8th Batch

02.
A
1. The higher the risk the more the return. At a higher risk, the range of the expected return is
high. As a result, in investor can assume great return from the investment if it becomes
profitable.
2. According to the capital asset pricing model (CAPM), risk and return are related in a linear
fashion.
3. Securities are risky because their returns are variable.
4. The most commonly used measure of risk or variability in finance is standard deviation.
5. The risk of a security can be split into two parts: unique risk and market risk.
6. Unique risk stems from form-specific factors where market risk emanates from economy-wide
factors.
7. Portfolio diversification washes away unique risk, but not market risk. Hence, the risk of a fully
diversified portfolio is its market risk.

C
A portfolio means a combination of two or more securities (assets). A large number of portfolios can
be formed from a given set of assets. Investors construct a portfolio of investment rather than invest
in a single asset. The risk of a portfolio is measured in much the same way as the risk of a single asset.
The portfolio return is a weighted average of the returns on the assets from which the portfolio is
formed. An asset with higher risk may be less risky when it is a part of a portfolio.
Efficient portfolio is a portfolio that maximizes return for a giver level of risk or minimizes risk for a
given level of return.

03.
A
Topics Money Market Capital Market
1. Definition Money market is the part of financial Capital market is part of the financial
market where lending and borrowing market where lending and borrowing
takes place for short-term up to one takes place for the medium-term and
year. long-term.
2. Types of Money market instruments Capital market instruments are equity
instruments are promissory notes, bills of exchange, shares, debentures, bonds, preference
involved commercial paper, T bills, call money, etc. shares, etc.
3. Institutions The money market contains financial It involves stockbrokers, mutual funds,
involved/types banks, the central bank, commercial underwriters, individual investors,
of investors banks, financial companies, chit funds, commercial banks, stock exchanges,
etc. Insurance Companies.
4. Nature of Money markets are informal. Capital markets are more formal.
Market
5. Liquidity of Money markets are liquid. Capital Markets are comparatively less
the market liquid.
6. Maturity The maturity of financial instruments is The maturity of capital markets
period generally up to 1 year. instruments is longer and they do not
have stipulated time frame.
 7. Risk factorSince the market is liquid and the Due to less liquid nature and long
maturity is less than one year, Risk maturity, the risk is comparatively high.
involved is low.
8. Purpose The market fulfills the short-term The capital market fulfills the long-term
credit needs of the business. credit needs of the business.
9. Functional The money markets increase the liquidity The capital market stabilizes the
merit of funds in the economy. economy due to long-term savings.
10. Return on The returns in money markets are usually The returns in capital markets are high
investment low. because of higher duration.

B
The global financial system has seven basic economic functions that create a need for the money and
capital markets.

Savings Function: Bonds, stocks, and other financial claims sold in the money and capital markets
provide a profitable, relatively low-risk outlet for the public’s savings. By acquiring these financial
assets, households may choose to forego consumption today in order to increase their consumption
opportunities in the future.

Wealth Function: Wealth is the sum of the values of all assets (automobiles, homes, clothing,
bonds, stocks etc.) we hold at any point in time. Total wealth is the sum of current savings, previous
wealth and their income in current time. For example, If I had wealth of 1000 in previous period and
their return is 100 (at interest rate 10%) and I saved 50 in current time, then my total wealth is 1150
[1000+100+50].
The portion of wealth held by society in the form of stocks, bonds, and other financial assets—that is,
financial wealth —is created by the financial system and the money and capital markets within that
system. Wealth holdings represent stored purchasing power that will be used in future periods as
income to finance purchases of goods and services and to increase society’s standard of living.

Liquidity Function: The world’s financial markets provide liquidity (immediately spendable cash)
for savers who hold financial instruments but are in need of money. Money generally earns the lowest
rate of return of all assets traded in the financial system, and its purchasing power is seriously eroded
by inflation. That is why savers generally minimize their holdings of money and hold other, higher-
yielding financial instruments until they really need spendable funds. For wealth stored in financial
instruments, the global financial marketplace provides a means of converting those instruments into
cash with little risk of loss.

Credit Function: Consumers need credit to purchase a home, buy groceries, repair the family
automobile etc. Businesses need credit to improve inventory, construct new buildings, meet payrolls,
and grant dividends to their stockholders. State, local, and federal governments borrow to construct
buildings and other public facilities and to cover daily cash expenses until tax revenues flow in. The
global financial markets furnish credit to finance current consumption and investment spending
reducing spending opportunities in the future.

