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SAMPLE TEXT on Financial Theory, Definitions and Trends

Finance is the science of describing the management of money, banking, credit, investments, and assets. Finance theory is the field which deals primarily with investment making decisions and the concept of the time value of money.

An evolutionary trend is a general direction of evolutionary change. There is a gradual trend toward increased centralization and control of global treasury activities. Acquiring and enhancing treasury technology still remains a major focus. A revolutionary trend, on the other hand, is relatively more radical. Sarbanes Oxley brought such trend, but it became less of a burden in recent days.

A financial market is a mechanism or sort of a platform which allows people to easily trade financial securities, commodities, and other fungible items of value at reasonable transaction costs and at prices that can properly serve as an efficient-market.

Both general markets (with many commodities traded) and specialized markets (with only one commodity traded) exist. They all work the same - by placing many interested buyers and sellers in one "place", thus making it easy for them to locate each other. In fact, an economy which relies primarily on interactions between these buyers and sellers to allocate resources is known as a market economy.

Bond is a kind of debt security in which the authorized issuer owes the holders a debt and is obliged to pay interest and/or to repay the principal at a later date at maturity. A bond can therefore be thought of as a formal contract on repaying borrowed money with interest at fixed intervals. Having said that, a bond is no different from a loan - the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. It is mostly used for financing long-term investments.

An Indenture is a legal contract between two parties. A Bond Indenture is a legal document issued to the lenders for describing key terms of the lending such as the interest rate, maturity date, convertibility, pledge, promises, representations, covenants, and other terms of the bond offering.

A treasury stock (aka reacquired stock) is a kind of stock which is bought back by the issuing company for the purpose of reducing the amount of outstanding stock on the open market. Stock repurchases are often used as a tax-efficient method of giving cash to the shareholders rather than paying dividends. A quite common motive for stock repurchase is to protect a company against hostile takeover. Do keep in mind, treasury stock does not pay dividend. It gives no voting rights. And it can never exceed the maximum proportion of total capitalization specified by law.

A warrant is a security that entitles the holder to purchase stock of a specific company that issued it at a specified price, which is usually higher than the stock price at time of issue. It is frequently attached to bonds or preferred stock as sort of a sweetener, effectively allowing the issuer to pay lower interest rates or dividends. It can, for example, enhance the yield of the bond and make the bond more attractive to potential buyers.

Equity warrants can be either call and put warrants. Call warrants give one the right to buy the underlying securities, while put warrants give one the right to sell the underlying securities. A warrant is said to be exercised when the holder informs the issuer their intention to purchase the shares underlying the warrant. A warrant's premium represents how much extra you have to pay for your shares when buying them through the warrant. The Expiration Date is the date the warrant will expire. Note that warrants are mostly traded over-the-counter.
 

SAMPLE TEXT on Liquidity Risk

Modern risk management would take an integrated approach to enterprise risk management for properly reflecting the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated. The Jarrow-Turnbull model is a remarkable example of a risk management methodology which integrates default and random interest rates.

In finance, liquidity risk refers to the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss. Liquidity risk may arise from situations in which a party interested in trading an asset fails to do it as nobody in the market wants to trade that asset. Liquidity risk becomes particularly important to parties who are about to hold or currently hold an asset. Manifestation of liquidity risk would be very different from a drop of price to zero. If one party cannot find another party interested in trading the asset, this is simply that the market participants cannot find each other. This is the reason why liquidity risk is commonly found higher in emerging markets or low-volume markets. Simply put, liquidity risk is a kind of financial risk due to uncertain liquidity.

Important: The Acid-test / quick ratio / liquid ratio is primarily for measuring the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities. Quick assets include those current assets that can be quickly converted to cash at quite close to their book values.

Note that liquidity risk tends to compound other risks. When a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk.

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