Capital adequacy affects all corporate entities, but as a term it is most often used in
discussing the position of firms in the financial sectors of the economy, and in particular
whether firms have adequate capital to guard against the risks that they face. A balance needs
to be struck between the often conflicting perspectives of the various stake-holders; lenders
require capital to ensure that there is a cushion against possible losses at the borrowing firm,
while shareholders often focus upon return on capital. For firms operating in the financial
sector, the general public also has a stake in the firm as failure may have implications for the
financial stability of the system as a whole.

The focus of financial stability is primarily upon banks because of the functions that they
perform. Banks not only provide a significant proportion of the financing required by the
economy, but they also act as a conduit for payments. Further, the financial sector is used by
central banks as a mechanism for transmitting changes in monetary policy through to the real
economy. The focus of financial stability is the financial system itself, rather than an
individual institution, but the means by which financial stability is achieved is through the
review of individual institutions. (See George (1994) for a policy speech on supervision and
financial stability.)
Users of the financial sector of the economy benefit from the competition within this sector,
and in response banks, and other firms, seek to optimize their business mix. In order to allow
competition within the financial sector those agents responsible for monitoring capital
adequacy need to give firms the freedom to take risks. On occasions, this means that firms in
the financial sector will fail. If this never happened either the costs to the users of banking
services would be prohibitive (and/or the range of services themselves extremely limited) or
the lender of last resort would effectively be taking all of the risks, but have no influence over
which risks it acquired.
Permitting banks to fail indicates a possible conflict between capital adequacy, deposit
protection (see Stone and Zissu, 1994a), and the perspective of other stakeholders such as
shareholders. Deposit protection schemes are operational in many countries, but most do not
protect the full value of every depositor's claim. The intention is usually to ensure that
depositors bear some responsibility for their actions when a bank is liquidated. If the deposits
46
were entirely risk free then a significant group of stakeholders would have no interest in the
risks being taken and banks might be tempted into acquiring inappropriate types and levels of
risk.
Capital adequacy is intended to aid financial stability and, as a result, the role of an individual
institution in the system is the overriding concern, rather than individual institutions per se.
As the relationship between banking activities and other parts of the financial sector is
increasing in breadth and depth, there is the possibility of financial stability being disrupted
by non-banking activities. It is also the case that some sources of disruption could originate
from international activities. These developments have encouraged greater discussion among
supervisors of different financial sectors, both domestically and internationally.
Risk and Capital Adequacy
Banks, by virtue of their role in the economy, transform risks. The commonest risks
transformed are those of credit and liquidity, which are also the risks that banks have been
assuming for the longest periods of time. Hall (1993) provides a list of statutes relating to the
financial sector of the economy for Japan, UK, and USA, including some legislation still in
place from the 1930s. Many banks have extended their financial intermediation role and risk
taking from traditional activities to include many forms of market risk; this is an indication of
the continuing evolution of banks and their role in the economy.
Risks are often described as "qualitative" when it is difficult to provide an accurate value as
to their impact. This is in contrast to those risks seen as quantitative. An example of a
qualitative risk is settlement risk where, although the amounts at risk can be measured, the
probability of loss is difficult to assess. An illustration of settlement risk was provided by the
demise of the Herstatt Bank in Germany during 1974. In order to alleviate this particular risk
there has been a concerted effort to promote real-time payment settlement systems and a
general reduction in settlement times. In this case the interested parties have not only been the
supervisors, but also industry bodies and individual firms in the financial sector. Another
example of a qualitative risk is reputational risk, affecting either one particular bank or an
entire sector of the banking community. Other risks in this category involve various
management and systems issues, including valuation methods and risk management for
complex products, as well as acts that are potentially criminal.
Some commentators would suggest that there are no new risks in the system, but it would
appear that certain types of products and activities amplify the impact of a given risk; an
example would be some forms of derivative contracts. While derivatives may be a relatively
recent tool by which banks intermediate risk, capital adequacy standards have also evolved to
reflect their development. Some of the standards are based upon holding given quantities of
47
capital for a given risk, while other standards may be qualitative. The Basle Supervisors
Committee issues statements on qualitative standards, such as the paper on risk management
guidelines for derivatives, as well as minimum quantitative standards, such as the Basle
Accord.
Banks and securities firms are required to hold capital against their quantitative and
qualitative risks. Until recently the main capital requirements, for banks, have addressed
credit and counterparty risk. For securities firms the focus has been upon market risk.
However, with the implementation of the Capital Adequacy Directive (which applies to
banks and securities firms in the EU) and proposed amendments to the Basle Accord, banks
will be required to hold capital against some of their market risks (see Stone and Zissu,
1994a). Both the Basle Accord and the Capital Adequacy Directive represent minimum
standards and local supervisors have the ability to impose higher requirements. For example,
the Basle Accord has 8 percent as the minimum ratio between capital- and risk-weighted
assets, but some supervisors impose higher ratios which typically reflect qualitative risks at
individual banks.
Capital may be in the form of equity, tier 1 capital, and various forms of subordinated debt,
upper and lower tier 2 capital, and must be capable of absorbing losses either on a continuing
basis or at least in the event of a bank's liquidation. Supervisors normally impose limits on
the contribution that different forms of capital can make to the composition of the capital
base.
It should be noted that the quantitative capital standards are based upon the values of the
positions held by the firms in the financial sector. Often national bodies produce guidelines
and recommendations on the application of accounting principles to banks and financial firms,
such as the British Bankers' Association statements of recommended practice. Differences
can occur between countries, in the capital required for an exposure, or position, due to
different accounting standards. This is a feature of on- and off-balance sheet items; however,
the International Accounting Standards Committee is in the process of producing
international guidance.

