finance is the science of funds management

8/7/2019 Finance is the science of funds management

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Plain Vanilla Swap

What Does it Mean? The most basic type of forward claim that is traded in the over-the-counter market between two privateparties, usually firms or financial institutions. There are several types of plain vanilla swaps, such as theplain vanilla interest rate swap, the plain vanilla commodity swap and the plain vanilla foreign currencyswap.

Finance is the science of fundsmanagement.[1] The general areas of finance arebusiness finance , personal finance , and public finance .[2] Finance includessaving money and oftenincludes lending money. The field of finance deals with the concepts of time, money, risk andhow they are interrelated. It also deals with how money is spent and budgeted.

One facet of finance is through individuals and business organizations, whichdepositmoney in a bank . The bank then lends the money out to other individuals or corporations for consumptionor investmentand chargesintereston the loans.

Loans have become increasingly packaged for resale, meaning that aninvestor buys the loan(debt) from a bank or directly from a corporation. Bonds are debt instruments sold to investorsfor organizations such as companies, governments or charities.[3] The investor can then hold thedebt and collect the interest or sell the debt on asecondary market. Banks are the mainfacilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of

debt. Financialassets, known as investments, are financially managedwith careful attention tofinancial risk managementto controlfinancial risk . Financial instrumentsallow many forms of securitizedassets to betraded on securities exchangessuch asstock exchanges, includingdebt such as bondsas well asequity in publicly traded corporations.[dubious discuss ]

Central banks, such as theFederal Reserve Systembanks in theUnited Statesand Bank of Englandin the United Kingdom, are strong players in public finance, acting aslenders of lastresort as well as strong influences on monetary and credit conditions in the economy.[4]

Ov er v iew of techniques and sectors of the financial industry

Main art icle: Fin ancial se rvices

An entity whose income exceeds its expenditure can lend or invest the excess income. On theother hand, an entity whose income is less than its expenditure can raise capital by borrowing or


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selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower , a financial intermediarysuch as a bank , or buy notes or bonds in the bond market. Thelender receives interest, the borrower pays a higher interest than the lender receives, and thefinancial intermediary earns the difference for arranging the loan.

A bank aggregates the activities of many borrowers and lenders.A bank accepts deposits fromlenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity.

Finance is used by individuals ( personal finance), by governments ( public finance), by businesses (corporate finance) and by a wide variety of other organizations, including schoolsand non-profit organizations. In general, the goals of each of the above activities are achievedthrough the use of appropriate financial instruments and methodologies, with consideration totheir institutional setting.

Finance is one of the most important aspects of business managementand includes decisions

related to the use and acquisition of funds for the enterprise.In corporate finance, a company'scapital structureis the total mix of financing methods it uses toraise funds. One method isdeb t financing , which includes bank loans and bond sales.Another method isequi ty financing - the sale of stock by a company to investors. Possession of stock gives the investor ownership in the company in proportion to the number of shares the investor owns. In return for the stock , the company receives cash, which it may use to expand its businessor to reduce its debt.[5] Investors, in both bonds and stock , may be ins t it ut ional in vest or s -financial institutions such as investment banks and pension funds- or private individuals, called

pr ivat e in vest or s or r eta il in vest or s

P ersonal finance Main art icle: Pe r son al finance

Questions in personal finance revolve around

y How much money will be needed by an individual (or by a family), and when?y How can people protect themselves against unforeseen personal events, as well as those

in the external economy?y How can family assets best be transferred across generations (bequests and inheritance)?y How does tax policy (tax subsidies or penalties) affect personal financial decisions?y How does credit affect an individual's financial standing?y How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financingdurable goodssuch asreal estateand cars, buying insurance, e.g. health and property insurance, investing and savingfor retirement.

Personal financial decisions may also involve paying for a loan, or debt obligations.


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C orporate finance

Main art icle: Cor porat e finance

Managerialor corporate financeis the task of providing the funds for a corporation's activities.For small business, this is referred to asSME finance(Small andMedium Enterprises). Itgenerally involves balancing risk and profitability, while attempting to maximize an entity'swealth and the value of its stock.

Long term funds are provided byownership equityand long-termcredit, often in the form of bonds. The balance between these elements forms the company'scapital structure. Short-termfunding or working capitalis mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. Aninvestment is an acquisition of anasset in the hope that it will maintain or increase its value. Ininvestment management in choosing a portfolio one has to decidewh at , h ow much and wh en to invest. To do this, a company must:

y Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;

y Identify the appropriate strategy: activev. passive hedging strategyy Measure the portfolio performance

Financial management is duplicate with the financial function of theAccounting profession.However , financial accountingis more concerned with the reporting of historical financialinformation, while the financial decision is directed toward the future of the firm.

[edit ] C apital

Main art icle: Fin ancial ca pi ta l

Capital, in the financial sense, is the money that gives the business the power to buy goods to beused in the production of other goods or the offering of a service. (The capital has two typesresources Equity and Debt)

[edit ] The desirability of budgeting

Budget is a document which documents the plan of the business. This may include the objectiveof business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for theinvestment.Also budget may be long term or short term. Long term budgets have a time horizonof 510 years giving a vision to the company; short term is an annual budget which is drawn tocontrol and operate in that particular year.

[edit ] C apital budget


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This concerns proposed fixed asset requirements and how these expenditures will be financed.Capital budgets are often adjusted annually and should be part of a longer-term CapitalImprovements Plan.

[edit ] C ash budget

Working capital requirements of a business should be monitored at all times to ensure that thereare sufficient funds available to meet short-term expenses.

The cash budget is basically a detailed plan that shows all expected sources and uses of cash. Thecash budget has the following six main sections:

1. Beginning C ash Balance - contains the last period's closing cash balance.2. C ash collections - includes all expected cash receipts (all sources of cash for the period

considered, mainly sales)3. C ash disbursements - lists all planned cash outflows for the period, excluding interest

payments on short-term loans, which appear in the financing section.All expenses that donot affect cash flow are excluded from this list (e.g. depreciation, amortization, etc.)4. C ash excess or deficiency - a function of the cash needs and cash available. Cash needs

are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists.

5. Financing - discloses the planned borrowings and repayments, including interest.6. E nding C ash balance - simply reveals the planned ending cash balance.

[edit ] Management of current assets

[edit ] C redit policy

Credit gives the consumer the opportunity to buy, purchase or acquire goods and services, and pay for them at a later date. This has its advantages and disadvantages as follows:

[edit ] Ad v antages of credit trade

y Usually results in more customers than cash trade.y Can charge more for goods to cover the risk of bad debt.y Gain goodwill and loyalty of customers.y People can buy goods and pay for them at a later date.y Farmers can buy seeds and implements, and pay for them only after the harvest.y Stimulates agricultural and industrial production and commerce.y Can be used as a promotional tool.y Increase the sales.y Modest rates to be filled.y can be a marketing tool

[edit ] Disad v antages of credit trade

y Risk of bad debt.


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y H igh administration expenses.y People can buy more than they can afford.y More working capital needed.y Risk of Bankruptcy.

[edit ] Forms of credit

y Suppliers credit:y Credit on ordinary open accounty Installment salesy Bills of exchangey Credit cardsy Contractor's credity Factoring of debtorsy Cash credity Cpf creditsy Exchange of product

[edit ] Factors which influence credit conditions

y Nature of the business's activitiesy Financial positiony Product durabilityy Length of production processy Competition and competitors' credit conditionsy Country's economic positiony Conditions at financial institutionsy Discount for early paymenty Debtor's type of business and financial position

[edit ] C redit collection

[edit ] Ov erdue accounts

y Attach a notice of overdue account to statement.y Send a letter asking for settlement of debt.y Send a second or third letter if first is ineffectual.y Threaten legal actions.

[edit ] E ffecti v e credit control

y Increases salesy Reduces bad debtsy Increases profitsy Builds customer loyaltyy Builds confidence of financial industryy Increase company capitalisationy Increase the customer relationship


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[edit ] Sources of information on creditworthiness

y Business referencesy Bank referencesy Credit agenciesy Chambers of commercey Employersy Credit application forms

[edit ] Duties of the credit department

y Legal actiony Taking necessary steps to ensure settlement of accounty Knowing the credit policy and procedures for credit controly Setting credit limitsy Ensuring that statements of account are sent outy Ensuring that thorough checks are carried out on credit customersy Keeping records of all amounts owingy Ensuring that debts are settled promptlyy Timely reporting to the upper level of management for better management.

Stock

Purpose of stock control

y Ensures that enough stock is on hand to satisfy demand.y Protects and monitors theft.y Safeguards against having to stockpile.y Allows for control over selling and cost price.

Stockpiling Main art icle: Cor ner ing t h e mark et

This refers to the purchase of stock at the right time, at the right price and in the right quantities.

