moneyrom his account and interest is payable on the entire sum o loan granted.

(/) ,econ&ary Function":

1. O-er&ra't Faci*ity:

(t reers to a acility in which a customer is allowed to overdraw his currentaccount upto an agreed limit. *his acility is generally given to respectableand reliable customers or a short period. Customers have to pay interest tothe bank on the amount overdrawn by them.

/. !i"countin Bi**" o' E+c$ane:


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(t reers to a acility in which holder o a bill o e0change can get the billdiscounted with bank beore the maturity. Ater deducting the commission,bank pays the balance to the holder. 5n maturity, bank gets its paymentrom the party which had accepted the bill.

2. Aency Function":Commercial banks also perorm certain agency unctions or their customers.For these services, banks charge some commission rom their clients.

,ome o' t$e aency 'unction" are:

(i) #ran"'er o' Fun&":

Banks provide the acility o economical and easy remittance o unds romplace#to#place with the help o instruments like demand drats, mailtransers, etc.

(ii) Co**ection an& Payment o' 3ariou" Item":

Commercial banks collect cheues, bills,6 interest, dividends, subscriptions,rents and other periodical receipts on behal o their customers and alsomake payments o ta0es, insurance premium, etc. on standing instructions otheir clients.

(iii) Purc$a"e an& ,a*e o' Forein E+c$ane:

!ome commercial banks are authorized by the central bank to deal in oreign

e0change. *hey buy and sell oreign e0change on behal o their customersand help in promoting international trade.

(i-) Purc$a"e an& ,a*e o' ,ecuritie":

Commercial banks buy and sell stocks and shares o private companies aswell as government securities on behal o their customers.

(-) Income #a+ Con"u*tancy:

*hey also give advice to their customers on matters relating to income ta0

and even prepare their income ta0 returns.

(-i) #ru"tee an& E+ecutor:

Commercial banks preserve the wills o their customers as trustees ande0ecute them ater their death as e0ecutors.

(-ii) Letter" o' Re'erence:


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#4hen looking at deposit services o'ered by banks, the main ocus should beon interest rates $or those products that pay interest%, minimum balances,ease o transers9transactions $some banks, or e0ample, restrict the numbero transactions that can be drawn on savings and money#market accounts%,and term length or services like C&s.

. :oan !ervices

*hese are most typically loans, rom short#term cash#;ow loans, lines ocredit and credit cards to long#term commercial mortgages.

/. Convenience 8roducts

At the most basic level, these services include things like electronic bankingand und transers, asset saekeeping and deposit bo0es, as well as morespecialized services like asset management and fnancial advice.

At a minimum, most business owners need to fnd a commercial bank thatfts their needs or electronic banking. *his usually entails being able to trackaccounts and transer money through the bank6s website, as well as a largeA*) network. ecently these services have also e0panded to includeelectronic check depositing and mobile banking on smartphones. 5therconvenience and miscellaneous services o'ered by commercial banks can bevery specialized, and must be evaluated within the ramework o

IN3E,#MEN# BANK,

help companies and governments and their agencies to raise moneyby issuing and selling securities in the primary market. *hey assist

public and private corporations in raising unds in the capital markets

$both euity and debt%, as well as in providing strategic advisory

services or mergers, acuisitions and other types o fnancial

transactions.

(nvestment banks also act as intermediaries in trading or clients.(nvestment banks di'er rom commercial banks, which take depositsand make commercial and retail loans.

(n recent years, however, the lines between the two types o structureshave blurred, especially as commercial banks have o'ered moreinvestment banking services.

(nvestment banks may also di'er rom brokerages, which in generalassist in the purchase and sale o stocks, bonds, and mutual unds.+owever some frms operate as both brokerages and investment


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banks3 this includes some o the best known fnancial services frms inthe world.

(n the strictest defnition, investment banking is the raising o unds,both in debt and euity, and the division handling this in an investmentbank is oten called the 9In-e"tment Ban%in !i-i"ion9 (IB!).

