Portfolio management involves the strategic management of investment portfolios to achieve specific financial goals while balancing risk and return. This process typically includes asset allocation, where investments are diversified across different asset classes such as stocks, bonds, and alternative investments. Risk assessment and mitigation strategies are implemented to align the portfolio with the investor's risk tolerance and investment objectives. Active portfolio management may involve monitoring and adjusting investments based on market conditions, economic trends, and individual asset performance. Additionally, portfolio managers often conduct research and analysis to identify opportunities for maximizing returns and minimizing losses. Overall, effective portfolio management aims to optimize the performance of investment portfolios over time while managing risk within acceptable parameters.
Portfolio Management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. The goal of portfolio management is to maximize returns given a certain level of risk tolerance, or conversely, to minimize risk given a certain level of expected returns. This involves selecting and managing a mix of investments that align with an investor's financial goals, time horizon, and risk tolerance. Portfolio managers analyze various factors, including market conditions, economic trends, and individual securities' performance, to construct and adjust portfolios to optimize returns and manage risk effectively. They may also rebalance portfolios periodically to ensure they remain aligned with the investor's objectives and risk profile. Effective portfolio management requires continuous monitoring, analysis, and adjustment to adapt to changing market conditions and investor needs.
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Portfolio Management FIN-614
Financial Institution and Capital Market FIN-616
Corporate Finance and Banking FIN-614
Bank Fund Management FIN-615
Major Finance and Banking
Prime University
Md Mahabub Hasan
ID NO-133020102060
Batch-34th
Program: MBA
Major: Finance and Banking
Department of Business Administration
Prime University, Mirpur-1, Dhaka-1216
Mahabub1625@gmail.com
www.mahabubbd.com
Dhaka, Bangladesh
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Finance: The word finance has been derived from a Latin word “FINIS” expressing the meaning
dealing with money. It can be defined as an art and science of managing money is called finance
Portfolio: A set or bundle or lot of securities is called portfolio
Management: The process of get things done by others. (Quality of a good manager - He will be
able to motivate)
“A set of activities directed at the resources of the organized to achieved the organization goals
and objectives efficiently and effectively is called Management
Business: Legal activities taken by an entity or entities for earning profit/return/gains is called
business
Business Organization: A forum or an association of some people exchanging the goods/services
and money is called Business Organization
Objectives of Business Organization:
1. Profit maximization
2. Wealth maximization
3. Value creation
4. Social responsibility
Principle of business: STAR
S = Smile
T = Try (To meet the need of customer)
A = acknowledgement respect
R = Respond
Satisfied customers are the best advertisement
Types of Business organization
Proprietorship / Sole Proprietorship
Partnership
Company / Corporation
Company: An association of some people having separated entity incorporate under a law
(company act 1994) representing an artificial person is called company
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Types of company (Flow Chart)
Company 1. Unlimited
2. Limited
Limited 1. Limited by Guaranties
2. Limited by shares
Limited by shares 1. Private limited
2. Public limited
Features of company
Formation is difficult
To have need Board meeting minimum 4 (four) time (Audit 2 time by external audit firm)
Life is long
Liability is limited
Double taxation is applicable (Tax ordinance 1984)
Should have separated entity
Managed by hired person (Agency costs)
A company can sue and can be sued
RJSC = Resister of Joint Stock Company
To need name clearance
Memorandum of association submit articles
To collect certificate of incorporation
Showing TIN no and deposit Tax per month 3000/= Tk. Only
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Draw distinction between private and public limited
Private limited company Public limited company
No of stockholder 2 – 50 No of stockholder 7 limited by stocks/share
Share transfer is difficult Share transfer is easier
private company cannot raise fund /
capital by issuing shares for common
people
They can raise capital / fund by issuing shares for
common people
They cannot issue prospectus They can issue prospectus ( Books and accounts
They can start business after having
license / Registration
For starting business public limited company has
to collect the document called certificate of
commencement of Business
Capital
1. Authorized
2. Issued Initial investment seed money by sponsored Directors
3. Issued
4. Issued
5. Paid - up - capital
Major consideration of finance
Collection of funds: (Financing maximize the profit)
Investment: (Utilization of the collected funds)
Distribution of profit: (Among the stakeholder)
Financial system to the context of Bangladesh
Financial system: An institutional set up agreement facilitations the transferees of fund from the
economic surplus group to economic deficit group is called financial system to the contest of
Bangladesh
Significant/Importance of financial system
It facilitates the flow movement of money
It increased the velocity of money thereby it enhance the productivity of money
It accelerates the economic development
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Component of financial system
Three kind of financial system
Debt instrument 1. BFI (Bank Financial institution) 1. Money market
Equity instrument 2. NBFI (Non-Banking Financial institution) 2. Capital market
Derivative instrument
1. Primary Market
2. Secondary Market
Basic equation of accounting
A=L+OE+R-D
For meaning
A= Asset L= Liabilities OE= Owners equities R= Revenues D= Distribution