There are several advantages to the stockpiling, the following are some of the examples:

y Losses due to price fluctuations and stock loss kept to a minimumy Ensures that goods reach customers timeously; better servicey Saves space and storage costy Investment of working capital kept to minimumy No loss in production due to delays

There are several disadvantages to the stockpiling, the following are some of the examples:

y Obsolescencey Danger of fire and theft


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y Initial working capital investment is very largey Losses due to price fluctuation

Rate of stock turnover

This refers to the number of times per year that the average level of stock is sold. It may beworked out by dividing the cost price of goods sold by the cost price of the average stock level.

Determining optimum stock levels

y Maximum stock le v el refers to the maximum stock level that may be maintained toensure cost effectiveness.

y Minimum stock le v el refers to the point below which the stock level may not go.y Standard order refers to the amount of stock generally ordered.y O rder le v el refers to the stock level which calls for an order to be made.

[edit ] C ash[edit ] Reasons for keeping cash

y Cash is usually referred to as the "king" in finance, as it is the most liquid asset.y The transaction moti v e refers to the money kept available to pay expenses.y The precautionary moti v e refers to the money kept aside for unforeseen expenses.y The speculati v e moti v e refers to the money kept aside to take advantage of suddenly

arising opportunities.

[edit ] Ad v antages of sufficient cash

y Current liabilities may be catered for meeting the current obligations of the companyy Cash discounts are given for cash payments.y Production is kept movingy Surplus cash may be invested on a short-term basis.y The business is able to pay its accounts in a timely manner , allowing for easily obtained

credit.y Liquidity y Quick upfront pay.

[edit ] Management of fixed assets

[edit ] Depreciation

Depreciation is the allocation of the cost of an asset over its useful life as determined at the timeof purchase. It is calculated yearly to enforce the matching principle

[edit ] Insurance


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Main art icle: Insu ra nce

Insurance is the undertaking of one party to indemnify another , in exchange for a premium, against a certain eventuality.

Uninsured risksy Bad debty Changes in fashiony Time lapses between ordering and deliveryy New machinery or technologyy Different prices at different places

Requirements of an insurance contract

y Insurable interesto

The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is destroyed or lost.o The item must belong to the insured.o One person may take out insurance on the life of another if the second party owes

the first money.o Must be some person or item which can, legally, be insured.o The insured must have a legal claim to that which he is insuring.

y Good faitho U berr imae fidei refers to absolute honesty and must characterise the dealings of

both the insurer and the insured.

[edit ] Shared Ser v icesThere is currently a move towards converging and consolidating Finance provisions intosharedserviceswithin an organization. Rather than an organization having a number of separateFinance departments performing the same tasks from different locations a more centralizedversion can be created.

Finance of public entities

Main art icle: Public fin ance

Public finance describes finance as related to sovereign states and sub-national entities(states/provinces, counties, municipalities, etc.) and related public entities (e.g. school districts)or agencies. It is concerned with:

y Identification of required expenditure of a public sector entityy Source(s) of that entity's revenuey The budgeting processy Debt issuance (municipal bonds) for public works projects


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Financial economics

Main art icle: Fin ancial economics

Financial economics is the branch of economicsstudying the interrelation of financialvariables, such as prices, interest ratesand shares, as opposed to those concerning the real economy.Financial economics concentrates on influences of realeconomic variables on financial ones, incontrast to pure finance.

It studies:

y Valuation- Determination of the fair value of an asseto How risky is the asset? (identification of the asset-appropriate discount rate)o What cash flowswill it produce? (discounting of relevant cash flows)o How does the market price compare to similar assets? (relative valuation)o Are the cash flows dependent on some other asset or event? (derivatives,

contingent claim valuation)

y Financial markets and instruments o Commodities -topics o Stocks -topics o Bonds -topics o Money market instruments-topics o Derivatives -topics

y Financial institutionsand regulation

Financial Econometricsis the branch of Financial Economics that uses econometric techniquesto parameterise the relationships.

Financial mathematics

Main art icle: Fin ancial mat h emat ics

Financial mathematics is a main branch of applied mathematics concerned with the financialmarkets. Financial mathematics is the study of financial data with the tools of mathematics, mainlystatistics. Such data can be movements of securities stocksand bondsetc.and their

relations.Another large subfield isinsurance mathematics. This is also known as quantitativefinance, practitioners asQuantitative analysts.

E xperimental finance

Main art icle: Expe r imen ta l finance


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Experimental financeaims to establish different market settings and environments to observeexperimentally and provide a lens through which science can analyze agents' behavior and theresulting characteristics of trading flows, information diffusion and aggregation, price settingmechanisms, and returns processes. Researchers in experimental finance can study to what extentexisting financial economics theory makes valid predictions, and attempt to discover new

principles on which such theory can be extended. Research may proceed by conducting tradingsimulations or by establishing and studying the behaviour of people in artificial competitivemarket-like settings.

Beha v ioral finance

Main art icle: Beh aviora l finance

Behavioral Financestudies how the psychology of investors or managers affects financialdecisions and markets. Behavioral finance has grown over the last few decades to become centralto finance.

Behavioral finance includes such topics as:

1. Empirical studies that demonstrate significant deviations from classical theories.2. Models of how psychology affects trading and prices3. Forecasting based on these methods.4. Studies of experimental asset markets and use of models to forecast experiments.

A strand of behavioral finance has been dubbedQuantitative Behavioral Finance, which usesmathematical and statistical methodology to understand behavioral biases in conjunction withvaluation. Some of this endeavor has been led byGunduz Caginalp(Professor of Mathematicsand Editor of Journal of Behavioral Financeduring 2001-2004) and collaborators includingVernon Smith(2002 Nobel Laureate in Economics), David Porter , Don Balenovich, V ladimiraIlieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm and others have demonstratedsignificant behavioral effects in stocks and exchange traded funds.Among other topics, quantitative behavioral finance studies behavioral effects together with the non-classicalassumption of the finiteness of assets.


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P ri v ate equity , in finance, is an asset classconsisting of equity securitiesin operating companiesthat are not publicly tradedon a stock exchange. [1]

Among the most common investment strategies in private equity are:leveraged buyouts, venturecapital, growth capital, distressed investmentsand mezzanine capital. In a typical leveraged

buyout transaction, the private equity firm buys majority control of an existing or mature firm.This is distinct from a venture capital or growth capital investment, in which the private equityfirm typically invests in young or emerging companies, and rarely obtain majority control.

[edit ] Le v eraged buyout

Main art icle: Levera ged bu yout

Diagram of the basic structure of a generic leveraged buyout transaction

Le v eraged buyout , LBO or Buyout refers to a strategy of making equity investments as part of atransaction in which a company, business unit or business assets is acquired from the currentshareholders typically with the use of financial leverage. The companies involved in thesetransactions are typically mature and generate operating cash flows.[2]

Leveraged buyouts involve afinancial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition. To do this, the financial sponsor will raiseacquisition debt which ultimately looks to the cash flows of the acquisition target to makeinterest and principal payments.[3] Acquisition debt in an LBO is oftennon-recourseto thefinancial sponsor and has no claim on other investment managed by the financial sponsor.


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Therefore, an LBO transaction's financial structure is particularly attractive to a fund's limited partners, allowing them the benefits of leverage but greatly limiting the degree of recourse of thatleverage. This kind of financing structure leverage benefits an LBO's financial sponsor in twoways: (1) the investor itself only needs to provide a fraction of the capital for the acquisition, and(2) the returns to the investor will be enhanced (as long as thereturn on assetsexceeds the cost of

the debt).[4]

As a percentage of the purchase price for a leverage buyout target, the amount of debt used tofinance a transaction varies according the financial condition and history of the acquisitiontarget, market conditions, the willingness of lendersto extend credit (both to the LBO'sfinancialsponsorsand the company to be acquired) as well as the interest costs and the ability of thecompany tocover those costs.Historically the debt portion of a LBO will range from 60%-90%of the purchase price, although during certain periods the debt ratio can be higher or lower thanthe historical averages.[5] Between 2000-2005 debt averaged between 59.4% and 67.9% of total purchase price for LBOs in the United States.[6]

[edit ] Venture capital Main art icle: Ven t ur e ca pi ta l

Venture capital [7] is a broad subcategory of private equity that refers to equity investmentsmade, typically in less mature companies, for the launch, early development, or expansion of a business.Venture investment is most often found in the application of new technology, newmarketing concepts and new products that have yet to be proven.[8][9]

Venture capital is often sub-divided by the stage of development of the company ranging fromearly stage capital used for the launch of start-up companiesto late stage and growth capital that

is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth.[10]

