Financial Concept

1. FINANCIAL CONCEPTS

2. AMORTIZATION
In business, amortization refers to spreading payments over multiple periods.
The term is used for two separate processes: amortization of loans and
amortization of intangible assets.
AMORTIZATION OF LOANS
AMORTIZATION OF
INTANGIBLE ASSETS
In lending, amortization is the
distribution of payment into multiple
cash flow installments, as determined
by an amortization schedule. Unlike
other repayment models, each
repayment installment consists of
both principal and interest.
Amortization is chiefly used in loan
repayments (a common example being
a mortgage loan) and in sinking funds.
Payments are divided into equal
amounts for the duration of the loan,
making it the simplest repayment
model.
In accounting, amortization refers to
expensing the acquisition cost minus
the residual value of intangible
assets (often intellectual property
Such as patents and trademarks or
copyrights) in a systematic manner
over their estimated useful economic
lives so as to reflect their
consumption, expiry, obsolescence or
other decline in value as a result of
use or the passage of time.

3. ASK PRICE
• Ask price, also called offer price, offer, asking price, or simply ask, is
the price a seller states she or he will accept for a good.
• The seller may qualify the stated asking price
as firm or negotiable. Firm means the seller is saying he or she won't
change the price. Negotiable means the seller is inviting the potential
buyer to attempt to convince the seller to lower the price

4. BASE EFFECT
• The Base effect relates to inflation in the corresponding period of the previous
year, if the inflation rate was too low in the corresponding period of the
previous year, even a smaller rise in the Price Index will arithmetically give a
high rate of inflation now. On the other hand, if the price index had risen at a
high rate in the corresponding period of the previous year and recorded high
inflation rate, a similar absolute increase in the Price index now will show a
lower inflation rate now.
• An illustration of the base effect would be like: Price Index 100 goes to 150,
and then to 200. The initial increase of 50, gives the percentage increase as
50% but the subsequent increase of 50 gives the percentage increase as
33.33%. This happens arithmetically as the base on which the percentage is
calculated has increased from 100 to 150.

5. BID PRICE
• A bid price is the highest price that a buyer (i.e., bidder) is willing to pay for a
good. It is usually referred to simply as the "bid.“
• In bid and ask, the bid price stands in contrast to the ask price or "offer", and
the difference between the two is called the bid/ask spread.

6. BUYDOWN
• A buydown is a mortgage financing technique where the buyer attempts to
obtain a lower interest rate for at least the first few years of the mortgage. The
seller of the property usually provides payments to the
mortgage lending institution, which, in turn, lowers the buyer's monthly
interest rate and therefore monthly payment. This is typically done for a period
of about one to five years. In a seller's market the seller might raise the
purchase price to compensate for the costs of the buy down but in most
markets it would not be to their advantage to use a buy down as an enticement
if they are going to offset the benefit by raising the price. In most cases, the
buydown does not even involve the seller. It is an arrangement between the
lender and the buyer.

7. BUYER’S CREDIT
• Buyer's credit is short term credit availed to an importer (buyer) from
overseas lenders such as banks and other financial institution for goods they
are importing. The overseas banks usually lend the importer (buyer) based on
the letter of comfort (a bank guarantee) issued by the importer's bank. For this
service the importer's bank or buyer's credit consultant charges a fee called an
arrangement fee.
• Buyer's credit helps local importers gain access to cheaper foreign funds that
may be closer to LIBOR rates as against local sources of funding which are
more costly.
• The duration of buyer's credit may vary from country to country, as per the
local regulations. For example in India, buyer's credit can be availed for one
year in case the import is for tradable goods and for three years if the import is
for capital goods. Every six months, the interest on buyer's credit may get
reset.

8. CAPITALIZATION RATE
• Capitalization rate (or "cap rate") is the ratio between the net operating
income produced by an asset and its capital cost (the original price paid to buy
the asset) or alternatively its current market value. The rate is calculated in a
simple fashion as follows:
• For example, if a building is purchased for $1,000,000 sale price and it
produces $100,000 in positive net operating income (the amount left over
after fixed costs and variable costs is subtracted from gross lease income)
during one year, then:
• $100,000 / $1,000,000 = 0.10 = 10%
• The asset's capitalization rate is ten percent; one-tenth of the building's cost is
paid by the year's net proceeds.

9. CASH FLOW
Cash flow is the movement of money into or out of a business, project, or financial
product. It is usually measured during a specified, limited period of time.
Measurement of cash flow can be used for calculating other parameters that give
information on a company's value and situation. Cash flow can be used, for
example, for calculating parameters: it discloses cash movements over the period.

10. COLLATERAL (FINANCE)
In lending agreements, collateral is a borrower's pledge of specific property to
a lender, to secure repayment of a loan. The collateral serves as protection for a
lender against a borrower's default - that is, any borrower failing to pay
the principal and interest under the terms of a loan obligation. If a borrower does
default on a loan (due to insolvency or other event), that borrower forfeits (gives
up) the property pledged as collateral—and the lender then becomes the owner of
the collateral. In a typical mortgage loan transaction, for instance, the real
estate being acquired with the help of the loan serves as collateral. Should the
buyer fail to pay the loan under the mortgage loan agreement, the ownership of
the real estate is transferred to the bank. The bank uses a legal
process called foreclosure to obtain real estate from a borrower who defaults on a
mortgage loan obligation. A pawnbroker is an easy and common example of a
business that may accept a wide range of items rather than just dealing with cash.

11. CONCEPT OF COLLATERAL
Collateral, especially within banking, traditionally refers to secured lending (also
known as asset-based lending). More recently, complex collateralization
arrangements are used to secure trade transactions (also known as capital market
collateralization). The former often presents unilateral obligations secured in the
form of property, surety, guarantee or other as collateral (originally denoted by the
term security), whereas the latter often presents bilateral obligations secured by
more liquid assets such as cash or securities, often known for margin. Another
example might be to ask for collateral in exchange for holding something of value
until