= L2
C
L= Land L= Labor C= Capital Organization
Accounting is the language of Business
Asset: claims of business to others is called asset
Liabilities: Obligation of business to others is called liability
Owners equities: claims of owners to the business is called Owners equities
Asset: Resources of a business firm having some value and benefits generating capabilities are
called assets
Financial asset/Financial
instrument/Securities
Financial institution Financial market
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4 (Four) kinds of resources
F = Financial Resource
H = Human Resources
P = Physical Resources
I = Information and Technical Resources
2 (Two) kinds of Asset 1. Fixed asset
2. Current asset
2 (Two) kinds Fixed asset 1. Tangible asset (Machine, Furniture, Building, Land)
2. Intangible asset (Goodwill, Trademark, Patent, Talent)
Financial asset/Instrument/Securities
An intangible asset representation a contact between two party (investor and issuer) where are
party (investor) enjoys the right to have future benefits and the others party (issuer) has the
obligation to repay the principal amount with benefit is called financial asset / Instrument /
securities
Security is an asset to the investor
Liability to the issuer
Types of securities / financial instrument
Debt instrument (Fixed income securities e.g. Bond)
Equity instrument (variable income securities e.g. share)
Derivative instrument (it represents financial contracts e.g. options future swaps)
Function of financial asset / financial / instrument / securities
Vacillating the transferring of funds from the surplus group to deficit group
Re-Distribution the risk
Financial institution Global definition
The business organization which deal with financial asset / financial instrument/securities are
called financial institution
This definition covers a large area of business firms like (Bank, Leasing Company, Insurance,
Investment, Micro credit, HBFC house building Finance Corporation, Post office)
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Definition to the context of Bangladesh
By the term financial institution to the context of Bangladesh. It is meant those business
organization which run their activities as per financial institution act, 1993 and resolution 1994
for example (IDLC, IPDC, GSP Finance and Longca Bangla etc. international development leasing
company, international promotion development company. All their leasing company and 31
more have leasing company of Bangladesh)
Function of Financial Institution
Facilitating the transferring of funds from the surplus group to deficit group
Creating financial asset
Transforming financial asset
Working as the agent of the customer
Working as the guarantor of the customer
Working as the portfolio manager of the customer
Contingent liability
Market: A set of potential buyer/seller is called market
Financial market: means/way/tools/mechanism through which financial asset/instrument are
traded enhance is called financial market
Types of financial market
Money market: Financial dealing with short-term security having maturity period one years to
less is called money market
Capital market: Financial dealing with long-term security having maturity period more than one
year is called capital market
Primary market: Financial market dealing with newly issued securities is called primary market
Secondary market: Financial market dealing with existing already issued securities is called
secondary market
Function of market
Facilitating the transferring funds from the surplus group to deficit group
Determine the price of financial assets
Providing liquidity to financial assets
Reducing the transaction cost
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List of money market instrument (securities) to the context of Bangladesh
Bank deposit having maturity period one year to less
Treasury bill (91 days, 180 days, 364 days)
Debentures
Islamic bank bond (3 months)
Islamic bank bond (6 months)
Prize bond (face value Tk. 1000 near money)
Near Money: The instrument which can be converted into money with little risk little delay and
little cost is called near money
Repo (Re-purchases agreement) Centre Bank provides liquidity to BFI and NBFI
Reserve Repo (Centre Bank sacks up excess liquidity from BFI and NBFI)
List of capital market instrument (securities) to the context of Bangladesh
FDR / TDR having maturity period more than one year
Treasury bond (2 years, 5 years, 10 years, 15 years, 20 years)
Mutual funds (ICB Investment Corporation of Bangladesh)
Bonds
Shares
US dollar investment bond
US dollar premium bond Debt office
Wage earners bond
Sanchay Patra
(a) 3 months profit based S. P.
(b) 3 years S. P.
(c) 5 years Bangladesh S. P.
(d) Paribaric S. P
(e) Pension S. P
Draw compares between Treasury bill and Treasury bond
Both the instrument is issued by central bank (BB) on behalf of Government
Through these both instrument Government take borrowing from institution
Treasury bill is a money market instrument on the other hand is a capital market instrument
Treasury bill are: 91 days, 180 days, 364 days on the others hand treasury bonds are: 2 years, 5
years, 10 years, 15 years, 20 years
Investment: Deployment of funds for earning profit/return/gain is called investment
Commitment of funds for providing return is called investment
Putting money into risk is called investment
Making liquid money ill liquid is called investment the process of sacrificing the current income
for generating move future income is called investment
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Explain the investment process through a suitable flow chart
Types of investment
Stand-alone investment: making investment in a single asset/sector/area/avenue is called stand-
alone investment
Portfolio investment: making investment in a portfolio that is making investment in more than
one asset/sectors/avenue is called portfolio investment in business the term “investment” refers
to portfolio investment
Features of portfolio investment
Professional investment
Investment in group of assets/securities/avenue
Overall return will be maximized and overall risk will be minimized
What is means by standard/optimum/optimal portfolio?
