ASSIGNMENT

Financial
Engineering and
Economics
[Type the document subtitle]
 FINANCIAL INSTITUTIONS
finance refers to funds needed to carry out production Funds are needed for meeting
current requirements or day to day expenses and for buying capital goods. A
business unit - factory or workshop - needs funds for paying wages and salaries, for
buying raw materials. Institutions that meet all such requirements of finance are
called financial institutions.
In financial economics, a financial institution is an institution that provides financial
services for its clients or members. Probably the most important financial service
provided by financial institutions is acting as financial intermediaries. Most financial
institutions are regulated by the government.
Broadly speaking, there are three major types of financial institutions:

1. Depositary Institutions : Deposit-taking institutions that accept and manage

deposits and make loans, including banks, building societies, credit
unions, trust companies, and mortgage loan companies
2. Contractual Institutions : Insurance companies and pension funds; and
3. Investment Institutes: Investment Banks, underwriters, brokerage firms.

SOURCES OF FINANCE

Two types

(a) Non-institutional sources, and

(b) Institutional sources

Non-institutional Sources of Finance

Loans from individuals, for example, loans taken from moneylenders, friends,
relatives, etc. are called non-institutional sources of finance.

Institutional Sources of Finance

Institutional sources of finance include organisations or establishments which are set

up to provide finance. They have a specialised objective and that is provision of
finance. Such institutions or organisations are also called financial institutions.
Examples of institutional sources of finance are banks, cooperative societies,
insurance companies, UTI, State Finance Corporations, Development Banks, etc.
 ALL INDIA INSTITUTIONS

1.Industrial Finance Corporation of India (IFCI)

IFCI was the first to be setup in the existing chain of development

banks in1948 by the Government of India. It provides medium and long term credit to
industry.

The Corporation performs three important functions:

(i) It grants loans and advances to industrial concerns and subscribes to the debentures
floated by them.
(ii) It guarantees loans raised by the industrial concerns in the capital market.
(iii) It underwrites the issue of stock, shares, bonds and debentures of industrial concerns.

IFCI provides long and medium term finance only to companies engaged in manufacturing,
mining, shipping and generation and distribution of electricity.
The limit of assistance to any single concern is now Rs.1 crore and the period of loans is not
to exceed 25 years.

2. Industrial Development Bank of India (IDBI)

The IDBI came into existence in 1964 and is now the apex institution providing term finance.
The main function of IDBI is to finance industrial enterprises such as manufacturing, mining,
Processing, shipping and other-transport industries and hotel industry.
It provides direct assistance by way of project loans, underwriting of and direct subscription
to industrial securities.
It also refinances term loans given by other financial institutions.

3. Industrial Credit and Investment Corporation of India (ICICI)

ICICI was set up in January, 195 5 for the purpose of developing small and medium
industries in the private sector.
The aim of lClCI is to stimulate the promotion of new industries, to assist the expansion and
modernisation of industries and to furnish technical and managerial guidance.
The Corporation grants:

(i) Long term or medium term loans

(ii) Guarantees loans from other private sources _
(iii) Participates in equity capital and underwrites new issues of shares and debentures.
IClCl has so far assisted industries manufacturing paper, chemicals and pharmaceuticals,
electrical equipment, textiles, sugar, metal ore, lime and cement works, glass manufacture,
etc. lClCl assists all sectors, that is, the private sector, the joint sector, the public sector and
the cooperative sector but the major beneficiary is the private sector

4. Small Industries Development Bank of India (SIDBI)

SIDBI was set up in 1996 as a wholly owned, subsidiary of tool.

It is the principal financial institution for financing and development of small scale industries
in the country. It extends financial assistance to the small scattered all over the country.

