The major obective of any business concern is to make profit for its owners by selling

goods or services. To reach this goal finance is required. In this context it can be said that
finance is the soul of any business concern. Keeping this in view, the proper management
of finance is absolutely necessary. Financial Management is concerened with optimal
procurement as well as usage of finance. Financial management my be defined as
planning, raising, utilising and controlling of funds used in business. It involves
management of the financial activities of business enterprises. It is concerned with
maximising the wealth of owners of business through wise and rational invesment of
funds.

.Definitions of Financial Management:

According to J.L.Massie, "Financial management is the operational activity of a business

that is responsible for obtaining and effectively utilizing the funds necessary for efficient
operations."

According to B.O.Wheeler, "Financial management is the business activity which is

concerned with acquisition and conservation of capital funds in meeting financial needs
and overall objectives of business enterprise."

In the words of J.F.Bradely, "Financial management is that area of business management

devoted to a judicious use of capital and a careful selection of sources of capital in order
to enable a spending unit to move in the direction of reaching its goals."

The finance function refers to following three major decisions which the finance manager
has to take:

1. Investment Decision
2. Financial Decision
3. Dividend Decision
1. Investment Decision: The first and foremost decision is concerned with the allocation
of funds to different investment proposal. This decision relates to the careful selection of
assets in which funds will be invested.. These investment porposal are evaluated on the
basis of their expected returns and risks involved. Investment decision involve the
investment of funds among fixed and current assets. A long-term investment decision is
called a Capital Budgeting Decision. These are like acquiring a new fixed assets, opening
a new branch etc. Short-term investment decision are called Working Capital Decision.
These are concerned with the decision about the levels of cash, inventories and debtors
etc.

2. Financial Decision: Financial decision relates to raising funds. This decision is about
the quantum of finance to be raise from various long-term sources. It involves
identification of various available sources which may be debt, equity share capital,
preference share capital and retained earnings etc. A proper mix of these sources, known
as capital structure, is essential. The most appropriate souces of funds are selected and the
amount of funds to be raised from each source is determined. A balanced capital structure
has to be decided which involves determining the proportion or ratio between equity and
debt.

3. Dividend Decision: Dividend decision relates to the appropriation of profits earned.

Net profits (after tax) are divided into two parts - retained earning and dividends.
Dividend is that protion of a company's net earnings which is paid out to the shareholders
and the profits, which are retained in the business for re-investment purpose are known as
retained earning. Financial manager has to make a major decision that how much profit
earned by the company are to be distributed to the shareholder and how much of it should
be retained in the business for meeting the investment requirements.

Finance manager is the head of the finance department of a business enterprise. He

manages all the financial affairs of the business. The main functions of a finance manager
(or financial management) are as follows:

1. Estimation of Required Capital: All business firms require capital for (i) purchase of
fixed assets, (ii) meeting working capital requirement, and (iii) modernisation and
expansion of business. The financial manager makes estimates of funds required for both
short-term and long-term financial requirements. These financial requiements of the
business are estimated keeping in view its projected sales, budget and market trends.
Accurate estimate of funds is essential to avoid excess or deficiency of funds.

2. Determining the Sources of Funds: Various sources and methods of financing to be

used to raising necessay funds. The finance manager has to decide the sources from
which the funds are the be raised. The management can raise funds from equity
shareholder, preference shareholder, debenture holders, banks, public deposits and other
financial institutions etc. These sources are selected after comparing their relative merits
and demerits very carefully.

3. Determining Capital Structure: After determining the requirement of capital funds,

the finance management has to decide regarding the kind and proportion of various
sources of funds has to be taken. The finance management ensures optimum combination
of debt and equity. A capital structure will be said to be optimum when the proportion of
debt and equity is such that it results an increase in the market price of share, i.e, increase
in the shareholders' wealth.

4. Procurement of funds: After selecting the sources of funds and deciding optimum
capital structure the finance manager takes the steps to the raise the required funds. It
might require negotiation with creditors and financial institutions, issue of prospectus etc.
The procurement of funds depends not only upon cost of raising funds but also on other
factors like general market conditions, choice of investors, government policies etc.