The portfolio that provides maximum return/gain/profit at minimum level of risk is called
standard/optimum/optimal portfolio
Basic principle of investment
Setting investment policy/strategies
Making securities analysis
Constructing a portfolio
Evaluating the portfolio
Revising the portfolio
Introducing the continuous monitoring
Income
Consumptions Saving
Investment
Return
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Speculating is a well-grounded and well-planned investment explain
Both investment and speculating are the process of deploying fund for earing profit/return/gains
but the speculating differs from the investment through the following: a) Return b) Risk c) Timing
That is in investment process the investor likes to have moderate return with minimum risk for a
long term on the others hand. The speculator likes to have high return taking high risk within
short term/time. That is speculator is nothing but a well-designed/planned/grounded investment
List the instrument avenue to the context of Bangladesh
Formal Avenues are:
BFIs (Special Bank)
NBFIs (Insurance Companies, Leasing Companies, Investment Companies etc.)
MFIs (Micro Finance Institution Registered Under MRA Act - 2006)
Securities market (DSC and CSE)
Post office
Semi – Formal Avenue are:
Co – Operative societies
NGOs
Informal Avenue are:
Mortgage Business (e.g. Gold, Smiths)
Daron Business
Real Estate Business
Capital asset pricing model (CAPM)
Capital intensive organigation (Bank)
Technology intensive organization (Software Development)
Labor intensive organization (Garments / buying house)
Capital asset pricing model:
A descriptive model facilitating the way / means for pricing / valuation of assets (Capital Asset) is
called capital asset pricing model (CAMP). It is an economic theory. Showing the relationship
between risk and return
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Assumption underlying the CAMP
The market is assumed as perfect market
Investor are risk averse in nature
The investor is assumed with the same expectation of return
The investor is assumed identical in case of investment time horizon
Based on risk taking capabilities investors are of
Risk lower (High Risk Taker)
Risk taker (Moderate Risk Taker)
Risk averse (Minimum Risk Taker)
What will be happened when all the investors of the economy are risk – averse?
If all the investors of the economy are risk – averse in nature then the total investment of the
economy will be decreased. As a result, overall growth of the economy will be hampered
Mathematical equation of CAMP
RRR = Rf + (Rm – Rf) Bi
Where,
RRR = required rate of return
Rf = Risk free rate of return
Rm = Market rate of return
(Rm – Rf) = Market rate – Premium
Bi = Systematic / Market Risk
Now, the graphical presentation of CAMP
Becomes Y
RRR RRR = Rf + (Rm – Rf) Bi
Bi = Systematic / Market Risk
0 Bi X
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Show the relationship between risk and return through the graphical presentation of CAMP
Y
Z C’ RRR = required rate of return
Bi = Systematic / Market Risk
RRR Y B’
X 0’
0 a b c X
Bi
From the above figure we see
= 0b ˃ 0a
= 0y ˃ 0x
Similarly,
= 0c ˃ 0b
= Oz ˃ 0y
So, we can say,
The return is increased with the increase of risk
So, the risk – return relationship is RRR α Bi
Mention the uses / Significant of CAPM
The CAMP is used to determine the value of required rate of return (RRR)
This “RRR” can be used as discount rate for determining the present value of future cash flow of
an asset
The summation of present value of future cash flow represent the price / value of asset
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Problem: An investor likes to make investment in securities having market risk 1.5 the market
study should that the risk-free rate of return is 8 % and market rate of return is 12 % calculate
the required rate of return for the said investor
Solution
Here,
Bi = 1.5
Rf = 8 %
Rm = 12 %
RRR =?
We know,
RRR = Rf + (Rm – Rf) Bi
= 8 % + (12 % - 8 %) 1.5
= 8 % + (4 %) 1.5
= 8 % + 6 %
= 14 %
Problem: An investor as received 15 % return making investment in a security where the
market risk premium was 4 % and risk-free rate of return was 8 % calculate the market risk
associated with the said security
Solution
Here,
RRR = 15 %
(Rm – Rf) = 4 %
Rf = 8 %
Bi =?
We know,
RRR = Rf + (Rm – Rf) Bi
15 % = 8 % + (4 %) Bi
8 % + (4 %) Bi = 15 %
Bi 4 % = 15 % - 8 %
Bi 4 % = 7 %
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7 %
Bi = Bi = 1.75 % Answer
4 %
Problem: An investor has identified 5 securities having risk 1.0. 0.75, 1.25, 1.5 and 1.75
respectively. If the market rate of return and risk – free rate of return are 12 % and 8 %
respectively then calculate the value of required rate of return for the said securities and
comment on the relationship between risk and return from obtained result
Solution
Here,
Rf = 8 %
Rm = 12 %
Bi1 = 0.75
Bi2 = 1.0
Bi3 = 1.25
Bi4 = 1.5
Bi5 = 1.75
RRR =?
