Financial Domain Questions:
1. What is Fixed rate loan?
A loan in which the interest loan rate does not change during the entire term of the loan is called a Fixed
rate loan. In case of low interest rates, the fixed rate loan allows an individual to lock in the low rates
and not concerned with fluctuations. Whether a fixed-rate loan is better for an individual will depend on
the interest rate environment when the loan is taken out and on the duration of the loan. Depending on
the terms of the agreement, the interest rate on the new loan will remain fixed, even if interest rates
climb to higher levels
2. What is home equity line of credit (HELOC)?
A home equity line of credit is a form of revolving credit in which your home serves as collateral.
Because a home often is a consumer's most valuable asset, many homeowners use home equity credit
lines only for major items, such as education, home improvements, or medical bills, and choose not to
use them for day-to-day expenses. With a home equity line, you will be approved for a specific amount
of credit. Many lenders set the credit limit on a home equity line by taking a percentage of the home's
appraised value and subtracting from that the balance owed on the existing mortgage.
3. What is Loan to value ratio?
A Loan to value ratio is the lending risk assessment ratio that financial institutions and others lenders
examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen
as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more
to borrow or he/ she will need to purchase mortgage insurance.
Loan to Value Ratio = Mortgage Amount / Appraised Value Of The Property
4. What is debt to income ratio?
A debt to income ratio is a personal finance measure that compares an individual's debt payments to the
income he or she generates. This measure is important in the lending industry as it gives lenders an idea
of how likely it is that the borrower will repay the loan. The higher this ratio, the more burden there is
on the individual to make payments on his or her debts. If the ratio is too high, the individual will have a
hard time accessing other forms of financing.
5. What is Lien holder?
A Lien holder is a person or institution holding a mortgage or having a legal claim on the specific
property of another person as security for a debt. Lien is the legal claim on a property until the debt on
that property is repaid. Lien Holder can be an individual or an institution that has a lien on someone’s
other property.
6. What are mutual funds?
A mutual fund is a type of Investment Company that pools money from many investors and
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invests the money in stocks, bonds, money-market instruments, other securities, or even cash.
Mutual fund shares are "redeemable." Investors purchase shares in the mutual fund from the fund
itself, or through a broker for the fund, and cannot purchase the shares from other investors on a
secondary market, such as the New York Stock Exchange or Nasdaq Stock Market.
7. Describe Trading of Stocks. What are stocks?
Stock Exchanges are the places where both the sellers and the buyers transact with each other.
Exchanges can be of two types: physical and virtual. Physical exchanges have some trading floors for
the transactions, while the virtual exchanges make use of computers and Internet for the trading. It is
most likely that you have seen the actions of the traders going out in the physical exchanges on TV or
through some other sources.
Stock market is a place that provides all of the basic requirements that one needs to trade in a secure
environment. It would have been almost impossible to trade or transact without compromising with your
security and privacy, if this kind of exchanges were not there. So, the exchanges could be taken as a
wholesale market that caters to the need of every buyers and sellers.
The stock of a business entity represents the original capital paid into or invested in the business by its
founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the
detriment of the creditors. Stock is distinct from the property and the assets of a business which may
fluctuate in quantity and value.
8. Importance of New York Stock Exchange
New York Stock Exchange (NYSE) is the most prominent of all among the trading exchanges. The birth
of "Big Board" occurred 200 years back at the table, where some 24 New York City stockbrokers and
merchants had signed the Buttonwood Agreement. Almost all of the America’s biggest companies invest
in the market through NYSE. The NYSE is also a listed exchange, which means that all of the trading
occurs through physical means between the traders on a physical trading floor. There is a place on the
trading floor called “trading post”, where the brokers trade their stocks and those stocks comes into the
hand of brokers via brokerage firms that are members of the exchange. There is a personnel at the
trading post called “specialist” that determines the prices through an auction method and matches the
compatible sellers & buyers. The current price of a stock is the highest possible value a buyer offers and
the lowest possible value a seller offers for its stocks. After successful completion of all these steps the
brokerage firm is apprised of the trading details and the brokerage firm in turn provide those details to
the concerned investor. Despite referred as a physical exchange, the NYSE makes use of the vast
capability of computers as well.
9. What is NASDAQ?
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange.