Pro&uct":

On*y a 'e "ma** rm" pro-i&e on*y t$i" "er-ice. A*mo"t a**in-e"tment an%" are $ea-i*y in-o*-e& in pro-i&in a&&itiona*nancia* "er-ice" 'or c*ient" "uc$ a" t$e tra&in o' &eri-ati-e"+e& income 'orein e+c$ane commo&ity an& e8uity"ecuritie".

;oe-er on*y a 'e "ma** rm" pro-i&e on*y t$i" "er-ice.A*mo"t a** in-e"tment an%" are $ea-i*y in-o*-e& in pro-i&in

a&&itiona* nancia* "er-ice" 'or c*ient" "uc$ a" t$e tra&in o'&eri-ati-e" +e& income 'orein e+c$ane commo&ity an&e8uity "ecuritie".

#$e "buy side"con"titute" t$e pen"ion 'un&" mutua* 'un&"$e&e 'un&" an& t$e in-e"tin pu*ic $o con"ume t$epro&uct" an& "er-ice" o' t$e "e**"i&e in or&er to ma+imi


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Certain types o lie insurance also may serve as"

A supplement or your retirement income

A unding vehicle or a college education, starting a business, an

emergency, or buying a second home

euired (nsurance

*he government reuires certain types o insurance i you are an employer.

According to the !mall Business Administration, you must purchase, at

minimum, workers compensation and unemployment insurance. *hese

insurances provide your employees with a fnancial saety net i they are hurt

on the 1ob or lose their 1ob. our employees do not pay any part o thepremiums or these plans. ou can deduct the premiums you pay as a

business e0pense when you fle your ta0es.

:iability (nsurance

:iability insurance policies pay the legal ees and 1udgments associated with

accidents, negligence and proessional errors. *he government reuires

some companies and proessionals to carry liability insurance. For e0ample,

trucking companies must have general liability insurance, and physicians

must have proessional liability insurance. ( you receive notice o a lawsuit,

your insurance companys unction is to hire lawyers to represent you in

court. our insurance company pays any settlements or 1udgments against

your company up to the policys limits. )anuacturers oten have product

liability insurance that pays i a product has a deect that results in an in1ury.

8roperty (nsurance

8roperty insurance comes in three types" basic, broad and special, according

to the (nsure? website. @0amples o items covered by policies include your

businesss buildings, machinery, inventory and even your copyrights and

trademarks. 4hile coverage di'ers depending on the type o policy, the

insurance companys unction is to pay or damages or losses ater storm

damage or thet. Business interruption policies pay or your lost earnings i

you have to close your business while repairs are made rom storm or fre

damage. 8roperty insurance policies typically pay or either replacement

costs or the actual value o the property beore the damage or loss occurred.

+ome#based Businesses


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( you have a home#based business, you may think your homeowners policy

covers all o your insurance needs. *his is not necessarily so. (t may be

possible to add an endorsement to your homeowners policy to cover your

business. ( your revenues are above D,EEE, clients come to your home or

you have e0pensive euipment, you should talk to an agent about stand#

alone policies such as a business owners policy. *he company insuring your

home#based business is there to provide assistance i you are sued and pay

or losses rom thet and storms.

. Brokerages

From the point o view o the retail investor, it is oten appropriate to reer to

an investment dealeras a broker. 4hen we deal with a securities frm as an

individual, we are asking that frm to broker a transaction on our behal.

+owever, we should know that the frm has plenty o other business that

does not involve retail trades. (n act, thefrmsunderwritingand principaltrading may orm the largest portion o its

ongoing business. +ere we look at what these activities are and how they

unction in the process o issuing securities.

#$e Primary Mar%et

8erhaps the most lucrative aspect o the securities business is the selling o

new securities issues to large institutionaland retail investors. *he sale o

new issues in this manner constitutes what is known as the primary market.

5riginally, only securities frms were involved in this business activity, which

is called underwriting or fnancing, and it did not involve the retail broker

whatsoever. +owever, most integrated frms now have both underwriting

departments and brokering departments.