5. Export - import Bank of India {EXIM Bank)

The EXIM Bank of India was set up in 1982 to provide finance for the development of
exports. - Its main objective is to solve the problems of exporters, provide special attention
to capital goods exports and export of technical services.
It provides financial assistance to the exporters and importers and acts as the principal
financial institution for coordinating the working of other institutions engaged Ill financing
exports and imports

6. Unit Trust of India (UTI)

The UTI was set up in 1964 at the initiative of the RBI. It is a $0 per cent subsidiary of the
IDBI. The rest of the 50 per cent is subscribed by the LIC, the State Bank of India, other
scheduled banks, and the ICICI.
The main source of funds of the UTI is the sale of units to the public under various schemes.
By selling these units they collect and mobilise savings from the general public and lends
them to the investors. It also participates in the underwriting of the new issues of
debentures and shares

7. Life Insurance Corporation of India

The Life Insurance Corporation of India (LIC) came into being in 1955after the nationalization and
merger of about 250 independent life after the nationalization and merger of about 250
independent life insurance societies. Insurance societies. It is headquartered in Bombay.

The primary activity of LIC is to carry on life insurance business, but it has gradually developed into
an important all has gradually developed into an important all--India financial institution India
financial institution which provides substantial support to industry

It works in close liaison with the other all It works in close liaison with the other all--India financial
institutions in India financial institutions in providing finance directly and in helping industrial
concerns by its providing finance directly and in helping industrial concerns by its underwriting
support.
Thanks to its massive resources, LIC is one of the two largest institutional investors in the country. By
law it is required to invest 25 percent of its funds in government securities and a further 25 percent
of in approved securities

8. General Insurance Corporation (GIC)

The General Insurance Corporation (GIC) was founded when the management of general founded
when the management of general insurances business in India was taken over by the insurances
business in India was taken over by the government in 1971 and subsequently nationalized in 1973.

It is headquartered in Bombay . In addition to investing in socially—oriented sectors, the bulk of its

inevitable resources are required to be Invested, GIC provides substantial assistance to industrial
projects by way of term loans, subscription to equity capital and debentures , loans , and
underwriting of securities.

9. RBI

The Reserve Bank of India (RBI) is India's central banking institution, which formulates the monetary
policy with regard to the Indian rupee. It was established on 1 April 1935 during the British Raj in
accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided
into shares of Rs.100 each fully paid, which was entirely owned by private shareholders in the
beginning.Following India's independence in 1947, the RBI was nationalized in the year 1949.RBI
assumes an important part in the development strategy of the Government of India, and as a leading
member of the Alliance for Financial Inclusion (AFI), is notably active in promoting financial inclusion
policy. RBI is also a member of the Asian Clearing Union. The general superintendence and direction
of the RBI is entrusted with the 21-member-strong Central Board of Directors—the Governor
(currently Duvvuri Subbarao), four Deputy Governors, two Finance Ministry representative, ten
government-nominated directors to represent important elements from India's economy, and four
directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each
of these local boards consists of five members who represent regional interests, as well as the
interests of co-operative and indigenous banks.
10 .NABARD

National Bank for Agriculture and Rural Development (NABARD) is an apex development
bank in India having headquarters based in Mumbai (Maharashtra)and other branches are all
over the country. The Committee to Review Arrangements for Institutional Credit for
Agriculture and Rural Development (CRAFICARD), set up by the Reserve Bank of India
(RBI) under the Chairmanship of Shri B. Sivaraman, conceived and recommended the
establishment of the National Bank for Agriculture and Rural Development (NABARD). It
was established on 12 July 1982 by a special act by the parliament and its main focus was to
uplift rural India by increasing the credit flow for elevation of agriculture & rural non farm
sector and completed its 25 years on 12 July 2007

11. NHB

The National Housing Bank (NHB) is a state owned bank and regulation authority in India,
created on July 8, 1988 under section 6 of the National Housing Bank Act (1987). The
headquarters is in New Delhi and is total staff June 30, 2008 was 80. The institution, owned
by the Reserve Bank of India, was established to promote private real estate acquisition. The
NHB is regulating and re-financing social housing programs and other activities like research
and IT-initiatives, too.