Entrepreneurs often develop products and ideas that require substantial capital during theformative stages of their companies' life cycles.Many entrepreneurs do not have sufficient fundsto finance projects themselves, and they must therefore seek outside financing.[11] The venturecapitalist's need to deliver high returns to compensate for the risk of these investments makesventure funding an expensive capital source for companies.Venture capital is most suitable for businesses with large up-front capital requirements which cannot be financed by cheaper alternatives such as debt.Although venture capital is often most closely associated with fast-growingtechnologyand biotechnologyfields, venture funding has been used for other more

traditional businesses.[8][12]

[edit ] Growth capital

Main art icle: Gr ow t h ca pi ta l


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Growth capital refers to equity investments, most often minority investments, in relativelymature companies that are looking for capital to expand or restructure operations, enter newmarkets or finance a major acquisition without a change of control of the business.[citat ion needed ]

Companies that seek growth capital will often do so in order to finance a transformational event

in their life cycle. These companies are likely to be more mature thanventure capitalfundedcompanies, able to generate revenue and operating profits but unable to generate sufficient cashto fund major expansions, acquisitions or other investments. The primary owner of the companymay not be willing to take the financial risk alone. By selling part of the company to privateequity, the owner can take out some value and share the risk of growth with partners.[13] Capitalcan also be used to effect a restructuring of a company's balance sheet, particularly to reduce theamount of leverage (or debt)the company has on its balance sheet.[14] A Private investment in public equity, or PIPEs, refer to a form of growth capitalinvestment made into a publicly tradedcompany. PIPE investments are typically made in the form of aconvertibleor preferredsecuritythat is unregistered for a certain period of time.[15][16] The Registered Direct, or RD, is another common financing vehicle used for growth capital. A registered direct is similar to a PIPE but is

instead sold as a registered security.[edit ] Distressed and Special Situations

Main art icle: Dis tr essed secu r it ies

Distressed or Special Situations is a broad category referring to investments in equity or debtsecurities of financially stressed companies.[17][18][19] The "distressed" category encompasses two broad sub-strategies including:

y "Distressed-to-Control" or "Loan-to-Own" strategies where the investor acquires debt

securities in the hopes of emerging from acorporate restructuringin control of thecompany's equity;[20] y "Special Situations" or "Turnaround" strategies where an investor will provide debt and

equity investments, often "rescue financing" to companies undergoing operational or financial challenges.[21]

In addition to these private equity strategies, hedge fundsemploy a variety of distressedinvestment strategies including the active trading of loans and bonds issued by distressedcompanies.

[edit ] Mezzanine capital

Main art icle: M ezzanine c a pi ta l

Mezzanine capital refers tosubordinated debtor preferred equitysecurities that often representthe most junior portion of a company'scapital structurethat is senior to the company'scommonequity. This form of financing is often used by private equity investors to reduce the amount of equity capital required to finance a leveraged buyout or major expansion.Mezzanine capital, which is often used by smaller companies that are unable to access thehigh yield market, allows


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such companies to borrow additional capital beyond the levels that traditional lenders are willingto provide through bank loans.[22] In compensation for the increased risk , mezzanine debt holdersrequire a higher return for their investment than secured or other more senior lenders.[23][24]

[edit ] Secondaries

Main art icle: P r ivat e equi ty second ar ies

Secondary in v estments refer to investments made in existing private equity assets. Thesetransactions can involve the sale of private equity fundinterests or portfolios of directinvestments in privately held companies through the purchase of these investments from existinginstitutional investors.[25] By its nature, the private equity asset class is illiquid, intended to be along-term investment for buy-and-hold investors. Secondary investments provide institutionalinvestors with the ability to improve vintage diversification, particularly for investors that arenew to the asset class. Secondaries also typically experience a different cash flow profile, diminishing the j-curveeffect of investing in new private equity funds.[26][27] Often investments

in secondaries are made through third party fund vehicle, structured similar to afund of funds although many large institutional investors have purchased private equity fund interests throughsecondary transactions.[28] Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds.

[edit ] O ther strategies

Other strategies that can be considered private equity or a close adjacent market include:

y Real E state : in the context of private equity this will typically refer to the riskier end of the investment spectrum including "value added" and opportunity funds where the

investments often more closely resemble leveraged buyouts than traditionalreal estate investments. Certain investors in private equity consider real estate to be a separate assetclass.

y Infrastructure : investments in various public works (e.g., bridges, tunnels, toll roads, airports, public transportation and other public works) that are made typically as part of a privatization initiative on the part of a government entity.[29][30][31]

y E nergy and P ower : investments in a wide variety of companies (rather than assets)engaged in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution (Energy) or companies engaged in the production or

transmission of electrical power (Power).y Merchant banking : negotiated private equity investment by financial institutions in the

unregistered securities of either privately or publicly held companies.[32]

[edit ] History and de v elopment

Main art icle: His t ory of pr ivat e equi ty and vent ur e ca pi ta l


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[edit ] E arly history and the de v elopment of v enture capital

Main art icles: His t ory of pr ivat e equi ty and vent ur e ca pi ta l and E ar l y h ist ory of pr ivat e equi ty

The seeds of the US private equity industry were planted in 1946 with the founding of two

venture capital firms:American Research and Development Corporation(ARDC) andJ.H .Whitney & Company.[33] BeforeWorld War II, venture capital investments (originally known as"development capital") were primarily the domain of wealthy individuals and families.ARDCwas founded byGeorges Doriot, the "father of venture capitalism"[34] and founder of I NSEAD, with capital raised from institutional investors, to encourage private sector investments in businesses run by soldiers who were returning from World War II.ARDC is credited with thefirst major venture capital success story when its 1957 investment of $70,000 inDigitalEquipment Corporation(DEC) would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 500 times on its investment and anannualized rate of returnof 101%).[35] It is commonly noted that the first venture-backed startupis Fairchild Semiconductor (which produced the first commercially practicable integrated

circuit), funded in 1959 by what would later becomeVenrock Associates.[36]

[edit ] O rigins of the le v eraged buyout

Main art icles: His t ory of pr ivat e equi ty and vent ur e ca pi ta l and E ar l y h ist ory of pr ivat e equi ty

The first leveraged buyout may have been the purchase byMcLean Industries, Inc. of Pan-Atlantic Steamship Companyin January 1955 andWaterman Steamship Corporationin May1955[37] Under the terms of that transaction, McLean borrowed $42 million and raised anadditional $7 million through an issue of preferred stock . When the deal closed, $20 million of Waterman cash and assets were used to retire $20 million of the loan debt.[38] Similar to the

approach employed in theMcLean transaction, the use of publicly tradedholding companies asinvestment vehicles to acquire portfolios of investments in corporate assets was a relatively newtrend in the 1960s popularized by the likes of Warren Buffett(BerkshireHathaway) and V ictor Posner (DWG Corporation) and later adopted by Nelson Peltz(Triarc), Saul Steinberg(RelianceInsurance) andGerry Schwartz(Onex Corporation). These investment vehicles would utilize anumber of the same tactics and target the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms. Infact it is Posner who is often credited with coining the term "leveraged buyout" or "LBO"[39]

The leveraged buyout boom of the 1980s was conceived by a number of corporate financiers, most notablyJerome Kohlberg, Jr. and later his protgHenry Kravis. Working for Bear Stearns

at the time, Kohlberg and Kravis along with Kravis' cousinGeorge Robertsbegan a series of what they described as "bootstrap" investments.Many of these companies lacked a viable or attractive exit for their founders as they were too small to be taken public and the founders werereluctant to sell out to competitors and so a sale to afinancial buyer could prove attractive. Their acquisition of Orkin Exterminating Companyin 1964 is among the first significantleveraged buyouttransactions.[40]. In the following years the threeBear Stearnsbankers would complete aseries of buyouts including SternMetals (1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) as well as Thompson Wire, Eagle


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Motors and Barrows through their investment in SternMetals.[41] By 1976, tensions had built up betweenBear Stearnsand Kohlberg, Kravis and Roberts leading to their departure and theformation of Kohlberg Kravis Robertsin that year.

[edit ] P ri v ate equity in the 1980s

Main art icles: His t ory of pr ivat e equi ty and vent ur e ca pi ta l and P r ivat e equi ty in t h e 1980s

In January 1982, former United States Secretary of the TreasuryWilliam Simon and a group of investors acquiredG ibson Greetings, a producer of greeting cards, for $80 million, of which only$1 million was rumored to have been contributed by the investors. By mid-1983, just sixteenmonths after the original deal, G ibson completed a $290 million IPO and Simon madeapproximately $66 million.[42] [43]

The success of theG ibsonGreetings investment attracted the attention of the wider media to thenascent boom in leveraged buyouts. Between 1979 and 1989, it was estimated that there were

over 2,000 leveraged buyouts valued in excess of $250 million[44]

During the 1980s, constituencies within acquired companies and the media ascribed the"corporate raid" label to many private equity investments, particularly those that featured ahostile takeover of the company, perceivedasset stripping, major layoffs or other significantcorporate restructuring activities.Among the most notable investors to be labeled corporateraiders in the 1980s includedCarl Icahn, V ictor Posner , Nelson Peltz, RobertM . Bass, T. BoonePickens, Harold Clark Simmons, Kirk Kerkorian, Sir JamesGoldsmith, Saul SteinbergandAsher Edelman. Carl Icahndeveloped a reputation as a ruthlesscorporate raider after his hostiletakeover of TWA in 1985. [45][46][47] Many of the corporate raiders were onetime clients of M ichaelM ilken, whose investment banking firm, Drexel Burnham Lamberthelped raise blind

pools of capital with which corporate raiders could make a legitimate attempt to take over acompany and providedhigh-yield debtfinancing of the buyouts.