For security – 1
RRR = Rf + (Rm – Rf) Bi
= 8 % + (12 % - 8 %) 0.75
= 8 % + 3 %
= 11 %
For security – 2
RRR = Rf + (Rm – Rf) B2
= 8 % + (12 % - 8 %) 1.0
= 12 %
For security – 3
RRR = Rf + (Rm – Rf) B3
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= 8 % + (12 % - 8 %) 1.25
= 13 %
For security – 4
RRR = Rf + (Rm – Rf) B4
= 8 % + (12 % - 8 %) 1.5
= 14 %
For security – 5
RRR = Rf + (Rm – Rf) B5
= 8 % + (12 % - 8 %) 1.75
= 15 %
Comment: It seen from the obtained result that the required rate of return RRR being increased
with the increase of risk (Bi), so the relationship can be shown as RRR α Bi
Feature / Attributes of securities / Financial asset and pricing / Valuation of financial asset
Financial asset/Financial instrument/Security
It is an intangible asset
Represent the contact between investor and issuer
Investor has right to have benefit
Issuer has obligation to pay the principle amount with benefit
List the feature / attributes of financial asset/securities
Money ness
Divisibility and denomination
Reversibility
Cash flow
Term maturity
Convertibility
Currency
Liquidity
Return predictability
Complexity, Tax status
Two system of Banking
1. Conventional Banking system
2. Islamic Sharia based Banking
system
2 Two / 3 Three kind of Banking of world
3. Branch Banking
4. Unit Banking
5. Holding Banking
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Money: it is an instrument that can be used as means of transaction, medium of exchange and
that has store of value
Pricing or valuation of financial assets / securities
The summation of present value of cash flow generate by financial asset is called the price or
value of that financial assets.
Where,
The present value of future cash flow = Cash flow X Discount factor
1
= CF X …………………………..
1+r
CF
CF = ………………………………
1+r
Using the above formula, we can write
1 C1
Present value of 1st years cash flow = C1 X ……………….. = ………………….
(1+r) 1
1+r
1 C2
Present value of 2st years cash flow = C2 X ………………. = ……………………….
(1+r) 2
(1+r) 2
1 C3
Present value of 3st years cash flow = C3 X ……………… =………………….
(1+r) 3
(1+r) 3
1 Cn
Present value of Net years cash flow = Cn X …………………….. = …………………
(1+r) n
(1+r) n
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C1 C2 C3 Cn
P/V = ………….. + …………… +………………. + …………… Where,
1+r (1+r) 2
(1+r) 3
(1+r) n
C = Cash flow
N = Maturity Period
R = Discounted rate
Market rate of return
Where,
R= RR+IP+DP+MP+LP+EP
WHERE,
RR = Real rate of return
IP = Inflation premium
DP = Default risk premium
MP = Maturity premium
LP = Liquidity premium
EP = Exchanges rate risk premium
Only according to share accounting
Sold at par means (10 Tk. = 10 Tk.)
Sold at premium means (10 Tk. = 15 Tk.)
Sold at discount means (10 Tk. = 8 Tk.)
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Problem: An investor likes to make investment in financial asset with the expectation of getting
12.5 % rate of return. The market study shown that he real rate of return is 6 % inflation
premium is 1.5 % defaults risk premium is 1 % maturity premium is 1.5 % liquidity premium is
0.5 % if the transaction is made through the currencies others than home currency then
calculates the value of exchange rate risk premium
Solution
Here, r = 12.5 % Where, r = RR+IP+DP+MP+LP+EP
RR = 6 % 12.5 % = 6 % + 1.5 % + 1% +1.5% +0.5+EP
IP = 1.5 % 12.5 % = 10.5 % + EP
DP = 1 % 10.5 % + EP = 12.5 %
MP = 1.5 % EP = 12.5 % - 10.5 %
LP = 0.5 % EP = 2 %
EP =?
Show the relationship between discount rate and price / value of financial assets
C1 C2 C3 Cn
P/V = ………….. + …………… +………………. + ……………
1+r (1+r) 2
(1+r) 3
(1+r) n
The relationship between price and discount rate is inversely proportional. That can be show
1
= P α ……………………
R
Pricing valuation of Bond
Bond: A long term fixed income security representing a contact between issuer and investor is
called bond. In a bond issuer is committed / obligated to depend the principle amount with the
benefit at maturity so, sometimes a bond is called promissory note.
