Submitted by: Ahraz Ali Durrani

ID: 5414

Submitted to: Waseem Hasan Raja

FINANCE
• The commercial activity of providing funds and capital
• Obtain or provide money for; "Can we finance the addition to our home?"
• The branch of economics that studies the management of money and other
assets
• Sell or provide on credit

Sources of Finance (Finance Sourcing)

A company would choose from among various sources of finance depending on the
amount of capital required and the term for which it is needed. Finance sources can be
divided into three categories, namely traditional sources, ownership capital and non-
ownership capital.

There are two main sources of finance some of them are discussed below:

1- Debt Financing
2- Equity Financing

1- DEBT FINANCING
When a firm raises money for working capital or capital expenditures by selling bonds,
bills, or notes to individual and/or institutional investors. In return for lending the money,
the individuals or institutions become creditors and receive a promise that the principal
and interest on the debt will be repaid.

Small and large business organizations generate their finance through these factors:

Working Capital Loan: It is the most popular short-term financing option. It is meant to
meet the working needs like the purchase of raw material, payment of wages and other
administrative expenses, financing inventories, managing internal cash-flows, supporting
supply chains, funding production and marketing operations. Most banks provide these
against collaterals. Companies who borrow from banks are subjected to the discipline of
maintenance of proper accounts and regular repayments of loans. They are subjected to
periodical monitoring through a reporting structure of financial and other statements and
also through analysis of cash flows routed through the banks.

Overdraft: The other short-term debt option is the overdraft facility, by way of which a
company opens a current account with a bank and can overdraw money up to an agreed
limit. In this case, you pay interest only for the time you use the money.

Factoring: The bank buys the customer’s account receivables in domestic and
international trade, assuming the responsibility of collecting them from the party who
owes money.
 Commercial Papers (CPs): It is a debt instrument issued by companies at a discount on
the face value. Banks, individuals and mutual funds usually buy commercial papers.

Term loans: Term loans are mostly taker to buy assets and grow business. These loans
are term based, which may vary from three to ten years. The amount, the tenure and
interest rates may vary depending upon the risk profile of the company. Term loans are
either asset-backed or cash flow backed. In the case of asset-backed term loans, lender
institutions seek assets of the company as collaterals while issuing loans. In the case of
cash flow backed loans, banks carefully scrutinize the balance sheets of a company to
study its cash-flow capability.

Debentures: This is a long-term debt instrument issued by a company with the

acknowledgement that it would repay the money at a certain rate of interest to the buyer.
These are not shares, thus the buyer can stake no claim in the share of the company.

Personal loans: Entrepreneurs also take personal loans from banks and financial
institutions to fund their projects e.t.c

2- EQUITY FINANCING:
The act of raising money for company activities by selling common or preferred stock to
individual or institutional investors. In return for the money paid, shareholders receive
ownership interests in the corporation. In other words, employer-financing business from
personal resources or by issuing shares of ownership is more likely to say as equity
financing. Commonly known as “Share Capital”

There are several major types of equity investments for a small business:

An Equity Loan:

This extends an ownership position to induce the loan or may be originally a note (debt)
with an option to convert from debt to equity.

Seed Financing:

Generally used by a business in the startup phase with no operating history. This kind of
investment depends heavily on a business plan, the management team, a strong marketing
plan, and sound financial analysis.

Financing By IPO

Company is ready for an Initial Public Offering (IPO). Venture capital will be used to
support the IPO. Issue of shares is the best way to generate equity finance.
Later Stage Financing

Company is now mature and is in need of funding for expansion either in facilities or
product lines. Their financial state should be profitable or at least not losing money.

M&A Financing

Two companies combine resources and if one survives it is the acquirer. If both survive
then there is a merger.

Q-2 INTEREST RATE

Annual cost of credit or debt-capital computed as the percentage ratio of interest to the
principal. In general, interest rates rise in times of inflation, greater demand for credit,
tight money supply, or due to higher reserve requirements for banks.

DETERMINANTS OF INTEREST RATE

We have concluded that investment is influenced by the rate of interest. That moves us
forward, but raises another question: What determines the rate of interest?