One of the final major buyouts of the 1980s proved to be its most ambitious and marked both ahigh water mark and a sign of the beginning of the end of the boom that had begun nearly adecade earlier. In 1989, KKR closed in on a $31.1 billion takeover of RJR Nabisco. It was, atthat time and for over 17 years, the largest leverage buyout in history. The event was chronicledin the book (and later the movie), Bar bar ians at t h e G at e: T h e F all of RJR N abisco . KKR wouldeventually prevail in acquiring RJR Nabisco at $109 per share, marking a dramatic increase fromthe original announcement thatShearson LehmanHuttonwould take RJR Nabisco private at $75 per share.A fierce series of negotiations and horse-trading ensued which pittedKKR against

Shearson LehmanHutton and later Forstmann Little & Co. Many of the major banking players of the day, includingMorgan Stanley, Goldman Sachs, Salomon Brothers, and Merrill Lynchwereactively involved in advising and financing the parties.After Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per sharea price thatenabled it to proceed without the approval of RJR Nabisco's management. RJR's managementteam, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figurethey felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR


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Nabisco.[48] At $31.1 billion of transaction value, RJR Nabisco was by far the largest leveraged buyouts in history. In 2006 and 2007, a number of leveraged buyout transactions were completedthat for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price.However , adjusted for inflation, none of the leveraged buyouts of the 20062007 periodwould surpass RJR Nabisco. By the end of the 1980s the excesses of the buyout market were

beginning to show, with the bankruptcyof several large buyouts includingRobert Campeau's1988 buyout of Federated Department Stores, the 1986 buyout of theRevcodrug stores, Walter Industries, FEB Trucking and Eaton Leonard.Additionally, the RJR Nabisco deal was showingsigns of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billionof new equity from KKR.[49] In the end, KKR lost $700 million on RJR.[50]

Drexel Burnham Lambertwas the investment bank most responsible for the boom in privateequity during the 1980s due to its leadership in the issuance of high-yield debt.

Drexel reached an agreement with the government in which it pleadednolo con t ende r e (nocontest) to six felonies three counts of stock parking and three counts of stock manipulation.[51]

It also agreed to pay a fine of $650 million at the time, the largest fine ever levied under securities laws.M ilken left the firm after his own indictment inMarch 1989.[52][53] On February13, 1990 after being advised byUnited States Secretary of the Treasury Nicholas F. Brady, theU.S. Securities and Exchange Commission(SEC), the New York Stock Exchangeand theFederal Reserve, Drexel Burnham Lambertofficially filed for Chapter 11bankruptcy protection.[52]

[edit ] Age of the mega-buyout 2005-2007

Main art icles: His t ory of pr ivat e equi ty and vent ur e ca pi ta l and P r ivat e equi ty in t h e 21s t cen t ury

The combination of decreasing interest rates, loosening lending standards and regulatory changesfor publicly traded companies (specifically theSarbanes-OxleyAct) would set the stage for thelargest boom private equity had seen.Marked by the buyout of Dex Media in 2002, large multi- billion dollar U.S. buyouts could once again obtain significant high yield debt financing andlarger transactions could be completed. By 2004 and 2005, major buyouts were once again becoming common, including the acquisitions of Toys "R" Us[54], The Hertz Corporation [55][56], Metro-Goldwyn-Mayer [57] and SunGard[58] in 2005.

As 2005 ended and 2006 began, new "largest buyout" records were set and surpassed severaltimes with nine of the top ten buyouts at the end of 2007 having been announced in an 18-month

window from the beginning of 2006 through the middle of 2007. In 2006, private equity firms bought 654 U.S. companies for $375 billion, representing 18 times the level of transactionsclosed in 2003.[59] Additionally, U.S. based private equity firms raised $215.4 billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higher than the 2005 fundraising total[60] The following year , despite the onset of turmoil in the creditmarkets in the summer , saw yet another record year of fundraising with $302 billion of investor commitments to 415 funds[61] Among the mega-buyouts completed during the 2006 to 2007 boom were:Equity Office Properties, HCA[62], Alliance Boots[63] and TXU[64].


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In July 2007, turmoil that had been affecting themortgage markets, spilled over into theleveraged financeand high-yield debtmarkets.[65][66] The markets had been highly robust duringthe first six months of 2007, with highly issuer friendly developments includingPIK and PIK Toggle (interest is " P ayable I n K ind") andcovenant lightdebt widely available to finance largeleveraged buyouts. July andAugust saw a notable slowdown in issuance levels in the high yield

and leveraged loan markets with few issuers accessing the market. Uncertain market conditionsled to a significant widening of yield spreads, which coupled with the typical summer slowdownled many companies and investment banks to put their plans to issue debt on hold until theautumn.However , the expected rebound in the market after Labor Day2007 did not materializeand the lack of market confidence prevented deals from pricing. By the end of September , thefull extent of the credit situation became obvious as major lenders includingCitigroupand UBSAG announced major writedowns due to credit losses. The leveraged finance markets came to anear standstill.[67] As 2007 ended and 2008 began, it was clear that lending standards hadtightened and the era of "mega-buyouts" had come to an end. Nevertheless, private equitycontinues to be a large and active asset class and the private equity firms, with hundreds of billions of dollars of committed capital from investors are looking to deploy capital in new and

different transactions.

In v estments in pri v ate equity

Diagram of the structure of a generic private equity fund

Although the capital for private equity originally came from individual investors or corporations, in the 1970s, private equity became an asset class in which variousinstitutional investors allocated capital in the hopes of achieving risk adjusted returns that exceed those possible in the public equity markets. In the 1980s, insurers were major private equity investors. Later , public


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pension funds and university and other endowments became more significant sources of capital.[68] For most institutional investors, private equity investments are made as part of a broad assetallocation that includes traditional assets (e.g., public equityand bonds) and other alternativeassets (e.g., hedge funds, real estate, commodities).

Most institutional investors do not invest directly in privately held companies, lacking theexpertise and resources necessary to structure and monitor the investment. Instead, institutionalinvestorswill invest indirectly through a private equity fund. Certaininstitutional investorshavethe scale necessary to develop a diversified portfolio of private equity fundsthemselves, whileothers will invest through afund of fundsto allow a portfolio more diversified than one a singleinvestor could construct.

Returns on private equity investments are created through one or a combination of three factorsthat include: debt repayment or cash accumulation through cash flows from operations, operational improvements that increase earnings over the life of the investment andmultipleexpansion, selling the business for a higher multiple of earnings than was originally paid.A key

component of private equity as an asset class for institutional investors is that investments aretypically realized after some period of time, which will vary depending on the investmentstrategy. Private equity investments are typically realized through one of the following avenues:

y an Ini t ia l Public Offe r ing ( IPO ) - shares of the company are offered to the public, typically providing a partial immediate realization to the financial sponsor as well as a public market into which it can later sell additional shares;

y a mer ge r or acquisi t ion - the company is sold for either cash or shares in another company;

y a Reca pi ta lizat ion - cash is distributed to the shareholders (in this case the financialsponsor) and its private equity fundseither from cash flow generated by the company or

through raisingdebt or other securities to fund the distribution.

[edit ] Liquidity in the pri v ate equity market


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Diagram of a simple secondary market transfer of a limited partnership fund interest. The buyer exchanges a single cash payment to the seller for both the investments in the fund plus anyunfunded commitments to the fund. Main art icle: P r ivat e equi ty second ary mark et

The private equity secondary market(also often called private equity secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternativeinvestment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equityasset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For thevast majority of private equity investments, there is no listed public market; however , there is arobust and maturing secondary market available for sellers of private equity assets.

Increasingly, secondariesare considered a distinct asset class with a cash flow profile that is notcorrelated with other private equity investments.As a result, investors are allocating capital tosecondary investments to diversify their private equity programs. Driven by strong demand for

private equity exposure, a significant amount of capital has been committed tosecondaryinvestmentsfrom investors looking to increase and diversify their private equity exposure.