12.POSB

POSBank (or POSB) is a brand of consumer banking services offered by DBS Bank in
Singapore, after it was acquired by the latter in November 1998. Prior to this, it was a major
public bank which began life as the Post Office Savings Bank, offering low-cost banking
services to Singaporeans. DBS Bank attempts to continue this tradition by promising to keep
costs low for basic savings accounts, and to exempt children, full-time students below the age
of 21 years and full-time National Servicemen from bank charges
13.Industrial reconstruction Bank of India

Reconstruction Bank, of the undertaking of the Corporation known as the Industrial

Reconstruction Corporation of India Limited, with a view to enabling the said
Reconstruction Bank to function as the principal credit and reconstruction agency for
industrial revival and to co-ordinate similar work of the other institutions engaged therein and
to assist and promote industrial development, and to rehabilitate industrial concerns, and for
matters connected therewith or incidental thereto.

14. Power Finance Corporation

Power Finance Corporation Ltd. (NSE: PFC, BSE: 532810) is an Indian financial institution.

Established in 1986, it is the financial back bone of Indian Power Sector. Net worth of the
company in the year 2007-2008 was 8688 Crore Indian Rupees. Initially wholly owned by
the Govt. of India, the company issued an IPO in January, 2007. The issue was
oversubscribed by over 76 times, which is the largest for an IPO of any Indian Company in
recent times.PFC is listed on the Bombay Stock Exchange (BSE) and the National Stock
Exchange (NSE). The company has been conferred with many prestigious awards, the latest
of which is "KPMG-Infrastructure Today Award 2008" for its contribution in development of
power sector. It is also an ISO 9001:2000 certified company and enjoys the status of
Navratna Company in India.

The Corporation is headed by the Chairman and Managing Director; who at present is
Satnam Singh.The company has three wings, each headed by a Functional Director namely,
Institutional Development & Administration (IDA) Division, Projects Division and Finance
& Financial Operations division. The IDA Division looks after the credit appraisal and
categorization of borrower entities, power sector reforms, review and analysis. The Projects
Division controls the operation in various states and project appraisal. Finance & Financial
Operations Division looks after the Fund Mobilization and Disbursement. PFC is a lean
organization. The numbers of employees during year 2007-2008 were 309.
15. Technology development and Information Corporation.

Technology Development and Information Company of India (Industrial Credit and

Investment Corporation of India). Information technology governance is a subset discipline
of corporate governance focused on information technology (IT) systems and their
performance and risk management. The rising interest in IT governance is partly due to
compliance initiatives, for instance Sarbanes-Oxley in the USA and Basel II in Europe, but
more so because of the need for greater accountability for decision-making around the use of
IT in the best interest of all stakeholders.
 State Level Institutions

State Industrial Development Corporations  

In 1960, the first State Industrial Development Corporations (SIDC) [8] was established
in Bihar. These mainly autonomous bodies are controlled by the State government,
who may own a stake in the corporation. There are approximately 28 SIDCs in India.
Their main functions include the promotion of rapid industrialization in India. They
mainly work at the grass roots level, providing development in the backward and less
frequented parts of India. They offer financial leases and offer guarantees. They also
administer the schemes of the central and state governments. The projects and
surveys of the industrial potential Areas are conducted by them, as well as the
evaluation of SEZs.

State Financial Corporations

In order to provide financial assistance to all types of industrial enterprises

(proprietary and partnership firms as well as companies) most of the states of our
country have set up SFCs. The primary objective of these corporations is to
accelerate the pace of Industrial development in their respective states. SFCs provide
finance in the form of long-term loans or through subscription of debentures, offer
guarantee to loans raised from other sources and take up underwriting of public
issues of shares and debentures made by companies. However, they cannot directly
subscribe to the shares issued by the companies. The SFC (Amendment) Act, 2000
has provided greater flexibility to SFCs to cope with the changing economic and
financial environment of the country.
 SOURCES OF LONG TERM FINANCE
These loans are taken for long periods of more than 5 years and are used for purposes of
buying land, factory building, to make permanent improvements on land, to pay off old debt
and to purchase costly machinery

