1. REVIEW QUESTIONS
ENGLISH FOR FINANCE & BANKING
(PART 1:FINANCE)
BUSI ESS FINANCE
o What is capital?
Capital is the money people use to set up a company.
o What is a loan?
A loan is the money individuals or companies borrow from banks and must be paid back with
interest.
o What are 'shares' or 'equities"?
They are certificates representing units of ownership of a company.
o Who are called 'shareholders'?
The people who invest money in shares issued by companies.
o What is 'share capital'?
It is the money provided by shareholders.
o What are 'bonds'?
They are investors' loans to companies, which pay interest and are repaid at a fixed future date.
o What is a 'debt'?
It is the money that is owed and will have to be paid to other people or businesses.
o What kinds of debts are called liabilities?
They are companies' debts in terms of accounting.
o What is working capital?
It is the money that a business uses for everyday expenses or has available for spending.
o What is revenue?
It is all the money coming into a company during a given period.
o What is called profit, earnings or net income?
It is revenue that minus the cost of sales and operating expenses, such as rent and salaries.
o What is a dividend?
It is part of company's profit that is paid to its shareholders.
o What is the purpose of taxpaying to the government by companies?
To finance government spending.
o What are retained earnings?
They are part of companies' profits that company keep for future use.
o What is a financial statement?
It is information a company gives about its financial situation.
o What does a balance sheet show?
It shows the company's assets and its capital.
o What does the profit and loss account show?
It shows the company's revenue and expenses during a particular period.
o What is the American term for the profit and loss account?
It is the income statement.
VENTURE CAPITAL
o What is venture/ risk! start-up capital?
It is funds for new businesses, called start-ups that are not allowed to sell stocks or shares to
the general public.
o Where can venture capital be raised?
From risk capital companies and other financial institutions and especially from rich people
called high net worth individuals or angels.
o What is called 'return on investment'?
It's the amount of money made from investors' investment.
o What's the difference between a private limited company and a public one?
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2. The former is not allowed to sell its stocks or shares on a stock market while the latter's are
listed on a stock exchange.
o What is called 'mezzanine financing'?
Mezzanine financing is a second round of financing before a company joins a stock exchange.
o What are 'convertibles'?
They are bonds that can later be converted to shares.
o What are 'preference shares'?
They are shares that receive a fixed dividend.
STOCKS AND SHARES
o What are stocks, shares and equities?
They are certificates representing part ownership of a company.
o What are called 'stock markets or stock exchanges'?
The places where the stocks and shares of listed or quoted companies are bought and sold.
o What does the term 'going public' mean?
It means the change from a private company to a public limited company (PLC) by selling
shares to outside investors for the first time (with a flotation.)
o What is a prospectus?
It's a document describing a company and offering stocks for sale to the public.
o What does IPO stand for and what does it mean?
It stands for Initial Public Offering, meaning the first sale ofa company's stocks to the public.
o What does the term "to underwrite a stock issue' mean?
To guarantee to buy newly-issued shares ifthere are not enough other buyers.
o Who are the first investors to get any money back if a company goes bankrupt?
The holders of preference shares but only after owners of bonds and other debts are repaid.
o What does a company have to do if it goes into liquidation?
The company has to sell all its assets to repay part of its debts.
o What is primary market?
The market on which new shares are sold.
o What is secondary market?
The market on which shares can be re-sold.
o What are the OTC markets?
They are markets where a widespread aggregation of dealers who make markets in many
different securities and do transaction over the dealers' counter instead of the marketplace.
o What is Nominal value?
The price written on a share, which never changes.
o What is Market price?
The price at which a share is currently being traded.
o What are market makers?
They are traders in stocks who quote bid (buying) and offer (selling) prices.
o What is 'Spread'?
It is the difference between the buying price and selling price of the shares (= profit; mark-up)
o What is 'Rights issue'?
The current shareholders have the first right to buy new shares issued by companies that
require further capital.
o What is 'Capitalization issue'?
Turning the profits into capital by issuing new shares to existing shareholders instead of paying
them a dividend. Other names for this process are scrip issue and bonus issue.
o What are 'Own shares'? (U.S. Treasury stock)
They are shares that are bought back on the secondary market by companies with surplus cash.
CATEGORIES OF STOCKS AND SHARES
o What are 'Blue chips'?
Stocks in large companies with a reputation for quality, reliability and profitability.
o What are 'Growth stocks'?
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3. Stocks that are expected to regularly rise in value.
D What are 'Income stocks'?
Stocks that have a history of paying consistently high dividends.
D What are 'Defensive stocks'?
Stocks that provide a regular dividend and stable earnings, but whose value is not expected to
rise or fall very much.
D What are 'Value stocks'?
Stocks that investors believe are currently trading for less than they are worth.
SHAREHOLDERS
D Who are 'bulls'?
Investors who expect prices to rise.
D Who are 'bears'?
Investors who expect prices to fall.
D Who are 'stags'?
Investors who buy new shares issues hoping that they will be over-subscribed.
D Who are 'speculators'?