Risk associated with a bond
Default risk
Interest risk
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Draw Comparism between Bond and Debenture Clues
Both are financial instrument
Both are fixed income security
Bonds are less risky
Debenture is more risky
Rate of interest is high for debenture
Feature Attributes of Bonds
Face value (Finance Express) / maturity value (Money Express) / principle value / redemption
value
Term to maturity / maturity period / Term
Expressed in year and denoted by “n” Business year “360”
Coupon rate of interest
Coupon payment = Coupon rate of interest X Face value
= 12 % X 1000
= 0.12 % X 1000
= 120 Tk.
Yield of Bond
Yield of Bond = Coupon payment + Capital Gain
= Coupon rate of interest X Face Value + Capital Gain
The summation coupon payment and capital gains obtained from a bond is called the yield of
Bond
Problem: Company “ABC” has issue bond having face value Tk. 1000 with coupon rate of
interest 5 %. This bond is sold on discount at Tk. 900 calculate the yield of the said company
bond.
Solution
Here,
Face value = Tk. 1000
Coupon rate interest = 5 % = 0.05 %
Capital Gains = Coupon payment – 900
= 1000 – 900 Tk. =100 TK.
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= 50 + 100 TK.
= 150 Tk.
Type of Bond
Level coupon Bond
Zero coupon Bond (BD) / pure discount Bond (America) / CONSOL (British)
Perpetual Bond
Baby Bond
Bond issue for a few days are called Baby Bond
Draw Comparism between share and perpetual Bond
Both are financial instrument
Both have no maturity period
Share represent a variable income security on the other hand perpetual Bond represent a fixed
income security
Share represent the ownership of a company
Callable Bond: (call+able)
Less amount of return due to lower maturity
Re investment Risk
Valuation of Bond
C1 C2 C3 Cn + M
V b = + + + …………. +
1+r (1+r) 2
(1+r) 3
(1+r) n
C = Cash Flow
R = Discount Rate / Market Rate of Return
N = Maturity Period
M = Face Value / Maturity Value
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Yield to maturity of a Bond: The rate of interest which quarter (make) equal the value of a Bond
to its market price is called yield to maturity of that Bond. This yield to maturity is denoted by “Y”
and can be express by the following equation
C1 C2 C3 Cn + M
P = + + + …………. +
1+y (1+y) 2
(1+y) 3
(1+y) n
P = Market price of the Bond
Discussion on – share
Share: A financial asset / security representing the unit ownership of a company is called share.
This share represents a smaller unit of capital.
Objective of share: To raise capital / fund
Types of share:
Ordinary share / common stock
Preference share / preferred stock
Right share
Preemptive right share
Split of share / splitting of share
Valuation of share
Ordinary share / Common stock: The share whose owners are the residual claimers of a company
are called ordinary share. To content of Bangladesh the term “share” refers ordinary share if any
other word in not added with it.
Hostile takeover
Friendly takeover
Preference share / preferred stock: The share whose owners are the preferential claimers to
capital / divided / capital and dividend both are called preference share
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Draw distinction between ordinary share and preference share
Ordinary share Preference share
Owners are the residual claimers Owners are the preferential claimers
Owners have voting right Owners have no voting right
Owners can be the number of Board of Director Owners cannot be the number of Board of
Director
Variable income security in nature Fixed income security in nature
Money collected through ordinary share is
reliable fund
Money collected through Preference share is
unreliable fund
Money collected through ordinary share can
be used as core capital
Money collected through Preference can be
used as supplementary capital
Ordinary share is unconvertible Preference share convertible
Right share: The ordinary share which are issue after IPO (initial public offer) among the existing
share holder to raise the capital is called right share
Objective of right share:
To raise capital
Vacillated the existing share holder
To maintain the number of stock holders up to certain limit
Preemptive share: Right share are the issue maintaining ratio that refer to the right of existing
share holder either for enjoying or for refusing or for selling. This ratio / right is called preemptive
right under common low.
Where, preemptive right can be expressed as:
No of share to be issued as right share
P.R. =………………………………………………………………………………………………….
No of total outstanding share
M p – S p Where, R = Right
R = ………………………. M p = Market price of existing share
N + 1 S p = Subscription price
N = No. share required to have one right share
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Split of share / Splitting of share
Process of the devising the exiting no of outstanding share into a new member of share with new
par value (smaller) is called split of share / splitting of shares. This split of share is done
maintaining a ratio between oil and new par value.
Objective of splitting share
To attract the small / average investor
To increase the no of shareholders for maintaining the transparency
To increase the overall asset value of the company
Valuation of share
Mother equation of valuation of financial asset
C1 C2 C3 Cn
V = + + + …………. +
1+r (1+r) 2
(1+r) 3
(1+r) n
Company with his equation the equation for share valuation can be written as
D1 D2 D3
Vs = + + + …………. α (Infinite)
1+r (1+r) 2
(1+r) 3
Why the share valuation methodology is called dividend discount model?
