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1 Banking and financial Services Concepts

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The use of debt is also referred to as Leverage Financing.

Income is the main objective for a debt investor. This income is paid in the form of Interest

Capital Appreciation is only a secondary consideration for debt investors.

Capital Appreciation is the main objective for a equity investor.

Income is only a secondary consideration for debt investors and is received in the form of

Dividends.

Debt is considered senior to equity (i.e.) the interest on debt is paid before dividends on

stock

Security is a financial instrument that signifies ownership in a company. example Stock,

Bond, Option

Debt is money owed by one person or firm to another. Bonds, loans, and commercial paper

are all examples of debt

Bond - An investor loans money to an entity (company or government) that needs funds for

a specified period of time at a specified interest rate. In exchange for the money,the

entity will issue a certificate, or bond, that states the interest rate (coupon rate) to be paid

and repayment date (maturity date).

Interest on bonds is usually paid every six months (semiannually).

Bonds - Bearer Bonds, Registered As to Principal Only and Fully Registered Bonds.

Bearer bonds are like cash since the bearer of the bond is presumed to be the owner.

Bearer bonds are Unregistered because the owner’s name does not appear on the bond

Bonds that are registered as to principal only have the owner’s name on the bond certificate

Bonds that are issued today are most likely to be issued fully registered as to both interest

and principal.

Fully Registered Bonds have no physical certificate

CORPORATE BOND - A bond issued by a corporation.

CORPORATE BOND - Secured Bonds, Unsecured Bonds (Debentures), and Subordinated

Debentures.

Secured Bonds - Mortgage Bonds,Equipment Trust Certificates, Collateral Trust Bonds

Mortgage Bonds are secured by real estate owned by the issuer

Equipment Trust Certificates are secured by equipment owned and used in the issuers

business

Collateral Trust Bonds are secured by a portfolio of non-issuer securities.

Treasury bills are short-term obligations issued for one year or less. They are sold at a

discount from face value and don't pay interest before maturity.

Treasury notes and bonds bear a stated interest rate, and the owner receives semi-annual

interest payments.Term is >1 year and < 10 yrs

Treasury bonds are issued by the U.S. Government.interest on Treasury bonds is not subject

to state income tax and term is > 10 yrs

Savings Bonds are bonds issued by the Department of the Treasury and are not transferrable

ZERO COUPON BONDS - generate no periodic interest payments but they are issued at a

discount from face value

COMMERCIAL PAPER - An unsecured, short-term loan issued by a corporation, typically for

financing accounts receivable and inventories.


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Commercial paper maturities range from 1 day to 270 days, but most commonly is issued for

less than 30 days. Paper usually is issued in denominations of $100,000 or more.

Credit rating agencies like Standard & Poor rate the Commercial papers

Investors in the commercial paper market-private pension funds, money market mutual

funds, governmental units, bank trust departments, foreign banks and investment

companies.

IPO- Initial Public Offering

Corporations seeking capital sell it to investors through a Primary Offering or an Initial Public

Offering (IPO).

SEC - Securities and Exchange Commission

Before shares can be offered, or sold to the general public, they must first be registered with

the Securities and Exchange Commission (SEC).

NYSE - New York Stock Exchange

From time to time, the Issuer may choose to repurchase the stock they previously issued.

Such repurchased stock shares are referred to as Treasury Stock

shares that remain trading in the secondary market are referred to as Shares Outstanding.

POP - Public Offering Price

Public Offering Price (POP) – The price at which shares are offered to the public in a Primary

Offering.

Book Value – The theoretical liquidation value of a stock based on the company's Balance

Sheet.

Par Value – An arbitrary price used to account for the shares in the firm’s balance sheet.

Current Market Price – The price determined by Supply and Demand in the Secondary

Markets.

Preferred shareholders have priority over common stockholders on earnings and assets in

the event of liquidation

Preferred stock is issued with a fixed rate of return that is either a percent of par (always

assumed to be $100) or a dollar amount.

