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MADURAI SCHOOL OF MANAGEMENT

NH - 7 Madurai- Dindigul Four Lane Road, T.Vadipatti, Madurai – 625 218
- Prepared by N. Ganesha Pandian, Assistant Professor
2 Marks question bank
Subject: BA7022 MERCHANT BANKING AND FINCIAL SERVICES

Unit 1: Merchant banking

1. What is financial system?

Ans: According to Robinson, the primary function of the system is “to provide link between
savings and investment for the creation of new wealth and to permit portfolio adjustment in
the composition of the existing wealth”

2. Draw the structure of financial system?

Ans: 1. financial intermediaries:

a, Regulatory
b, Intermediaries
c, non Intermediaries
2. Financial markets:
a, Money market
b, Capital market
c, Foreign exchange market
d, Derivative market
3. Financial assets and instruments:
a, Primary
b, Secondary

3. What is merchant banking?

Ans: Rule 2(e) of SEBI (merchant bankers) rules 1992, defines who is a merchant banker,
“merchant banker means any person who is engaged in the business of issue management
either by making arrangements regarding selling, buying or subscribing to securities as
manager-consultant, advisor or rendering corporate advisory services in relation to such issue
management”

4. Give the definition of companies act?

Ans: The companies act defines a company as,” A company formed and registered under this
act or an existing company”. An “existing company” means a company formed and registered
under any of the former companies act

5. What is SCRA?

Ans: The government of India has been exercising control over the capital market through
the provisions of SCRA since 1957. It has been controlling primarily, as well as secondary
market by formulating SCRA rules under the powers granted to it by SCRA, 1956. From
1992, SEBI has been empowered by the central government to exercise control/regulation
over this market.
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6. What is FEMA?

Ans: The foreign exchange management act (FEMA) 1999, replaced the Foreign exchange
regulation act (FERA) 1973, which regulated the foreign exchange transactions in India and
which sought to control certain aspects of the conduct of business outside the country by
Indian companies and in India by foreign companies

7. What is NSE?

Ans: The National stock exchange (NSE) is the India’s largest securities exchange in terms
of daily trade numbers. It offers automated electronic trading of a variety of securities,
including equity, corporate debt, central and state government securities, commercial paper
and exchange traded funds

8. What do you mean by OCTEI?

Ans: Over-the-counter Exchange of India (OCTEI) is and electronic stock exchange based
in Indian that is comprised of small and medium sized firms looking to gain access to the
capital market. The first OTC stock exchange in India was established in 1990 to provide
investors and companies with an additional way to trade and issue securities

9. What is corporate counselling?

Ans: corporate counselling is the beginning of the merchant banking services. Every
industrial unit either new or existing needs it. The scope of corporate counselling is very vast.
It covers a wide range of merchant banking activities and includes the services such as
project counselling, project management, loan syndication, working capital management,
capital re-structuring, public issue management, fixed deposit

10. List any four merchant banking activities relating to foreign currency financing
Ans: Foreign currency finance is the fund provided for foreign trade transactions. It may
take form of export-import trade finance, euro currency loans.
1. Providing assistance for carrying out the study of turn-key and construction contract
projects
2. Providing assistance in applications to working groups, liaison with RBI, ECGC and
other institutions
3. Providing assistance in opening and operating banks accounts abroad
4. Providing guidance on forward cover for exchange risk

11. What is portfolio management?

Ans: Portfolio managers are defined as persons, who in pursuance of a contract with clients,
advise/direct/undertake, the management/administration of portfolio of securities/funds of
clients on behalf of the latter. The term portfolio means the total holdings of securities
belonging to any person

12. What are the roles of financial system?

Ans: 1. Increase the output of economy
2. Accelerate the volume and rate of savings
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3. Makes innovation
4. Evaluating assets, increasing liquidity, producing and spreading information
5. Risk management services
6. Stability and resilience
7. Disciplining and guiding the management companies
8. Accelerate the rate of economic growth

13. What are the weaknesses of financial system?

Ans: 1. Lack of Co-ordination between different financial institutions

2. Monopolistic market structure
3. Dominance of development banks in industrial financing
4. Inactive and erratic capital market
5. Imprudent financial practices

