FACULTY: MANAGEMENT
SCIENCE
DEPARTMENT: ACCOUNTANCY
COURSE CODE: BAF 331
COURSE TITLE: FINANCIAL MANAGEMENT / MATHEMATICS
TABLE
CONTENTS
Title page……… I
Dedication……… II
CHAPTER ONE
What is finance and features
of finances … III-IV
CHAPTER TWO
Current and Emerging issues
in finance…. V-VIII
CHAPTER ONE
WHAT IS FINANCE
Finance is the management of large
amount of money, especially by government or large company. It is also provides
fund for a person or business enterprise.
Finance is the study of investor
allocating their assets over time under conditions of certainty and
uncertainty. According to entrepreneur, finance is concerned with cash. Every
business transaction involves cash directly. According to academicians, finance
is the procurement of funds and effective utilization of funds.
According to experts, finance is
simple task of providing the necessary fund required by the business to
entities like companies, firms individuals and others on the terms that are
favourable to achieve their economics objectives.
FEATURES OF FINANCE
The main features of finance are
i. Opportunities: In finance investment
can be explained as a utilization of money for profit or returns.
ii. Profitable Opportunities: In finance,
profitable opportunities are considered as an important aspirations.
iii. Optimal Mix of Funds: It is concern with the best optimal mix of
funds in order to obtain the desired and determined results respectively.
iv. System of Internal Controls: These help
finance to maintained in the organization or workplace.
v. Future Decision Making: Finance is also
concern about the future decision making of the organization.
CHAPTER TWO
CURRENT AND EMERGING ISSUES IN FINANCE
The financial sector of the world
economy seems utterly convinced that the world is currently descending into a
major crisis. The crisis was clearly prompted by the financial sector and the
practices that had come to flourish in it. The imbalances about which some of
us had worries for some years, particularly the US current account deficit and
the disequilibrating capital flows centered on the Yen carry, trade, have not
in the event (at least up to this point) triggered a crisis.
Can one skill argue that
international policy coordination should be a powerful instrument in avoiding
crises, or does the form of co-ordination need significant reform to address
new threats?
The plan of present paper is as
follows, it starts by examining the recent financial turbulence, and what
contributed to it. Discussion of the global imbalances and how they have
evolved in recent years, and of the threat that they have been perceived to
pose. The discussions carry trade and of the conditions that need to be
satisfied for those who engage in it to make profits. The next section asks
whether the past form of international policy co-ordination could have hoped to
do anything about the dangers posed by these developments. The final
substantive section asks whether any form of international co-ordination might
be relevant to diminishing the risk of crisis, and if so what form of action
would be called for.
Financial turbulence
As is well know the current
financial difficulties originated in the sub-prime market in the UnitedStates.
This is a market where prospective home owners who do not satisfy the tradition
condition for being granted a mortgage could hope to borrow to finance home
ownership. The traditional conditions involved, being able to put down a
deposit of fair proportion (traditionally 20%) of a house’s value, and having a
regular income that was some multiple (traditionally four times) of the value
of the monthly mortgage payment, in order to qualify for a 30 year mortgage.
Many of those who have been critical of what went on in the sub prime sector
are highly supportive of the aim of enabling those who are not in a position to
qualify by the traditional criteria to start on the ladder of home ownership.
The criticisms related rather to the use of high pressure tactics to persuade
people to take out mortgage, the failure to emphasize borrowers to larger
mortgage than they were in a position to services when costs increased in
accord with terms of loan.
Trouble started when house prices
stopped rising and started falling, as should have been expected since booms do
not go on forever and the existence of a boom must have been clear even to
central bankers. One of the mechanisms that have previously enabled borrowers
to continue servicing debts that were large relative to their net worth then
ceased functioning. Under old fashioned financial arrangements this would have led
to financial difficulties for the borrowers and some of the lenders that had
made these imprudent loans, but lower earning or at worst their bankrupting
would have ended the matter. Moreover, in many cases the lenders would have
found it in their own interest to renegotiate the terms of the loan to enable
the borrower to maintain debt services.
The biggest disaster to befall a
financial institution as a result of the seizing up of the inter bank market
occurred to the British provincial bank northern rock, whose business model was
based on engaging in mortgage lending but borrowing a large part of the
necessary cash in the short term markets. Northern rock had in fact made
reasonably solid mortgage loans, but it was unable to continue raising the
finance needed to balance its book. There upon the first bank run in British
history for over a century ensued. This was not ended by a Bank of England
guarantee, presumably because the British system of deposit insurance covered
100% of losses only for the first £2,000 and then only with the likelihood of a
long delay in payment. The run was only stemmed by a treasury guarantee of all
deposits up to £35,000 to be paid within a week. After much delay, authorities
have now bowed to the inevitable and announced a decision to nationalize the
bank, so that public will benefit from any upside that many in due course
emerge and not simply carry all the downside risk. This action was not treated
as a precedent by us authorities when Bear sterns faced bankruptcy.
Many financial institutions suffered
losses as a result of these development and a numbers of the Chief officers of
financial institutions have lost their jobs. Despite these facts, aggregate
bonuses in the financial sector fell remarkably little at the end of last year.
These bonuses now seem to have been consolidated as an expected part of the
remuneration of those in the sector. One has to observe that the pay seems
extraordinarily high in the light of disasters that are so frequently
generated.
In the months that have followed the
outbreak of the crisis in August 2007, it has spread and deepened. While the
first impact was on the mortgage and inter bank markets. Many additional assets
have now been affected. The process of contagion seems fairly similar to that
which has been observed in previous crises. A fall in the value of certain
assets triggers calls for increased collateral to be posted by those who have
used those assets as collateral; to meet this obligation, the affected
institutions are forced to sell other assets, whose prices therefore fall; and
that in turn sets the stage for the further propagation of the crisis. Up to
now, however, there seems to have been remarkably little fallout beyond the
financial sector.
Global imbalance
The current imbalances involve a
concentration of the major current account deficit in the United States and the
corresponding surpluses in parts of East Asia and the oil exporting countries.
The latter reflect the recent increases in the oil prices, and the IMF has
argued that the oil export tends to eliminate most of their surpluses in due
course. If that is right, it implies that the adjustment problem is essentially
between that United States and certain East Asia countries like China, Malaysia
and Hong Kong.