SAP FI CO

mySAP ERP comes with several new transaction codes that replace existing transaction codes

n FAGLB03: Display Balances (New); replaces FS10N

n FAGLL03: Display Line Items (New); replaces FBL3N

n FB50L/FB01L: G/L Document Posting for a Ledger Group; replaces FB50/FB01

n FAGL_FC_VAL: Foreign Currency Valuation (New); replaces F.05

n FAGLF101: Sorting/Reclassification (New); replaces F101

n FAGLGVTR: Balance Carry-forward (New), replaces F.16, GVTR, and 2KES

                                                               SAP FI

what is debug ?how to debug the error and find solution ? 

ANS:  Debugging is done when you have Z reports made with the help of Abapers. And they do debugging if any error pops up

 

1 Settings for Cross Company Code

Scenario: Please provide path of cross company code settings for GL and asset                     cross company code settings.

Solution:  T-Code is OBYA and follow the yellow lines for the path

 

 

Fill in the company code 1 and Company Code 2 and you will up and ready for the integration

                                                                    SAP Fi
 

Purpose
Use this procedure to carry forward the customer and vendor balances of the previous fiscal year
to the new fiscal year. The amounts of the open balances will be carried forward and are reflected
in the “Balance Carryforward” amount when displaying a particular customer or vendor balance
display.
The program can be executed as often as necessary. If this program has not been executed,
transactions can still be posted to the customer or vendor account in the old fiscal year but the
carry forward balance will not be reflected in their account balance.
Trigger
Perform this procedure at the beginning of a new fiscal year. After this process is run, if posting
has occurred to customer or vendor accounts in the previous fiscal year, then this process must be
run again to bring the correct balance forward.
Prerequisites
• There must be customer and vendors established in SAP.
Menu Path
Use the following menu path(s) to begin this transaction:
• Select SAP Menu Accounting Financial Accounting Accounts Receivable
Periodic Processing Closing Carry Forward F.07 – Balance Carryforward.
Transaction Code
F.07
Helpful Hints
This process should be run at part of the year end process.

Title:

Balance Carry Forward AR and AP 11/20/07

Functional Area :

Finance

Process :

General Ledger

File name:

~BPP_FI_GL_F.07_BALANCE_CARRYFORWA

RD_AR_AP_112007.DOC

Version:

08 SBBC Final Review

Last Modified:

11/28/2007

Work Instruction

Page 1 / 14

Work Instruction

Balance Carry Forward AR and AP 11/20/07

F.07

Purpose

Use this procedure to carry forward the customer and vendor balances of the previous fiscal year

to the new fiscal year. The amounts of the open balances will be carried forward and are reflected

in the “Balance Carryforward” amount when displaying a particular customer or vendor balance

display.

The program can be executed as often as necessary. If this program has not been executed,

transactions can still be posted to the customer or vendor account in the old fiscal year but the

carry forward balance will not be reflected in their account balance.

Trigger

Perform this procedure at the beginning of a new fiscal year. After this process is run, if posting

has occurred to customer or vendor accounts in the previous fiscal year, then this process must be

run again to bring the correct balance forward.

Prerequisites

•

There must be customer and vendors established in SAP.

Menu Path

Use the following menu path(s) to begin this transaction:

•

Select

SAP Menu

Accounting

Financial Accounting

Accounts Receivable

Periodic Processing

Closing

Carry Forward

F.07 – Balance Carryforward

.

Transaction Code

F.07

Helpful Hints

This process should be run at part of the year end process.

Procedure

1.

Start the transaction using the menu path or transaction code.

SAP Easy Access

2.