5. Utilization of funds: Funds obtained through the various sources should be properly
utilized by judicious investment in various assets. The financial manager should
endeavour to make the best use of funds. Proper procedure must be established so as to
prevent misuse of funds and leakage of revenue.

6. Disposal of Surplus or Profits: Out of the availabe earnings, the financial manager
has to decide how to dispose the surplus from time to time. He must ensure a fair return
to investment of shareholders and should retain enough funds to meet the needs of
expansion of the organisation. Thus a financial manager has to decide dividend policy,
ploughing back of profits and creation of reserves.

7. Management of Cash: It is an important task of the financial manager to manage the

cash and other current assets. A financial manager is to provide adequate funds for the
enterprise to carry out its operations smoothly so as to ensure the firm's liquidity and
solvency. Management of cash involves forecasting the cash inflow and outflows to
ensure that sufficient cash is available at all time to purchase raw materials, to pay wages
and salaries, to pay to creditors and to meet day to day expenses etc. If sufficient amount
of cash is not available at the proper time, the firm may lose its credit-worthiness in the
market.

8. Financial Control: A financial manager has to exercise proper control over corporate
funds so that various financial decisions yield maximum advantage. He must evaluate the
financial performance of the business enterprise to determine whether various financial
decisions and activities have resulted into maximisation of market value of equity share
or not. The overall measure of evaluation is Return on Investment (ROI). The other
techniques of financial control and evaluation include budgetary control, cost control,
internal audit, break-even analysis and ratio analysis etc.

The major obective of any business concern is to make profit for its owners by selling
goods or services. To reach this goal finance is required. In this context it can be said that
finance is the soul of any business concern. Keeping this in view, the proper management
of finance is absolutely necessary. Financial Management is concerened with optimal
procurement as well as usage of finance. Financial management my be defined as
planning, raising, utilising and controlling of funds used in business. It involves
management of the financial activities of business enterprises. It is concerned with
maximising the wealth of owners of business through wise and rational invesment of
funds.

.Definitions of Financial Management:

According to J.L.Massie, "Financial management is the operational activity of a business
that is responsible for obtaining and effectively utilizing the funds necessary for efficient
operations."

According to B.O.Wheeler, "Financial management is the business activity which is

concerned with acquisition and conservation of capital funds in meeting financial needs
and overall objectives of business enterprise."

In the words of J.F.Bradely, "Financial management is that area of business management

devoted to a judicious use of capital and a careful selection of sources of capital in order
to enable a spending unit to move in the direction of reaching its goals."

Meaning of Working Capital

Working capital is relatively liquid portion of the total capital of the business. It is
required for investment in current assets like cash, stock of materials and fininshed
goods, debtors, etc.

Working capital is that portion of capital which is requird for holding current assets like
stock of materials and finished goods, bills receivable, accounts receivable and cash for
meeting current expenses like salaries, wages, taxes, rent, etc.

The term 'working capital' is used in two senses, namely, gross working capital and net
working capital. Gross working capital denotes the total investment in current assets and
net working capital capital represents the excess of current assets over current liabilities.
Current liabilities comprise bills payable, accounts payable and expenses payable. It is
the concept on net working capital which is more relevant for the purpose of determining
the amount of working capital required.

Gross Working Capital: It represents the total value of current assets. In other words, it
is the sum total of net working capital and current liabilities. It is a quantitative concept
pointing out the total amount available for financing the current assets. It cannot reveal
the true financial position of a company. In fact, it represents the operating cycle of
working capital of a company.

Net Working Capital: It represents the excess of current assets over current liabilities. In
other words -

Net Working Capital = Current Assets - Current Liabilities

The concept of net working capital indicates the soundness of current financial position.
Normally, the current ratio, i.e. ratio between current assets and current liabilities of 2:1
is considered to be a good sign of soundness of financial structure. Thus, the net working
capital concept indicates the margin of protection pointing out financial soundness to the
creditors and investors. It is a qualitative concept indicating the firm's ability to meet its
operating expenses and current liabilities.