Following are the determinants of Interest rate:

Liquidity Preference:

The interest rate is linked to the supply of money by the "liquidity preference"
relationship. Let's have a look at the relationship:

The idea (remember) is that holding money is a trade-off between convenience and
interest income. People keep money in their wallets or in low-interest checking accounts
to have the convenience of being able to make payments without making special
arrangements at the bank -- that is, money saves "shoe leather costs."

Interest and Bond Prices:

At that rate of interest, people want to shift of their assets from bonds to money. That is,
they want to sell that amount of bonds. But the competition to sell the bonds will
push the price of bonds down and so the interest rate will rise above.

Market Rate of Interest:

The payment to those who supply financial capital for its use is called the market rate of
interest. This is expressed as a percentage of sums of funds borrowed.

Return on Capital:

The entrepreneur who buys capital equipment and sues it in the process of production
gets addition to his revenue which is called return on capital. The return on capital is
the addition to production which increases his revenue.

HIGHER INTEREST RATES HAVE VARIOUS

ECONOMIC EFFECTS:
Increases the cost of borrowing. Interest payments on credit cards and loans are more
expensive. Therefore this discourages people from borrowing and saving. People who
already have loans will have less disposable income because they spend more on interest
payments. Therefore other areas of consumption will fall.

Increase in mortgage interest payments. Related to the first point is the fact that
interest payments on variable mortgages will increase. This will have a big impact on
consumer spending. This is because a 0. 5% increase in interest rates can increase the
cost of a £100,000 mortgage by £60 per month. This is a significant impact on personal
disposable income.

Increased incentive to save rather than spend. Higher interest rates make it more
attractive to save in a deposit account because of the interest gained.

Higher interest rates increase the value of £ (due to hot money flows. Investors are
more likely to save in British banks if UK rates are higher than other countries) A
stronger Pound makes UK exports less competitive - reducing exports and increasing
imports. This has the effect of reducing Aggregate demand in the economy.

Rising interest rates affect both consumers and firms. Therefore the economy is likely
to experience falls in consumption and investment.

Government debt interest payments increase. The UK currently pays over £23bn a
year on its own national debt. Higher interest rates increase the cost of government
interest payments. This could lead to higher taxes in the future.
Reduced Confidence. Interest rates have an effect on consumer and business confidence.
A rise in interest rates discourages investment; it makes firms and consumers less willing
to take out risky investments and purchases.
Q-3 FINANCIAL MARKET
In economics, a financial market is a mechanism that allows people to buy and sell
(trade) financial securities (such as stocks and bonds), commodities (such as precious
metals or agricultural goods), and other fungible items of value at low transaction costs
and at prices that reflect the efficient-market hypothesis.

The trading of stocks and bonds in the Financial Market can take place directly between
buyers and sellers or by the medium of Stock Exchange. Financial Markets can be
domestic or international.

Different types of markets are:

Capital Market: Capital Market consists of primary market and secondary market. In
primary market newly issued bonds and stocks are exchanged and in secondary market
buying and selling of already existing bonds and stocks take place. . Bond Market
provides financing by bond issuance and bond trading. Stock Market provides financing
by shares or stock issuance and by share trading. As a whole, Capital Market facilitates
raising of capital.

Money market: Money Market facilitates short term debt financing and capital.

Foreign Exchange Market: Foreign Exchange Market facilitates the foreign exchange
trading.

Insurance Market: Insurance Market helps in relocation of various risks.

Commodity Market: Commodity Market organizes trading of commodities.

Securities Traded In Financial Markets

There are three types of Securities traded in financial markets:

Stocks: The capital stock (or just stock) of a business entity represents the original capital
paid into or invested in the business by its founders. It serves as a security for the
creditors of a business since it cannot be withdrawn to the detriment of the creditors.
Stock is distinct from the property and the assets of a business which may fluctuate in
quantity and value.

Bonds :In finance, a bond is a debt security, in which the authorized issuer owes the
holders a debt and, depending on the terms of the bond, is obliged to pay interest (the
coupon) and/or to repay the principal at a later date, termed maturity
Treasury Securities: Treasury securities are a great way to invest and save for the future.
Treasury bills, Treasury notes and Treasury are some of the securities traded in financial markets.