Double-click

Carry Forward Receivables/Payables

3.

As required, complete/review the following fields:

Field Name

R/O/C

Description

Company code R The Company Code is an organizational unit within financial

accounting.

Broward County Public Schools (BCPS) is only using 

   

one company code. This field should always be 

SBBC.

Example:

SBBC

Carryforward to fiscal

year

R Description of the Carryforward to fiscal year.

Example:

2008

4.

Click

to carry forward balances for customers.

5.

Click

to carry forward balances for vendors.

6.

Click

to run process in a test to ensure there are no errors

before running process in production.

7.

Click

to provide details in regards to the process.

8.

Click

to execute program in the test mode.

Carry Forward Receivables/PayaFor the Year 2008 Test Run

 

Direct Taxes Taxes whose impact and incidence are on the same person. The taxes levied on income, and wealth taxes are instances of direct taxes.

Discount This refers to:

1. The margin by which a security's market price is lower than its face value.
2. In security analysis, it means the adjustment in security prices consequent to the assimilation of new information about a company, or news in general. An illustration is the increase in the price of a stock following the news of the company bagging big sale orders.
3. Reduction in the sale price of goods.

Discount Rate The interest rate used in calculating the PRESENT VALUE of future cash flows.

Disinvestments The sale of shareholding by an individual or institution in order to raise cash.

Diversification The process of spreading out investments so as to limit exposure and reduce risk. Individuals do this by investing in shares of different companies or by combining stocks with DEBENTURES, MUTUAL FUND shares, FIXED DEPOSITS and other investment vehicles. Companies achieve diversification by venturing into new and unrelated business areas. 




EEFC Account This refers to the Exchange Earners' Foreign Currency Account, a scheme introduced in 1992 for exporters and residents receiving foreign exchange. A certain percentage of the earnings may be maintained in this account in order to limit exchange rate risk in case of future imports or for other specified purposes. 

Efficient Portfolio A diversified selection of stocks resulting in a least risk PORTFOLIO for a given rate of return. At that level of RISK, no other portfolio provides superior returns. Combining shares from different unrelated industries helps to neutralize the UNSYSTEMATIC RISK inherent in each security.


EOQ The acronym for Economic Order Quantity, a term that relates to INVENTORY management. It is the optimum size of order which minimizes the cost of purchasing and holding inventories.
Equity Grading A service offered by the credit rating agency, ICRA Limited, under which the agency assigns a grade to an equity issue, at the request of the prospective issuer. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered, on the basis of its in-depth study of the company and all relevant factors. It takes into account the earning prospects, risk and financial strength associated with the issuer, which reflect its managerial competence, industry outlook, competition, etc. credit rating agency, ICRA Limited, under which the agency assigns a grade to an equity issue, at the request of the prospective issuer. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered, on the basis of its in-depth study of the company and all relevant factors. It takes into account the earning prospects, risk and financial strength associated with the issuer, which reflect its managerial competence, industry outlook, competition, etc. There are 12 grades starting with ERAI (signifying excellent earning prospects with low risk) and ending with ERD3 (representing poor earning prospects and high risk). The agency also offers the service of Equity Assessment, which is at the request of an investor. This appraisal is a one-time exercise and is in the form of a report that is intended to help investors in their investment decisions.


Equity Share A security that represents ownership interest in a company. It is issued to those who have contributed capital in setting up an enterprise. Apart from a PUBLIC ISSUE, equity shares may originate through an issue of BONUS SHARES, CONVERTIBLE securities, WARRANTS, GDRS, etc. An alternative term that is sometimes used is 'COMMON STOCK' or simply, 'STOCK'.

Escrow Cash, securities or other valuable instruments that are held by a third party to ensure that the obligations under a contract are discharged. The escrow mechanism is a technique of mitigating the risk to lenders and it is used typically in infrastructure projects such as power, roads or telecom. For example, an escrow account can be set up at a bank for depositing the payments of electricity bills.

Euro The common European currency that will come into being with the formation of the European Union. This economic union has given birth to the European Monetary Union tht will be characterized by a common CENTRAL BANK and MONETARY POLICY, besides the common currency. Elimination of exchange rate risk and reduction of transaction costs between members are seen as major benefits of the common currency. The circulation of the Euro is slated to take place in 2002 and it is expected to emerge as an important international currency. More specifically, it will compete with the US dollar as a reserve currency.

Euro Issue An issue of securities to raise funds outside the domestic market. Euro issues by Indian companies have been by way of GDRS or EUROCONVERTIBLE BONDS. The advantages associated with Euro issues are :

1. Reduced cost of capital owing to lower interest rates and floatation costs.
2. Efficient pricing that maximizes mobilization.
3. No immediate dilution of voting control.
4. Greater visibility due to international exposure.
5. Inflow of foreign currency funds.