Investors seeking access to private equity have been restricted to investments with structuralimpediments such as long lock-up periods, lack of transparency, unlimited leverage, concentrated holdings of illiquid securities and high investment minimums.

Secondary transactions can be generally split into two basic categories:

y Sale of Limited P artnership Interests - The most common secondary transaction, thiscategory includes the sale of an investor's interest in a private equity fund or portfolio of

interests in various funds through the transfer of the investor's limited partnership interestin the fund(s). Nearly all types of private equity funds (e.g., including buyout, growthequity, venture capital, mezzanine, distressed and real estate) can be sold in the secondarymarket. The transfer of the limited partnership interest typically will allow the investor toreceive some liquidity for the funded investments as well as a release from any remainingunfunded obligations to the fund.

y Sale of Direct Interests Secondary Directs or Synthetic secondaries, this categoryrefers to the sale of portfolios of direct investments in operating companies, rather thanlimited partnership interests in investment funds. These portfolios historically haveoriginated from either corporate development programs or large financial institutions.


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Bank rate , also referred to as the discount rate, is the rate of interestwhich acentral bank

charges on the loans and advances that it extends tocommercial banksand other financialintermediaries. Changes in the bank rate are often used by central banks to control themoneysupply. Bank rate websites such asBanxQuote provide greater efficiency and transparency to themarket creating a centralized gateway for easy side-by-side review and comparison, as well as acentralized transaction platform that reduces the time and effort required by in-market consumerswho would otherwise need to regularly call and check numerous individual bank and mortgagewebsites for interest rate quotes and updates. .

[edit ] Difference between Bank Rate and Repo Rate

While repo rate is a short-term measure, i.e. applicable to short-term loans and used for

controlling the amount of money in the market, bank rate is a long-term measure and is governed by the long-term monetary policies of the governing bank concerned.

Bank rate, also referred to as the discount rate, is the rate of interest which a central bank chargeson the loans and advances that it extends to commercial banks and other financial intermediaries.Changes in the bank rate are often used by central banks to control theMoney supply

current bank rate at which RBI lends to Banks is 6%.

Repo rate: Whenever the banks have any shortage of funds they can borrow it from the central bank. Repo rate is the rate at which our banks borrow currency from the central bank.A

reduction in the repo rate will help banks to getMoney at a cheaper rate. When the repo rateincreases borrowing from the central bank becomes more expensive.

The Reverse repo rate is the rate at which the central bank borrows from the banks, while theRepo rate is the rate at which the banks borrow from the central bank.

A bank rate is the interest rate that is charged by a countrys central or federal bank on loansand advances to control money supply in the economy and the banking sector. This is typicallydone on a quarterly basis to control inflation and stabilize the countrys exchange rates.A fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a countryseconomy. For instance, the prices in stock markets tend to react to interest rate changes.A

change in bank rates affects customers as it influences prime interest rates for personal loans.Types of Bank Rates

Here are the different types of monetary instruments on which financial institutions offer thefollowing bank rates:

Savings account bank rate:Modest rates are charged on funds that are deposited in the savingsaccounts.However , investors have high flexibility in withdrawing the deposits.


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C ertificates of deposit (CD) bank rate: These offer comparatively high interest rates comparedto savings accounts. Bank rates on CDs are determined by the term period of a deposit and thecurrent economic situation. The longer the term of a CD, the higher will be the bank interest rate.

Money-market funds bank rate: The interest rate on money-market funds is relatively low.As

most of the money market accounts are privately insured, it is a secure method of investment.Deposits in a money market account generate interest through short-term investments.

[edit ] Regional Bank Rate

Though influenced heavily by the none Interest rate, all bank rates will vary regionally. It pays tocompare interest rates on a regional or state-wide level.

[edit ] United Kingdom

In theUK bank rates are set by theBank of England's Monetary Policy Committee. The keyinterest rate is called theofficial bank rate[1] which is the lowest rate at which the Bank acts aslender of last resortto the money markets.

[edit ] India

current repo rate is 6.25% (As on november 2010) (As these rates keep changing to know thecurrent rates please visithttp://www.rbi.org.in/home.aspxand see the Current Rates at right handside of the page)

[edit ] C anada

In Canada, the bank rate is defined as the upper limit of theovernight rateband announced eachmonth by theBank of Canada, (making it the target overnight rate + 0.25%).[2]

A Repurchase agreement , also known as aRepo or S ale and Repu r ch a se Ag r eemen t , is the saleof securitiestogether with an agreement for the seller to buy back the securities at a later date.The repurchase price will be greater than the original sale price, the difference effectivelyrepresenting interest, sometimes called ther epo rat e. The party who originally buys thesecurities effectively acts as alender . The original seller is effectively acting as a borrower , usingtheir security ascollateralfor a secured cashloan at a fixed rate of interest.

A repo is equivalent to a cash transaction combined with aforward contract. The cash transactionresults in transfer of money to the borrower in exchange for legal transfer of the security to thelender , while the forward contract ensures repayment of the loan to the lender and return of thecollateral of the borrower. The difference between theforward priceand thespot priceiseffectively the interest on the loan while thesettlement dateof the forward contract is thematuritydate of the loan.


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[edit ] Structure and terminology

A repo is economically similar to asecured loan, with the buyer (effectively the lender or investor) receiving securities ascollateralto protect against default of the seller - the party whoinitially sells the securities being effectively the borrower.Almost any security may be employedin a repo, though practically speaking highly liquid securities are preferred because they aremore easily disposed of in the event of a default and, more importantly, they can be easilysecured in the open market where the buyer has created a short position in the repo securitythrough a reverse repo and market sale; by the same token, illiquid securities are discouraged.Treasury or Government bills, corporate and Treasury/Government bonds, and stocks may all beused as "collateral" in a repo transaction. Unlike a secured loan, however , legal title to thesecurities clearly passes from the seller to the buyer.Coupons(installment payments that are payable to the owner of the securities) which are paid while the repo buyer owns the securitiesare, in fact, usually passed directly onto the repo seller. This might seem counterintuitive, as theownership of the collateral technically rests with the buyer during the repo agreement. It is possible to instead pass on the coupon by altering the cash paid at the end of the agreement, though this is more typical of Sell/Buy Backs.

Although the underlying nature of the transaction is that of a loan, the terminology differs fromthat used when talking of loans because the seller does actually repurchase the legal ownershipof the securities from the buyer at the end of the agreement. So, although the actual effect of thewhole transaction is identical to a cash loan, in using the "repurchase" terminology, the emphasisis placed upon the current legal ownership of the collateral securities by the respective parties.That said, one of the most important aspects of repos is that they are legally recognised as asingle transaction (especially important in the event of counterparty insolvency) but do not countas a disposal and a repurchase for tax purposes.

The following table summarizes the terminology:

Repo Re v erse repo

P articipantBorrower Seller Cash receiver

Lender Buyer Cash provider

Near leg Sells securities Buys securitiesFar leg Buys securities Sells securities

[edit ] Types of repo and related products

There are three types of repo maturities: overnight, term, and open repo. Overnight refers to aone-day maturity transaction. Term refers to a repo with a specified end date. Open simply hasno end date.Although repos are typically short-term, it is not unusual to see repos with amaturity as long as two years.


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A whole loan repo is a form of repo where the transaction is collateralized by a loan or other form of obligation (e.g. mortgage receivables) rather than a security.

[edit ] E quity repo

The underlying security for many repo transactions is in the form of government or corporate bonds.E quity repos are simply repos on equity securities such as common (or ordinary) shares.Some complications can arise because of greater complexity in the tax rules for dividends asopposed to coupons.

[edit ] Sell/buy backs and buy/sell backs

A sell/buy back is the spot sale and a forward repurchase of a security. It is two distinct outrightcash market trades, one for forward settlement. The forward price is set relative to the spot priceto yield a market rate of return. The basic motivation of sell/buy backs is generally the same asfor a classic repo , i.e. attempting to benefit from the lower financing rates generally available for

collateralized as opposed to non-secured borrowing. The economics of the transaction are alsosimilar with the interest on the cash borrowed through the sell/buy back being implicit in thedifference between the sale price and the purchase price.

There are a number of differences between the two structures.A repo is technically a singletransaction whereas a sell/buy back is a pair of transactions (a sell and a buy).A sell/buy back does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller (typically the SIFMA /ICMA commissionedG lobalMaster RepoAgreement (GM R A)). For this reason there is an associatedincrease in risk compared to repo. Should the counterparty default, the lack of agreement maylessen legal standing in retrieving collateral.Any coupon payment on the underlying security

during the life of the sell/buy back will generally be passed back to the seller of the security byadjusting the cash paid at the termination of the sell/buy back. In a repo, the coupon will be passed on immediately to the seller of the security.