14. What are the functions of the Merchant bankers?

Ans: 1. Underwriting
2. Banking
3. Broking
4. Registration
5. Act as Debenture trustees
6. Portfolio management

15. What are the objectives of merchant banking?

Ans: 1. to help for capital formation

2. Creates a secondary market to boost the industrial activities in the nation
3. It assists and promote economic endeavour
4. It provides financial assistance to venture capital
5. They provide seed capital to new concerns
6. Provides financial clearance
7. Merchant bankers help to mobilize funds from public

16. List some functions of SEBI

Ans: 1. to register and regulate the working of stock brokers

2. To register and regulate the working of bankers to an issue
3. To control and exercise securities market
4. To regulate the working of mutual funds
5. To control investment business
6. To conduct research for above purposes

17. What are the powers of SEBI?

Ans: 1. Power to seek information

2. Powers of inspection
3. Powers of civil court exercisable by SEBI
4. Powers of SEBI where an inquiry or investigation is ordered
5. Powers to issue directions
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6. Power to search and seizure

18. What is BSE?

Ans: Bombay stock exchange established in 1875 is Asia’s first stock exchange and one of
India’s leading exchange groups. The bourse was established as “The native share and stock
brokers’ association”
BSE is a corporatized and demutualised entity, with a broad share holder base which includes
two global exchanges Deutsche bourse and Singapore exchange as strategic partners.
BSE has been acclaimed to be the largest out of 23 stock exchanges in India.

19. List the services of merchant bankers

Ans: 1. corporate counselling

2. Project counselling
3. Loan syndication
4. Management of capital issues
5. Corporate advisory services
6. Portfolio management

20. What are the disadvantages of merchant bankers?

Ans: some of disadvantages of merchant bankers are

1. Merchant bankers are really only for large corporate customers, or extremely wealthy
smaller businesses owned by individual clients
2. Not all deals carried by merchant bankers meet with unqualified success
3. There is a risk attached to the kinds of deal that merchant bankers undertake

Unit 2: Issue Management

1. What do you mean by issue management?

Ans: The management of issues for raising funds through various types of instruments by
companies is known as “Issue management”. The function of capital issues management in
India is carried out by merchant bankers who have the requisite profession skill and
competence.

2. Define the term IPO?

Ans: Initial public offering (IPO), also referred to simply as a “Public offering”, is the first
sale of stock by a private company to the public. IPOs are often issued by smaller, younger
companies seeking capital to expand, but can also done by large privately owned companies
looking to become publicly traded

3. What are equity shares?

Ans: Equity shares are, earlier known as ordinary shared or common shares. Equity
shareholders are the real owners of the company as they have the voting rights and enjoy
decision making authority on important matters, related to the company. The shareholders
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return is in the form of dividend, which is dependent on the profits of the company and
capital gain/loss, at the time of their sale.

4. What is a debenture?

Ans: A debenture is an instrument executed by company under its common seal

acknowledging indebtedness to some person or persons to secure the sum advanced. It is thus
a security issues by a company against the debt.
The term debenture has not been defined in the act. Indian companies act simply says;
“debenture includes debenture stock, bonds and any other security of a company whether
constituting a charge on the assets of the company or not”

5. What do you mean by warrant?

Ans: A warrant is a bearer document of title to buy specified number of equity shares at a
specified price. Usually warrants can be exercised over a number of years. The life periods of
warrants are long. Warrants are generally offered to make the bond or preferred stock
offerings more attractive
Bonds may bear low interest rate but the warrants offered along with them helps the investor
to enjoy the equity appreciation value. Warrants are detachable. The investor can sell the
warrants separately and they are traded in the market

6. Who are registrars?

Ans: Registrars to issue play an important role in post issue management. They work in close
collaboration with bankers to issue. The task of getting applications together, sorting them
and arranging in an order is undertaken by the registrars to the issue.
Merchant bankers assist the company by coordinating this activity till final allotment is made
and allotment letters and refund orders are posted

7. Who is banker to issue?

Ans: Bankers to the issue business is a part of merchant banking business is one of the good
sources of low cost deposits and therefore, concerned efforts are to be made for its
development.
From time to time, merchant banking division is issuing instructions/guidelines for the
benefit of the field staff for the efficient and effective handling of the banker’s to issue
assignments and for the meticulous compliance of RBI/SEBI directives

8. What are printers?

Ans: The printers are involved in the process of printing and distribution of issue related
stationery. Merchant bankers maintain a list of approved printers and the company in
consultation with the lead manager appoints printer after considering the cost and quality of
service.
Lead merchant banker is responsible to ensure the printing of prospectus, application forms,
posters, brochures and other stationery
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9. What is right issue?