Since for valuation for share the dividend (cash flow) is discounted for getting the present value,
so, the share valuation methodology is called dividend discount model
Dividend: Distribution profit among the stock holder is called dividend
Share valuation models
Zero growth / No growth model
Assumption
Dividend will not grow that is dividend growth rate is zero
Formula
D1 where, D1 = Dividend after the one year
Vs = ------------ Vs = Value of share
R R = Discount rate/Market rate of return
24. Page | 24
Constant growth model
Assumption
Dividend will growth at a constant rate
Formula
D1 where, D0 = Dividend just declared
Vs = ------------ g = Dividend growth
r – g
D1 = D0 (1 + g1)
Non-Constant / Differential growth model
Assumption
Dividend will grow at a varying rate
After specified time dividend growth rate become constant
Smoke + Fog = Smog (Dhoasha)
Formula:
D1 D2 D3 Dc 1
Vs = + + + …………. + X
1+r (1+r) 2
(1+r) 3
r + g c (1+r) (n – 1)
Where,
D c = Constant Dividend
G c = Constant Dividend growth rate
n = Number of years at which constant dividend growth rate reached
Problem come exam: “XYZ” has outstanding share in the market. It has just declared dividend
Tk. 20 / share after that the dividend has been grown @ 5 % and 6 % respectively for the next
2 years after that the dividend growth rate reached constant value 7 % considering the market
rate of return 12 % determine the price value of share of the said company.
Solution
Here, G1 = 5 % = 0.05
G2 = 6 % = 0.06
Gc = 7 % = 0.07
25. Page | 25
R = 12 % = 0.12 %
N = 3 years
D0 = Tk. 20
Vs =?
Therefore, D1 = D0 (1 + g1)
= 20 (1 + 0.05)
= 20 X 1.05
= 21 Tk.
D2 = D1 (1 + g2)
= 21 (1 + 0.06)
= 21 X 1.06
= 22.26 Tk.
D3 = D2 (1 + g3)
= 22.26 (1 + 0.07)
= 22.26 X 1.07
= 23.82 Tk.
D1 D2 D3 1
Vs = + + X
1+r (1+r) 2
r- g c (1+r) (n – 1)
21 22.26 23.82 1
Vs = + + X
1+0.12 (1+0.12)2 0.12- 0.07 (1+0.12) (3 – 1)
Vs = 18.75 + 17.74 + 476.4 X 0.797
Vs = 18.75 + 17.74 + 379.70
= 416.18
26. Page | 26
Derivative: The word “Derivative’’ has been originated from “derive” that is derivatives are the
instrument which are derived from underlying assets for diversified uses. These derivatives are
of different types such as
Commodity derivatives
E.g. a chair is a derivative
Mathematical derivatives
Financial derivatives
Currency derivatives
Financial derivatives: A contract between 2 parties for buying / selling specified sum of securities
within specified time at specified price is called financial derivatives
Contract vs Agreement
A contract agreement supported by law
All contract is agreement
Significant of derivatives
For increasing the diversified uses of asset
For minimize the risk and maximizing the profit
For accomplishing huge volume of business with small amount of capital
Types of financial derivatives
Forward
Core derivatives
Future
Option
Hybrid derivatives
Swaps
Forwards: A contract between 2 parties (long position and short position) where 1 (long position)
party agrees to by specified sum of securities from others party (short position) at specified price
in some future date is called forward
27. Page | 27
Option: A contract between two parties where one party allows or grand the others party to buy
or grand the others party to buy or sell specified sum of securities at specified price with specified
premium within specified time is called option
Problem: Investor “A” and “B” signed a forward contract where “A” is agreed to buy 100 shares
of company “XYZ” “B” @ TK. 500/= share within 3 months. After specified time / stipulated
time the price of share of the said company become Tk. 550 calculate the loss / gains of “A”
and “B”
Solution
Contract price Tk. 500 / share
Maturity period Tk. 550 / share
Gain of “A” = 100 X (550 – 500) = 100 X 50 = 5000 Tk.
Loss of “B” = 100 X (500 – 550) = 100 X - 50 = - 5000 Tk.