(n its unction as an underwriter, a frm owns the new security issue as part

o its inventory, thereby taking on a certain amount o risk. *he rewards or

taking this risk, however, are oten huge" the underwriting frm receives a

proft rom the di'erence between the buying and selling prices, so naturally,

this frm will aim to sell as many units o the issue as possible at the highest

price possible. By contrast, the new issuergenerally does not assume the

same risk, since payment is guaranteed by the underwriter regardless o the

price at which the issue eventually sells in the market, or even whether it

sells at all.
http://www.investopedia.com/terms/d/dealer.asphttp://www.investopedia.com/terms/b/broker.asphttp://www.investopedia.com/terms/u/underwriting.asphttp://www.investopedia.com/terms/p/principal.asphttp://www.investopedia.com/terms/i/institutionalinvestor.asphttp://www.investopedia.com/terms/r/retailinvestor.asphttp://www.investopedia.com/terms/p/primarymarket.asphttp://www.investopedia.com/terms/i/issuer.asphttp://www.investopedia.com/terms/b/broker.asphttp://www.investopedia.com/terms/u/underwriting.asphttp://www.investopedia.com/terms/p/principal.asphttp://www.investopedia.com/terms/i/institutionalinvestor.asphttp://www.investopedia.com/terms/r/retailinvestor.asphttp://www.investopedia.com/terms/p/primarymarket.asphttp://www.investopedia.com/terms/i/issuer.asphttp://www.investopedia.com/terms/d/dealer.asp


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Given the risks involved, the securities issuer and its investment dealer worktogether very closely to determine the original price or the issue, its timingand other marketability actors that will help attract investors. (n general, theunderwriting frm is concerned that the price o the securities mightdeteriorate while they are in inventory, which would erode profts or even

turn potential profts into losses. *o deal with the large risks involved, aconsortium o like#minded investment frms will orm to mitigate some o theindividual risk and ensure a speedy distribution o securities among all o thefrms clients, instead o those o only one frm.

(n negotiating the terms o the primary securities issue, the underwriting frmuses all o its e0pertise o trading in the secondary market$which we defnein detail below%. *he frm gains a sense o the nature o the market to whichthe new issue o securities will be released # the securitys currentattractiveness to investors and the market valuation o close competitors.5ne o the reasons why investment frms became involved in both aspects o

the market around the mid#Eth century is that they possessed e0pertise inthe secondary market, which aids in primary market sales.

Principa* #ra&in5nce a new security is transacted between its issuer and an underwriter,that security is considered issued and outstandingand, as such, it begins totrade on the secondary market. (nvestment frms participate on thesecondary market in one o two ways" as principals, holding securities orsale in their own inventory, and as agents, acting on behal o a buyer orseller but not owning the security at any point during the transaction.

(n principal trading, the investment frm hopes to proft rom buyingsecurities in the open market, holding them in its own inventory or a certainperiod o time, and selling them later or a higher price. As mentionedearlier, it is advantageous or investment frms to engage in principal tradingbecause theyre well acuainted with current market conditions and,thereore, they have the e0pertise to devise suitable benchmarks or pricingprimary market issues or the yields on new bond issues.

Another advantage an investment frm gains rom principal trading activitiesis liuidity. Because it can accomplish the buyor the sell sideo anytransaction with its own inventory, the investment frm need not wait or

simultaneous matching o buy and sell orders rom outside investors in orderto complete a transaction. *his advantage o principal trading greatly adds tothe liuidity o the market and ensures that there will typically be a buyer oralmost every security, even i retail investors are generally not active intrading that security. $*o learn more about this process, check out The Nitty-Gritty Of Executing A Trade.%

Bro%er or Aency #ran"action"
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(n terms o investment banking, the role o the securities broker is the onewith which retail investors are most amiliar. (n their unction as brokers,frms simply act as an agent or intermediary in a transaction on thesecondary market, never actually owning the securities themselves. *hebroker can represent buyers and sellers, who in act are the principals, or

owners o the securities. (n e0change or acilitating or e0ecuting a trade,brokers charge their clients a commission.
http://www.investopedia.com/terms/c/commission.asphttp://www.investopedia.com/terms/c/commission.asp

404b --financial inst.docx

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