Fixed Capital

The capital invested in fixed or permanent assets like land and buildings, plants and
machinery, furniture and fixtures etc. is known as fixed capital or block capital. Fixed
capital is the portion of the capital which is represented by fixed assets.

Fixed assets are those assets which are required for permananet use and are not meant for
resale. These assets are not fixed in value but they are needed for long term and cannot be
disposed of without breaking up the business. Fixed capital is known as 'block capital'
because it is blocked up in fixed assets for the lifetime of the company, Fixed capital
represents the permanent or long-term capital of an enterprise. Therefore, it is raised
through long-term sources like shares, debentures, long-term loans and retained earnings.

It is equally necessary to know the meaning of fixed capital management. Management of

fixed capital is meant the correct estimation of its requirement. This estimate depends
upon the need of fixed assets. In other words, at first, need of fixed assets is estimated
and thereafter need of fixed capital is estimated. Success of the business depends largely
on adequate quantity of fixed assets. Hence, efficient management of fixed capital
depends on the precise estimation of fixed assets and then to purchase it.

Importance of Financial Planning

For the success of any business it is essential to have a sound financial planning. It will
provide policies and procedures to achieve close co-ordination between the various
functional areas of business. It aims at enabling the business to tackle the reducing
uncertanities in respect of the availability and timing of the funds and helps in smooth
functioning of an organisation. This will lead to minimisation of wastage of resources.
The management can follow an integrated approach in the formulation of financial
policies, procedures and programmes only if there is a sound financial plan.

Importance of Financial Planning:

1. Financial planning provides policies and procedures for the sound administration of the
finance function.
2. Financial planning results in preparation of plans for the future. Thus, new projects
could be undertaken smoothly.
3. Financial planning ensures required funds from various sources for the smooth conduct
of business.
4. Uncertainly about the availability of funds is reduced. It ensures stability of business
operations.
5. Financial planning attempts to achieve a balance between the inflow and outflow of
funds. Adequate liquidity is ensured throughout the year. This will increase the repuration
of the business.
6. Cost of financing is kept to the minimum possible and scarce financial resources are
used judiciously.
7. Financial planning serves as the basis of financial control. The management attempts
to ensure utilzation of funds in tune with the financial plans.

Financial system of a country plays an important role in the its economic development. It
is the financial system that helps transfer finance from surplus sector to the sector where
it is needed the most. Financial system has three main organs: Financial Market,
Financial Institution and Financial Securities. It is the financial market that plays an
important role in transferring funds from one sector to the other.
A business needs finance from the time an entrepreneur makes the decision to start it. It
needs finance both for working capital requirements such as payments for raw materials
and salaries to its employees, and fixed capital expenditure such as purchase of
machinery or building or to expand its production capacity. A business can raise these
funds from various different sources and in different ways through financial markets
A financial market consists of two major segments – (i) Money Market and (ii) Capital
Market. The market that deals in short-term securities is called money market and the
market that deals in long-term securities is called capital market.
Financial markets are the crucial link in the saving investment process. They serve to
transfer money capital or financial resources from savers to the entrepreneurial
borrowers.

Capital Market

Capital market is the market which is concerned with long-term finance for industry and
government.The savings of individuals and institutions are converted into investment
through capital issued by companies and public loans floated by government and semi
government bodies. Capital market facilitates dealings in financial assets that have a long
or indefinite period of maturity. It constitutes (a) raising of capital by issued of new
shares, (b) raising of borrowing by issue of new debentures, (c) raising of long-term
borrowings by inland and foreign banks and financial institutions.

The major constituents of the capital market are the investors and the organisations which
mobilise savings and chanalise them into investment channels. Investors of funds may be
individuals, companies and the financial institutions. The bodies which mobilise savings
may be banks, investment trusts, specialized financial corporations and stock exchange.
Money Market
Money Market is a market for short term funds which deals in monetary assets whose
period of maturity is upto one year. Money market constitutes a major source of working
capital for business. It is a market in liquid assets. Funds borrowed against different types
of credit instruments such as bills of exchange, short-term securities, promissory notes
and treasury bills drawn for a short period, etc., are called near money. The term near
money means short-term securities or assets which could be encashed in a short period of
time. These assets are close substitutes for money. Thus, the term money market may
sound misleading as it does not deal in cash or money but in near money assets.