People who buy and sell shares rapidly, hoping to make a profit.
D Who are 'day-traders'?
People who buy stocks and sell them again before the settlement day, which is the day on
which they have to pay for the stocks they have purchased, usually 3 business days after the
trade was made.
SHARE PRICES
D What are the factors that share prices depend on?
- the financial situation of the company;
- the situation of the industry in which the company operates;
- the state of the economy in general;
- the beliefs of investors.
Share price predicting theories
D What is the 'random walk hypothesis'? .1
Pries move along a 'random walk', which means day-to-day changes are completely random or
unpredictable.
D What is the 'efficient market hypothesis'?
Share prices always accurately reflect all relevant information.
D What is the 'technical analysis'?
Market prices result from the psychology of investors rather than from real economic value.
D What is the 'fundamental analysis'?
Markets are not efficient; the true value reflects the present value of the future income from
dividends.
Types of risks
D What are systematic risks?
They are things (interest rates, recession and wars) that affect the entire market and cannot be
avoided through diversification. Also known as "un-diversifiable risks" or "market risks."
D What are unsystematic risks?
They are things that affect individual companies such as production problems or a sudden fall
in sales.
BONDS
D What are bonds?
Loans to local and national governments and to large companies.
D What is 'Principal'?
The money invested by bondholders; the amount of capital making up a loan.
D What is 'Credit rating'?
An estimation of a borrower's solvency or ability to pay debts.
D What are 'gilt-edged stocks'?
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4. Bonds issued by the British government.
D What are 'Treasury bonds'?
Long-term bonds issued by the American government.
D What are 'Treasury notes'?
Medium-term (2 - 10 years) bonds issued by the American government.
D What is a 'Coupon'?
The amount of interest a bond pays (ti~n Iffitrai phieu)
D What are 'Floating-rate notes'?
Bonds whose interest rate varies with market interest ratesttrai phieu eo lffi suAttha n6i)
D What are 'Zero coupon bonds'?
Bonds that pay no interest but are sold at a big discount on their par value (Trai phieu khong
tra Iffi).
D What are 'Junk bonds' (Jump bonds)?
They are low-credit-rating-but-high-interest bonds (trai phieu racl nhay vot).
FUTURES
D What are 'Forward & future contracts'?
They are arrangements to sell an asset at a fixed price on a fixed date in the future.
D What is the 'Spot-price'?
It is the price that would be paid for immediate delivery (gia giao ngay).
D What does 'Backwardation' mean?
This is the short-term demand that pushes the spot price above the future price (chenh lech gia
xuong).
FINANCIAL FUTURES
D What are 'Currency futures' and 'forwards'?
They are contracts that specify the price at which a certain currency will be bought or sold at a
specific date (giao djch ti~n t~ ky han va giao sau).
D What are 'Interest rate futures'?
They are agreements between banks and investors and companies to issue fixed income
securities at a future date (giao dich IffisuAtky han),
D Why is future trading called a 'zero-sum game'?
It is so called because the amount of money gained by one party will be the same as the sum
lost by the other.
DERIV ATIVES
D What are 'Derivatives'?
They are financial products whose value depends on (derived from) another financial product,
such as a stock, a stock market index or interest rate payments.
D What are 'Options'?
They are like futures except that they give the right (not the obligation) to buy or sell an asset
in the future.
D What is a 'Call option'?
It is the right to buy an asset for a specific price, either at any time before the option ends or on
a specific future date.
D What is a 'Put option'?
It is the right to sell an asset at a specific price within a specified period or on a specific future
date.
D What are 'Swaps'?
They are arrangements between institutions to exchange interest rates or currencies.
D What are 'Warrants'?
They, like options, give the right, but not the obligation, to buy stocks in the future at a
particular price, probably higher than the current market price. (Chirng khe; chirng quyen)
D What is 'premium'?
I. The total cost of an option.
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5. 2. The difference between the higher price paid for a fixed-income security and the security's
face amount at issue.
Strike price = Exercise price
o What is 'Strike price'?
The price at which a specific derivative contract can be exercised. Strike price is mostly used
to describe stock and index options, in which strike prices are fixed in the contract.
ASSET MANAGEMENT
o What is 'Asset management'?
It is managing financial assets for institutions or individuals.
o Who manages assets?
Pension funds and insurance companies manage huge amounts of money.
Private banks specialize in managing portfolios of wealthy individuals.
Unit trusts invest money for small investors in a range of securities.
o How assets are managed?
Assets managers have to decide how to allocate funds they are responsible for:
How much to invest in shares, mutual funds, bonds, cash, foreign currencies, precious metals,
or other types of investments.
o Why do we need asset management?
Asset allocation decisions depend on objectives and size of the portfolio.
The portfolio's objectives determine the returns expected or needed, and the acceptable level of
risk.
The best way to reduce exposure to risk is to diversify the portfolio - easier and cheaper for a
large portfolio than a small one.
Types of investors
o Investors have different goals or objectives.
Some want regular income from the investment -less concerned with size of their capital.