A buy/sell back is the equivalent of a "reverse repo".

[edit ] Securities lending

The general motivation for repos is the borrowing or lending of cash. Insecurities lending, the purpose is to temporarily obtain the security for other purposes, such as covering short positionsor for use in complex financial structures. Securities are generally lent out for a fee. Securities

lending trades are governed by different types of legal agreements than repos.

[edit ] Re v erse Repo

A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not theseller's.Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" areexactly the same kind of transaction, just described from opposite viewpoints. The term "reverse


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repo and sale" is commonly used to describe the creation of a short position in a debt instrumentwhere the buyer in the repo transaction immediately sells the security provided by the seller onthe open market. On the settlement date of the repo, the buyer acquires the relevant security onthe open market and delivers it to the seller. In such a short transaction the seller is wagering thatthe relevant security will decline in value between the date of the repo and the settlement date.

[edit ] Uses

For the buyer , a repo is an opportunity to invest cash for a customized period of time (other investments typically limit tenures). It is short-term and safer as a secured investment since theinvestor receives collateral.Market liquidityfor repos is good, and rates are competitive for investors.Money Fundsare large buyers of RepurchaseAgreements.

For traders in trading firms, repos are used to financelong positions, obtain access to cheaper funding costs of other speculative investments, and cover short positions in securities.

In addition to using repo as a funding vehicle, repo traders "make markets". These traders have been traditionally known as "matched-book repo traders". The concept of a matched-book tradefollows closely to that of a broker who takes both sides of an active trade, essentially having nomarket risk , only credit risk. Elementary matched-book traders engage in both the repo and areverse repo within a short period of time, capturing the profits from the bid/ask spread betweenthe reverse repo and repo rates. Presently, matched-book repo traders employ other profitstrategies, such as non-matched maturities, collateral swaps, and liquidity management.

[edit ] United States Federal Reser v e use of repos

Repurchase agreements when transacted by theFederal OpenMarket Committeeof the FederalReservein open market operationsadds reservesto the banking system and then after a specified period of time withdraws them; reverse repos initially drain reserves and later add them back.This tool can also be used to stabilize interest rates, and the Federal Reserve has used it to adjustthe Federal funds rateto match thetarget rate.[3]

Under a repurchase agreement ("RP" or "repo"), the Federal Reserve (Fed) buysU.S. Treasurysecurities, U.S. agency securities, or mortgage-backed securitiesfrom a primary dealer whoagrees to buy them back , typically within one to seven days; a reverse repo is the opposite. Thusthe Fed describes these transactions from the counterparty's viewpoint rather than from their ownviewpoint.

If the Federal Reserve is one of the transacting parties, the RP is called a "system repo", but if they are trading on behalf of a customer (e.g. a foreign central bank) it is called a "customer repo". Until 2003 the Fed did not use the term "reverse repo"which it believed implied that itwas borrowing money (counter to its charter)but used the term "matched sale" instead.

[edit ] Risks


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While classic repos are generally credit-risk mitigated instruments, there are residual credit risks.Though it is essentially a collateralized transaction, the seller may fail to repurchase thesecurities sold at the maturity date. In other words, the repo seller defaults on his obligation.Consequently, the buyer may keep the security, and liquidate the security in order to recover thecash lent. The security, however , may have lost value since the outset of the transaction as the

security is subject to market movements. To mitigate this risk , repos often are over-collateralizedas well as being subject to daily mark-to-market margining. Conversely, if the value of thesecurity rises there is a credit risk for the borrower in that the creditor may not sell them back. If this is expected to happen then the borrower may negotiate a repo which is under-collateralized.[4] Credit risk associated with repo is subject to many factors: term of repo, liquidity of security, the strength of the counterparties involved, etc.

Repo transactions came into focus within the financial press due to the technicalities of settlements following the collapse of Refco. Occasionally, a party involved in a repo transactionmay not have a specific bond at the end of the repo contract. This may cause a string of failuresfrom one party to the next, for as long as different parties have transacted for the same

underlying instrument. The focus of the media attention centers on attempts to mitigate thesefailures.

[edit ] History

In the US, Repos have been used from as early as 1917 when war time taxes made older forms of lending less attractive.At first Repos were used just by the Federal reserve to lend to other banks, but the practice soon spread to other market participants. The use of Repos expanded inthe 1920s, fell away through theGreat depressionand WWII, then expanded once again in the1950s, enjoying rapid growth in the 1970s and 1980s in part due to computer technology.[4]

[edit ] Market size

The US Federal Reserve and the European Repo Council (a body of theInternational CapitalMarket Association) both try to estimate the size of their respective repo markets.At the end of 2004, the U.S. repo market reached US$5 trillion.

The European repo market has experienced consistent growth over the past five years, from 1.9 billion in 2001 to 6.4 trillion by the end of 2006, and is expected to continue significant growthdue toBasel II, according to a 2007 Celent report entitled The European RepoMarket.[5]

Especially in the US and to a lesser degree in Europe, the repo market contracted in 2008 as aresult of thefinancial crisis. But by mid 2010 the market had largely recovered and at least inEurope had grown to exceed its pre-crisis peak.[1]

Other countries including India, Japan, Mexico, Hungary, Russia, China, and Taiwan, have their own repo markets, though activity varies by country, and no global survey or report has beencompiled.


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This percentage is fixed by theReserve Bank of India. The maximum and minimum limits for the SLR are 40% and 25% respectively.[1] Following the amendment of the Banking regulationAct(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently, the SLR is25% with effect from 7 November 2009. It was raised from 24% in the RBI policy review on 27October 2009.

[edit ] Difference between SLR & C RR

SLR restricts the banks leverage in pumping more money into the economy. On the other hand, CRR , or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with theCentral Bank.

The other difference is that to meet SLR , banks can use cash, gold or approved securitieswhereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereasSLR is maintained in liquid form with banks themselves.


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India is divided into twenty-eight states and sevenunion territories(UTs). States have their owngovernment, whereas union territories are administered by theCentral government. As per theConstitution of India, the central government can also empower a union territory with alegislature.As of 2008, two union territories, the National Capital Territory of DelhiandPondicherryhave their own legislatures.

The state and union territory capitals are sorted according to the administrative, legislative and judicial capitals. The administrative capital is where executive government offices are located, the legislative capital is where thestate assemblyconvenes, and the judicial capital is thelocation of the territorialH igh Courts of India.

[edit ] States and territories

The 28 states and 7 union territories of India

States:

1. Andhra Pradesh 2. Arunachal

Pradesh 3. Assam 4. Bihar 5. Chhattisgarh 6. Goa 7. Gujarat

8. Haryana 9. H imachal

Pradesh 10. Jammu and

Kashmir 11. Jharkhand 12. Karnataka 13. Kerala 14. Madhya

Pradesh

15. Maharashtra 16. Manipur 17. Meghalaya 18. M izoram

19. Nagaland 20. Orissa 21. Punjab

22. Rajasthan 23. Sikkim 24. Tamil Nadu 25. Tripura

26. Uttar Pradesh 27. Uttarakhand 28. West Bengal

Union Territories:


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A. Andaman and Nicobar Islands B. Chandigarh C. Dadra and Nagar Haveli D. Daman and Diu E. Lakshadweep

F. National Capital Territory of Delhi G. Puducherry

State or UT

Administrati v ecapital

Legislati v e capital

Judiciarycapital

Year of establishmen

t

Formercapital

Andamanand NicobarIslands

P ort B lair Kolkata 1956

AndhraP radesh Hyderabad

Hyderabad Hyderabad 1956

Hyderabad (Hyderabad State), Kurnool (AndhraState)[1]

ArunachalP radesh Itanagar

Itanagar Guwahati 1972

Assam Dispur Guwahati Guwahati 1975

Shillong[2]

(1874-1972)B ihar P atna Patna Patna 1912

C handigarh C handigarh [3] Chandigar h 1966

C hattisgarh Raipur Raipur Bilaspur 2000 Dadra andNagarHa v eli

Sil v assa Mumbai 1941

Daman and

Diu Daman Mumbai 1987

NationalC apitalTerritory of Delhi

Delhi Delhi Delhi 1952

Goa P anaji [4] Porvorim Mumbai 1961 Gujarat Gandhinagar Gandhinagar Ahmedaba 1970 (1960-


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d 1970)

Haryana C handigarh Chandigarh Chandigar h 1966

HimachalP radesh Shimla

Shimla Shimla 1948

Jammu andKashmir

Srinagar (S)

Jammu(W)

Srinagar (S)

Jammu(W)Srinagar 1948

Jharkhand Ranchi Ranchi Ranchi 2000 Karnataka Bengaluru Bengaluru Bengaluru 1956 Mysore

