Promotional tools and advertising.

Every day we receive a lot of promotional messages. Each of these messages is part of a promotional strategydesigned to inform, persuade, or influence us to purchase a good or a service. ---Push strategyis a promotional effort that persuades middlemen to sell a product aggressively. This strategy relies on personal selling to wholesalers and retailers, and attempts to influence them by providing promotional allowances for displays, special discounts, brochures, pamphlets, posters, and cooperative advertising, an arrangement . This push strategy is especially important to companies competing in markets, such as food stores where shelf-space is very restricted. ---Pull strategyis a promotional effort designed to stimulate consumer demand for products and services through the use of advertising and sales promotion. The idea is to persuade the ultimate consumer to request a specific product from retailers. This strategy is used for health care products, books, and records. ----Positioningis a promotional strategy that focuses on specific market segments. Market research identifies the market segments as a sectors that will most likely to purchase a product; that product is then differentiated from the competition and promoted with the appropriate market image. We can differentiate one product from another by such things as brand name, package, package design, capabilities, color, logo, taste, and price.

Marketing textbooks distinguish 4 basic promotional tools: advertising, sales promotion, public relations and personal selling. Advertising is the most important tool for consumer goods. Companies use advertising in order to build up the company’s name or image. Sales promotions are temporary tactics designed to stimulate sales of a product. Sales promotion can also be aimed at distribution dealers and retailers to encourage them to stock new items or larger quantities, or to encourage off-season buying. Main types of sales promotions: free samples, coupons and competitions, price reductions and so on. Public relations (PR) are activities designed to improve or maintain or protect a company’s or a product’s image. It includes company publications, the annual report, and sponsorship. The most important element of PR is publicity (non-paid commercially significant news about ideas, products or institutions). It can have a huge impact on public awareness that couldn’t be achieved by advertising. Personal selling is the most expensive and important tool for industrial goods. Sales reps (торг представители) can build up relationships with company buyers, and can be very useful in persuading them to choose a particular product. Advantage – flexibility. Disadvantage – cost.

Why is personal selling is so important for marketing? *It is a flexible tool: Personal selling involves individual and personal communication.*It involves minimum wasted effort.*It results in actual sale.*It provides feedback: Personal selling involves two-way flow of communication between the buyer and the seller. *It educates customers.*It assists the society.

There are two types of advertising. Product advertisingis designed to promote a product or product line. Institutional advertisingis designed to promote an image or goodwill message of a company, industry, organization, or government. Product advertising can be primary or selective. The aim of primary advertisingis to stimulate an increase in the sale in a class of goods without regard to brand. These ads are usually run by trade associations or unions. The aim of selective advertising is to persuade consumers to purchase a specific product. This is the type of advertising you commonly find on newspapers and magazines, and on radio and television.

Although large companies could easily set up their own advertising departments, write their own advertisements, and buy media space themselves. The most talented advertising people generally prefer to work for agencies rather then individual companies as this gives them the chance to work on а variety of advertising accounts (contract to advertise products or services). Advertising agency is an independent company that specializes in all phases of preparation and execution of client advertising. The client company gives the advertising agency an agreed budget. The agency creates advertisements and develops a media plan specifying which media will be used and in which proportion. The agency’s media planners have to decide what percentage of the target market they want to reach and the number of times they are likely to see ads.

How much to spend on advertising is always problematic. Some companies use the comparative-parity method (metoda comparativ-analogica) - they simply match their competitors' spending, thereby avoiding advertising wars. Others set their ad budget at a certain percentage of current sales revenue. But both these methods disregard the fact that increased ad spending or counter-cyclical advertising (reclama anticiclica) can increase current sales. On the other hand, excessive advertising is counter-productive (antiproductiva) because after too many exposures people tend to stop noticing ads, or begin to find them irritating.