The dealers in the money market consist of the Government, banks, commercial and
industrial concerns, stock exchange brokers, dealers in Government and other securities,
merchants, manufacturers etc.

Money market plays an important role in the economy of any country in the following
ways:

(i) Money market is an important source of financing trade and industry through
commercial bills, commercial papars, etc.

(ii) It provides funds for both internal and international trade.

(iii) It helps the lenders to earn on their idle or surplus funds for short periods.

(iv) It allows the government to raise funds from the investors and commercial banks.

(v) The government can check inflationary trend by issuing documents and decreasing
liuidity in the call money market.

(vI) Money market facilitates implementation of the monetary policy of the country's
central banks.

Insurance

Insurance is a promise of compensation for specific potential future losses in exchange

for a periodic payment. In other words, insurance is the act, system, or business of
insuring property, life, one's person, etc., against loss or harm arising in specified
contingencies, as fire, accident, death, disablement, or the like, in consideration of a
payment proportionate to the risk involved.
Insurance is designed to protect the financial well-being of an individual, company or
other entity in the case of unexpected loss. Some forms of insurance are required by law,
while others are optional. Agreeing to the terms of an insurance policy creates a contract
between the insured and the insurer. In exchange for payments from the insured (called
premiums), the insurer agrees to pay the policy holder a sum of money upon the
occurrence of a specific event. In most cases, the policy holder pays part of the loss
(called the deductible), and the insurer pays the rest. Examples include car insurance,
health insurance, disability insurance, life insurance, and business insurance.

The major operations of an insurance company are underwriting, the determination of

which risks the insurer can take on; and rate making, the decisions regarding necessary
prices for such risks.

The underwriter is responsible for guarding against adverse selection, wherein there is
excessive coverage of high risk candidates in proportion to the coverage of low risk
candidates. In preventing adverse selection, the underwriter must consider physical,
psychological, and moral hazards in relation to applicants.

Physical hazards include those dangers which surround the individual or property,
jeopardizing the well-being of the insured.

The amount of the premium is determined by the operation of the law of averages as
calculated by actuaries. By investing premium payments in a wide range of revenue-
producing projects, insurance companies have become major suppliers of capital, and
they rank among the nation's largest institutional investors.

Automobile Insurance

Meaning
There is danger at every corner when a vehicle comes to roads. It may have to face an
accident and could be hit by someone who makes mistake at highway. Auto Insurance or
Vehicle Insurance is an insurance that protects the insured against financial losses
involving the use of vehicles if you have an accident. Vehicle Insurance is a contract
between you and the insurance company that provides specific automobile liability
coverage for you.

Definition

"An Auto insurance policy is a safe guard for consumers that shields private passenger
carrying automotive vehicle owners from monetary losses if a vehicle they own is
involved in any type of accident. ..."

"This is a type of insurance that protects the policyholder against losses involving
automobiles. Different amounts of coverage can be purchased ..."
General Insurance

General insuracne means insuring anything other than human life. Examples are insuring
property like house and belongings against fire and theft or vehicles against accidental
damage or theft. Injury due to accident or hospitalisation for illness and surgery can also
be insured. Your liabilities to others arising out of the law can also be insured and is
compulsory in some cases like motor third party insurance.

Need to buy General Insurance

Insurance is a way of allowing people to minimize their individual financial damages by
combining their potential for loss with that of others.When one has earned and
accumulated property, it is prudent to protect it against financial losses. If you have a car
or house you need to protect them against accidents, damage, theft, fire and anything else
that could affect them.
The law also provides us to be insured against some liabilities. That is, in case we should
cause a loss to another person, that person is entitled to compensation. To ensure that we
can afford to pay that compensation, the law requires us to buy liability insurance so that
the responsibility of paying the compensation is transferred to an insurance company.
In order to protect it against losses due to fire or theft and so on, anyone who owns an
asset can buy insurance. Each one of us can insure our and our dependents’ health and
well being through hospitalisation and personal accident policies. To buy a policy the
person should be the one who will bear financial losses if they occur. This is called
insurable interest.
Types of General Insuranc:

• Home Insurance
• Automobile Insurance
• Accident Insurance
• Medical Insurance
• Travel Insurance
• Pet Insurance
• Unemployment Insurance (to protect your income)
• Mortgage or Loan Payments Insurance (Payment Protection Insurance)
• Critical illness Insurance
• Long-term care insurance

What kinds of policies are there?