Parties of option
Option buyer
Decision whether the option is to be execute or not will be taken by option buyer
Option writer
The option writer has the right to have premium whether the option is executed or not
Types of option
Call option: where the option buyer is allowed buy the securities
Put option: where the option buyer is allowed to sell the securities
Draw distinction between forward and option
Forward Option
A contract between 2 parties where 1 party
agrees to by specified sum of securities from
others party at specified price in some future
date is called forward
A contract between two parties where one
party allows or grand the others party to buy
or grand the others party to buy or sell
specified sum of securities at specified price
with specified premium within specified time
is called option
2 parties are long position and short position 2 parties are option buyer and option writer
Must be execute May be or may not be execute
Both parties are decision maker Option buyer is the decision maker
No premium Premium is obligatory
May be with recourse or without recourse No such type
Sometimes third-party grantee No third-party grantee
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Distinction between Broker and Dealer
Broker Dealer
Working as an agencies of market participant Working on behalf of market participant
They have no own investment They have own investment
They do not bear any risk for their job They are bear risk in their job
They are not the market maker They are the market maker
All the Broker are not Dealer All the Dealer are Broker
Capital market: a financial market dealing with long-term securities market having maturity
period more than one year is called capital market
That is capital market long term fund
Function of capital market
Facilitating the saving
Transforming the saving into investment
Accommodating the buyer and seller
Facilitating the transforming of fund from economic surplus group to deficit group
Types of capital / security market
Primary market: a financial market dealing with new securities issue is called primary market
Secondary market: a financial market dealing with existing securities is called secondary market
Function of primary market
Facilitating the issuance of new securities
Facilitating the scope for public Ltd. Company to raise their company
Function of primary market
Price discovery providing necessary information to market participant
Providing liquidity to financial asset
Facilitating the transaction of existing securities
Types of security market
Organized securities market
Over the counter market (OTC)
29. Page | 29
Organized securities market having fixed location physical structure and accepted by strategies
law DSE and CSE
Over the counter market (OTC) from the global perspective by the term OTC. It is meaning a
geographical dispersed sophisticated telecommunication securities market, where securities can
be traded from different areas. To the context of Bangladesh by the term OTC. It is means special
type’s securities designed for close monitoring of securities of badly performed companies
Between call and continuous market which one is preferred to you and why?
Between call and continuous market. The continuous market is preferred to me. Because this
market provides the facilitating for trading of any group securities at any time during the business
hours if the trading condition are satisfied. As a result of prime function of securities market
satisfied
On the others hand the call market groups the securities for trading at different hours. As a result,
one cannot get the scope for liquidating his/her securities trading the business hours for
mismatching the buying and selling orders
Who the regulator / monitor of securities market to the context of Bangladesh? List the
provision
Bangladesh securities exchange commission (BSEC) is the regulator, monitoring the securities
market to the context of Bangladesh
Provision / Core Provision
Securities and Exchange Commission ordinance, 1969
Securities act, 1920
Securities and Exchange Commission act, 1993
Secondary level acts
Companies act, 1994
Bank companies act, 1991
Financial institution act, 1993
Insurance act, 2010
Anti-money laundering ordinance, 2012
30. Page | 30
Risk-Return Trade-Off
Net Income Total Operating Revenue Total Assets
ROE = X X
Total Operating Revenue Total Assets Total Equity Capital
ROE = Net Profit Margin X Asset Utilization Ratio X Equity Multiplier
(ROE - Return of Equity)
Where, Net Income
The Net Profit Margin (NPM) = …………………………………………………
Total Operating Revenue
Total Operating Revenue
The Degree of Asset Utilization (AU) = …………………………………………
Total Assets
Total Assets
The Equity Multiplier (EM) = ………………………………….
Total Equity Capital
Definition: Standard quarry, Variation, Variance, Take Risk, Market Risk, Diversification, Spread
Risk-Return Trade-Off
R Low Risk
E Low Return
T
U High Risk
R High Return
N
Standard Deviation (Or Risk)
31. Page | 31
Objective of Risk-Return Management
Define and measure the expected rate of return of an individual investment
Define and measure the riskiness of an individual investment
Compare the historical relationship between risk and rates of return in the capital markets
Explain how diversifying investment affect the riskiness and expected rate of return of a portfolio
Explain the relationship between an investor required rate of return on an investment and the
riskiness of the investment
The wage of best diversification
Spread your portfolio among multiple investment vehicles
The risk in your securities
Very your securities by industry
Asset allocation
Conservative
Neutral
Aggressive
Performance Evaluation of Bank / Analysis of financial institute of Bank
Dimension are
Probability
Risk management
Liquidity management
Operational efficiency
CAMELS rating
Use of UBPR
What is profit?