Pluses and minuses of advertising media Newspapers.Most adults read newspaperswhich are the most popular advertising medium, and because of their local emphasis, they are used heavily by retailers. Newspaper advertising has many advantages. They have large portions of a local market or metropolitan area. Another is its relative low cost per thousand. In addition, they are timely: some smaller newspapers appear weekly, but most newspapers are dailies. And their special interest sections such as entertainment, business, sports, and family pages are effective in reaching a target market.However, there are also disadvantages to using newspapers, and most

of them represent the flipsides of the advantages enumerated. Many national advertisers use cooperative advertising, because they can share the cost with the local retailers who feature their products. Televisionis the second most popular advertising medium. Television offers many advantages to advertisers: both maximum reach and maximum frequency. Reach is the number of potential viewers who have TV sets, and frequency is the number of times a message can be run. In addition, television is demographically selective, which means it is relatively easy to reach a target market. Finally, television has superior product demonstration capability because of its visual dimension. The major disadvantage of television is its high absolute cost and many local advertisers or small companies simply cannot afford to buy TV time.

Another disadvantage is its clutter and noise level, especially during prime time. In addition, it takes time to prepare a TV commercial and this can be a disadvantage for national advertisers because they may lose out on timely events that they could use to their advantage. Direct Mailis the third most commonly used advertising medium. It includes letters, catalogs, postcards, folders, and other forms of ‘junk mail’, as it is known by its critics. The purpose of direct mail is to obtain immediate orders or inquiries from customers. It is very expensive; however companies use it, because it’s effective and convenient for some people. Radio.Many advertisers feel that radiois undervalued for the size of audience it can reach. Because there are so many local radio stations in existence. Like television, radio is demographically selective. Radio advertisers can select a market segment and broadcast their commercials on the station that appeals to the people in this particular segment. Other major advantages include radio’s universal availability and its high message frequency. As for disadvantages of radio as an advertising medium, they include clutter, low-reach, and the short life of messages. Another problem stems from radio’s high degree of selectivity. An advertiser promoting a product with a universal appeal must purchase time on several radio stations to attain the same coverage as one TV station. Finally, because it is audio and not video, a radio commercial is best suited for simple messages that do not require product demonstration. Magazinesoffer several unique advantages to the advertiser. They are demographically and geographically selective. They have a longer life than newspapers, and they can offer reproduction and repeated exposure. Magazines offer a number of attractive graphic options such as centerfolds, bleeds (a picture that covers an entire page) and inserts. The major disadvantages of magazines can be traced to the fact that they come periodically. Thus, they have a delayed reach and frequency, which often dates the ads. Clutter is also a disadvantage. With so many advertisements on a page, some popular magazines often resemble catalogs.

Outdoor Advertisingis a million dollar industry that includes billboards, portaboards, skywriting, placards, neon signs and a new technique using lasers. Two basic types of outdoor advertising account for most of the revenue; they are the poster panel and the painted bulletin. Poster panelsare the billboards we are most used to seeing. Manufacturers of beer, cigarettes, automobiles, and soft drinks commonly use this type of billboard, politicians — in their election campaigns. Printed bulletinsare another type of billboards used to advertise shows, records, and premiere movie runs. The main advantage of outdoor advertising is the repetition it offers. A disadvantage can be lack of visibility if the billboard is in an area that is not lit at night.

ACCOUNTING

A. is the art to organizing, maintaining, recording and analyzing financial activities. It’s main function is to provide and analyze information about the economic entity of the company. It’s generally know as a ‘language of business’.

Everyone uses accounting information.( managers, investors, bankers and supplies, customers and employees)

The actual rec’ord-making phase of accounting is usually called bookkeeping. Actually, bookkeeping is just a part of accounting and it can be defined as writing down the details of transactions (debits and credits). The three main steps in making records in bookkeeping are: 1.recording every purchase and sail that a business make in Journal; 2.entering these temporary records in the ledger(регистр); 3. transferring all the relevant totals to the profit or loss account.

Double-entry principle- each transaction must be recorded as 2 separate entries(debit, credit)/ The total of the account on debit and credit referred to the trial balance. Bookkeeping-task-oriented function, recording day-to-day financial transactions/Accounting-results-oriented function, not the actual preparation, function-thе interpretation of the accounting info.