Most general insurance policies are annual – that is, they last for one year. Some policies
are given for longer periods – like fire insurance for residences – and some for shorter
periods – like insurance for goods transportation or for emergency medical treatment
during foreign travel.
Insurance Broker
An insurance broker acts as an intermediary between clients and insurance companies.
Clients may be either individuals or commercial businesses and organisations. Brokers
use their in-depth knowledge of risks and the insurance market to find and arrange
suitable insurance policies. Insurance brokers, unlike tied agents, are independent and
offer products from more than one insurer, to ensure that their clients get the best deal.

Typical work activities

Typical work activities depend largely on the size and nature of the employer and the
scale of the business. In a large company, a broker may specialise in a core area; in a
small firm, a broker could be involved in most functions, including new business
development and acting as placing broker and claims broker.

Insurance brokers may perform the following tasks:

• gathering information from clients, assessing their insurance needs and risk
profile;
• building and maintaining ongoing relationships with clients including scheduling
and attending meetings and understanding the nature of clients' businesses or lives
• advising clients whether and when they need to make a claim on their policies;
• developing relationships with underwriters, surveyors, photographers, structural
engineers and other professionals;
• draw up a list of potential clients
• make contact with these clients and see if they are interested in insurance
• interview prospective clients to explain the details of an insurance policy and
make recommendations on the amount and type of cover that may be taken
• research and review available insurance products to make sure that the clients are
given the best and most appropriate offer
• market their services to increase their number of clients
• collect and keep records of payments.
• administrative tasks such as dealing with paperwork, correspondence, keeping
detailed records;
• collecting insurance premiums and processing accounts.

The firm that functions as a broker is called a brokerage. There are many companies
working as Insurance Consultants. These companies search for the best insurance policy
for the customer from a large number of companies. For this activity, they receive a fee
from the customer.

Mutual Funds
An investment company operates a mutual fund. The Investment Company pools
shareholder or unit holder funds and invests in various securities. It raises money from
shareholders and invests it in stocks, bonds, options, commodities or money market
securities that meet the investment objectives of the fund and distributes the profits. In
other words, a mutual fund allows an investor to indirectly take a position in a basket of
assets
The investment company offers the investor the benefits of portfolio diversification
(provides greater safety and reduced volatility), and professional management. The
portfolio manager trades the fund's underlying securities, realizing a gain or loss, and
collects the dividend or interest income. The investment proceeds are then passed along
to the individual investors. The units or shares are redeemable by the fund on demand by
the investor. The value of the assets of the fund influences the current price of units.

Money Market Funds

Money market funds are generally the safest and most secure of mutual fund investments.
A money market fund is a mutual fund that invests solely in money market instruments.
The goal of a money-market fund is to preserve principal while yielding a modest return.
Money market instruments are forms of debt that mature in less than one year and are
very liquid. These funds are a great place to park your money. Whether you're storing
money for emergencies, saving for the short-term, or looking for a place to store cash
from the sale of an investment, money market funds are a safe place to invest. These
funds invest in short-term debt instruments and typically produce interest rates that
double what a bank can offer in a checking account or savings account and rival the
returns of a CD (Certificate of Deposit). Unlike bank accounts and money market
accounts, most deposits are not FDIC insured, but the risk is extremely low (only those
funds administered by banks are FDIC-insured, but some others are privately insured).
Although money market mutual funds are among the safest types of mutual funds, it still
is possible for money market funds to fail, but it is unlikely. In fact, the biggest risk
involved in investing in money market funds is the risk that inflation will outpace the
funds' returns.