Preferred stock investors are primarily seeking income.

different types of preferred stock are Straight, Cumulative, Convertible, Callable,

Participating and Variable

Convertible preferred stock can be converted into shares of common stock either at a fixed

price or a fixed number of shares.

Convertible preferred stock is essentially a mix of debt and equity

Convertible preferred stock is most often used as a means for a risky company to obtain

capital when neither debt nor equity works

Convertible preferred stock offers considerable opportunity for capital appreciation.

Non-convertible preferred stock remains outstanding in perpetuity and trades like stocks.

ADR - AMERICAN DEPOSITORY RECEIPTS

ADR - facilitate the domestic trading of a foreign stock

An ADR is a receipt for a specified number of foreign shares owned by an American bank

ADRs trade like shares, either on a U.S. Exchange or Over the Counter

HYBRIDS - Hybrids are securities, which combine the characteristics of equity and debt.


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CONVERTIBLE BONDS - Convertible Bonds are instruments that can be converted into a

specified number of shares of stock after a specified number of days.

Warrants are call options – variants of equity.

Warrants are offered as bonus or sweetener, attached to another security and sold as a Unit.

A derivative is a product whose value is derived from the value of an underlying asset, index

or reference rate.

A forward contract is an agreement to buy or sell an asset (of a specified quantity) at a

certain future time for a certain price.

A futures contract is an agreement between two parties to buy or sell an asset at a certain

time in the future at a certain price

Hedging involves protecting an existing asset position from future adverse price movements.

Arbitrage: An arbitrageur is basically risk averse. He enters into those contracts were he can

earn risk less profits.

An option is a contract, which gives the buyer the right, but not the obligation to buy or sell

shares of the underlying security at specific price on or before a specific date.

Two kinds of options: Call Options and Put Options.

Call Options are options to buy a stock at a specific price on or before a certain date.

Put Options are options to sell a stock at a specific price on or before a certain date.

The primary function of options is to allow investors ways to manage risk

Their price of stock is determined by factors like the underlying stock price, strike price, time

remaining until expiration (time value), and volatility.

American options can be exercised at any time between the date of purchase and the

expiration date. Most exchange-traded options are of this type.

European options can only be exercised at the end of their life.

Long-Term Options are options with holding period of one or more years

LEAPS - Long-Term Equity Anticipation Securities

Long-Term Options are called LEAPS

The simple calls and puts are referred to as "plain vanilla" options

Non-standard options are called exotic options

Open Interest is the number of options contracts that are open; these are contracts that

have not expired nor been exercised.

Swaps are the exchange of cash flows or one security for another

Currency Swap involves the exchange of principal and interest in one currency for the same

in another currency.

Forward Swap agreements are created through the synthesis of two different swaps,

differing in duration, for the purpose of fulfilling the specific timeframe needs

Swaptions - An option to enter into an interest rate swap.

Swapation - The contract gives the buyer the option to execute an interest rate swap on a

future date.

A financial transaction is one where a financial asset or instrument, such as cash, check,

stock, bond, etc are bought and sold.

Financial Market is a place where the buyers and sellers for the financial instruments come

together and financial transactions take place.

Primary market is one where new financial instruments are issued for the first time.


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Secondary Market is a place where primary market instruments, once issued, are bought

and sold.

Role of capital market - Channelling funds from “savings pool” to “investment pool”,

Providing liquidity to investors, Providing multitude of investment options to

investors, Providing efficient price discovery mechanism.

NASDAQ - National Association of Securities Dealers Automated Quotations

LSE - London Stock Exchange

BSE - Bombay Stock Exchange

NSE - National Stock Exchange of India

The share price is determined by the market forces, i.e. the demand and supply of shares at

each price.

Bond markets are also sometimes called Fixed Income markets.

The central bank of the country such as Federal Reserve in US and Reserve Bank of India in

India, is the biggest player in the bond market

Then the market interest rates go up, prices of bonds fall and vice-versa.