Euro issues must conform to the guidelines issued by the Central Government. Among other thing, prior permission for an issue must be obtained from the Ministry of Finance. (See GDR and FOREIGN CURRENCY CONVERTIBLE BOND). 

Euro bond A bond denominated in a currency different from that of the country in which it is sold. 

Financial Futures These are contracts guaranteeing delivery of specified financial instruments on a future date, at a predetermined price. The financial instruments traded in the U.S. futures markets consist of foreign currencies and debt securities e.g., TREASURY BILLS, long-term U.S. Treasury BONDS, COMMERCIAL PAPER, etc. The futures contracts on debt securities are commonly known as interest-rate futures. They offer companies, banks and institutions a means to insulate themselves from adverse interest rate movements through HEADING. The objective behind hedging is to establish in advance, a certain rate of interest for a given time period. That apart, financial futures offer considerable profit potential which attracts speculators and individual investors too.

Financial Institution A non-banking financial intermediary (company corporation or co-operative society) carrying on any of the activities specified in the relevant section of the Reserve Bank of India Act. These activities include lending, investing in shares and other securities, HIRE-PURCHASE, insurance and CHIT FUNDS.
 In general, this term refers to the Development Finance Institutions such as IDBI and IFCI, as well as the Unit Trust of India (UTI) and the Life Insurance Corporation of India (LIC). 

Financial Leverage The ability to magnify earnings available to equity shareholders, by the use of debt or fixed-charge securities. Generally, the higher the amount of debt in relation to total financing, the greater will be the impact on profits available to equity shareholders, other things being equal. 

DFL =	Percentage change in EPS
	Percentage change in PBIT

The Money Market is that segment of the financial markets wherein financial instruments having maturities of less than one year are traded. These different instruments are listed below :

Instrument	Typical MATURITY (in days)
CALL MONEY and NOTICE MONEY	1 and up to 14
REPOS	14
INTER-BANK TERM MONEY	15 TO 90
BILL OF EXCHANGE	90
TREASURE BILL	91 AND 364
INTER-BANK PARTICIPATION
CERTIFICATE	91 TO 180
CERTIFICATE OF DEPOSIT	90 TO 364
COMMERCIAL PAPER	30 TO 364
INTERCORPORATE DEPOSIT	90

 The Capital Market is that segment of the financial markets in which securities having maturities exceeding one year are traded. Examples include DEBENTURES, PREFERENCE shares and EQUITY SHARES.


Fiscal Policy The use of tax and expenditure powers by a government. Government all over the world, are vested with the task of creating infrastructure (e.g., roads, ports, power plants, etc.) and are also required to ensure internal and external security. These responsibilities entail government expenditures on various fronts – capital outlays, the defense forces, police, the administrative services and others. Taxes are a major source of revenue to meet these outflows. Thus, the Union Government collects income tax, EXCISE DUTY, customs duty, etc., through its different arms.

Floating Exchange Rate The exchange rate of a currency that is allowed to float, either within a narrow specified band around a reference rate, or totally freely according to market forces. These forces of demand and supply are influenced by factors, such as, a nation's economic health, trade performance and BALANCE OF PAYMENTS position, interest rates and INFLATION.

Floating Rate Bond A debt security whose COUPON RATE is periodically adjusted upwards or downwards, usually within a specified band, on the basis of a benchmark interest rate or an index. These securities, also termed 'Indexed Bonds', were introduced to offer investors protection from INFLATION and INTEREST RATE RISK that are inherent in a DEBENTURE or BOND bearing a fixed coupon. When interest rates and bond YIELDS go up, the coupon is raised as indicated by the issuer. The disadvantage is when rtes fall, because the bondholder's coupon receipts will fall. Moreover, the downward revision of the coupon would also preclude any CAPITAL GAINS by way of price appreciation, accruing to the holder. In India e.g., the first such instrument was introduced by the State Bank of India in December 1993. The bonds carry a floating rate of interest for 3 percent over the bank's maximum term deposit rate, with a minimum coupon rate of 12 percent per annum; the coupon rate will be adjusted at regular intervals of six months on January 1 and July 1 throughout the tenure of the instrument.