Advantages of Mutual Funds

The advantages of investing in a Mutual Fund are:
Diversification: The best mutual funds design their portfolios so individual investments
will react differently to the same economic conditions. For example, economic conditions
like a rise in interest rates may cause certain securities in a diversified portfolio to
decrease in value. Other securities in the portfolio will respond to the same economic
conditions by increasing in value. When a portfolio is balanced in this way, the value of
the overall portfolio should gradually increase over time, even if some securities lose
value.

Professional Management: Most mutual funds pay topflight professionals to manage their
investments. These managers decide what securities the fund will buy and sell.

Regulatory oversight: Mutual funds are subject to many government regulations that
protect investors from fraud.
Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call,
and you've got the cash.

Convenience: You can usually buy mutual fund shares by mail, phone, or over the
Internet.

Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment.
Expenses for Index Funds are less than that, because index funds are not actively
managed. Instead, they automatically buy stock in companies that are listed on a specific
index

1. Transparency

2. Flexibility

3. Choice of schemes

4. Tax benefits

5. Well regulated

Share Capital
The capital of a joint stock company is divided into shares and called ‘Share Capital’.
The share capital may be classified as below:
(1) Nominal: This is the amount of the capital which is stated in Memorandum of
Association and with which the company is registered. Nominal capital is the maximum
amount which the company is authorized to raise from the public.
(2) Issued Capital: This is the nominal amount of shares actually issued to the public. In
other words, issued capital is that part of the nominal capital, which is offered to the
public for subscription. The balance of the nominal capital, which is not offered to the
public for subscription, is called un-issued capital.
(3) Subscribed Capital: This is the nominal amount of the shares taken up by the public.
In other words, subscribed capital is that part of the issued capital, which is applied for by
the public. The balance of the issued capital, which is not subscribed for by the public is
called, unsubscribe capital.
(4) Called up Capital: This is the amount of the capital that the shareholders have been
called to pay on the shares subscribed for by them. The nominal amount of the shares is
usually collected from the shareholders in installments and it is possible that the entire
amount of the subscribed capital may not have been called. The amount of the subscribed
capital, which is not called, is known as uncalled capital.
(5) Paid up Capital: This represents that part of the called up capital, which is actually
received by the company. The amount of the called-up capital, which not paid by the
shareho0lders, is called as unpaid capital or calls in arrears.
(6) Reserve Capital: A company may by special resolution determine that any portion of
its share capital which has not been already called up, shall not be capable of being
called-up, except in the event of winding up of the company. Such type of share capital is
known as reserve-capital

Preference Shares

A share that carries the following two preferential rights is called ‘Preference Share’:
(i) Preference shares have a right to receive dividend at a fixed rate before any dividend
given to equity shares.
(ii) Preference shares have a right to get their capital returned, before the capital of equity
shareholders is returned. in case the company is going to wind up.

Preference shares can be classified as under:

(a) Cumulative Preference Share is that share on which arrears of dividend accumulate.
Unless otherwise stated, a preference share is always deemed to be cumulative.

(b) Non-cumulative Preference Share is that share on which arrears of dividend do not
accumulate as per the express provision in the Articles of Association.

(c) Participating Preference Share is that share which, in addition to two basic preferential
rights, also carried on or more of the following rights as per articles:
(i) A right to participate in the surplus profits left after paying dividend to equity
shareholders.
(ii) A right to participate in the surplus assets left after the repayment of capital to equity
shareholders on the winding up of the company.

(d) Non-participating Preference Share is that share which is not a participating share.
Unless otherwise stated, a preference share is always deemed to be a non-participating
preference share.
(e) Convertible Preference Share is that share which confers on its holder a right of
conversion into equity share.
(f) Non-convertible Preference Share is that share which does not confer on its holder a
right of conversion into equity share. Unless otherwise stated, a preference share is
always deemed to be a non-convertible one.
(g) Redeemable Preference Share is that share which is redeemable.