Payments Function: The global financial system also provides a mechanism for making payments
for purchases of goods and services. It provides cheques against demand deposit which can be used as
a popular medium of exchange in making payments all over the globe. Also debit and credit cards issued
by banks. In the case of credit cards, the customer receives instant access to short-term credit when
contracting for purchases of goods and services.

Risk Protection Function: The financial markets offer businesses, consumers, and governments
protection against life, health, property, and income risks through the sale of different policies. These
are known as insurance policies. The financial system permits individuals and institutions to engage in
both risk sharing and risk reduction. Risk sharing occurs when an individual or institution transfers risk
exposure to someone willing to accept that risk (such as an insurance company), while risk reduction
usually takes place when we diversify our wealth across a wide variety of different assets so that our
overall losses are likely to be more limited.

Policy Function: Government take different policies to stabilize the economy and avoid inflation.
By manipulating interest rates and the availability of credit, government can affect the borrowing and
spending plans of the public, impacting the growth of jobs, production, and prices. This task of economic
stabilization has been given largely to central banks.

C
The primary market is the market where new securities are initially issued and sold by companies or
governments to raise capital. In the primary market, issuers (such as corporations or governments) sell
newly created securities directly to investors through various methods, including initial public offerings
(IPOs), rights issues. Once securities are sold in the primary market, they enter the secondary market,
where they can be traded among investors.

The secondary market is the market where previously issued securities that have already been through
the primary market are bought and sold among investors. Stock exchanges (DSE, CSE etc.) and over-
the-counter (OTC) markets facilitate the trading of securities in the secondary market. The secondary
market provides liquidity to investors, allowing them to buy and sell securities as needed, and it also
helps determine the market prices of these securities based on supply and demand. Prices in the
secondary market may fluctuate based on factors like economic conditions, investor sentiment, and
company performance.

04.

Topics Central Bank Commercial Bank

1. Formation Central bank is established through Commercial bank is formed on the basis
special law of the government. of Banking Company Law.
2. Ownership Central bank is established under Commercial bank is established under
government ownership. both govt. and private ownership
3. Purpose The main purpose of central bank is to The main purpose of commercial bank is
control credit system and money to earn profit.
market.
4. Number In a country there is only one central In a country there can be a greater
bank. number of commercial banks.
5. Control Central bank is conducted under Commercial bank is conducted under
Government control. Central bank.
6. Government Government has direct influence on Government has indirect influence on
Influence central bank. commercial bank.
 7. Currency Central bank organizes, controls and Commercial bank is the member of
Market administers currency market. currency market.
8. Competition Central bank does not compete with Commercial banks have to face lot of
other banks. competition.
9. Foreign Central bank has no branch abroad. Commercial banks may have many
Branch branches abroad.
10. Note Issue Central bank can issue notes. Commercial bank cannot issue notes.
11. Credit Central bank controls credit. Commercial bank assists central bank in
Control controlling credit.
12. Nature of Central bank is not engaged in general Commercial bank is engaged in receiving
Work banking activities i.e., to receive deposits, paying money, creating loan
deposits, to lend, to create loan etc. etc.
13. Foreign Central bank controls foreign Commercial bank helps central bank in
Exchange exchange. controlling foreign exchange.
14. Investment Central bank does not make any Commercial bank makes investment in
investment for profitability purpose. various sectors for the purpose of
profitability.

B
The method how the central bank controls the loanable fund of commercial banks is call credit control.
There are two method of credit control:
i. Quantitative or General Method
ii. Qualitative or Selective Method

Quantitative or General Method:

(i) Bank Rate Policy: Bank rate is the rate at which central bank lend money to other banks.
If there is more credit in an economy it will lead a higher price, higher wage and unusual
economic activities. Then the central bank will increase the bank rate. As the bank rate is
increased the supply of loanable funds will be lower and the interest rate will increase. As
the interest rate increase the investment will fall. Thus, the employment, income will fall. As
a result, the price will also fall. The reversed will happen when the bank rate is lowered.

(ii) Open Market Operation: If the central bank wants to decrease the loanable funds of
commercial banks it sells bonds in open market against bank checks. As a result, the loanable
funds of commercial banks decreases. Conversely, if the central bank wants to increase the
credit it buy/withdraw the bonds. As a result, the liquidity of banks increases and they can
create more credits.