Kerala Thiru v ananthapuram

Thiruvananthapuram Ernakulam 1956

Lakshadweep

Ka v aratti Ernakulam 1956

MadhyaP radesh

Bhopal Bhopal Jabalpur 1956 Nagpur [5] (1861-1956)

Maharashtra Mumbai [6]

Nagpur (W/2nd)[7]

Mumbai(S+B)

Nagpur (W)[8] Mumbai 18181960

Manipur Imphal Imphal Guwahati 1947 Meghalaya Shillong Shillong Guwahati 1970 Mizoram Aizawl Aizawl Guwahati 1972 Nagaland Kohima Kohima Guwahati 1963

O rissa Bhubaneswar Bhubaneswar Cuttack 1948 Cuttack (1936-1948)

P ondicherry P ondicherry Pondicherry Chennai 1954

P unjab C handigarh Chandigarh Chandigar h 1966

Lahore[9] (1936-1947)

Shimla (1947-1966)

Rajasthan Jaipur Jaipur Jodhpur 1948 Sikkim Gangtok [10] Gangtok Gangtok 1975 Tamil Nadu C hennai [11] Chennai Chennai 1956 Tripura Agartala Agartala Guwahati 1956 UttarP radesh

Lucknow Lucknow Allahabad 1937


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Uttarakhand Dehradun [12] Dehradun Nainital 2000 West Bengal Kolkata Kolkata Kolkata 1947


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Rajya SabhaFrom Wikipedia, the free encyclopediaJump to:navigation, search

Ananya 007^

Type

Type Upper house

Leadership

The C hairman

MohammadHamid Ansari,

Independentsince 2007

Majority LeaderPrime M inister Manmohan Singh, (I NC)since 2007


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O ppositionLeader

Arun Jaitley, (BJP)since 2009

Structure

Members 250 (238 elected + 12 appointed)

Meeting place

Sansad Bhavan

Website

rajyasabha.nic.in

The Rajya Sabha (Hindi: ; meaning the "C ouncil of States ") is theupper houseof theParliament of India. Membership is limited to 250 members, 12 of whom are chosen by thePresident of Indiafor their expertise in specific fields of art, literature, science, and socialservices. These members are known as nominated members. The remainder of the body iselected bystate and territoriallegislatures. Terms of office are for six years, with one third of themembers retiring every two years.

The Rajya Sabha meets in continuous session and, unlike the lower house of parliament, the Lok Sabha, is not subject to dissolution. The Rajya Sabha shares legislative powers with the Lok Sabha, except in the area of supply, where the Lok Sabha has overriding powers. In the case of conflicting legislation, a joint sitting of the two houses is held.However , since the Lok Sabhahas more than twice as many members than the Rajya Sabha, it holdsde factoveto power in such joint sessions. Only three joint sessions have been held; the last one was for the passage of theanti-terror lawPOTA.


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The V ice-President of India(currently, Hamid Ansari) is theex-officio Chairman of the RajyaSabha. The Deputy Chairman of the Rajya Sabha, who is elected from amongst its members, takes care of the day-to-day matters of the house in the absence of the Chairman. The RajyaSabha held its first sitting on 13May 1952.

C ontents[hide]

y 1 Membership o 1.1 ElectedMembers o 1.2 NominatedMembers o 1.3 Membership Composition

y 2 See also y 3 References y 4 Further reading y 5 External links

[edit ] Membership

The minimum age for a person to become a member of Rajya Sabha is 30 years.

Main art icle: M embe r s of R ajya S abh a

[edit ] E lected Members

There are 238 indirectly-elected members, who represent the 28 states and 2 Union Territoriesincluding the National Capital territory, New Delhi. Seats are allotted in proportion to population.

[edit ] Nominated Members

Under article 80 of theConstitution of India, out of the 250 members of the Council of States(Rajya Sabha), 12 are nominated by thePresident of Indiafrom amongst persons who havespecial knowledge or practical experience in the fields such as literature, science, art or socialservice.

Since its inception in 1952, 105 members of the Rajya Sabha have been nominated so far , for aterm of 6 years each. One-third of the members retire every two years.[1]

[edit ] Membership C omposition

Members by Party Source: Election Commission of India[2] (as of 11/08/2010)


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Alliances (after 2010 election) P arty M P s

United ProgressiveAlliance Seats: 90

Indian National Congress 71 Nationalist Congress Party 7DravidaMunnetra Kazhagam 7All India Trinamool Congress 2 National Conference 2Bodoland People's Front 1

National DemocraticAlliance Seats: 66

Bharatiya Janata Party 49Janata Dal (United) 7Shiv Sena 4ShiromaniAkali Dal 3Asom Gana Parishad 2

Rashtriya Lok Dal 1Third Front Seats: 31

Communist Party of India (Marxist) 15Communist Party of India 5All India Anna DravidaMunnetra Kazhagam5Telugu Desam Party 4All India Forward Bloc 1Revolutionary Socialist Party 1

Parties supporting UPA from outsideSeats: 40

Samajwadi Party 5Bahujan Samaj Party 18Rashtriya Janata Dal 4Janata Dal (Secular) 1Lok Janshakti Party 2M izo National Front 1Sikkim Democratic Front 1 Nagaland People's Front 1Biju Janata Dal 6JharkhandMukti Morcha 1

Indian National Lok Dal 1 NominatedSeats: 9 9

Other Parties and IndependentsSeats: 7

Vacant SeatsSeats: 1


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Total 245

Lok SabhaFrom Wikipedia, the free encyclopediaJump to:navigation, search

Lok Sabha

Type

Type Lower house

Leadership

Speaker Meira Kumar , (I NC)since 3 June 2009

DeputySpeaker

Karia Munda, (BJP)since 8 June 2009

MajorityLeader

PranabMukherjee, (I NC)since 1 June 2009

O ppositionLeader

Sushma Swaraj, (BJP)since 18 December 2009

Structure


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Members545 (543 elected + 2appointed)

Politicalgroups

Left Front NDA UPA

E lection

Last election A pril-May, 2009

Meeting place

Lok Sabha, Sansad Bhavan

Website

loksabha.nic.in

The Lok Sabha (Hindi: ) (also titled theHouse of the P eople , by theConstitution) is thedirectly elected lower houseof theParliament of India. As of 2009 there have been fifteen Lok Sabhas elected by the people of India. The Constitution limits the Lok Sabha to a maximum of 552 members, including no more than 20 members representing people from theUnionTerritories, and two members to represent theAnglo-Indiancommunity (if the President feelsthat that community is not adequately represented). The current size of the Lok Sabha has 545members including the Speaker and two appointed members, if any.

Each Lok Sabha is formed for a five-year term, after which it is automatically dissolved, unlessextended by a P r ocl amat ion of Eme r genc y which may extend the term in one-year increments.The 15th Lok Sabhawas formed inMay 2009.

An exercise to redraw Lok Sabha constituencies' boundaries has been carried out by theDelimitation Commissionbased on theIndian censusof 2001. This exercise, which wassupposed to be carried out after every census, was suspended in 1976 following aconstitutionalamendmentto avoid adverse effects of the family planning program which was beingimplemented.[1] Today, the Lok Sabha has its own TV channel, Lok Sabha TV, headquarteredwithin the Parliament premises.


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[edit ] Membership qualifications

Membership of the Lok Sabha requires that the person must be acitizen of India, aged 25 or over , mentally sound, should not be bankruptand has nocriminal proceduresagainst him/her.For reserved seats one should be member of the scheduledcastesand/or tribes.

[edit ] Sessions and working hours

On normal business days, the Lok Sabha assembles from 11 a.m. to 1 p.m., and again from 2 p.m. to 6 p.m. The first hour of every sitting is called theQuest ion Hou r , during which questions posed by members may be assigned to specificgovernment ministries, to be answered at a fixeddate in the future.

The Lok Sabha shares legislative power with theRajya Sabha, except in the area of Money Bills, in which case the Lok Sabha has the ultimate authority. In the case of money bill it is only sent to

the rajya sabha for recommendations and in the case of other related issues it is sent with a period of 14 working days. If it is not returned in that span of time it is considered as passed. If conflictinglegislationis enacted by the twoHouses, a joint sitting is held to resolve thedifferences. In such a session, the members of the Lok Sabha would generally prevail, since theLok Sabha includes more than twice as many members as theRajya Sabha.

Three sessions of Lok Sabha take place in a year:

y Budget session: February toMay.y Monsoon session: July to September.y Winter session: November to December.