I. Internal

a) Depreciation charges.
Depreciation is the expiry of service potential or consumption of operating capacity
and unless it is provided for, capital would not be taken to be maintained intact. In
fact, the concept of depreciation derives from the desire to maintain capital intact.
The main emphasis there is on the maintenance of assets or operating capacity
therein. Charging depreciation against profits helps to retain a firm equal to profits, if
profits are sufficient to cover all costs including losses related to the assets. The funds
thus accumulated during the life time of an asset finally assist in maintenance of
service potential through purchase of an identical asset or an asset having the same
operating period.

b) Retained earnings.
Retained earnings enable a firm to withstand seasonal reactions and business
reflections, it creates greater resistance power for the industry to face
depression. Secondly, the large retained earnings facilitate a stable dividend
policy and enhance the credit-standing of a company. Thirdly, they act as an
important long-term source of capital for expansion purpose and without
creating a charge against the assets a company meets its requirements of
finance long-term for expansion and other development schemes

II. External

a) Equity capital

Equity capital represents ownership capital and its owners-ordinary

shareholders and equity holders share the reward and risk associated with
ownership of corporate enterprises. It is also called ordinary share capital
is contrast with preference share capital which carries certain
preferences/prior rights in regard to income and redemption
 b) Term loans.
Term loans are also known as term or project finance. The primary sources of
such loans are financial institutions. Commercial banks also provide term
finance in a limited way. The financial institutions provide project finance for
new projects and also for expansion/diversification and modernization
whereas the bulk of term loans extended by banks is in the form of working
capital term loan to finance the working capital gap

a) Debentures /Notes / Bonds.

Loans can be raised from public by issuing debentures or bonds by public limited
companies.
Some of the characteristics of Debentures or Bonds are:-
Debentures are normally issued in different denominations ranging from ` 100 to ` 1,000
and carry different rates of interest.
Normally, debentures are issued on the basis of a debenture trust deed which lists the
terms and conditions on which the debentures are floated.
Debentures are either secured or unsecured.
The cost of capital raised through debentures is quite low since the interest payable on
debentures can be charged as an expense before tax.
From the investors' point of view, debentures offer a more attractive prospect than the
preference shares since interest on debentures is payable whether or not the company
makes profits.
Debentures are thus instruments for raising long-term debt capital.

b) Hybrid sources– Preference capital, Convertibles, Warrants and

Options.

PREFERENCE CAPITAL

These are a special kind of shares; the holders of such shares enjoy priority, both as regards
to the payment of a fixed amount of dividend and repayment of capital on winding up of the
company. Some of the characteristics of Preference Share Capital are:-
Long-term funds from preference shares can be raised through a public issue of shares.
Such shares are normally cumulative, i.e., the dividend payable in a year of loss gets
carried over to the next year till there are adequate profits to pay the cumulative
dividends.
 The rate of dividend on preference shares is normally higher than the rate of interest on
debentures, loans etc.
Most of preference shares these days carry a stipulation of period and the funds have to
be repaid at the end of a stipulated period.
Preference share capital is a hybrid form of financing which imbibes within itself some
characteristics of equity capital and some attributes of debt capital. It is similar to equity
because preference dividend, like equity dividend is not a tax deductible payment. It
resembles debt capital because the rate of preference dividend is fixed

Cumulative Convertible Preference Shares (CCPs) may also be offered, under which the
shares would carry a cumulative dividend of specified limit for a period of say three years
after which the shares are converted into equity shares. These shares are attractive for
projects with a long gestation period.
Preference share capital may be redeemed at a pre decided future date or at an earlier
stage inter alia out of the profits of the company. This enables the promoters to withdraw
their capital from the company which is now self-sufficient, and the withdrawn
capital may be reinvested in other profitable ventures.

c) Leasing and Hire purchase finance.