Foreign exchange markets are where the foreign currencies are bought and sold.

Currency trading is conducted in the over-the-counter (OTC) market.

The central bank regulates the markets to ensure its smooth functioning.

Money market is for short term financial instruments, usually a day to less than a year.

A repo is a contract in which the seller of securities, such as Treasury Bills, agrees to buy

them back at a specified time and price.

Money market instruments - Treasury bills of very short tenure, commercial paper,

certificates of deposits

SEBI - Securities and Exchange Board of India

SEC - Securities and Exchange Commission

PORTFOLIO MANAGEMENT SYSTEMS - allow the investment managers to choose the

instruments to invest in.

Stock markets, bond markets, money markets, foreign exchange markets and derivatives

markets are prominent examples of financial markets.

Shares (stock) of a company are issued and traded in the stock markets.

A Balance sheet is a statement that lists the total assets and the total liabilities of a given

business to portray its net worth at a given moment of time.

An Asset is anything owned by an individual or a business, which has commercial value.

A Liability is a debt payable by the firm to its creditors

Current Assets are those assets of a company that are reasonably expected to be realized in

cash, or sold, or consumed in the next one year.

Cash And Cash Equivalents means all cash, securities, which can be converted into cash at a

very short notice

Short Term Investments: All investments, which will be converted in Cash in the next one

year.

Receivables: Also referred to as Account receivables. This indicates the money due to the

firm, for service rendered or goods sold on credit.

Inventory: Inventory for companies includes raw materials, items available for sale or in the

process of being made ready for sale.


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Long-term assets are those assets that are not consumed during the normal course of

business, e.g. land, buildings and equipment, goodwill, etc.

Fixed Assets are assets of a permanent nature required for the normal conduct of a business,

and which will not normally be converted into cash during the next fiscal period.

Assets lose their value as they provide service. This loss of value, or spreading of cost, is

called depreciation.

Intangible Asset is an asset that is not physical in nature. Examples are things like copyrights,

patents, intellectual property, or goodwill.

Current Liabilities are amounts, or goods and services, to be paid or executed, within next

one year.

An accrued expense is an expense that the company has already incurred but company has

not paid for it so far.

Short Term Loans: All the loans that have to be paid in the next one year.

when company declares dividend,Nothing changes till the company pays out dividends

when company pays out dividends,Retained earnings go down by amount of dividend

Profit And Loss Statement (P&L) is also known as an income statement

Profit And Loss Statement (P&L) shows business revenue and expenses for a specific period

of time.

The difference between the total revenue and the total expense is the business’ net income.

EBIT- Earnings Before Interest and Taxes

PBT - Profit Before Tax

PAT - Profit after Tax

EPS - Earnings per share

EPS(T) = S/ Number of shares where S is Net Income or PAT

P/E Ratio = Market price/T where T is EPS

Revenue is the inflows of assets from selling goods or providing services to customers.

Direct Cost is that portion of cost that is directly expended in providing a product or service

for sale e.g. material and labor.

Gross profit shows the relationship between sales and the direct cost

Indirect Cost is that portion of cost that is indirectly expended in providing a product or

service for sale

Operating Expenses is all selling and general & administrative expenses. This includes

depreciation, but not interest expense.

Operating Income is revenue less cost of goods sold

Interest expense captures all the finance charges incurred on any borrowed capital.

Net Income or PAT (Profit after Tax)is is the profit after all the obligations, which can be

distributed to shareholders

Revenue is the Top Line and Net Income or PAT is the Bottom-line in P &L statement

Earnings per Share (EPS) is the amount of net income (earnings) related to each share

Price to Earnings Ratio (P/E) is a performance benchmark that can be used as a comparison

against other companies or within the stock's own historical performance

CASH FLOW STATEMENT - Statement accounting for all the inflows and outflows of cash is

captured in this statement.