Ans: A right issue involves selling securities in the primary market by issuing rights to the
existing shareholders .When a company issues additional equity capital, it has offered in the
first instance to the existing shareholders on a pro rata basis
This is required under section 81 of the companies Act 1956. The shareholders, however,
may be a special resolution forfeit this right, partially or fully, to enable a company to issue
additional capital to the public

10. What is placement with FIIs?

Ans: SEBI registered FIIs have been permitted to purchase shares/convertible debentures of
an Indian company through offer/private placement, subject to ceiling prescribed, i.e.,
individual FII/sub-account – 10 percent and all FIIs/subaccount put together – 24 percent of
the paid-up capital of the Indian company and to the sectoral limits, as applicable.

11. What do you mean by offer for sale?

Ans: Offer for sale is a public invitation by a sponsoring intermediary, such as bank or
broker, to buy new or existing securities. It contrasts with an offer for subscription which is
an invitation to subscribe direct from issuer
The company sponsor offers shares to the public by inviting subscription from investors:
1. Offer for sale by fixed price
2. Offer for sale by tender

12. What is meant by bought out deals?

Ans: Brought out deals (BOD) is a process of investment by a sponsor or a syndicate of

investors/sponsors directly in a company. Such direct investment is being made with an
understanding between company and the sponsor to go for public offering in a mutually
agreed time
Bought out deal is a type of wholesale of equities by a company

13. Define the term Book building?

Ans: Book building is actually a Price discovery method. In this method, the company does
not fix up a particular price for the shares, but instead gives a price range. When bidding for
the shares, investors have to decide at which price they would like to bid for the shares.
Based on the demand and supply of the shares, the final price is fixed. The lowest price is
known as “Floor price” and the highest price is known as “Cap price”

14. What are issue marketing strategies?

Ans: Marketing strategies adopted for public issues aim at educating the investors for active
participation in capital market and reducing the cost of issue as also the risk of investors and
the issuer companies in the form of over pricing and under pricing respectively.
With these objectives in mind, marketing strategies are developed from time to time to make
Indian capital market more efficient
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15. What do you mean by post – issue management?

Ans: The steps involved in post issue management;

1. To verify and confirm that the issue is subscribed to the extent of 90%including
development from underwriters in case of under subscription
2. To report periodically to SEBI about the progress in the matters related to allotment
and refunds
3. To ensure the listing of securities at stock exchange
4. To attend the investors grievances regarding the public issue

16. Who is a book running lead manager?

Ans: Lead book runner is an essential requirement for a 100 percent book-building process is
the appointment of a lead runner by the issuer. The book runner is primarily responsible for
book-building in order to determine the appropriate price and quantum of issue.
SEBI registered underwriters and other eligible merchant bankers are appointed by the book-
runner as member of the syndicate. In the event of any short fall

17. What is green shoe option?

Ans: Green shoe option means an option of allocating shares in excess of the shares included
in the public issue and operating post listing price stabilizing mechanism for a period not
exceeding 30 days in accordance with the provisions of chapter VIIIA of DIP guidelines,
which is granted to a company to be exercised through a stabilizing agent

18. Define the term ‘Prospectus’

Ans: Prospectus is a formal legal document, which is required by and filed with the securities
exchange board of India that provides details about an investments offering for sale to the
public. A Prospectus should contain the facts that an investor needs to make an informed
investment decision. Also known as an “Offer document”

19. What is private placement?

Ans: A qualified institutional placement is a private placement of equity shares or securities
convertible into equity shares by a listed company to qualified institutional buyers (QIB) only
in terms of provisions of chapter XIIIA of SEBI (DIP) guidelines. The chapter contains
provisions relating to pricing, disclosures, currency of instruments and etc.