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"NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It
is the largest electronic screen-based equity securities trading market in the United States and second-
largest by market capitalization in the world. As of January, 2011, there are 2,872 [Link]
NASDAQ has more trading volume than any other electronic stock exchange in the world. Here on
Nasdaq, there are market markers for the stocks that are nothing but the brokerages as in the NYSE.
Through these market markers the shares prices are regulated within a limit and bids are thrown
continuously to create a potential market for those shares.
10. Stock Exchanges in USA.
A stock exchange is an entity that provides "trading" facilities for stock brokers and traders to trade
stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of
securities and other financial instruments, and capital events including the payment of income and
dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts,
derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock
exchange, it must be listed there. The initial offering of stocks and bonds to investors is by definition
done in the primary market and subsequent trading is done in the secondary market. A stock exchange is
often the most important component of a stock market. Supply and demand in stock markets is driven by
various factors that, as in all free markets, affect the price of stocks.
New York Stock Exchange (NYSE) is the most prominent of all among the trading exchanges. The birth
of "Big Board" occurred 200 years back at the table, where some 24 New York City stockbrokers and
merchants had signed the Buttonwood Agreement. The NYSE is also a listed exchange, which means
that all of the trading occurs between the traders on a physical trading floor.
The NASDAQ : The other kind of exchange called virtual exchange or more often over-the-counter
(OTC) market is devoid of any kind of physical trading floors or the floor brokers. Nasdaq is the same
for the virtual exchange, what NYSE is for the physical exchange. All sorts of transaction and trading
are achieved through a network of computers and telephones. Previously it became a custom for all the
bigger companies to go for the NYSE, leaving behind other second-tier stocks to be listed on other
exchanges. But the scenario has changed completely with the advent of latest technologies in the late
90s that made Nasdaq the primary choice for many larger technology companies.
Other Exchanges: Earlier the American Stock Exchange (AMEX) was also a great competitor of the
NYSE, but now its been displaced by the Nasdaq. But it is still the third biggest exchange of the U.S.
market. It has been bought by the parent of nasdaq called the National Association of Securities Dealers
(NASD) in 1998. Amex has now been the target source for small-cap stocks and their derivatives.
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11. Factors that will affect the change in price of Stocks.
Due to the market force of supply & demand the change in the stock prices is of a daily phenomenon. If
the ratio of demand to supply is higher, the stock prices go upwards. But when this ratio comes below
the mark of “one”, the stock prices go downwards. Demand & supply are directly related to buying &
selling respectively. It is quite easy to understand the concept of demand and supply. The thing that is
somewhat more complex to understand is that why people prefer a particular stock to others. Different
planning and strategies of different investors govern this preference to the stocks and it involves the
favorable or unfavorable news concerned to the companies. Stock prices of an individual companies
vary according to the understanding of investors for the company’s worthiness. The earnings of public
sector companies are reported in a year for four earning seasons, at which the Wall Street keeps its
attention. The reporting of the earning has a very important value in deciding the future value of a
company. The more a company shows its earnings the better its chance to be valued highly by the
market analysts and the investors, and this analysis is based upon the future earning projections of the
company decided by their current earning report. The other factors are:
● While comparing the value of two companies the market capitalization (i.e., price * shares
outstanding) should also be considered.
● In theory it is the company’s earning through which investors assess the value of a company, but
it is not completely true. Other common factors have also their roles to play, like expectations,
sentiments, reliance of the investors towards the company.
There are several theories doing the rounds that claim to be most effective in determining the stock
prices, but in reality not a single theory is capable enough to correctly predict the stock price.
12. How to buy a stock?
There are primarily two ways to buy a stock. The first one is through brokerage and secondly is through
dividend Reinvestment Plans and Direct Investment Plans.
Through Brokerage: It is the most accepted way of buying stocks. There two types of brokerage to
choose from: full service & discount service. The former type of brokerage takes all of the
responsibilities of your account, but their service charge is higher; the latter provides limited services to
your account but is cheaper in comparison. There was a time when only full service brokerage was there
that charged heavy service charges and were out of the reach of small investors. But, with the advent of
Internet there came the flood of discounted brokerage as a relief for the small investors.
Dividend Reinvestment Plans (DRIPs) and Direct Investment Plans (DIPs): These plans allow the
investors to purchase their stocks directly from the stock releasing companies and drawing the stock
prices to a lower level. So, if you plan to invest small sum of money at regular intervals, the DRIPS is a
great plan to follow.
