CSS Business Administration Financial Management Syllabus

What is the broad function of financial markets?

To channel funds from savers/lenders (surplus units) to borrowers/investors (deficit units), facilitating the efficient allocation of capital in the economy.

Distinguish money markets from capital markets.

Money markets deal in short-term debt instruments (maturity of one year or less, e.g., T-bills, commercial paper). Capital markets deal in long-term securities (maturity over one year, e.g., stocks and bonds).

Distinguish a primary market from a secondary market.

In the primary market new securities are issued and sold for the first time (raising fresh capital for the issuer). In the secondary market existing securities are traded among investors, providing liquidity.

Distinguish money markets from capital markets by the type of funds raised.

Money markets provide short-term working/liquidity financing, while capital markets provide long-term funds for investment in fixed assets and expansion.

What is the difference between debt markets and equity markets?

Debt markets trade instruments representing borrowed funds (bonds, debentures) that must be repaid with interest; equity markets trade ownership claims (shares) entitling holders to residual income and control.

What is the difference between organized exchanges and over-the-counter (OTC) markets?

Organized exchanges are centralized physical/electronic venues with standardized trading rules (e.g., stock exchange); OTC markets are decentralized dealer networks where securities are traded directly between parties.

What are financial intermediaries?

Institutions (such as banks, insurance companies, mutual funds, and pension funds) that stand between savers and borrowers, collecting funds from savers and channeling them to borrowers.

Name four major types of financial intermediaries.

Commercial banks, insurance companies, pension funds, and mutual funds (also investment banks and finance companies).

What is asset transformation by financial intermediaries?

The process by which intermediaries convert the small, short-term, low-risk savings of depositors into large, long-term, higher-risk loans for borrowers, transforming maturity, size, and risk.

List three key benefits provided by financial intermediaries.

Reducing transaction costs, providing risk diversification and risk sharing, and reducing information asymmetry through expertise in screening and monitoring borrowers.

What is a financial instrument (security)?

A tradable financial asset or contract representing a claim to future cash flows, such as a share, bond, bill, or derivative, evidencing a legal agreement involving monetary value.

What is the basic difference between a bond and a share of stock?

A bond is a debt instrument that pays fixed interest and must be repaid at maturity, giving the holder creditor status; a share is an equity instrument giving ownership, voting rights, and a residual claim on profits with no maturity.

What is a Treasury bill (T-bill) and how does it generate return?

A short-term government debt security (maturity up to one year) sold at a discount and redeemed at face value; the return is the difference between the discounted purchase price and the par value (it pays no coupon).

What is the difference between common stock and preferred stock?

Common stock carries voting rights and a variable, residual claim on earnings; preferred stock typically has no voting rights but receives fixed dividends with priority over common stockholders in dividends and liquidation.

What is a derivative security?

A financial instrument whose value is derived from the value of an underlying asset, index, or rate, such as futures, forwards, options, and swaps.

Define the time value of money.

The principle that a sum of money available today is worth more than the same sum in the future because of its potential earning capacity (it can be invested to earn a return).

What is the future value formula for a single sum under annual compounding?

FV = PV x (1 + i)^n, where PV is present value, i is the interest rate per period, and n is the number of periods.

What is the present value formula for a single future sum?

PV = FV / (1 + i)^n, where FV is the future value, i is the discount rate per period, and n is the number of periods.

What is the difference between compounding and discounting?

Compounding moves a present value forward in time to find a future value (multiplying by (1+i)^n); discounting brings a future value back to the present (dividing by (1+i)^n).

What is an annuity?

A series of equal cash flows (payments or receipts) occurring at regular, equal intervals over a specified period of time.

Distinguish an ordinary annuity from an annuity due.

In an ordinary annuity, payments occur at the end of each period; in an annuity due, payments occur at the beginning of each period, so an annuity due is worth more (one extra period of compounding).

What is the present value formula for an ordinary annuity?

PV = A x [1 - (1 + i)^-n] / i, where A is the periodic payment, i is the interest rate per period, and n is the number of periods.

What is the future value formula for an ordinary annuity?

FV = A x [(1 + i)^n - 1] / i, where A is the periodic payment, i is the rate per period, and n is the number of periods.

What is a perpetuity and what is its present value formula?

A perpetuity is an annuity that continues forever (infinite equal cash flows). Its present value is PV = A / i, where A is the periodic payment and i is the discount rate per period.

What is the present value of a growing perpetuity?

PV = A / (i - g), where A is the first period's cash flow, i is the discount rate, and g is the constant growth rate of the cash flows (valid when i > g).

What is loan amortization?

The process of repaying a loan through equal periodic payments, where each payment covers the interest due plus a portion of the principal, so the loan balance reduces to zero by maturity.

In an amortizing loan, how do the interest and principal portions of each payment change over time?

The interest portion declines and the principal repayment portion increases over the life of the loan, while the total payment stays constant (because interest is charged on a shrinking balance).

How is the equal periodic payment on an amortized loan calculated?

Payment = Principal / [annuity present value factor] = P x i / [1 - (1 + i)^-n]; that is, the loan principal is divided by the present value annuity factor for the rate i and n periods.

How does more frequent compounding affect the future value and effective rate?

The more frequently interest is compounded within a year, the greater the future value and the higher the effective annual rate, because interest is earned on interest more often.

What is the formula for the effective annual rate (EAR) given a nominal rate?

EAR = (1 + i/m)^m - 1, where i is the nominal annual rate and m is the number of compounding periods per year.

What is the future value formula with compounding m times per year?

FV = PV x (1 + i/m)^(m x n), where i is the nominal annual rate, m is the number of compounding periods per year, and n is the number of years.

What is the formula for continuous compounding?

FV = PV x e^(i x n), where e is the exponential constant (approximately 2.71828), i is the annual rate, and n is the number of years.

What are the four primary financial statements?

The balance sheet (statement of financial position), the income statement (profit and loss account), the statement of cash flows, and the statement of changes in owners' equity.

What does the balance sheet show and what is its fundamental equation?

It shows a firm's financial position at a point in time. Its equation is: Assets = Liabilities + Owners' Equity.

What does the income statement report?

It reports a firm's revenues, expenses, and resulting net profit or loss over a period of time, summarizing operating performance (Revenues - Expenses = Net Income).

What are the three sections of the statement of cash flows?

Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

What is working capital and how is net working capital calculated?

Working capital is the funds available for day-to-day operations. Net working capital = Current Assets - Current Liabilities.

What is the difference between gross profit, operating profit, and net profit on an income statement?

Gross profit = Sales - Cost of Goods Sold; Operating profit (EBIT) = Gross profit - Operating expenses; Net profit = Operating profit - Interest - Taxes.