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‘Bank’ is used generically to refer to any financial institution that is licensed to accept

deposits and issue credit through loans.

The Central bank of any country can be called the banker’s bank.

The Federal Reserve is the central bank of the United States, while Reserve Bank of India is

the central bank in India.

CRR - Cash Reserve Ratio

Banks facilitate the investing/spending of money that multiply funds through circulation and

this is known as “Money Multiplier” effect.

The difference between the rates, which banks offer to depositors and lenders, is generally

referred to as “Spread”.

Top 10 US Banks -JPMORGAN CHASE & CO 2 CITIGROUP INC 3 BANK OF AMERICA

CORPORATION 4 WELLS FARGO & COMPANY 5 HSBC NORTH AMERICA HOLDINGS INC.6

TAUNUS CORPORATION 7 PNC FINANCIAL

SERVICES GROUP, INC. 8 U.S. BANCORP 9 BANK OF NEW YORK MELLON CORPORATION, 10

SUNTRUST BANKS

The universal banking concept permits banks to provide commercial bank services, as well as

investment bank services at the same time.

Glass-Steagall Act of 1933, created a Chinese wall between commercial banking and

securities businesses in US.

The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and

insurance services.

Provisions that prohibit a bank holding company from owning other financial companies

were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act.

The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to

consolidate

Banks are an integral part of any economy channelizing savings from lenders to borrowers

Central banks define a nation’s monetary policy

A bank makes a profit by investing or lending money that is earning a higher rate of interest

than it pays to its depositors.

Banks are generally organized as corporate banking, investment banking, retail banking, and

private banking functions.

CDBs - Community development banks

Community development banks provide retail banking services to the residents of the

community and spureconomic development in low- to moderate-income geographical areas

CDFI - Community Development Financial Institution

The largest and oldest community development bank is Shore Bank, headquartered in the

South Shore neighborhood of Chicago.

A credit union is a cooperative financial institution that is owned and controlled by its

members

Credit Union is operated for the purpose of promoting thrift, providing credit at reasonable

rates, and providing other financial services to its members

Private Banks manage the assets of high net worth individuals

Offshore banks are banks located in jurisdictions with low taxation and regulation

An offshore bank is a bank located outside the country of residence of the depositor


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Savings banks primary purpose is accepting savings deposits. It also provides other services

such as payments, credit and insurance.

Demand deposits are accounts that allow money to be deposited and withdrawn by the

account holder on Demand (Savings, Checking).

Deposits placed with a bank for a specified term and is called Term Deposits

IRA - Individual Retirement Account

IRA - Roth IRA, Simple IRA, Traditional IRA, SEP IRA, Self Directed IRA

Roth IRA - contributions are made with after-tax assets, all transactions within the IRA have

no tax impact, and withdrawals are usually tax-free.

Traditional IRA -contributions are often tax-deductible,all transactions and earnings within

the IRA have no tax impact, and withdrawals at retirement are taxed as income

SEP IRA - a provision that allows an employer to make retirement plan contributions into a

Traditional IRA established in the employee's name

SIMPLE IRA - a simplified employee pension plan that allows both employer and employee

contributions

Self-Directed IRA - a self-directed IRA that permits the account holder to make investments

on behalf of the retirement plan.

A typical Retail branch at a Bank has these two primary activities:Teller Operations and

Relationship Managers

A bank teller is an employee of a bank who deals directly with most customers.

Relationship Managers are the Banks’ single point of contact to the customer.

Relationship Managers have day-to-day personal contact with the Client for new account

opening, account maintenance and product sales.

CORE BANKING/MULTI BRANCH BANKING is a special facility that allows a customer to

operate his Accounts through a network of branches of the bank where he has an account.

Core banking vendors of repute are Fidelity, Temenos, Infosys (Finacle), Oracle (FLEXCUBE).

An automated teller machine (ATM) is a computerized telecommunications device that

provides the customers with access to financial transactions in a public space without the

need for a human clerk or bank teller.