Foreign Currency Convertible Bond (FCCB) An unsecured debt instrument denominated in a foreign-currency and issued by an Indian company which is convertible into shares, or in some cases into GDRs, at a predetermined rate. That is, the CONVERSION PRICE and the exchange rate are fixed. The BOND which bears a certain coupon enables the issuing company to economize on interest cost by tapping foreign markets and also to postpone a DILUTION in the EARNINGS PER SHARE. The advantage to the investor is the option of retaining the security as a bond till REDEMPTION, if the stock does not rise to the desired level. Moreover, the interest rate on the security is higher as compared to bonds of foreign companies. Subject to the rules prevailing, put and call OPTIONS may be attached to the instrument. The put enables investors to sell their bonds back to the issuer. The call allows the issuer to undertake REFINANCING or to force conversion. Incidentally, one dimension of FCCBs is that they add to India's external debt. Moreover, until conversion, the interest is paid in foreign currency. If the option to convert is not exercised, redemption too will entail an outflow of foreign currency. Therefore, the exchange risk, i.e., the depreciation cost, must be taken into consideration. In some respects, an 'Alpine Convertible' bond (issued to Swiss investors) scores over others; the issue costs are lower and the placement process is shorter.


Forfeiting This refers to the sale of export receivables. It amounts to DISCOUNTING receivables by a forfeiting company, but without recourse to the exporter. Therefore, it serves to convert as sale of goods on credit into a cash sale. Under this arrangement, the exporter receives the proceeds on surrendering to the forfeiter, the endorsed debt instrument duly accepted by the importer and co-accepted by his bank. Unless otherwise specified, the forfeiter bears the risk of default in payment by the importer. So, the forfeiter's fee depends on the country of the importer apart from the due date of payment. For instance, the fee for forfeiting bills accepted by an importer in Uganda could be higher than for an importer in U.K. in India, the EXIM BANK introduced forfeiting in 1992. Authorized Dealers in foreign exchange may also enter this business.

Forfeiture It means the deprivation of shares held by an investor, usually as a consequence of default in paying money, called upon allotment, to the company. As a result of a forfeiture, the investor ceases to be a shareholder insofar as the forfeited shares are concerned; however, he remains liable for the sum due.
Formula Plans These are mechanistic methods of timing decisions relating to the buying and selling of securities. There are different formula plans that include the Constant Dollar Plan and the Constant and Variable Ratio Plans. These methods are for the patient, conservative investor who seeks protection from large losses and is not confident of timing his decisions correctly.


Forward Contract A transaction which binds a seller to deliver at a future date and the buyer to correspondingly accept a certain quantity of a specified commodity at the price agreed upon, which is known as the 'Forward Rate'. A forward contract is distinct from a futures contract because the terms of the former can be tailored to one's needs whereas, the latter is standardized in terms of quantity, quality and delivery month for different commodities. In other words, forward contracts are customized contracts that enable the parties to choose delivery dates and trading units to suit their requirements. (See also COMMODITY FUTURES.)

Forward Discount The differential by which a currency is less expensive in the forward market as compared to the SPOT MARKET.
Forward Premium The amount by which a currency's forward rate exceeds the spot market rate.


Futures Market A market in which contracts for future delivery of certain commodities or securities are traded.

Goodwill The value of intangible facets of a business such as its name, reputation and location, which is reflected in the excess of its acquisition price over the fair value of its tangible assets.

Gross Domestic Product (DGP) This is a comprehensive measure of the economic activity that takes place in a country during a certain period. It is the total value of final goods and services produced in an economy in a year. The computation is on the basis of value added – the contribution of a producing enterprise is the difference between the value of its finished product and the cost of materials used.

Hence, national output is the total value added by all producing enterprises. More specifically, gross domestic product is expressed as

C + I + G + (X – M)

Where
C stands for consumption, which is the expenditure by consumers on consumption goods and services.
I is 'Gross private Domestic Investment' representing the acquisition of new capital goods (e.g., plant and machinery) and inventory additions by business enterprises, as well as construction of factories, houses, etc.
G denotes government expenditure on goods and services.
(X-M) represents the difference between exports (S) and imports (M) of goods and services.

Havala Transaction An Indian term which refers to a mode of transfering of funds out of India or into the country, bypassing official and legal channels. As an example, an individual may transfer his ill-gotten cash to a discreet bank in a foreign country. Using the havala route, he gives the rupees to an intermediary in India, who then arranges a reciprocal deposit of an equivalent amount to his account in the chosen bank. At a later date, the funds could be brought into India through another havala transaction. Since such deals circumvent official channels, there is a loss to the nation in terms of the net inflow of foreign exchange.

Hedging The action of combining two or more transactions so as to achieve a risk-reducing position. The objective, generally, is to protect a profit or minimize a loss that may result on a transaction.

For instance, a SHORT SALE could be employed to lock in a price gain on a LONG TRANSACTION. As demonstrated in Appendix II, hedging is useful with futures contracts too. A disadvantage with hedging, however, is that it results in less than the maximum profit that could have accrued.