Leasing is a general contract between the owner and user of the asset over a specified period
of time. The asset is purchased initially by the lessor (leasing company) and thereafter leased
to the user (lessee company) which pays a specified rent at periodical intervals.
Thus, leasing is an alternative to the purchase of an asset out of own or borrowed funds.
Moreover, lease finance can be arranged much faster as compared to term loans from
financial institutions

d) Venture capital finance

The venture capital financing refers to financing of new high risky venture promoted by
qualified entrepreneurs who lack experience and funds to give shape to their ideas. In broad
sense, under venture capital financing venture capitalist make investment to purchase
equity or debt securities from inexperienced entrepreneurs who undertake highly risky
ventures with a potential of success. Some of the characteristics of Venture Capital Funding
are:-
It is basically a equity finance in new companies.
It can be viewed as along term investment in growth-oriented small/medium firms.
Apart from providing funds, the investor also provides support in form of sales strategy, business
networking and management expertise, enabling the growth of the
entrepreneur
 FINANCIAL INSTRUMENTS

1. TREASURY BILLS
Treasury bill, short-term U.S. government security with maturity ranging from 4 weeks to 52
weeks. Treasury bills are usually sold at auction on a discount basis with a yield equal to the
difference between the purchase price and the maturity value. In contrast to longer-term
government securities, such as treasury notes (with maturity ranging between 1 and 10
years), treasury bills are much more liquid investments (i.e., cash for alternative investments
is tied up for shorter periods of time). Because of this high liquidity, the yield rate on
treasury bills is normally lower than on longer-term securities. Prices of treasury bills do not
usually fluctuate as much as those of other government securities but may be influenced by
the purchase or sale of large quantities of bills by the central bank. From 1970 to 1998 the
minimum order for treasury bills was $10,000, after which it was reduced to $1,000 and
then to $100.

First used extensively during World War I and initially regarded as an emergency source of
revenue, bills and other short-term debt instruments have become a permanent element in
the public debt of several countries because of their relatively low interest cost and greater
flexibility. Treasury bills are ordinarily held as secondary reserves by commercial banks and
by other investors as a means of temporarily employing excess funds.

2. NEGOTIABLE CERTIFICATES OF DEPOSIT (CDS).

A negotiable certificate of deposit (CD) is a financial savings vehicle offered by a financial
institution like a bank that usually requires a high minimum deposit of at least $100,000.
When one opens a CD, the bank issues a certificate that guarantees the holder to be paid
back her deposit plus interest. Similar to normal certificates of deposits, negotiable CDs last
for a predetermined duration, and funds can't be withdrawn from the deposit account until
the predetermined date. Typically, negotiable CDs operate on a short time horizon and
mature (funds may be withdrawn) after a year or less. Some negotiable CDs may have
longer terms, and offer higher interest rates. While negotiable CDs may not be cashed in
before the date of maturity, there is an active secondary market for negotiable CDs where
the certificates can be sold.
Because negotiable CDs require large deposits, they are typically held by institutional
investors such as insurance companies and banks, and sometimes by wealthy individuals.
Due to the large amounts of capital involved, which may differ significantly from one CD to
another, the interest rates and maturation dates are subject to negotiation between the
saver and the bank. A certain wealthy individual may only want to save his money for a
specific duration, at a specific interest rate; banks that would not normally alter their rates
or maturity offerings for normal individuals are more willing to negotiate deals when large
amounts of capital are involved.

3. COMMERCIAL PAPER

In the global money market, commercial paper is an unsecured promissory note with a fixed
maturity of no more than 270 days. Commercial paper is a money-market security issued
(sold) by large corporations to get money to meet short term debt obligations (for example,
payroll), and is only backed by an issuing bank or corporation's promise to pay the face
amount on the maturity date specified on the note. Since it is not backed by collateral, only
firms with excellent credit ratings from a recognized rating agency will be able to sell their
commercial paper at a reasonable price. Commercial paper is usually sold at a discount from
face value, and carries higher interest repayment rates than bonds. Typically, the longer the
maturity on a note, the higher the interest rate the issuing institution must pay. Interest
rates fluctuate with market conditions, but are typically lower than banks' rates.

Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business
becomes established, and builds a high credit rating, it is often cheaper to draw on a
commercial paper than on a bank line of credit. Nevertheless, many companies still maintain
bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the
credit that does not have a balance. While these fees may seem like pure profit for banks, in
some cases companies in serious trouble may not be able to repay the loan resulting in a
loss for the banks.
4. REPURCHASE (REPO) AGREEMENTS

In its simplest form, a repurchase agreement is a collateralized loan, involving a contractual

arrangement between two parties, whereby one agrees to sell a security at a specified price
with commitment to buy the security back at a later date for another specified price. In
essence, this makes a repurchase agreement much like a short-term interest-bearing loan
against specific collateral. Both parties, the borrower and lender, are able to meet their
investment goals of secured funding and liquidity. The repurchase price should be greater
than the original sale price, the difference effectively representing interest, sometimes
called the repo rate. The party that originally buys the securities effectively acts as a lender.
The original seller is effectively acting as a borrower, using their security as collateral for a
secured cash loan at a fixed rate of interest.

There are three types of repo maturities: overnight, term, and open repo. Overnight refers
to a one-day maturity transaction. Term refers to a repo with a specified end date. Open
simply has no end date. Although repos are typically short-term, it is not unusual to see
repos with a maturity as long as two years. Repo transactions occur in three forms: specified
delivery, tri-party, and held in custody (wherein the "selling" party holds the security during
the term of the repo). The third form (hold-in-custody) is quite rare, particularly in
developing markets, primarily due to the risk that the seller will become insolvent prior to
maturation of the repo and the buyer will be unable to recover the securities that were
posted as collateral to secure the transaction. The first form—specified delivery—requires
the delivery of a prespecified bond at the onset, and at maturity of the contractual period.
Tri-party essentially is a basket form of transaction, and allows for a wider range of
instruments in the basket or pool. In a tri-party repo transaction a third party clearing agent
or bank is interposed between the "seller" and the “buyer”. The third party maintains
control of the securities that are the subject of the agreement and processes the payments
from the "seller" to the "buyer."

5. INTERCORPORATE DEPOSITS.

When borrowing from banks there are many formalities in terms of documentations to be
adhered to. All of these formalities can be done away with when borrowing and lending
short term funds with the aid of intercorporate deposits. Intercorporate deposits are
deposits made by one company with another company, and usually carry a term of six
months. These deposits are made by corporate having surplus funds to cash starved
companies
6. BILLS DISCOUNTING.

Bill discounting, as a fund-based activity, emerged as a profitable business in the early

nineties for finance companies and represented a diversification in their activities in tune
with the emerging financial scene in India. Trading or selling a bill of exchange prior to the
maturity date at a valueless than the par value of the bill. The amount of the discount will
depend on the amount of time left before the bill matures, and on the perceived risk
attached to the bill. Cashing or trading a bill of exchange at less than its par value and before
its maturity date. The cash thus realized varies according to the number of days until
maturity and the risk involved.

7. MONEY MARKET MUTUAL FUNDS / LIQUID FUNDS.

Mutual fund refers to a fund established in the form of a trust by a sponsor to raise money
through one or more schemes for investing in securities. It is a special type of investment
institution, which acts as an investment intermediary that collects or pools the savings of a
large number of investors and invests them in a fairly large and well diversified portfolio of
sound investments. This minimizes their risk and ensures good returns to the investors.
Thus, they act as an investment agency for small investors and a good source for long-term
finance for the business.

FEATURES OF MUTUAL FUNDS

The essential features of mutual funds are as follows:

1. It is a trust into which a number of investors invest their money in the form of units to
form a large pool of funds.

2. The amount is invested in securities by the managers of the fund.

3. The amount is invested in different securities of reputed companies to ensure definite

and regular income. Thus, it helps in minimizing the risk.