Human aspect- reports are made on peoples options, estimates and decisions/

Financial accountinginformation is intended primarily for external use.the first target group of fa inf includes potential investors, creditors and owners. The next gr of external users includes employees and their unions. Customers are the third group. Managerial accounting information is intended for internal use.

Basic accounting concepts: Business entity concept. The main idea of that concept is that each business has separate existence from its owners, creditors, employees, other interested parties and other businesses. In order not to distort the financial position or profitability of the business the reports of a business should be parted from transaction or assets of another business. Continuity concept stands on the assumption that the business entity keeps on operating into the indefinite future. It allows to value long-term assets at cost on the balance sheet – so they are used rather than supposed to be for sale. Money measurement concept economic activity is recorded and reported in terms of a common monetary unit of measure – dollar US that is treated as a stable unit of measure. Periodicity concept according to which entity’s life can be subdivided into time periods for reporting the results of its economic activities.

Basic accounting principles : cost principle that is concerned mainly with recording all goods and services purchased at cost. Objectivity principlerequires that accounting records should be based on provable events such as business transactions that involve exchanges of economic consideration between two or more independent parties. Accounting information must be based on objective data. Revenue principleassumes recording the revenue at the time it is earned, the services are rendered or at the time sold goods are transferred to its buyer but not before. Matching principleexpenses and the revenues earned as a result of expenses should be reported on the income statement in the same account period.

Further principles: Materially principle requires the effort of recording a transaction should be worthwhile (дающий результат). To determine what is material and what is not – is the priority of the firm to fix its rules. Full-disclosure principle proclaims that financial statement should include only relevant, important data about the operations and financial position of the entity.Consistency principle comes to avoid constant changing of the accounting methods. A company uses the same accounting methods period after period. Prudence principle means that an accountant while making his choice to which figure a given item to be taken will likely understate rather than overstate the profit. The capital of the firm is shown at a lower amount rather than a higher one.

Revenues –is one component that permits the recognition of profit. Expences– cost of doing business (certain costs that must be incurred by every business). Profit represents the income that a business has earned after certain deductions have been made from revenues.

Basic accounting equation ASSETS = EQUITY + LIABILITIES. Assets basically are the things – money, properties, or goods that belong to the company. Liabilities are those moneys, properties, or goods that must be paid out, such as taxes, debts, interest and mortgage payments, or the money owed to others, which are grouped together on the balance sheet as creditors. The owners’ (shareholders)equity is what remains of the assets once all the liabilities have been serviced provided that something does remain. An alternative term for owners or shareholders’ equity is Net Assets. This includes share capital (money received from the issue of shares), sometimes share premium (money realized by selling shares at above their nominal value), and the company’s reserves, including the year’s retained profits.

Financial statement –financial document giving certain financial information. There are three basic reports that the business organization uses on a regular basis: Profit and loss account or Income statement; Cash flow statement or statement of cash flows; Balance Sheet.

The balance sheet shows a company’s financial situation on a particular date, generally the last day of the financial year. It lists the company’s assets, its long-term and short-term liabilities and shareholders’ funds.

Types of assets: tangible (current – cash; fixed – property; investment – stock and shares) and intangible (goodwill; copyright; trademark). Types of liabilities: current (taxes, dividends, wages) and long term (bonds, mortgages, notes)

Income statement or profit and loss account. It shows revenue and expenditure, net income or net loss. It usually gives figures for total sales or turnovers and costs, expenses and overheads for a period of time. The flow of funds and cash statement shows the flow of cash in and out of the business between balance sheets dates.

If a company has a majority interest in other companies, the balance sheet and profit and loss account of the parent company and the subsidiaries are normally combined in consolidated accounts – the account reflecting activity of several business entity and accumulating operations, spent by them. Public accounting – work in public concerns and charge a fee for their services. Private accounting – help an individuals to file his tax returns. Government accounting – as a rule are salaried and work in government offices.