20. Give an example for ‘Green shoe option’

Ans: for an example, if a company decides to publicly sell 1 million shares, the underwriters
can exercise their green shoe option and sell 1.15 million shares. When the shares are priced
and can be publicly traded, the underwriters can buy-back 15% of the shares. This enables
underwriters to stabilise fluctuating share prices by increasing or decreasing the supply of
shares according to initial public demand
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21. What is sweat equity?

Ans: Sweat equity shares are equity shares issued by a company to its employees or directors
at a discount, or as a consideration other than cash for providing know-how or making
available rights in the nature of intellectual property or value additions

22. What is called as derivatives?

Ans: Derivatives are financial instruments whose value is derived from one or more
underlying financial asset. The underlying instrument could be a financial security, a
securities index or some combination of securities and indexes. Derivatives are financial
instruments that have no intrinsic value. They hedge the risk of owning things that are subject
to unexpected price fluctuations

23. Who is an underwriter?

Ans: An underwriter is a securities dealer who helps government entities bring bond issues to
market. The key role it plays is to buy bonds from the issuer and then resell them to investor.
In doing so, it assumes a financial risk and thus expects to make a profit on the transaction

24. What is E-IPO?

Ans: A company proposing to issue capital to public through the online system of the stock
exchange for offer of securities can do so it complies with the specific requirements. The
appointment of various intermediaries by the issuer includes a prerequisites that such
members/ registrars have the required facilities to accommodate such an online issue process.

25. What are the characteristics of book-building?

Ans:
1. Tendering process
2. Floor price
3. Price band
4. Bid
5. Allotment
6. Participants

Unit 3: Other fee based services

1. What is merger?

Ans: A merger is a combination of two companies into one larger company. This action
involves stock swap or cash payment to the target. In a merger, the acquiring company takes
over the assets and liabilities of the merged company. All the combining companies are
dissolved and only the new entity continue to operate

2. What is conglomerate merger?

Ans: When two concerns dealing in totally different activities join hands, it will be a case of
conglomerate merger. The merging companies are neither horizontally nor vertically related
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to each other. For example, a manufacturing company may be merged with insurance
company

3. What do you mean by acquisition?

Ans: An acquisition also known as a takeover is the buying of one company by another. An
acquisition typically has one company – the buyer - that purchases the assts or shares of the
seller, with the form of payment being cash, the securities of buyer, or other assets of value to
the seller.

4. Give any two differences between merger and acquisition?

Ans: Nature: Merger: A purchase deal will also be called a merger when both CEOs agree
that joining together is in the best interest of both of their companies
Acquisition: When the deal is unfriendly, (i.e) when the target company does not want to be
purchased – it always regarded as an acquisition

5. What is portfolio management?

Ans: Portfolio management deals with the analysis of individual securities as well as with
theory and practice of optimally combining securities into portfolio. An investor who
understands the fundamental principles and analytical aspects of portfolio management has a
better chance of success.

6. Who is portfolio merger?

Ans: Discretionary portfolio manager means a portfolio manager who exerscises or may,
under a contact relating to portfolio management, exercise any degree of discretion as to the
investments or management of the portfolio of securities or the funds of the client, as the case
may be.

7. What is credit syndication?

Ans: A syndicated loan is a loan which is provided to the borrower by two or more banks
known as participants, which is governed by a single loan agreement. The loan is arranged
and structured by an arranger, and managed by an agent. The arranger and the agent may also
be participants. Each participant provides a defined percentage of the loan, and receives the
same percentage of repayments.

8. What is credit rating?

Ans: According to Standard & Poors, ‘Credit ratings help investors by providing an easily
recognizable, simple tool that couples a possibly unknown issuer with an informative and
meaningful symbol of credit quality.’

9. Name any four ‘credit rating agencies ‘functioning in India?

Ans: 1. Credit Rating Information Services of India Limited (CRISIL)

2. Investment Information and Credit Rating Agencies of India (ICRA)
3. Credit Analysis and Research Limited ((CARE)
4. Duff Phelps Credit Rating (DPER)
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10. What do you mean by mutual funds?

Ans: According to Pierce, James, L., it’s a non depositary or non banking financial
intermediary which acts as an ‘important vehicle for bringing wealth holders and deficit units
together indirectly’.

11. What is business valuation?

Ans: Business valuation is a process and set of procedures used to estimate the economic
value of an owner’s interest in a business. Valuation is used by financial market participants
to determine the price they are willing to pay or receive to consummate a sale of a business.