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With the purchase of stocks you get the right to vote for the company’s policies and also have the
limited ownership on the assets as well as on the earnings of the company.
13. Why stocks are treated as equity while bonds as debt?
This is because the bonds provide a guaranteed return on the investment with a higher claim too. On the
other hand, shares doesn’t always guarantee return on the investment and so is riskier, but the shares
provide comparatively higher returns on the same amount of investment. This means that you get more
money from the same amount of investment from stocks than from bonds, if your investment is in a
profitable company, but you also have the risk to loose all of your money if your decision to choose a
particular stock proves a mistake. There are mainly two kinds of stocks: common & preferred.
Companies can form classes within their stocks at their will.
14. What is Swap and describe the types of swaps.
Traditionally, a Swap can be defined as the exchange of one security for another to change the maturity
(bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently,
swaps have grown to include currency swaps and interest rate swaps. If firms in separate countries have
comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm
may have a lower fixed interest rate, while another has access to a lower floating interest rate. These
firms could swap to take advantage of the lower rates.
The types of swaps are:
a) Forward swap: It is also known as delayed start swap, forward start swap/ deferred start swap and is a
kind of swap agreement that is often valued with two different and partial offsetting swaps and both the
swaps starts immediately. But one of them ends on the date of the start of the other one known as
forward swap. This swap is specially designed for the timing convenience of the investors.
b) Total return swap: It is the most widely used form of swap in physical commodities market or in case
of equity market. It is a kind of swap agreement that allows one party to pay according to a fixed rate or
according to a variable rate. But, the other party only pays according to the returns it gets from the
underlying assets like loans, bonds, etc. and includes the generated income from and the capital gains of
the underlying assts.
c) Currency swap: it is the kind of swap with the help of which all of the principal amount as well as the
interest on that amount of a particular currency can be swapped with another currency and it is free of
any kind of exchange rules.
d) Circus swap: It also termed as currency coupon swap / cross-currency swap and includes the
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characteristics of both the currency swap as well as of the interest rate swap. Under this swap a loan of
fixed rate of a particular currency can be replaced with a loan of floating rate of some other currency.
e) Commodity swap: This is a kind of swap under which all of the cash transactions are the result of the
underlying commodity and hence called commodity swap. Through this swap an institution gets a fixed
price from the commodity user and market price from the commodity producer. The financial institution
in return facilitates the required needs of both the parties.
f) Asset swap: Under this swap agreement, only the floating or the fixed investments are swapped but
not the fixed or floating interest rates and this swap is almost similar to the plain vanilla swap except the
underlying swap contract.
g) Interest rate swap: It is the kind of swap agreement between two companies or banks to switch over a
floating rate loan into a fixed rate loan or vice versa in different countries. The currencies into which the
swap has taken place could be either same or different.
h) Constant maturity swap: It is the kind of swapping agreement under which a buyer has the right to set
its own time duration for the received flows on a particular swap. It can of two different types termed as
cross-currency swap or single currency swap. This swap allows the readjustment of a part of the interest
rate periodically based on the fixed maturity rate of the market and it is a variant form of interest rate
swap. But it cannot be readjusted with any floating reference index rate.
i) Basic rate swap: Generally, due to different rates of borrowing and lending, companies run the risk of
interest rate, which is neutralized with the help of basic rate swap. It enables the two parties involved in
the agreement to exchange the interest rates varying according to money markets.
j) Variance swap: It is a variant of the volatility swap and under this swap the linearity of variance go
along with the payout, not with the volatility as in the case of volatility swap. This difference makes the
payout as the one with higher rates, not the volatility.
k) Overnight index swap: it simply involves the swapping of a fixed interest rate to an overnight rate.
l) Zero basic rate: It is also known as Zebra swap, actual rate swap/ perfect swap and is a swap
agreement between a financial intermediary and a municipality. Under this swap agreement, the
financial intermediary receives from the municipality a floating rate of interest and pays to the
municipality a fixed rate of interest.
m) Roller coaster swap: It is a kind of seasonal swap that gets created for meeting the periodical
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financial requirements of the counter-party and provides some liberty in terms of payment according to
the periods set beforehand. So if a company is dealing in some commodity, which has its demand
seasonally, then the company will surely go for a roller coaster swap.
n) Airbag swap: This swap gets created to counter the effects of fluctuating interest rates that puts a
negative pressure on the investment. This counter effect is achieved through the adjustment of the
notional value of the fluctuating interest rate by indexing the very part of the interest rate that is
fluctuating to a constant maturity swap.