Some want to preserve their capital- avoid taking risks. If the goals is capital preservation,
the asset manager usually allocates more money to bonds than stocks.
Active investment
Some asset managers (or their clients) choose an active strategy - buying and selling
frequently, adapting the portfolio to changing market circumstances.
Passive investment
Other asset managers use a passive strategy - buying and holding securities. Leaving the
position unchanged for a long time.
HEDGE FUNDS & STRUCTURED PRODUCTS
o What are 'Hedge Funds'?
They are private investment funds for wealthy investors, run by partners who have made big
personal investments in the fund.
o What does 'Gearing" or 'Leverage' mean?
It means borrowing money as well as using their own funds to increase the amount of capital
available for investment.
o What does "Arbitrage' mean?
It means the simultaneous purchase and sale of an asset in order to profit from a difference in
the price.
o What are "Structured Products"?
They are customized - individualized or non-standard - over-the-counter instruments.
MERGERS AND TAKEOVERS
o What is a merger?
This is when two companies join together to form a new one.
o What is an acquisition or takeover?
This is when one company buys enough shares of another company in order to control it.
o What is a joint venture?
This is when two or more companies decide to work together for a specific project or product.
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6. o What is a friendly takeover?
It is a situation in which a target company's management and board of directors agree to a
merger or acquisition by another company.
o What is a hostile takeover?
It is a situation in which a target company's management and board of directors do not
agree to a merger or acquisition by another company.
o What can a company do to avoid a hostile takeover?
It can try to find a white knight - another company that they would prefer to be bought by, or
they can use the 'poison pill' defense which involves issuing new shares at a big discount.
o What is horizontal integration?
It is when a company gets bigger by acquiring competitors in the same field of activity.
o What is vertical integration?
It is acquiring companies involved in other parts of the supply chain, usually to make cost
savings.
o What is backward integration?
It is acquiring suppliers of raw materials or components.
o What is forward integration?
It is buying distributors or retail outlets.
o What is diversification?
It is when a company buys businesses in completely different fields to reduce the risk involved
in operating in only one industry.
LEVERAGED BUYOUTS
o What is a conglomerate?
A conglomerate is a parent company with its several subsidiaries that operate in many different
business areas.
o What is market capitalization?
It is the total market price of all of a conglomerate's ordinary shares.
o What is asset-stripping?
It is the process of buying an undervalued company with the intent to sell off its assets for a
profit.
o Who are corporate raiders?
They are individuals or companies that want to take over other companies.
o What is a leveraged buyout (LBO)?
It is the acquisition of another company using a significant amount of borrowed money (bonds
or loans) to meet the cost of acquisition.
o What is a management buyout (MBO)?
It is the acquisition of another company with the aim to re-organize it, usually by the
company's own managers.
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7. The Sarbane-Oxley Act 2002
In the US the response to the breakdown of stock market trust caused by perceived
inadequacies in corporate government arrangements and the Enron scandal was the
Sarbanes-Oxley Act 2002. The Act applies to all companies that are required to file
periodic reports with the Securities and Exchange Commission (SEC). The Act was the
most far-reaching US legislation dealing with securities in many years and has major
implications for public companies. Rule-making authority was delegated to the SEC on
many provisions.
Sarbanes-Oxley shifts responsibility for financial probity and accuracy to the board's
audit committee, which typically comprises three independent directors, one of whom has
to meet certain financial literacy requirements (equivalent to non-executive directors in
otherjurisdictions).
Along with rules from the Securities and Exchange Commission, Sarbanes-Oxley
requires companies to increase their financial statement disclosures, to have an internal
code of ethics and to impose restrictions on share trading by, and loans to, corporate
officers.
Internal control and risk management
The internal control systems have a key role in managing the risks linked with a
company's business objectives, helping to safeguard assets and the shareholders'
investment. The control system also aids the efficiency and effectiveness of operations,
the reliability of reporting and compliance with laws and regulations. Effective financial
records, including proper accounting records, are an important element of internal
control.
A company's environment is constantly evolving and the risks it faces are constantly
changing. To maintain an effective system of internal control, the company should
regularly carry out a thorough review of the risks it faces.
As profits are partly the reward for risk-taking in business, the purpose of internal control
is to help manage risk rather than eliminate it.
The director - shareholder relationship
Agency is a significant issue in corporate governance because of the dominance of the
joint-stock company, the company limited by shares as a form of business organization.
For larger companies this has led to the separation of ownership of the company from its
management. The owners (the shareholders) can be seen as the principal, the
management of the company as the agents.
Although ordinary shareholders (equity shareholders) are the owners of the company to
whom the board of directors are accountable as agents, the actual powers of shareholders
tend to be restricted. They normally have no right to inspect the books of account, and
their forecasts of future prospects are gleaned from the annual report and accounts,
stockbrokers, journals and daily newspapers.
The day-to-day running of a company is the responsibility of the directors and other
managers to whom the directors delegate, not the shareholders. For these reasons,
therefore, there is the potential for conflicts of interest between management and
shareholders.