12. What are the different types of mergers?

Ans: 1.Horizontal Merger

2. Vertical Merger
3. Conglomerate Merger
4. Congeneric Merger
5. Reserve Merger

13. What is reverse merger?

Ans: A unique type of merger called a reserve merger is used as a way of going public
without the expense and time required by an IPO. Incase of an ordinary merger, a profit
making company takes over another company which may or may not be making profit. The
objective is to expand or diversify the business.

14. What are the disadvantages of merger?

Ans: 1. Higher Prices.

2. Less Choice
3. Job Losses
4. Diseconomies of Scale

15. What is hostile acquisition?

Ans: A hostile takeover/acquisition means that the acquired company (i.e., the Board of
Directors, senior management, /or employees) does not want to be acquired, for business
reasons (valuation are opportunistic for the acquirer, due to market factors), personal reasons
(management believes that it is doing an excellent job and does not believe the acquirer will
do as well), or perhaps job security reasons. It is a holistic takeover if the management of the
company being taken over is opposed to the deal.

16. What are the advantages of acquisition?

Ans: Increased Market Power

Overcoming Entry Barriers
Cost of new product development and increased speed to market.
Adequate and easy Terms Working Capital
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Increased Diversification
Reshaping the Firm’s Competitive Scope

17. What are the disadvantages of acquisition?

Ans:
1. High cost Involved in Acquisition
2. Problems of Valuation
3. Clash of cultures
4. Upset Customers
5. Problem of Integration
6. Resistance from Employees
7. Non-existent of synergy
8. Questionable motives
9. High failure Rate
10. Diseconomies of Scale

18. What are the documents needed for credit syndication?

Ans:
1. Mandate Letter
2. Tem Sheet
3. Information Memorandum
4. Syndicated Credit Agreement
5. Fee Letters

19. What are the characteristics of credit rating?

Ans:
1. Rating is Based on Information
2. Many Factors Affect Rating
3. Rating by more than one Agencies
4. Publication of Rating
5. Rating of Rating Agencies
6. Rating not applicable to Equity shares
7. Credit versus Financial Analysis
8. Time Taken in Rating Process

20. Write down the types of credit rating?

Ans:
1. Financial Instruments Rating
Bond Rating
Commercial Paper Rating
2. Customer Rating
3. Borrower Rating
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21. What are the advantages of credit rating?

Ans:
1. To Investors
 Information Service
 Systematic Risk Evaluation
 Professional Competency
 Low Cost
 Other Benefits
2. To the Company
 Easy to Rise Resources
 Reduced Cost of Borrowing
 Rating Builds Up Image
 Rating Facilitates Growth

22. What are the functions of credit rating agencies?

Ans:
1. Provides Unbiased Opinion
2. Provides quality and Dependable Information
3. Provide Information at Low cost
4. Provide Basis for Investments
5. Formation of Public Policy

23. What are open ended schemes?

Ans: Incase of open-ended schemes, the mutual fund continesoly offers to sell and
repurchase its units at net asset value or NPV related prices. Unlike close ended schemes,
open-ended ones do not have to be listed on the stock exchange and can also offer repurchase
soon after allotment.

24. What is called as closed end funds?

Ans: Close-ended schemes have a fixed corpus and a stipulated maturity period ranging
between 2 to 5 years. Investors can invest in the scheme when it is launched. The scheme
remains open for a period not exceeding 45 days.

25. What is “no load fund”?

Ans: Mutual funds incur various expenses on marketing, distribution, advertising, portfolio
churning, fund manager’s salary etc. Many funds recover theses expenses from the investors
in the form of load. These funds are known as “Load finds”. All those funds that do not
charge any of the above mentioned loads are known as “No-load funds”
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26. What is ETF?

Ans: Exchange traded funds provide investors with combined benefits of a closed-ended and
an open-ended mutual fund. Exchange traded funds follow stock market indices and are
traded on stock exchanges like a single stock at index linked prices.