[edit ] P owers, including the special powers of the Lok Sabha

The special powers of the Lok Sabha is the reason why the Lok Sabha isde f act o and de jur e more powerful than theRajya Sabha.

y Motions of no confidenceagainst thegovernmentcan only be introduced and passed inthe Lok Sabha. If passed by a majority vote, the PrimeM inister and the Council of M inisters resigns collectively. The Rajya Sabha has no power over such a motion, andhence no real power over the executive.However , the PrimeM inister may threaten thedissolution of the Lok Sabha and recommend this to the President, forcing an untimelygeneral election. The President normally accepts this recommendation unless otherwiseconvinced that the Lok Sabha might recommend a new PrimeM inister by a majorityvote. Thus, both the executive and the legislature in India have checks and balances over each other.

y Money billscan only be introduced in the Lok Sabha, and upon being passed, are sent tothe Rajya Sabha, where it can be deliberated on for up to 14 days. If not rejected by theRajya Sabha, or 14 days lapse from the introduction of the bill in the Rajya Sabhawithout any action by theHouse, or recommendations made by the Rajya Sabha are not


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H imachal Pradesh State 4Jammu and Kashmir State 6

Jharkhand State 14Karnataka State 28

Kerala

State 20Lakshadweep Union Territory 1Madhya Pradesh State 29

Maharashtra State 48Manipur State 2

Meghalaya State 2M izoram State 1

Nagaland State 1Orissa State 21

Pondicherry Union Territory 1Punjab State 13

Rajasthan State 25Sikkim State 1

Tamil Nadu State 39Tripura State 2

Uttarakhand State 5Uttar Pradesh State 80West Bengal State 42

[edit ] Lok Sabha and general election

Lok Sabha is constituted after the general election as follows:

Lok Sabha General E lection1st Lok Sabha Indian general election, 19512nd Lok Sabha Indian general election, 19573rd Lok Sabha Indian general election, 19624th Lok Sabha Indian general election, 1967

5th Lok Sabha Indian general election, 19716th Lok Sabha Indian general election, 19777th Lok Sabha Indian general election, 19808th Lok Sabha Indian general election, 19849th Lok Sabha Indian general election, 198910th Lok Sabha Indian general election, 1991


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11th Lok Sabha Indian general election, 199612th Lok Sabha Indian general election, 199813th Lok Sabha Indian general election, 199914th Lok Sabha Indian general election, 2004

15th Lok Sabha

Indian general election, 2009

[edit ] Members by party

Present members of Lok Sabha by political party and alliance:[3][4][5]

Alliances P arty SeatsUnited ProgressiveAlliance Seats: 262

Indian National Congress 206All India Trinamool Congress 19DravidaMunnetra Kazhagam 18 Nationalist Congress Party 9 National Conference 3JharkhandMukti Morcha 2Indian UnionMuslim League 2V iduthalai Chiruthaigal Katchi 1Kerala Congress (Mani) 1All IndiaMajlis-e-IttehadulMuslimeen 1

National DemocraticAlliance Seats: 159

Bharatiya Janata Party 116Janata Dal (United) 20

Shiv Sena 11Rashtriya Lok Dal 5ShiromaniAkali Dal 4Telangana Rashtra Samithi 2Asom Gana Parishad 1

Third Front Seats: 79

Left Front Left Democratic Front 24

Bahujan Samaj Party 21Biju Janata Dal 14

All India Anna DravidaMunnetra Kazhagam9Telugu Desam Party 6Janata Dal (Secular) 3Marumalarchi DravidaMunnetra Kazhagam 1Haryana Janhit Congress 1

Fourth Front Samajwadi Party 22


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Seats: 27 Rashtriya Janata Dal 4Other Parties and IndependentsSeats: 16

Assam United Democratic Front 1JharkhandV ikas Morcha (Prajatantrik) 1 Nagaland People's Front 1

Bodaland Peoples Front 1Swabhimani Paksha 1BahujanV ikas Aaghadi 1Sikkim Democratic Front 1Independents 9

Total 543


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C ountry C apital C ities larger than the capitalAAfghanistan Kabul Albania Tirana

Algeria

Algiers

Andorra Andorra laVella Angola Luanda Antigua andBarbuda St. John's

Argentina BuenosAires Armenia Yerevan Australia Canberra Sydney, Melbourne, Brisbane, Perth, Adelaide, GoldCoast, Newcastle Austria V ienna Azerbaijan Baku B Bahamas Nassau Bahrain Manama Bangladesh Dhaka Barbados Bridgetown Belarus M insk Belgium Brussels

Belize Belmopan Corozal Town, Dangriga, Orange Walk Town, SanIgnacio Cayo, Belize City

BeninPorto- Novo (official), Cotonou (administrative)

Cotonou

Bhutan Thimphu

Bolivia Sucre(official), LaPaz (administrative)

Santa Cruz(Santa Cruz is larger than La Paz; La Paz islarger than Sucre; metropolitan La Paz is larger thanSanta Cruz)

Bosnia andHerzegovina Sarajevo

Botswana Gaborone Brazil Braslia So Paulo, Rio de Janeiro, Belo Horizonte (metropolitan area), Salvador BruneiDarussalam Bandar Seri Begawan Bulgaria Sofia Burkina Faso Ouagadougou


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Burundi Bujumbura C Cambodia Phnom Penh Cameroon Yaound Douala

Canada Ottawa Toronto, Montreal, Vancouver , Calgary(Ottawa'smetropolitan areais larger than Calgary's;Greater Vancouver is larger than Ottawa's metropolitan area)

Cape Verde Praia CentralAfricanRepublic Bangui Chad N'Djamena

Chile Santiago(official), Valparaso (legislative)

China, People'sRepublic of Beijing Shanghai

Colombia Bogot Comoros Moroni Congo, Republic of the Brazzaville

Congo, DemocraticRepublic of the

Kinshasa

Costa Rica San Jos

Cte d'Ivoire Yamoussoukro (official), A bidjan (administrative)

A bidjan

Croatia Zagreb Cuba Havana Cyprus Nicosia Czech Republic Prague DDenmark Copenhagen Djibouti Djibouti City

Dominica Roseau DominicanRepublic Santo Domingo

E East Timor Dili Ecuador Quito Guayaquil


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Egypt Cairo El Salvador San Salvador EquatorialGuinea Malabo

Eritrea Asmara Estonia Tallinn

Ethiopia Addis A baba FFiji Suva Finland Helsinki France Paris GGabon Libreville Gambia, The Banjul Georgia Tbilisi Germany Berlin[1] Ghana Accra Greece Athens Grenada St. George's Guatemala Guatemala City Guinea Conakry Guinea-Bissau Bissau Guyana Georgetown HHaiti Port-au-Prince Honduras Tegucigalpa Hungary Budapest IIceland Reykjavk

India New Delhi

(Metropolitan area rank)Mumbai(1st), (Old)Delhi(2nd), Kolkata(3rd), Chennai(4th), Hyderabad(5th), Bangalore(6th), Ahmedabad, Pune,

Lucknow, Jaipur , Kanpur , Nagpur , Vadodara, Cochin, Trivandrum, Bhubaneswar (metropolitan).Indonesia Jakarta Iran Tehran Iraq Baghdad Ireland, Republic of Dublin


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Israel Jerusalem[2] Italy Rome M ilan (MetropolitanArea) Naples (MetropolitanArea)JJamaica Kingston

Japan Tokyo

Jordan Amman K Kazakhstan Astana Almaty, Shymkent Kenya Nairobi Kiribati Tarawa Korea, North Pyongyang Korea, South Seoul Kuwait Kuwait City Kyrgyzstan Bishkek LLaos V ientiane Latvia Riga Lebanon Beirut Lesotho Maseru Liberia Monrovia Libya Tripoli Liechtenstein Vaduz SchaanLithuania V ilnius Luxembourg Luxembourg City MMacedonia Skopje Madagascar Antananarivo Malawi Lilongwe Blantyre

Malaysia Kuala Lumpur (legislative; de facto), Putrajaya (administrative)

Kuala Lumpur

Maldives

Mal

Mali Bamako

Malta Valletta

Birkirkara, Mosta, Qormi, abbar , St. Paul's Bay, Sliema, San wann, Naxxar , Rabat, ejtun, ebbu , Fgura, Attard, urrieq, amrun, Marsaskala, Bir ebbu a, Paola (Ra al did), Swieqi, Si iewi, St.Julian's, Msida, Tarxien, Mellie a, G ira, V ictoria(Gozo)


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Marshall Islands Majuro Mauritania Nouakchott Mauritius Port Louis Mexico Mexico City

M icronesia

Palikir

Weno

Moldova Chi in u Monaco Monaco Mongolia Ulaanbaatar Montenegro Podgorica Morocco Rabat Casablanca Mozambique Maputo Myanmar Naypyidaw(Pyinmana) Yangon, Mandalayetc

N Namibia Windhoek

Nauru None (governmentoffices inYarenDistrict)

Denigomodu, Meneng, Aiwo

Nepal Kathmandu

Netherlands, Kingdom of the

Amsterdam(official), The Hague (administrative, legislative, and judicial)

Ro

finance is the science of funds management

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