15. What are options and Bonds and its types.
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal
at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at
fixed intervals. Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender
(creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance
long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates
of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds.
Bonds must be repaid at fixed intervals over a period of time.
Types of Bonds:
a) Treasury bonds: This bond is the most widely known and is issued by the U.S. government only with
a starting value of $1000. Its maturity being longer than 10 years has a fixed interest rate and is
marketable too.
b) Municipal bonds: This bond can be issued by municipality or the state or the country itself and its
purpose is to provide debt security by financing the public expenditures.
c) Corporate bonds: This bond is issued by the corporations only and thus taxable. Normally it has a par
value of $1000 and a maturity term, but can be traded freely at major exchanges.
d) Zero coupon bonds: It is named zero coupon bond because there no payment in terms of coupon is
made rather an initial discount is offered at the par value.
Options
In finance, an option is a derivative financial instrument that establishes a contract between two parties
concerning the buying or selling of an asset at a reference price. The buyer of the option gains the right,
but not the obligation, to engage in some specific transaction on the asset, while the seller incurs the
obligation to fulfill the transaction if so requested by the buyer. The price of an option derives from the
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difference between the reference price and the value of the underlying asset (commonly a stock, a bond,
a currency or a futures contract) plus a premium based on the time remaining until the expiration of the
option. Other types of options exist, and options can in principle be created for any type of valuable
asset.
There are mainly two types of Options called calls and puts. The former provides an authentication to
an individual to make a purchase of some property within a given time frame and is very much similar
to a stock’s long position. Buyers invest in the calls with an expectation of a large raise in the value of
stocks. But when it comes to put, the holder gets an authentication to sell some property or asset within a
given time period and it is very much similar to a stock’s short position.
16. Bonds in Finance.
The price of a bond never remains constant on a given day, as it is true for any of the securities that are
traded publicly. It is not necessary to hold a bond for its selling until its maturity rather it can be sold any
time in a open market and this is the reason its price never remains static.
There are several factors affecting the price of a bond, but the most influential of them all is present
interest rates doing rounds in an economy. The other factors include: maturity term, face value, yield,
coupon payment and the issuer. The price of the bonds falls as soon as the prevailing interest rate in the
market rises, bringing up the yield of the older bonds and making then stand at the same price level to
that of the newer bonds, with higher coupon. On the contrary, the price of the bonds raises as soon as the
prevailing interest rate in the market falls, bringing down the yield of the older bonds and making them
stand at the same price level to that of the newer bonds, with lower coupon.
17. What are Options in Finance.
In finance, an option is a derivative financial instrument that establishes a contract between two parties
concerning the buying or selling of an asset at a reference price. The buyer of the option gains the right,
but not the obligation, to engage in some specific transaction on the asset, while the seller incurs the
obligation to fulfill the transaction if so requested by the buyer. The price of an option derives from the
difference between the reference price and the value of the underlying asset (commonly a stock, a bond,
a currency or a futures contract) plus a premium based on the time remaining until the expiration of the
option. Other types of options exist, and options can in principle be created for any type of valuable
asset.
18. What is a derivative and how does it function?
It is a kind of financial security that derives its price from one or more than one underlying assets. It is in
itself nothing more than a contract between two or more than two parties. Its price is highly depends on
the fluctuating value of the underlying assets. Some of the important underlying assets on which the
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price of derivative depends are: commodities, stocks, interest rates, bonds, currencies, etc. The
institutional investors mostly use it for their increment in overall return.
19. Who is a broker dealer?
A broker-dealer is a term used in United States financial services regulations. It is a company or other
organization that trades securities for its own account or on behalf of its customers. Although many
broker-dealers are "independent" firms solely involved in broker-dealer services, many others are
business units or subsidiaries of commercial banks, investment banks or investment companies. When
executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When
executing trades for its own account, the institution is said to be acting as a "dealer." Securities bought
from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in
the capacity of dealer, or they may become a part of the firm's holdings.