27. What are the advantages of mutual funds?

Ans:
1. Simplicity of fund of funds
2. Cheap for the new investors
3. Relatively low minimum investment levels
4. Diversification
5. Oversight

28. What is Modigliani & Modigliani measure?

Ans: Modigliani & Modigliani measure, which is referred to as M^2 provides a risk-adjusted
measure of performance that has an economically meaningful interpretation
The M^2 is given by M^2=rp-rm
Where M^2 = Modigliani & Modigliani measure
rp= return on the adjusted portfolio
rm= return on the market portfolio

29. What is the rationale behind business valuation?

Ans:
1. Buy/sell agreements
2. Addition or retirement of partners, dissolution of partnership
3. Ownership disputes
4. Sharing of family separations
5. Mergers and acquisitions
6. Allocation of purchase price

Unit 4: Fund based financial services

1. What is meant by leasing?

Ans: A lease may be defined as “a contractual agreement in which a party owning an asset
provides the asset for use to another over a certain period of time for consideration in form of
periodic payment with or without a further payment

2. What is financial lease?

Ans: A type of lease where the present value of the minimum lease payments at the
commencement of the lease exceeds, or is equal to, the fair value of the leased asset is called
“Financial lease”. In other words, a lease is classified as financial lease provided it secures
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for the lessor, the recovery of the capital outlay and a return on the funds invested during the
lease period

3. What is meant by operating lease?

Ans: In an operating lease, the lessor does not transfer all the risks and rewards incidental to
the ownership of the asset and the cost of the asset is not fully amortized during the primary
lease period. The lessor provides services attached to the leased asset, such as maintenance,
repair and technical advice. Operating lease is also called as Service lease.

4. Give any two challenges facing the leasing industry?

Ans:
1. Funding
2. Eroding tax benefits
3. Regulatory environment changes
4. Others challenges like risk, much concentration in a sector and robust secondary
market for some equipments

5. Name the parties involved in hire purchasing?

Ans:
1. Hire purchaser: He is the customer who obtains possession of the goods at the outset
and can use it, while paying for it by instalments over an agreed period of time
2. Hire vendor: The time of ownership of the goods remains with the seller called hire
vendor until the hire purchaser has made all the payments

6. State any four features of ‘hire purchasing ‘?

Ans:
1. Under the hire purchase agreement the hire seller transfers possession of goods
immediately to the purchaser
2. The buyer agrees to make payment in instalment over a period of time
3. The ownership of goods will remain with the seller until the payment of the last
instalment
4. The hire purchaser generally make a down payment on signing the agreement

7. What is consumer instalment credit?

Ans: Consumer instalment credit is finance offered to consumers for acquiring consumer
durables. Instalment credit may be in the form of a personal loan credit sale, rental or
conditional sale in the form of hire purchase. The consumer acquires goods by utilizing the
funds being advanced under the hire purchase agreement
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8. What is industrial and commercial credit?

Ans: In industrial and commercial fields, finance may be provided through loans, credit sales,
leasing, factoring or hire purchase. The financing house, desirous of financing a commercial
concern for the purchase of equipments itself purchases the equipment from the manufacturer
or dealer through hire purchase and lets it on hire purchase to the said commercial concern
instead of lending money.

9. Who are hire purchaser and vendor?

Ans:
1. Hire purchaser: He is the customer who obtains possession of the goods at the outset
and can use it, while paying for it by instalments over an agreed period of time
2. Hire vendor: The time of ownership of the goods remains with the seller called hire
vendor until the hire purchaser has made all the payments

10. Define hire-purchase agreement

Ans: Hire purchase can be defined as a contract in which buyer acquires the possession of the
goods immediately and agrees to pay the total cost in instalment where each instalment is
treated as hire charges. The ownership of goods is transferred to the buyer from sller only
when the last instalment is paid

11. What is swap leasing?

Ans: Also referred to as lease exchange, this is when two parties negotiate to trade leases or
simply transfer one or more leases from one party to another. Also referred to as a lease
assumption, the lease swap can occur between private parties, businesses and financial or
rental institutions
Many private consumers offer a lease swap as a way to get out of a lease they are unhappy
with, or a vehicle that they dislike

12. Write a note on Efficient Rate interest calculation in hire purchase financing
Ans: Efficient rate of interest (ERI) method, also known as annual percentage rate method, is
a method of interest calculation where the effective rate of interest is determined by the
popular IRR technique
Accordingly, effective rate of interest is that rate of interest, which equates the PV of all
future annual instalment payments, with the HP principal payable at the beginning of the hire
purchase contract.
Hire purchase principal payable is the excess of the cost of the asset hire-purchased, over and
above the down payment mode