Hire-Purchase Arrangement A transaction by which an ASSET is acquired on payment of regular installments comprising the PRINCIPAL and interest spread over a specified period. Although the asset gets transferred on payment of the last installment, the hirer can avail of DEPRECIATION and deduction of interest cost for computing taxable income.
Hundi An Indian term for a negotiable instrument that is similar to a BILL OF EXCHANGE.

Hypothecation This refers to the pledging of assets as security for funds borrowed. Bank lending for working capital involves a hypothecation of INVENTORIES and book debts. Under this arrangement, the CURRENT ASSETS remain with the borrower, but in case of default, the bank may seek recovery of the loan by instituting a lawsuit to seize the hypothecated assets, which can later be sold.

Dividend The payment made by a company to its shareholders. Legal and financial considerations have a bearing on the level of dividend to be paid. For instance, dividends may be paid out of profits alone; so also, a growing company needs funds to finance its expansion and hence may pay only a modest dividend, in order to conserve resources. 

Dow Theory A theory to ascertain the emergence of a primary trend (a trend which indicates either a bullish or bearish phase) in the stock market. It seeks confirmation of whether a long-term market advance or decline is under way, by examining the movement of the Dow Jones Industrial Average in conjunction with the Dow Jones Transportation Average. These averages are summary measures of stock prices in the U.S.

Dumping The sale of goods in a foreign market at a price that is below the price realized in the home country, after allowing for all costs of transfer including transportation charges and duties. The motive may be to enhance revenues, offload surplus stocks or a predatory intent of killing foreign competition. Earnings Per Share (EPS) The net profits of a company expressed on a per (EQUITY) SHARE basis. It is arrived at by dividing the figure of profits after taxes and DIVIDENDS paid on PREFERENCE SHARES, if any, by the number of equity shares outstanding. Therefore, it does not reveal the potential impact of dilution in earnings on account of securities such as convertibles or warrants that may be outstanding. Moreover, an improvement in EPS does not necessarily indicate a more productive use of the total amount of funds available with a firm.

Economic Value Added (EVA) A tool for evaluating and selecting stocks for investment, and also used as a measure of managerial performance. An American consultancy firm, Stern Stewart is credited with the development of this tool in the late eighties. It is calculated by subtracting the total cost of capital from the after-tax operating profits of a company.

EVA = After-tax Operating Profits – Total cost of capital

Efficient Portfolio A diversified selection of stocks resulting in a least risk PORTFOLIO for a given rate of return. At that level of RISK, no other portfolio provides superior returns. Combining shares from different unrelated industries helps to neutralize the UNSYSTEMATIC RISK inherent in each security.

Bank Rate The rate of interest charged by the Reserve Bank of India (RBI) on financial accommodation extended to banks and FINANCIAL INSTITUTIONS. The support is provided in the form of a bills rediscounting facility and advances or REFINANCE against specified ASSETS (e.g. TREASURY BILLS and DATED SECURITIES) or PROMISSORY NOTES.


Bear A person who expects share prices in general to decline and who is likely to indulge in SHORT SALES.


Bond A long-term debt instrument on which the issuer pays interest periodically, known as 'Coupon'. Bonds are secured by COLLATERAL in the form of immovable property. While generally, bonds have a definite MATURITY, 'Perpetual Bonds' are securities without any maturity. In the U.S., the term DEBENTURES refers to long-term debt instruments which are not secured by specific collateral, so as to distinguish them from bonds


Bonus Shares The issue of shares to the shareholders of a company, by capitalizing a part of the company's reserves. The decision to issue bonus shares, or stock DIVIDEND as in the U.S., may be in response to the need to signal an affirmation to the expectations of shareholders that the prospects of the company are bright; or it may be with the motive of bringing down the share price in absolute terms, in order to ensure continuing investor interest. Following a bonus issue, though the number of total shares increases, the proportional ownership of shareholders does not change. The magnitude of a bonus issue is determined by taking into account certain rules, laid down for the purpose. For example, the issue can be made out of free reserves created by genuine profits or by share PREMIUM collected in cash only. Also, the residual reserves, after the proposed capitalization, must be at least 40 percent of the increased PAID-UP CAPITAL. These and other guidelines must be satisfied by a company that is considering a bonus issue



Book Value It is the amount of NET ASSETS that would be available per EQUITY SHARE, after a company pays off all LIABILITES including PREFERENCE SHARES from the sale proceeds of all its ASSETS liquidated at BALANCE SHEET values.