20. How does a commercial bank operate in a brokerage industry?
There are several functionalities of a commercial bank in a brokerage industry:
● It helps the brokerage firms in dealing with their security inventories and providing margin loans
to their clients, by financing the loans.
● It acts as a cashier for the securities of the U.S. government.
● It also provides custody to the financial institutions.
● It issues commercial papers and loans to make it easier of the availability of short-term credit for
the trading market.
● It also takes part in the municipal bonds underwriting.
● It also functions as the creator of banker’s acceptances to facilitate the trade internationally.
21. Who is a market maker?
Market makers, also known as Ax, are the one who throw bids continuously and quote the prices that
ranges within the prescribed percentage spread of the shares and the market makers are obliged to make
a market for the share within that spread. It depends on the volume of the stock, if the numbers of the
market makers for that stock would be 4 or 40 or somewhere within them. Market makers also exert a
large effect on the secondary market through accelerating the liquidity of stocks and in result growing
the market on a long run. This is why; the market makers are also termed as the catalyst of the market.
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The main function of a designated market maker is to make ready the buyers and the sellers for the sell
orders and the purchase orders respectively. So, they are responsible for both the bid and the price quote
to be maintained all the time and that also under a predefined spread. This function of a market maker
creates a market for the stocks.
22. Who is a specialist?
To perform all kinds of trading functions, the NYSE rely on an individual known as the specialist. All of
the stocks in the NYSE are allocated to this specialist, who performs all kinds of buying and selling of
those stocks through a particular place called the trading post. The agents, brokers or the floor traders,
all of them gather at this trading post to know about the all of the bids and the ask prices for the
securities. Then the current bids and the ask prices are told loudly to the floor traders and an execution
of trading completes, when a bid and its ask order meets each other.
Many of the specialists are not only assigned the task of meeting the buyers and the sellers rather they
also have to hold a substantial number of different shares in order to fill the gap, if any, between the buy
and the sell orders. So, the traders continuously hold more and more share until equilibrium reaches for
the demand & supply. It is a common task for the specialists to hold shares. Besides, these regular tasks
the specialists are also responsible for holding the order of a customer that has ordered a price that is
higher than the lowest ask price or is lower than the stop order, which is the best bid price. Now that the
specialists only execute order when he ensures that the ordered price has come at par with the stock
price.
Another task for the specialists is to find out the fair price for each of the stocks, which are under their
supervision, at the start of the trading day, under their guidance. Fair price of a stock is determined
according to the current demand & supply of the concerned stock. The specialists has also the authority
to delay the opening of a particular stock well after the opening of the NYSE at 9:30 a.m., until they find
the fair price for that stock. So, it’s quite evident that a specialist’s works are very stressful and he/she
hardly gets any leisure time in between.
It becomes the responsibility of the market makers to buy or to sell minimum 1000 securities at their
quoted price, once they make that quotation. Afterwards, they can leave the market and then propose a
new bid or the price, so that they can make some profit on those securities. Besides this task they are
also involved in the facilitation of the liquidation for their clients. For this task they get a predetermined
commission. They can also do the trading for a firm other than their own, just like a specialist.
The market makers are federally bound to provide the best possible bids and ask prices to their clients
for every transaction and it has the purpose of conducting a fair transaction for a two-sided market.
Without these regulations, the customers would have been the victims of the trading market.
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23. What are the bonds and types of bonds?
Treasury bonds: They involve no risk at all as the U.S. government itself issues them in a term of 30
years with a fixed interest rate calculated half-yearly.
Corporate bond: There are times when a company needs a large capital for some kind of investment or
expenditures, but are not able to support it through their own sources. Then the company issues bonds in
the market for the public to buy them and these very bonds are called corporate bonds.
Euro bond: Some company that has no presence in the European market issues euro bonds, also known
as the global bonds. This is why the, the currency in which the issuing company of this type of bonds
deals in are different from the currency in which the Euro bonds are sold and bought. Mostly, the
currency for trading Euro bonds is Euro.
Municipal bonds: They are those bonds that are issued by the local government or the state or the city
itself, to raise funds to meet their special expenditures and some special projects.
Emerging market bond: This is the kind of bond issued by the financial market that is still in the phase
of development and is comparatively small in size. These markets are situated in the developing
countries.
Investment grade bond: These are the bonds that are considered safe to invest in with a high rating of
bond, such as BBB or even higher.