13. What are the different types of leasing?

Ans:
1. Operating or service lease
2. Financial lease
3. Sale or lease back
4. Single investor lease
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5. Domestic lease
6. Direct lease
7. Leveraged lease
8. International lease

14. What is internal rate of return method?

Ans: Internal rate of return (IRR) can be computed with the help of present value tables. The
various steps involved in its computation are as:
1. Determining the future net cash flows for the period of the lease
2. Determining the rate of discount at which the present value of cash inflows in equal to
the present value of cash outflows.

15. What are the advantages of leasing?

Ans: Advantages to lessor:
1. Full security
2. Tax benefits
3. High profitability

Advantages to lessee
1. Financing of capital goods
2. Additional source of finance
3. Less costly

16. What are elements of leasing?

Ans:
1. Parties to the contract
2. Asset
3. Ownership separated from user
4. Term of lease
5. Lease rentals
6. Modes of terminating lease

17. Who are the parties involved in leasing?

Ans:
1. Lessee: the user or renter of the leased asset or property is called lessee. In case of
capital leases, the lessee is also called the “debtor” to the lessor.
2. Lessor: Owner or the title holder of the leased asset or property, the lessor is also the
lender and secured party in case of capital leases and operating leases

18. What are the clauses of hire purchase agreement?

Ans:
1. Nature of agreement
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2. Delivery of equipment
3. Location
4. Inspection
5. Repairs
6. Alteration
7. Termination
8. Risk
9. Registration and fees
10. Indemnity clauses
11. Schedule
12. Stamp duty

19. What are the rights of hirer?

Ans:
1. The hirer has the right to receive a notice in writing for the termination of the hire-
purchase agreement from the owner
2. The hirer has the right of receiving from the owner a statement showing the amount
paid by or on behalf of the hirer

20. What are the rights of owner/vendor?

Ans:
1. He has the rights to repossess the goods on default in paying any instalment
2. On termination of the agreement, he has the right to retain the amount that he has
already received and to recover arrears of hire due

21. What are the advantages of hire purchase?

Ans:
1. Spread the cost of finance
2. Interest free credit
3. Higher acceptance rates
4. Sales
5. Debt solutions 6. Fewer defaulters

22. What are the disadvantages of hire purchase?

Ans:
1. Encourages lavish expenditure
2. Future income is mortgaged
3. Higher instalment price
4. Difficulty in re-sale of goods
5. Personal debt
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Unit 5: Other fund based financial services

1. What is consumer credit?

Ans: According to E.R.A. Seligman, an authority on consumer credit, “The term consumer
credit refers to a transfer of wealth, the payment of which is deferred in whole or in part, to
future, and is liquidated piecemeal or in successive fractions under a plan agreed upon at the
time of the transfer”.

2. What are the types of consumer credit?

Ans:
1. Revolving Credit
2. Fixed Credit
3. Cash Loan
4. Secured Finance
5. Unsecured Finance
6. Non-Installment Credit
7. Instalment Closed-End Credit

3. What are the sources of consumer credit?

Ans:
1. Traders
2. Commercial Banks
3. Credit Card Institution
4. NBFCs
5. Credit Unions
6. Middlemen

4. What are the features of credit cards?

Ans:
1. All Credit Cards provide cash availing facility
2. Most of the cards provide for personal accident insurance coverage
3. All the credit cards generally provide free credit period
4. Most of the cards provide Automated Teller Machine (ATM) facility
5. Service Charge is levied

5. What are the types of credit cards?

Ans:
1. Bank-Issued Cards
2. JCB
3. Gold Cards
4. Affinity Cards
5. Store Cards
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6. Electronic Debit Cards

7. Telephone Cards
8. Fuel Cards
9. Add-on Cards

6. What are credit cards?

Ans: A credit Card system is a type of retail transaction settlement and credit system, named
after the small plastic card issued to users of the system. A credit Card is different from a
debit card issuer loans the consumer money rather than having the money removed from an
account. Most Credit Cards are the same shape and size, as specified by the ISO/IEC 7810
standard.