(iii) Variable Reserve Ratio: The central bank can control volume of credit by varying cash
reserve ratio whenever necessary. If central bank increases the reserve ratio, it will lead
to a reduction in the supply of credit. Similarly, by an opposite process the supply of credit
may be expanded.

Qualitative or Selective Method:

(i) Rationing of credit: Central bank limits the amount of credit for each applicant.
 (ii) Direct action: Direct action means that central bank will penalize the banks by charging
plenty rates over and above the official discount rate who didn’t follow the instruction laid
down by central bank.

(iii) Moral Suasion: Central banks can suggest to banks that they should restrict lending in
certain areas or follow specific lending practices for the stability of the financial system.

05.
A
1. Deposits Create Loans: When individuals or businesses deposit money into a bank, these
deposits serve as a source of funds for the bank. Banks are required to keep only a fraction of
these deposits (known as reserves) and are allowed to lend out the remaining portion. This means
that when you deposit money in a bank, the bank doesn't just keep your money in a vault. Instead,
it uses a significant portion of these deposits to extend loans to other customers. This process
allows banks to create new money in the form of loans, based on the initial deposits they receive.
In essence, your deposit becomes the basis for someone else's loan.
2. Loans Create Deposits: When a bank extends a loan to a borrower, the loan amount is credited
to the borrower's account. This credit effectively creates a new deposit in the banking system.
For example, if you take out a loan to buy a car, the loan amount is deposited into the seller's
account.

B
Credit multiplier is an equation which states that how much the money supply will increase from an
initial deposit. It finds the number through which the initial deposit will be multiplied to find the amount
money supply increased through loan-deposit circulation.

Limitations Of Credit Creation:

 Credit creation depends upon the amount of deposits. The greater the deposit, the more the
credit creation.
 Credit creation inversely related with CRR (Cash Reserve Ratio). The more the CRR the less the
credit Creation.
 If the liquidity preference of the people is high, the credit creation will be less.
 If business conditions are bright then demand for credit will be more.

06.
A
For growth and development of modern banking, Indo-Pak Subcontinent have a positive role.
a) The Ancient Era: Many evidences are found with the archeological symbols of Harappa and Mohenjo-
Daro. From different religious scriptures we find a lot of information regarding modern banking
activities.

b) The Mughal Era: The Mughal Government introduced gold and silver coins. In 1700, The Hindustan
Bank was established.
c) The British Era: The expansion program of the modern bank started when the English took power of
India. In 1784, Bengal bank introduced paper currency note. In this period several banks have
established such as, Bank of Bengal, Bank of India, Bank of Bombay, Bank of Madras etc.

d) The Pakistan Era: After the separation of India, 639 branches of different of banks were the parts
of Pakistan.

e) The Bangladesh Era: After the liberation of Bangladesh, the State Bank of Pakistan named
Bangladesh Bank and declared as Central Bank of Bangladesh. Also, two bank’s headquarter was located
in east Bengal. With all this banks and branches the banking system of Bangladesh started to run.

C
Discount rate is the interest rate used to convert future values to the present value. And discounting
is the process of finding the present value of a future cash flow or a series of cash flows.

There are three types of annuities.

A. Ordinary Annuity: Ordinary annuity is an annuity for which the cash flow occurs at the end of
each period. Ordinary annuity means that periodic equal payments which are made at the end of each
specified period.

B. Annuity Due: Annuity due is an annuity for which the cash flow occurs at the beginning of each
period.

C. Perpetuity: Most annuities call for payments to be made over some finite period of time. However,
some annuities go on indefinitely, these are call perpetuity.

Topics Ordinary Annuity Annuity Due

1. Definition Ordinary annuity is the payment Annuity due is the payment occurs at
occurs at the end of each period. the beginning of each period.
2. Cash flow Cash flows start at the end of each Cash flows start at the beginning of
start period. each period.
3. Future Value
𝐴{(1 + 𝑅) − 1} 𝐴(1 + 𝑅){(1 + 𝑅) − 1}
𝐹𝑉 = 𝐹𝑉 =
𝑅 𝑅

4. Present Value
1 1
𝐴 1− 𝐴 1− (1 + 𝑅)
(1 + 𝑅) (1 + 𝑅)
𝑃𝑉 = 𝑃𝑉 =
𝑅 𝑅

5. Toral Value Total amount of money is less than Total amount of money is more than
that of annuity due. that of ordinary annuity.