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Vaibhav (Banking and Insurance) - 1
Vaibhav (Banking and Insurance) - 1
Financial Instruments/Assets
Financial Instruments can be defined as a market for short-term money and
financial assets that is a substitute for money. The term short-term means
generally a period of one year substitutes for money is used to denote any
financial asset which can be quickly converted into money. Some of the
important instruments are as follows:
Capital Market:
A capital market is an organised market which provides long-term finance for
business. Capital Market also refers to the facilities and institutional
arrangements for borrowing and lending long-term funds. Capital Market is
divided into three groups:
The U.S. Federal Reserve, like many other central banks, has specific targets for
these objectives. It seeks an unemployment rate below 6.5 percent. The Fed
says the natural rate of unemployment is between 4.7 percent and 5.8percent. It
wants the core inflation rate to be between 2 percent and 2.5 percent. It seeks
healthy economic growth. That's a 2 to 3 percent annual increase in the nation's
gross domestic product.
The important dimensions of a firm’s credit policy are credit terms, credit
standards and collection policies.
1. Credit Terms:
Credit terms are the stipulations under which the firm sells on credit to its
customers. These are with regard to the repayment of the credit sales amount.
Credit terms reflect a combination of both credit period and cash discount.
For example, if credit is extended as ‘3/10 net 30’. It implies a cash discount of
3% is offered to a customer who pays within 10 days from the sale date. If the
offer is not availed, then, payment has to be made by the 30th day. If not paid
then, he would be deemed to have defaulted.
2. Credit Standards:
Credit should be allowed to only those customers who contribute good credit
risk. Credit standards are the basic criteria for extension of credit to customers.
they are influenced by three C’s of credit viz..
3. Collection policy:
It should aim at accelerating collection from slow payers and be reducing bad
debts losses. The collection program should consist of the following:
Hence, the optimum collection policy is a trade-off between costs and benefits
which maximizes profitability and the value of the firm.