Debentures

Meaning
When a company desires to borrow a considerable sum of money for its expansion, it
invites the general public to subscribe to its debentures. A debenture is a certificate issued
by the company acknowledging the debt due by it to its holders and is issued by means of
a prospectus in the same manner as shares. A debenture is a written instrument
acknowledging a debt and containing provision as regards the repayment of principal and
the payment of interest at a fixed rate. A debenture includes debentures, stock, bonds and
any other securities of a company whether constituting a charge on the assets of the
company or not. A Debenture is a long-term Debt Instrument issued by governments and
big institutions for the purpose of raising funds. Usually, Debentures are freely negotiable
Debt Instruments. The Debenture-holder works as a lender to the Debenture issuer. In
return, the Debenture-holders is paid interest as it is paid in case of a loan. In finance, a
debenture is a long-term debt instrument used by governments and large companies to
obtain funds. It is defined as "a debt secured only by the debtor’s earning power, not by a
lien on any specific asset." It is similar to a bond except the securitization conditions are
different. A debenture is usually unsecured in the sense that there are no liens or pledges
on specific assets. It is, however, secured by all properties not otherwise pledged. In the
case of bankruptcy debenture holders are considered general creditors.

Definition

"A bond issued without specific security. In the event of a crisis, holders of debentures
take a back seat to other bondholders. To compensate for the added risk, debentures
usually pay higher interest than secured bonds, or offer conversion to common stock."

"Any debt obligation backed strictly by the borrower's integrity, e.g. an unsecured bond.
A debenture is documented in an indenture."

"A promissory note that is backed by the general credit of the issuing company. Unlike a
mortgage bond, a debenture is generally not secured by a mortgage or lien on any specific
property"

"A long-term debt instrument issued by corporations or governments that is backed only
by the integrity of the borrower, not by collateral. A debenture is unsecured and
subordinate to secured debt. A debenture is unsecured in that there are no liens or pledges
on specific assets"

"A corporate debt security backed solely by the financial strength of the issuer and not by
any specific assets."

Types of Debentures

1. Security Point of View

(i) Secured Debentures

(a) Fixed Charge: A fixed charge is created on certain specified assets generally
immovable such as land and building, plant and machinery, long term investments and
the like. So it is equivalent to mortgage. When the charge is fixed, the company can only
deal with the property subject to the charge, that is, a fixed charge allows the company to
retain possession of the assets but prevents the company from selling, leasing etc., of the
assets without the consent of the charge holders. The property identified remains so
identified during the period for which the charge is created.

(b) Floating Charge: A floating charge is generally in respect of movables, that is,
properties which are constantly changing. It does not amount to mortgage of property. A
charge on the stock-in-trade from time to time of a business is a floating charge. When an
item is sold out of the stock, the charge ceases to attach to it and the buyer cannot be
asked to pay the debt. When a new item is added to it the charge automatically attaches to
it without further new agreement. So the property is certainly identified at the time of
creation of charge; its very identification goes on changing and the final identification is
at the point of time when the charge crystallizes or becomes fixed after which the
company can mortgage or sell that property subject the charge. The charge will continue
to attach only so long as the item remains unsold.

(ii) Unsecured Debentures: When debentures are issued without any charge or security,
they are termed as unsecured or naked debentures. Holders of unsecured debentures are
ordinary unsecured creditors and do not enjoy any special rights.

2. Tenure Point of View

(i) Redeemable Debentures: Such debentures are redeemable at par or premium after
the expiry of a particular period or under a system of periodical drawings.

(ii) Perpetual Debentures: Debentures may be made irredeemable or in other words

perpetual. Such debentures are redeemable either on the happening of a contingency or
when the company is wound up or when the company decides to redeem.

3. Mode of Redemption Point of View

(i) Convertible Debentures: Debentures may be convertible into equity or preference

shares of the company on certain dates or during certain periods on the basis of an
agreement between company and debenture holders.

(a) Fully Convertible Debentures: When the full amount of debentures is converted into
shares of the company at agreed terms and conditions. The conversion is to be made at or
after 18 months from the date of allotment but before 36 months.
(b) Partly Convertible Debentures: When only a part of the amount of debentures is
convertible into shares at a specified time and remaining part of debenture is redeemable
on agreed terms.