Profit = Revenue – Expense
Net Income
ROE = …………………………………. (Return of Equity) ROE
Total Equity
Net Income
ROA = …………………………………… (Return of Asset) ROA
Total Asset
32. Page | 32
Net Income
EPS = …………………………………………………
Common Equity share holder
Total interest income Total interest expense
Earning Spread = ………………………………………. _ ……………………………………………………
Total Earning asset Total interest-bearing liability
Earning Spread: It is measure effectiveness of a financial firm intermediation function in
borrowing and lending money and also the intensity of competition in the firm market area
Important of Ratio Analysis
1. To measure efficiency
2. To measure financial solvency
3. Forecasting and planning
4. To facilitate decision making
5. Aid to take corrective action
6. Aid in intra firm competition
Standard of Comparism
1. Intra - company compares
2. Inter – company compares
3. Industry average
4. Ideal ratio
There are 6 types of ratio
1. Growth ratio
2. Profitability ratio
3. Coverage ratio
4. Activity ratio
5. Liquidity ratio
6. Leverage ratio
33. Page | 33
Risk Management
1. Credit Risk 2. Liquidity Risk 3. Market Risk
4. Market Risk 5. Operational Risk 6. Legal and compliance Risk
7. Reputation Risk 8. Strategic Risk 9. Capital Risk
5 C’ S to minimize credit risk
1. Character (Mortgage – Land, Building) (Collateral – Share, Bond)
2. Cash flow
3. Capital
4. Collateral
5. Condition
Liquidity Management Liquidity Crises
1. Use short-term fund for log-term investment
2. Large proportion of liabilities in repaid n shortest possible time
3. Over sensitiveness to the rate of interest
4. Lake of caution about prime customer
5. Skill of the personnel for loan recovery
6. Absence of linkage with the bank rating agencies
7. Inaccessibility to the money market
8. Inefficient of front-line customer service
LM - Liquidities Management Strategies
1. Asset conversion strategies
2. Liability management strategies
3. Balance liquidity management strategies
UBPR – Uniform Bank Performance Report
1. Liquidity
2. Profit ability
3. Efficiency
4. Reputation
Identification of key risk Deciding the trend of
increase
Finding the method to
monitor the risk in real time
34. Page | 34
CAMELS – Rating
C – Capital adequacy
A – Asset quality
M – Management efficiency
E – Earning level
L – Liquidity strength
S – Sensitivity to the market risk
Five point of scale
1. Excellent
2. Satisfactory
3. 3. Fair
4. Marginal
5. Unsatisfactory
Asset liability management
Price D S S-Supply
Of D-Demand
Credit i1 ….…………………….. I-Interest
...……………….
i ………….
i2
0 i2 i i1 D
Quality of loanable fund
Two kind of Risk
Price Risk
Re- Investment Risk
35. Page | 35
Interest rate hedging
(Net interest margin) NIM
Interest income – interest expenses
NIM = X 100
(Net interest margin) NIM influenced by
1. Change in interest rate up or down
2. Change in the spread between asset and liabilities
3. Change in the volume of interest sensitive asset and liabilities
4. Change in the mix of asset and liabilities
GAP Management (1. Maturity 2. Reprising)
Decision regarding is GAP Management
1. Management choose the time period for which NIM is to be managed
2. Management choose a target NIM
3. To increase NIM management either
- Develop correct interest rate forecast
- Reallocate asset and liabilities to increase spread
4. Management interest choose volume of interest sensitive asset and liabilities
Problem with interest sensitive GAP Management
IRS – interest rate spread = 16 – 10 = 6 %
IS asset = 870 Million (IS – Interest Sensitive)
IS liabilities = 625 Million
# Duration
Problem: A book grants a loan to one of its customers for a term of 5 years. The customer
promises the bank an annual interest payment of a 10 percent. The face value of the loan is
1000 what is the duration of this loan?
We know,
Expected CF X period t / (1 + yam) t
D =
Current market value or price
Where, D = duration
CF = the value of each expected cash flow in each time period
36. Page | 36
YTM = the instrument current yield to maturity
100 X t / (1+0.10)t + 5 / (1+0.10)5
D =
1000
4169.87
=
1000
= 4.17 years
1
Calculation of duration of loan PV=
(1+0.10)1, 2, 3,4,5,6
Particular Period of
expected
cash flow
Expected
cash flow
from loan
PV of
expected
cash flow 10
% ytm
Time period
cash is to be
received
PV of
expected
cash flow X t
1 100 90.91 1 90.91
2 100 82.64 2 165.29
Expected interest
income from loan
3 100 75.13 3 225.39
4 100 68.30 4 275.21
5 100 62.09 5 310.46
Repayment of loan
principal
5 1000 620.92 5 3104.64
Total 4169.87
Corporate Finance
The capital which is required to meet up the daily operation of a business is called working capital
A rise in the price level of general products and service is called Inflation
A decrease in the purchasing power of money is called Inflation
37. Page | 37
Capital Structure: Any combination of debt and equity in where a firm is able to get optimal
return is called Capital Structure
V = S + B
Where,
V = value of the firm
S = market value of the equity
B = market value of debt
Levered firm: The firm which has debt is called levered firm
Unlevered firm: The firm which has no debt is called unlevered firm
VL = value of levered firm
VU = value of unlevered firm
If no tax payment yet VL = VU
Where,
R S = The excepted return on equity / cost of equity / required return on equity
R O = Cost of the capital for an all equity firm
R B = Cost of debt
B = Market value of debt
S = Market value of equity
Where,
Vu = value of unlevered firm
EBIT (1 – Tc) = Firm cash flow after corporate tax
Tc = Corporate tax rate
Ro = The cost of capital for an all equity firm
Where,
R s = The expected return on equity Tc = Corporate tax rate
Ro = Cost of capital for an all equity firm RB = cost of deb
B = Market value of debt
S = Market value of equity
40 Debt
60 Capital
Equity
60