7. What are smart cards?

Ans: A Smart Card is a plastic card embedded with the computer chip that stores and
transacts data between users. This data associated with either value or information or both
and is stored and processes within the card’s chip, either a memory or microprocessor. The
card data is transacted via a reader that is part of a computing system.

8. What are the disadvantages of credit cards?

Ans:
1. Risk of fraud, through the use of stolen cards
2. Cost of installing and paying for an electronic terminal
3. Card holders may spend more than they can afford
4. Cost of processing the transactions
5. Interest can be high if card is not paid-off in full each month-and cash withdrawals
are expensive

9. What are the different types of bills?

Ans:
1. Demand Bill
2. Usance Bill
3. Documentary Bills
4. D/A Bills
5. D/P Bills
6. Clean Bills
7. Inland Bills
8. Foreign Bills
9. Accommodation Bills
10. Supply Bills
11. Hundis
 Page 20 of 21

10. What are the disadvantages of bill discounting?

Ans:
1. Lack of uniformity in the documents to be submitted for availing bill discounting
facility
2. Wide geographical spread of the buyers
3. Delay on the part of drawer’s bank in sending the bills for presentation/
acceptance
4. Delay on the part of drawee in accepting the bills within a reasonable time frame
5. Delay in remittance of proceeds by the bank at the drawee’s end

11. What is real estate financing?

Ans: Real estate finance can be defined as a branch of finance, which deals with investing
money or wealth in real estate. Real estate finance deals with the allocation, generation, and
use of monitory resources over time, which is invested in the real estate business.

12. What is meant by bill discounting?

Ans: A bill discounting or bill of exchange is a short-term negotiable and self-liquidating

money-market instrument. The bill of exchange used for financing a transaction in goods
which means that it is essentially a trade-related instrument.

13. What is factoring?

Ans: According to C. S. Kalyanasundaram, “Factoring is a system designated to eliminate

payment risk in overseas sales and ensure that the seller receives prompt settlements”.

14. What are the types of factoring?

Ans:
1. Resource Factoring
2. Non-Resource Factoring
3. Advance Factoring
4. Bank Participation Factoring
5. Maturing Factoring
6. Notified and Undisclosed Factoring
7. Full Factoring
8. Invoice Factoring
9. Buyer-based, seller-Based, and Selective Factoring
10. Export Factoring
11. Edifactoring

15. What is forfeiting?

Ans: The concept of forfeiting was originally developed in Switzerland in mid 1960s and
became important after the end of Second World War with the objective of helping to finance
 Page 21 of 21

the West German exports to eastern block countries. “Forfeit” is a French word which means
“to surrender something or give up one’s fight”.

16. What is ‘EDI factoring ‘?

Ans: EDI factoring is a worldwide system for dealing with all factoring documentation
required for the paperless trading environment of Electronic Data Interchange (EDI). Ii is a
web-based EDI communication system used by all members of Factors Chain International
(FCI). The latest of generation of EDI systems developed by FCI, Edi factoring uses the
universal XML (an acronym for extended MarkupLanguage) standard for all business
messages and reports.

17. What is meant by venture capital?

Ans: The term venture capital comprises of two words, namely, ‘venture and capital’. The
term venture literally means a course or proceeding, the outcome of which is uncertain but
which is attended by the risk of danger of ‘loss’. On the other hand, the term capital refers to
the resources to start the enterprise.

18. What is seed capital?

Ans: In the first stage of project development, a small amount of capital is provided to the
entrepreneurs for concept testing or translating an idea into business. The initial Capital used
to start a business. Seed Capital often comes from the company founder’s personal assets or
from friends and family.

19. What are the advantages of forfeiting?

Ans:
1. Simplicity and Flexibility
2. Non-Resource Basis
3. Fixed Interest Rate and No currency Risk
4. No need to carry Receivables
5. EXIM Bank
6. No Hassles of collection

20. What are the powers of SEBI on Venture capital funding?

Ans:
1. Power to conduct inspection/investigation in respect of conduct and affairs of
FVCIs
2. Power to issue directions in the interest of the capital market and investors
3. Power to suspend or cancel registration
4. Power to call for any information
5. It is authorized to invest in venture capital fund or carry on activity as Venture
Capital Fund
6. It is regulated by an appropriate foreign regulatory authority or is an income tax payer 7.
It is a fit and proper persons