Break-even Point The point where the revenues from a business operation equal the total costs (FIXED COSTS = VARIABLE COSTS). Thus, a profit accrues when revenues exceed the break-even point. The break-even volume is computed by dividing the fixed costs (FC) by the difference between the selling price per unit (SP) and variable cost per unit (VC). For instance, if FC is Rs.4,000, VC is Rs.60 and SP is Rs.85, the break-even volume is 4,000/(85-60) = 160 units of output.



Budget A financial plan that projects receipts and payments of an entity covering a specific period of time, usually one year. Its primary purpose is to achieve financial control. Budgets could be distinguished on the basis of time span, function and flexibility. For instance, budgets may be short-term or long-term; similarly, there are Sales Budgets, Cash Budgets, Capital Expenditure Budgets and other to cover different functions.

Bull A person who expects share prices in general to move up and who is likely to take a long position in the stock market.



Capital Adequacy Ratio A requirement imposed on banks to have a certain amount of capital in relation to their ASSETS, i.e., loans and investments as a cushion against probable losses in investments and loans. In simple terms, this means that for every Rs.100 of risk-weighted assets, a bank must have Rs. X in the form of capital. Capital is classified into Tier I or Tier II. Tier I comprises share capital and disclosed reserves, whereas Tier II includes revaluation reserves, hybrid capital and subordinated debt. Further, Tier II capital should not exceed Tier I capital. The risk weightage depends upon the type of assets. For example, it is zero on government guaranteed assets, 20 percent on short-term bank claims on 100 percent on private sector loans. (Risk weights on GOVERNMENT SECURITIES are being introduced.) The capital adequacy ratio is percentage of total capital funds to the total risk-weighted asset



Capital Reserves The reserves created in certain ways, that include the sale of FIXED ASSETS at a profit. These amounts are regarded as not available for distribution as DIVIDENDS.

Cash Reserve Ratio (CRR) A legal obligation on all SCHEDULED COMMERCIAL banks excluding REGIONAL RURAL BANKS to maintain certain reserves in the form of cash with the Reserve Bank of India (RBI). The reserves, to be maintained over a fortnight, are computed as a percentage of a bank's net demand and time LIABILITIES. Banks earn interest on eligible cash balances thus maintained and it contributes to their profitability. However, such interest payment tends to attenuate monetary control, and hence these outflows need to be moderated if the situation so demands. An alternative that has been suggested is to fix a lower level of reserves and pay a modest interest. 


Commercial Paper (CP) A short-term, unsecured PROMISSORY NOTE issued by BLUE CHIP companies. Like other MONEY MARKET instruments, it is issued at a DISCOUNT on the FACE VALUE and is freely marketable. Commercial Paper may be issued to any person including individuals, banks and companies. The Reserve Bank of India (RBI) has laid down certain conditions regarding issue of CPs. The issuing company must have a certain minimum tangible NET WORTH, working capital limit, asset classification, etc. and the paper must have a CREDIT RATING of P2, A2 or PR-2. Moreover, the rating must not be over two months old at the time of issue. From November 1996, the extent of CP that can be issued by all eligible corporates has been raised to 100 percent of the working capital credit limit. As for restoration of the limit consequent on redemption of CP, banks have been given freedom to decide on the manner of doing so.


Commodity Futures A standardized contract guaranteeing delivery of a certain quantity of a commodity (such as wheat, soybeans, sugar or copper) on a specified future date, at a price agreed to, at the time of the transaction. These contracts are standardized in terms of quantity, quality and delivery months for different commodities. Contracts on certain commodities such as pepper and coffee are already traded in India. Moreover, the Kabra Committee in 1994 recommended that futures trading be permitted in several other commodities including rice, cotton, Soya bean and castor oil. Further, in an interesting development, a committee appointed by the Reserve Bank of India under the chairmanship of R.V. Gupta has recommended that Indian corporates be allowed to hedge in offshore futures and OPTIONS markets in a phased manner. The committee submitted its report in November 1997.


Cost of Capital The weighted average cost for long-term funds raised by a company from different sources such as term loans, DEBENTURES/BONDS, PREFERENCE SHARES, EQUITY SHARES and retained earnings.

Cost of Goods Sold Alternatively called the Cost of Sales, it is the sum of total input costs associated with a certain quantity of goods sold. The total input costs include materials used, direct and indirect labour, utilities, and other manufacturing expenses including DEPRECIATION.

Coupon Rate It is the rate of annual interest on the PAR VALUE of DEBENTURES or BONDS that an issuer promises to pay. In India, till a few years ago, coupon rates were subject to a ceiling stipulated by the Controller of Capital Issues. With the removal of the ceiling, issuers have fixed their coupon rates by taking into consideration, market perceptions and expectations. The rate may be fixed or it may be floating in relation to some benchmark.