PIN - personal identification number.

Debit cards and ATM cards are used to transact in ATMs and PoS (Point of Sale) Terminals.

Visa and Master networks are large global networks that service ATMs

ATM consortium - is a computer network that connects the ATMs of different banks and

permits these ATMs to interact with the ATM cards of non-native banks.

Telephone banking allows customers to perform transactions over the telephone

VRU - Voice Response Unit

CTI - computer telephony integration

Voice Response Unit (VRU) is a computer telephony integration (CTI) term that refers to the

interaction between a human and a computer that is programmed to respond to the

human's requests.

IVR - interactive voice response

IVR - this is a computer phone application that accepts touch-phone keypad selection input

from the caller and provides appropriate information in the form of voice answers.


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The contact centre /Call centre handle inbound service calls, technical support requests and

sales enquiries, Sell products and advice through outbound calls.

Online banking (or Internet banking) allows customers to conduct financial transactions on a

secure website operated by their bank or credit union.

Mobile banking is a term used for performing balance checks, account transactions,

payments etc. via a mobile phones

Instruments are used to move and /or transfer funds from one account to another.

A check is a bill of exchange and is an instrument instructing a financial institution to pay a

specific amount of a specific currency from an account holders specific demand

account held in that bank.

The receiver of the check is payee.

Paper check processing - The drawer issues the check in the name of the Payee. The Payee

presents the check in the drawer/maker’s bank to the credit of his account.

This clearing and settlement process is known as Check-truncation.

By introducing check-truncation, intra-city clearing turn-around-times can be reduced

dramatically.

An electronic check is a transaction that starts at the cash register with a paper check for

payment is converted to an electronic debit, which is processed via ACH

ECC converts a paper check into an electronic payment at the point of sale

ELECTRONIC CHECK CONVERSION -In a store, the customer can present a check to a store

cashier -> The check can be processed through an electronic system that captures the

banking

information and the amount of the check. -> Once the check is processed, the customer

signs a receipt authorizing the store to present the check to the bank electronically and

deposit the funds into the store’s account.-> The customer gets a receipt of the electronic

transaction and the check is returned to the customer.-> It should be voided or

marked by the merchant so that it can't be used again.

Retail payments usually involve transactions between consumers and businesses

Bill Payment—Payment for previously acquired or contracted goods and services.

P2P Payments—Payments from one consumer to another.

EFT - electronic funds transfer

Electronic banking, also known as electronic fund transfer (EFT), uses computers and

payment networks as a substitute for checks and other paper transactions.

EBPP - ELECTRONIC BILLING PRESENTATION AND PAYMENT

Electronic Bill Payment allows a depositor to send money from his demand account to a

creditor or vendor to be credited against a specific account.

Electronic bill presentment and payment (EBPP) is a process that enables bills to be created,

delivered, and paid over the Internet.

BSP - Bill Service Provider

The banking operations are basically divided in to three; Front office, Middle Office and Back

Office.


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Front office is the Banking channels – Branch, ATM, Bank’s Website, etc. where the

customers contact the Bank’s representatives for their financial services.

Middle Office is where the decisions are made about the product, interest rate, credit

policies, Compliance monitored etc.

Back office mostly does the data base management, data processing, transaction processing

etc.

Checks can be processed in various modes: Paper check processing, check imaging /Check

truncation, Electronic Check conversion.

Consumers generally use one of these retail payments systems: Purchase of Goods and

Services, Bill Payment, P2P payments, Cash withdrawals and Advances.

Electronic banking, also known as electronic fund transfer (EFT), uses computer and

electronic technology as a substitute for checks and other paper transactions.

The federal Electronic Fund Transfer Act (EFT Act) covers most (not all) electronic customer

transactions.

EBPP is a mode of transaction involving the use of electronic means, such as email or a short

message, for rending a bill

A residential mortgage is a loan made using residential property as collateral to secure

repayment.

