Beruflich Dokumente
Kultur Dokumente
institutions
Lecture 1: Introduction
Relevance of the course
Much of the financial crisis of 2008-
09 has roots in financial markets and
institutions
What happened on the financial
markets in 2008-09?
What happened on the financial markets in 2008-
09 ?
Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation,
commonly known as Fannie Mae and Freddie Mac
were bought by their regulator
A week later: A bust of one of the biggest players
on the market: a record-breaking bankruptcy of
Lehman Brothers
A day later: US government takeover of a
desperately illiquid American International Group
(AIG)
A day later: Bank of America bought Merrill Lynch
in US; Lloyds bought HBOS in UK
Central banks desperately throw liquidity on the
markets
TOTAL 2008 2008 2008 2007 2007
Firm ($bn) Q3 Q2 Q1 Q4 Q3
Citigroup -61.00 -6.20 -12.00 -19.00 -18.20 -5.60
Commercial Banks
Development Financial Institutions
Mutual Funds
Insurance Companies
Commercial Banks
The most important and largest part of
the financial system ~ 40% of financial
savings is with banks
Prior to 1991, Indian banking was highly
regulated. Also, profitability and financial
strength of banks were not considered
important, but now profitability of banks
have improved significantly.
About 80% of the banking deposits and
assets are in the public sector.
Development Financial
Institutions
All India DFIs - IDBI, ICICI, IFCI,
SIDBI
State DFIs - example: KIDC and
KFC
DFIs had access to low cost SLR
funds, cost of which has increased
to market levels since
liberalisation.
Problem of high NPAs - lending at
the most risky stage of the
Development Financial Institutions
Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships
Limited Liability
Corporate tax on profits +
Corporations
Personal tax on dividends
Corporate form of
business
Most large firms are organised as a company or
corporation
Corporation is a separate legal entity from its
owners. Owners enjoy limited liability. (First limited
liability co. Verenigde Oostindische Compagnie or VOC was
Netherlands biggest trading company during the 17th and 18th
centuries. It was the worlds first joint-stock limited liability company
with freely transferable shares. Shares issues in 1602) Source:
http://www.worldsoldestshare.com /. In India, limited liability companies enabled
by Act in 1857.
The purpose of the corporation is set in the articles
of incorporation.
Closely held/private corporation few shareholders
with no public share ownership
Public listed companies are those where the public
hold shares of the firm and the shares are traded on
an exchange.
Assets
Real assets
Tangible, eg. Plant and machinery
Intangible, eg. Technical expertise,
brands, patents
Financial assets
Stocks, bonds, etc.
Two basic questions
1. What real assets should the firm
invest in?
Capital Budgeting
Financial policy
Corporate planning
Treasurer Controller
Cash management Preparation of financial
Raising capital statements
Banking relationship Accounting
Tax
Fundamental Objective
Maximizing the value of the cash
invested in the firm.
Logic:
a. Shareholders want to be as rich as
possible, that is maximize his or her
wealth.
b. Transform the wealth into most
desirable time pattern of
consumption
c. Manage the risk characteristics of
that consumption
Shareholder Value
Ethics is an important issue and is
not to be forgotten while maximizing
value.
The Users
Savers Financial of
System funds
Financial system: the
institution link
Cash Cash
Financial
Savers Users
Intermediary
IOU IOU
I Owe (yo)U
IOU:
Markets:
Savers facilitate Users
the
process
IOU
Financial Instruments
Common stock
Ownership
Voting rights
Preferred stock
Financial Instruments
Debt
Maturity
Fixed vs floating
Denominated in INR or foreign currency
Seniority junior or senior
Secured or unsecured
Straight bonds or convertible bonds