Credit Rating The exercise of assessing the credit record, integrity and capability of a prospective borrower to meet debt obligations. Credit rating relates to companies, individuals and even countries. In the case of a company's debt instrument, such formal evaluation with the aid of quantitative and qualitative criteria, culminates in the assignment of a letter rating to the security. The instrument could be a DEBENTURE, FIXED DEPOSIT OR COMMERCIAL PAPER. The rating represents in rating agency's opinion at that time on the relative safety of timely payment of interest and principal associated with the particular debt obligation. This opinion rests on the agency's assessment of the willingness and capability of the issuer to meet the debt obligations. The methodology is to examine key factors like the business, the management, regulatory environment, competition and fundamental aspects including the financial position. A high credit rating can help in reducing the interest cost and also facilitate placement of the debt security. The rating agencies in India are Credit Rating and Information Services of India Limited (CRISIL), ICRA, and Credit Analysis and Research (CARE)


Cross Currency Option An instrument that confers a contractual right on the purchaser of the OPTION to buy (call) or sell (put) a currency against another currency, e.g., Yen for U.S. dollar. For this privilege, the purchaser pays a cost termed PREMIUM. Incidentally, the terminology applicable to cross currency options is similar to the one for stock options. For instance, the STRIKE PRICE is the contracted exchange rate at which the option buyer buys or sells a currency. The advantages with a cross currency option, (introduced in India in January 1994) as compared to forward and futures deals are that the option buyer is under no obligation to exercise the right; moreover, the maximum possible loss, it at all, becomes known to the option buyer at the outset. Thus, when the direction of a currency's movement is uncertain, a cross currency option may be preferable to a FORWARD CONTRACT.


Current Assets The assets which are expected to be converted into cash or consumed during the 'Operating Cycle' of a business. The operating cycle is the time taken for the sequence of events from the purchase of raw materials to the collection of cash from customers for goods sold. Hence, it is also known as the 'Cash Conversion Cycle'. However, if raw materials are bought on credit, then the cash conversion cycle is shorter than the operating cycle by the period of credit available. Examples of current assets are cash, short-term investments particularly MONEY MARKET securities, raw materials, work-in-process, finished goods, and ACCOUNTS RECEIVABLE. 

Current Liabilities The claims against a company that will become due within a year. These are mainly LIABILITIES on account of purchase of materials or services rendered to the firm. Examples include accounts and PROMISSORY NOTES payable, as well as taxes and loan repayments falling due within the year. Current Ratio This ratio is a measure of a company's ability to pay its short-term debts as they become due. It is computed from a BALANCE SHEET by dividing CURRENT ASSETS by CURRENT LIABILITIES. In India, the general norms for this liquidity ratio is 1.33 Debenture A debt security issued by companies, having a certain MATURITY and bearing a stated COUPON RATE. Debentures may be unsecured or secured by ASSETS such as land and building of the issuing company. Debenture holders have a prior claim on the earnings (coupon) and ASSETS in the event of liquidation, as compared to PREFERENCE and equity shareholders. 

Debt Service Coverage Ratio (DSCR) A ratio used to assess the financial ability of a borrower to meet debt obligations. While appraising loand requests, lending institutions ascertain the debt servicing capacity from financial projections submitted, by computing the ratio of cash accruals plus interest payments (on term loans) to the sum of interest and loan repayments :

DSCR =	Profits after taxes – DEPRECIATION + Interest charges
	Interest charges + Loan repayments

Deflation A phenomenon of falling prices in an economy, which may be due to a contraction in MONEY SUPPLY.


Depreciation An accounting process by which the cost of a FIXED ASSET, such as a building or machinery, is allocated as a periodic expense, spread over the depreciable life of the ASSET. The term also means the amount of expense determined by such a process. Sometimes, it is called AMORTIZATION when the ASSET is intangible or 'depletion' when the asset is a natural resource, such as minerals. There are different methods of depreciation such as the Straight Line Method and the Written Down Value (WDV) method


Depression An economic condition that is characterized by a severe contraction in economic activity, which is manifested. In numerous business shut-downs, widespread unemployment, and declining investment in plant and equipment on account of falling sales.
Derivative A financial contract that derives its value from another ASSET or an index of asset values. These underlying assets maybe foreign exchange, BONDS, equities or commodities. For example, FORWARD CONTRACTS relate to foreign exchange; futures to commodities, debt instruments, currencies or stock indices; and OPTIONS to equities. Derivatives are traded at organized exchanges and in the over-the-counter (OTC) market. 


Devaluation The lowering of a country's official exchange rate in relation to a foreign currency (or to gold), so that exports compete more favorably in the overseas markets. Devaluation is the opposite of REVALUATION.