(ii) Non-Convertible Debentures: Such debentures are not convertible into equity or
preference shares.

4. Coupon Rate Point of View: Usually the debentures are issued with a specified rate
of interest, which is called as coupon rate. The specified rate may either be fixed or
floating. The floating interest rate is usually tagged with the bank rate and yield on
Treasury bond plus a reward for risk. Since the bank rate and yield on treasury securities
keep on fluctuating over a period of time any change is compensated in the risk premium.
The rate of interest in such a case is quoted as "PLR + 50 basis points". In this case if it is
assume a PLR of 9% the rate of interest would 9.5%. The "+ basis points" is determined
in relation to risk involved.

A zero coupon bond is one which does not carry a specified rate of interest. In order to
compensate the investors such bonds are then issued at a substantial discount. The
difference between the face value and issue price is the total amount of interest related to
the duration of the bond.

Meaning of Bond

A Bond is a credit that an investor makes to a company, government, centralized agency,

or other organization. Bonds are financial instruments that help large business houses and
the state to rise finance on a large scale. It is a long-term debt security with a stated
interest rate and fixed due dates, issued by a corporation or a government, when interest
and principal must be paid. Bond is used as a major type of financial instrument in the
market. Bonds enable the issuer to finance long-term investment with external funds.

Bonds enable the issuer to finance long-term investment with external funds. A bond
fund is a collective investment scheme that invests in bonds and other debt securities. A
bond is mostly just an advance, but in the form of a security, even if terms used is rather
dissimilar. The issuer is equivalent to the borrower, the bondholder to the lender, and the
coupon to the interest. There are no risks involved while investing in a bond.
Bondholders are paid before anyone else, even stockholders and creditors, if the company
runs into hard times or goes bankrupt. Returns are assured in a bond unlike other
financial instruments like shares or mutual funds. Bonds give you a stream of income
based on their rate of return. Bonds are usually much less volatile then stocks are.

Bonds are flexible category of financial instrument. Bonds are like stocks because they
are both traded. Therefore one can buy the bonds after they are originally issued while at
the same time one can sell bonds before they mature. Bond prices are subject to volatility
in relation to market conditions. The demand-supply mechanism makes the price
determination of the bonds. Market conditions change very rapidly and so do the needs
and requirements of the investors. This leads to the change in bond prices in different
types of bonds.

Municipal Bonds
In order to raise funds for public purposes, the states, cities, or local government entities
issue bonds or debt securities. These bonds or debt securities are called ‘Municipal
Bonds’. Municipalities issue bonds to raise capital for their day-to-day activities and for
specific projects such as --- building schools, hospitals, constructing a new sewage
systems, and expanding highways etc.

When an investor purchases a municipal bond, he lends money to the government entity
that issued the bond. In exchange, the government entity promises to pay him a specified
amount of interest, usually semiannually, and returns his principal amount on a specified
maturity date.

Interest on municipal bonds is generally exempt from federal tax. In the case that the
bond is bought by a resident of the state that issued the bond, the interest payments are
also exempt from state tax. Interest payments are further exempt from local tax if
residents of the locality that issued the bond buy them.

Zero Coupon Bonds

Zero coupon bond is a bond that generates no periodic interest’s payments during its life
time. Zero coupon bonds are at a deep discount from their face value. The holder of a
zero-coupon bond only receives the face value of the bond at maturity. When a zero
coupon bond matures, the investor will receive one lump sum equal to the initial
investment plus interest that has accrued. The maturity dates on zero coupon bonds are
usually long-term. With the deep discount, an investor can put up a small amount of
money that can grow over many years.

The difference between a zero-coupon bond and a regular bond is that a zero-coupon
bond does not pay coupons, or interest payments, to the bondholder while a typical bond
does make these interest payments. A coupon-paying bond will initially trade near the
price of its face value. In other words, a zero-coupon bond gains from the difference
between the purchase price and the face value, while the coupon bond gains from the
regular distribution of interest. Zero-coupon bondholders gain on the difference between
what they pay for the bond and the amount they will receive at maturity.

Zero coupons tend to fluctuate in price much more than other type of bonds.