High yield bonds: There was a time when the high yield bonds were considered very risky. But now, it
has earned its credibility among the investors as a solution for the non-investing companies to raise
some capital in the market. Only those companies that are far from the credit rating guidelines of Fitch,
S&P and Moody issue these bonds.
Convertible bonds: As its name suggests these are the bonds that can be converted or exchanged with a
certain number of the same company’s shares that has issued the convertible bonds. These bonds are
normally of junior debenture kinds.
Equity-linked bond: It is the bond that has its returns dependent upon the performances of the equity
index, the single equity share and the basket of equity securities.
Exchangeable bond: These bonds have the same properties as that of the convertible bonds. The only
exception is that an exchangeable bond can be exchanged into a certain number of shares of the
companies that haven’t issued that exchangeable bond.
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Inflation-linked bond: An inflation-linked bond is very much similar to a regular saving bond. The
difference lies in its capability to insulate the effects of inflation due to the tying of its yield with the rate
of inflation.
Mortgage bond: Mortgage bonds are those bonds that are acquired by offering a physical property or
real state as the mortgage. This mortgage provides the security to the issuing company.
Yankee bond: It is the bond that can only be issued by the overseas corporations and banks that are not
situated in the U.S., but the value of bonds are denominated in the dollars of U.S. only.
Subordinate bond: This bond is also termed as the junior security and is taken as a subordinate of other
kinds of bonds in respect of the earnings and the assets.
Discount bond: This is the bond whose market price is valued lower than that of its face value.
Zero coupon bond: This is the bond, which doesn’t provide any interest whatsoever, but provide profits
in terms of a large discount at the time of buying and this discount can be converted into cash at the time
of its maturity.
24. What is SOX?
It is the act that has been passed by the U.S. Congress in favor of investors, through which the
corporations are bound not to do any kind of fraud with the investors. This act provides more teeth to the
already present security regulations. The important points of SOX Act is given below:
● It is the law for the security of investors and is necessary to follow by the people who come
under its net and knows its relationship with the information security.
● It secures the whole audit history of different software policies and maintains all the records
including the changes in policies.
● It also helps in keeping the proper record and maintenance of the project documentations.
● It also keeps the tab on the data conversion and the security risk and develops the system
acquisitions.
● It clearly defines the boundary between the development and the application of products in order
to automate and model the involved processes.
● Ensures a strict regimen of testing which also includes the test cases.
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● Keeps continuous vigil to the application-movements by development authorities throughout
from the testing to the production.
● Reviews the management and the approval of IT systems by automating the process of approval.
● Keeps the security system intact by enforcing all of the formal procedures and policies.
● It has also established the Public Company Accounting Oversight Board (PCAOB) for the
companies to be registered and that is mandatory too.
● Hires auditing committees to strictly apply auditor regulation and inspect the actions of
accounting firms.
● Increases the responsibilities for corporate to always take care of any kind of fraudulent
activities.
● Enforces the ethical guidelines for the senior financial officials and disclosure of the financial
statements of companies.
● Stipulates the guidelines to be followed in case of any conflicts of interest among analysts.
● Availability of the authorities before Commission & Federal Court and requirement of
qualifications for the brokers and the dealers.
● Availability of the enforcement methods to punish any criminal activities, identified under the
Act.
25. What are Treasury Bills?
Treasury bills are short-term securities maturing in one year or less.
● Bills are sold at a discount from their face value.
● When a bill matures, the investor receives the face value.
● The difference between the purchase price and the face value equals the interest earned.
For example, if a $1,000 26-week bill sells at auction for a 3.80% discount rate, the purchase price
would be $980.79, a discount of $19.21. The purchase price can be determined from the following
formula:
P = F (1 - (d x t)/360), thus
P = 1000 (1- (.0380 x 182)/360)
P = $ 980.79
P = Price
F = Face value
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d = rate of discount
t = days to maturity
Methods of Purchase
● Treasury bills can be purchased by individuals and various types of entities including trusts,
estates, corporations, partnerships, etc.
● Treasury bills can be purchased by individuals, organizations, fiduciaries, and corporate
investors in Legacy Treasury Direct, or through a broker or financial institution.
● Institutions may establish a TAAPS account to bid for Treasury securities directly at auction.
Learn more about establishing a TAAPS account.