A commercial mortgage is a loan made using commercial real estate, like multifamily

property, or an office complex etc. as collateral to secure repayment.

The process by which a mortgage is secured by a borrower is called origination.

PROCESSING - This process ensures that documentary requirements are fulfilled and

regulatory checks are done.

UNDERWRITING - This is a process by which a lender determines if the risk of lending to a

particular borrower under certain parameters is acceptable.

Three C’s of underwriting: Credit, Capacity and Collateral.

It is always up to the underwriter to make the final decision on whether to approve or

decline a loan.

Escrow accounts is used for handling taxes and insurance premiums.

Fixed Rate - A fixed Rate Mortgage (FRM) is a mortgage loan where the interest rate on the

note remains the same through the term of the loan

Balloon Payment Mortgage - Balloon Payment Mortgage has a fixed rate for the term of the

loan followed by the ending balloon payment.

Adjustable Rate Mortgage (ARM) - An Adjustable Rate Mortgage (ARM) is a mortgage loan

where the interest rate on the note is periodically adjusted based on a variety of indices

such as 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI),

and the London Interbank Offered Rate (LIBOR)

Graduated Payment Mortgage - is a mortgage with low initial monthly payments which

gradually increase over a specified time frame

Interest Only Loan -An interest-only loan is a loan in which for a set term the borrower pays

only the interest on the principal balance, with the principal balance unchanged

Amortization refers to gradual decrease of principal balance of the loan as the loan is repaid

gradually over its term.


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Negative Amortization occurs whenever the loan payment for any period is less than the

interest charged over that period and so the outstanding balance of the loan increases.

Standard Variable Rate with Cash Back - one receive a substantial cash sum (Example 3–5%

of the amount borrowed) when we take up the loan.

Base Rate Tracker - the interest rate is guaranteed to be a set amount above the base rate

and alters in line with changes in that rate.

Discounted interest rate - The payments are variable, but they are set at less than that

lender’s going rate for a fixed period of time. At the end of the period, one is charged

the lender’s standard variable rate.

Capped rate - The payments go up and down as the mortgage rate changes but are

guaranteed not to go above a set level (the ‘cap’) during the period of the deal.

FHA Loan - FHA loans are meant for lower income Americans to borrow money for the

purchase of a home

VA Loan - home financing to eligible veterans in areas where private financing is not

generally available

Conventional Loans - These are loans without any government backing

Agency Loans - These are the loans issued by Government Sponsored Entities (GSEs) such as

Fannie Mae, Freddie Mac and Ginnie Mae.

Mortgage backed Security (MBS) is a type of asset-backed security that is secured by a

mortgage or collection of mortgages.

Self Certification Mortgages, informally known as "self cert" mortgages, are available to

employed and self employed people who have a deposit to buy a house but lack the

sufficient documentation to prove their income.

100% mortgages are mortgages that require no deposit (100% loan to value). These are

sometimes offered to first time buyers, but almost always carry a higher interest rate on

the loan.

Together/Plus Mortgages represent loans of 100% or more of the property value - typically

up to a maximum of 125%.

Student Loans are Loans availed by eligible students to pursue graduate and post graduate

studies in Schools/Colleges/Universities.

Students Loans offered can be categorized broadly into two types: Federally sponsored loans

& Non-federally sponsored loans

Federally sponsored loans are of two types - Federal Family Education Loan Program (FFELP)

& Federal Direct Loan (FDLP)

Federal Direct Loan (FDLP)- where the department of Education directly provides the loans

Federal Family Education Loan Program can further be divided into four types - Federal

Stafford, Federal PLUS, Consolidation loans,Graduate Plus

Federal Stafford –Federal Stafford loans are the most common source of education loan

funds in the US.

Federal PLUS - PLUS loans are availed by the parents of a full- or half-time undergraduate

student.

Consolidation loans - A consolidation loan involves two or more existing federally sponsored

loans into one single loan.

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