4. The mutual fund schemes often have the advantages of high return, easy liquidity, safety
and tax benefits to the investors.

5. The net income received on the investments of the fund is distributed over the units held.

6. The managers of the fund are obliged to redeem the units on demand or on the expiry of
a specified period.

8. FACTORING.
Factoring is another type of financial service provided by the specialist organizations. When
small scale firms sell on credit basis, collection of receivable poses a problem. In that case
factoring organizations play an important role in collection of debtors. Factoring involves
sale of receivables to specialized firm, called factors. Factors collect receivables and also
advance cash against receivables to solve the client firm’s liquidity problem. For providing
their services, they charge interest on advance and commission for other services. In other
words, factoring is an arrangement under which a financial institution (called factor)
undertakes the task of collecting the book debts of its client in return for a service charge in
the form of discount or rebate. The

factoring institution eliminates the client’s risk of bad debts by taking over the responsibility
of book debts due to the client. The factoring institution advances a proportion of the value
of book debts of the client immediately and the balance on maturity of book debts

9. LEASING
A lease transaction is a commercial arrangement whereby an equipment owner or
Manufacturer conveys to the equipment user the right to use the equipment in return for a
rental. In other words, lease is a contract between the owner of an asset (the lessor) and its
user (the lessee) for the right to use the asset during a specified period in return for a
mutually agreed periodic payment (the lease rentals). The important feature of a lease

contract is separation of the ownership of the asset from its usage. Lease financing denotes
procurement of assets through lease. The subject of leasing falls in the category of finance.

Leasing has grown as a big industry in the USA and UK and spread to other countries during
the present century. In India, the concept was pioneered in 1973 when the First Leasing
Company was set up in Madras and the eighties have seen a rapid growth of this business.
Lease as a concept involves a contract whereby the ownership, financing and risk taking of

any equipment or asset are separated and shared by two or more parties. Thus, the lessor
may finance and lessee may accept the risk through the use of it while a third party may
own it. Alternatively the lessor may finance and own it while the lessee enjoys the use of it
and bears the risk. There are various combinations in which the above characteristics are
shared by the lessor and lessee.
10 . BANKERS ACCEPTANCES

A banker's acceptance, or BA, is a promised future payment, or time draft, which is accepted
and guaranteed by a bank and drawn on a deposit at the bank. The banker's acceptance
specifies the amount of money, the date, and the person to which the payment is due. After
acceptance, the draft becomes an unconditional liability of the bank. But the holder of the
draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the
maturity date for the funds in the deposit. A banker's acceptance starts as a time draft
drawn on a bank deposit by a bank's customer to pay money at a future date, typically
within six months, analogous to a post-dated check. Next, the bank accepts (guarantees)
payment to the holder of the draft, analogous to a post-dated check drawn on a deposit
with over-draft protection. The party that holds the banker's acceptance may keep the
acceptance until it matures, and thereby allow the bank to make the promised payment, or
it may sell the acceptance at a discount today to any party willing to wait for the face value
payment of the deposit on the maturity date. The rates at which they trade, calculated from
the discount prices relative to their face values, are called banker's acceptance rates.

Banker’s acceptances make a transaction between two parties who do not know
each other more safe because they allow the parties to substitute the bank's credit
worthiness for that who owes the payment. They are used widely in international trade for
payments that are due for a future shipment of goods and services. For example, an
importer may draft a banker's acceptance when it does not have a close relationship with
and cannot obtain credit from an exporter. Once the importer and bank have completed an
acceptance agreement, whereby the bank accepts liabilities of the importer and the
importer deposits funds at the bank (enough for the future payment plus fees), the importer
can issue a time draft to the exporter for a future payment with the bank's guarantee.
Banker's acceptances are typically sold in multiples of US $100,000. Banker's acceptances
smaller than this amount are referred to as odd lot.