Financial Management
Financial Market and The Corporation Financial markets: Markets in which financial assets are traded. Financial markets function as both primary and secondary markets for debt and equity securities. The term primary market refers to the original sale of securities by governments and corporations. The secondary markets are those in which these securities are bought and sold after the original sale.
Continue reading Goals of Financial Management To maximize the current value per share of the existing stock. Survive Avoid financial distress and bankruptcy Beat the competition Maximize sales or market share Minimize costs Maximize profits Maintain steady earnings growth
Continue reading Financial Management Decision The financial manager must be concerned with three basic types of questions. Capital Budgeting decision: process of planning and managing a firm’s long-term investments. Financial decision: ways which the firm obtains and manages the long-term financing it needs to support its long-term investments. Financial decision relates with capital structure ( or financial structure) which is the specific
Continue reading Hedging Interest Rate Risk Using Interest Rate Swap Interest rate swaps allow companies to exchange interest payments on an agreed notional amount for an agreed period of time. Swaps may be used to hedge against adverse interest rate movements or to achieve a desired balanced between fixed and variable rate debt. Interest rate swaps allow both counterparties to benefit from
Continue reading Hedging Interest Rate Risk Using Caps, Floors and Collars Interest rate cap: A cap involves using interest rate options to set a maximum interest rate for borrowers. If the actual interest rate is lower, the option is allowed to lapse. Interest rate floors: A floor involves using interest rate options to set a minimum interest rate for investors. If the actual interest
Continue reading Hedging Interest Rate Risk Using Interest rate option Interest rate options allow businesses to protect themselves against adverse interest rate movements while allowing them to benefit from favourable movements. They are also known as interest rate guarantees. Options are like insurance policies: You pay a premium to take out the protection. This is non-returnable whether or not you make use
Continue reading Hedging Interest Rate Risk Using Interest Rate Future Futures contracts are of fixed sizes and for given durations. They give their owners the right to earn interest at a given rate, or the obligation to pay interest at a given rate. Selling a future creates the obligation to borrow money and the obligation to pay interest Buying a future creates the obligation to deposit money and the
Continue reading Hedging Interest Rate Risk Using Forward Rate Agreement (FRA) These arrangements effectively allow a business to borrow or deposit funds as though it had agreed a rate which will apply for a period of time. The period could, for example start in three months’ time and last for nine months after that. Such an FRA would be termed a 3
Continue reading Hedging Interest Rate Risk Using Asset and Liability Management This relates to the periods or durations for which loans (liabilities) and deposits (assets) last. The issues raised are not confined to variable rate arrangements because a company can face difficulties where amounts subject to fixed interest rates or earnings mature at different times. Say, for example, that a company borrows
Continue reading Hedging Interest Rate Risk Using Matching When taking out a loan or depositing money, businesses will often have a choice of variable or fixed rates of interest. Variable rates are sometimes known as floating rates and they are usually set with reference to a benchmark such as LIBOR, the London Interbank Offered Rate. For example, variable rate might be set
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