A debenture is a debt instrument, which is not backed by collateral’s. Debentures are backed by the creditworthiness and reputation of the debenture issuer. Besides, a debenture is a long-term debt instrument issued by governments and big institutions for the purpose of raising funds. The debenture has some similarities with bonds but the terms and conditions of securitization of debentures are different from that of a bond. A debenture is regarded as an unsecured investment because there are no pledges (guarantee) or liens available on particular assets. Nonetheless, a debenture is backed by all the assets which have not been pledged otherwise. Normally, debentures are referred to as freely negotiable debt instruments. The debenture holder functions as a lender to the issuer of the debenture. In return, a specific rate of interest is paid to the debenture holder by the debenture issuer similar to the case of a loan. In Continue reading
Financial Concepts
Steps Involved in the Process of Securitization
Securitization, a process by which illiquid financial assets are transformed into tradable commodities, is one of the most significant innovations of the financial world. Having originated in 1970 in mortgage markets in the USA, securitization has already converted over $90 trillion worth of non-tradable assets into marketable securities. As a powerful tool of liquidity and risk management, securitization has had a tremendous impact on the welfare of the world economy. In mortgage markets in many countries it provides a cheaper source of financing, and thus promotes the demand for housing. In the banking sector, securitization is widely used for allocating capital more efficiently, transforming risk into a tradable security, and reducing the overall cost of capital. It has enabled developing countries to emerging market institutions to raise their sovereign ratings ceilings and thereby tap international capital markets for lower-rate financing. Read More: The Concept of Securitization The process of securitization Continue reading
Functions of Debt Recovery Agents
The core function of a debt recovery agent is to collect dues/receivables from specified debtors of the bank as per agency agreement entered with the principal. Remitting the collected funds to principal, keeping account of the receivables collected and yet to be collected and reporting the position and developments to the principal are essential but ancillary to the core function. All these functions will be specified in most agency agreement and would require to be accordingly discharged by the debt recovery agent. Apart from the easily collectible receivables, most banks have on their books over due receivables from debtors who are not traceable, or who show unwillingness pay or who resist surrendering the security charged. In such cases, the recovery process is difficult and requires handling by specialized collection agencies to process the required expertise. The functions of re-processing the security, initial legal action and tracing Continue reading
Decision Making Conditions
There are different conditions in which decisions are made. Managers sometimes have an almost perfect understanding of conditions surrounding a decision, but in other situations they may have little information about those conditions. So, the decision maker must know the conditions under which decisions are to be made. Generally, the decision maker makes decision under the condition of certainty, risk and uncertainty. 1. Certainty Certainty is a condition under which the manager is well informed about possible alternatives and their outcomes. There is only one outcome for each choice. When the outcomes are known and their consequences are certain, the problem of decision is to compute the optimum outcome. Similarly, if there are more than one alternative they are evaluated by conducting cost studies of each alternative and then choosing the one which optimizes the utility of the resources. The condition of certainty exists in case of routine decisions such Continue reading
Commodity Futures – Meaning, Objectives and Benefits
What is “Commodity” and “Commodity Exchange”? Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”. A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority. In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities Continue reading
Demand and Supply of Capital for Investments
Demand for Capital The demand schedule for capital refers to the arrangement of the various proposed projects in a descending order according to their estimated rates of return together with required amounts of capital needed by the respective projects. Before analyzing the investments, the management must understand the nature of opportunities. Some investments are complimentary i.e. making one investment implies that another investment will be necessary. Some investments are mutually exclusive i.e. acceptance of one, implies rejection of others and some investments are independent. It is therefore necessary to identify the various opportunities of investments. Alternative investments can be ranked according to their relative profitability. It is also important to distinguish between cost reducing investment and revenue increasing investment. According to W.W. Haynes “any investment decision is profitable if it adds more to revenue than to cost or if it reduces cost more than the revenue.” An important element in Continue reading