18. Money. Banking. Central banking. Exchange rates.

Although the crucial feature of money is its acceptance as the means of payment or medium of exchange, money has other functions. It serves as a standard of value, a unit of account, a store of value and as a standard of deferred payment.Money as the Medium of Exchange and a barter economy:Workers exchange labour services for money then buy and sell goods in exchange for money.A barter economy has no medium of exchange. There has to be a double coincidence of wants. Trading is very expensive in a barter economy. People must spend a lot of time and effort finding others with whom they can make mutually satisfactory swaps. Since time and effort are scarce resources, a barter economy is wasteful.

Other Functions of Money.Money can also serve as a standard of value. Society considers it convenient to use a monetary unit to determine relative costs of different goods and services. In this function money appears as the unit of account, is the unit in which prices are quoted and accounts are kept.Money is a store of value because it can be used to make purchases in the future.To be accepted in exchange, money has to be a store of value. Nobody would accept money as payment for goods supplied today if the money was going to be worth/less when they tried to buy goods with it tomorrow. Finally, money serves as a standard of deferred payment or a unit of account over time. When you borrow, the amount to be repaid next year is measured in pounds sterling or in some other hard currency.

Different Kinds of Money.These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes), which also serve as a medium of exchange.A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money.The essential condition for the survival of token money is the restriction of the right to supply it. Private production is illegal.In modern economies, token money is supplemented by IOU money.An IOU money is a medium of exchange based on the debt of a private firm or individual.A bank deposit is IOU money because it is a debt of the bank.

History of banking.In the past most societies used different objects as money. Some of these were valuable because they were rare and beautiful, others- because they could be eaten or used. Early forms of money like these were used to buy goods. But it was difficult to measure their value accurately, divide some of them into а wide range of amounts, keep some of them for а long time, use them to make financial plans for the future. For reasons such as these, some societies began to use another kind of money, that is, precious metals.People used gold, gold bullion, as money. People wanted а safe place to keep their gold. So they deposited it with goldsmiths, people who worked with gold for jewelry and sо on and also had а guarded vault to keep it safe in. And when people wanted some of their gold to pay for things with, they went and fetched it from the goldsmith.

Two developments turned these goldsmiths into bankers.The first was that people found it а lot easier to give the seller а letter than it was to fetch some gold and then physically hand it over to him. This letter we would nowadays call а cheque.The second development was that goldsmiths realized they had а great deal of unused gold. The goldsmith realized that some of the gold in his vault could be lent to the firm, and of course he asked the firm to pay it back later with а little interest.

Types of banks, the functions of each type.Commercial or retail banks are businesses that trade in money. They receive and hold deposits, pay money according to customers’ instructions, lend money, offer investment advice, exchange foreign currencies, and so on. They make a profit (margin) from the difference between the interest rates they pay to lenders or depositors and those they charge to borrowers. When lending money, bankers have to find balance between yield and risk.

Investment banks raise funds for industry. They offer stockbroking and portfolio management services to rich corporate and individual clients. It makes their profits from the fees and commissions they charge for their services.

Universal banks combine deposit and loan banking with share and bond dealing and investment services. American legislations separate commercial and investment banks.

CB and their functions.The first one is actually to implement monetary policy. There are 3 ways to do it.1) Setting interest rate, which means limiting, upwards or downwards, the fluctuations of the interest rate.2)Printing operation- coins, banknotes.3)Open market operation, which are simply buying and selling government bonds to and from Commercial banks.That was the first task of CB. The second one is exchange rates supervision. Third main task, commercial banking supervision, make sure that the commercial banks have enough liquidities, to avoid any bank run.The fourth main task would be to act as lenders of last resort, in case, one of these commercial banks goes bankrupt and the investors, the people putting money in the bank, have to get back their money.

Interest rates. A countries interest rate is usually fixed by central bank. This is the discount rate, at which CB makes secured loans to commercial banks. Banks lend to blue chip borrowers at the base rate or the prime rate.

Eurocurrencies. In most financial centers, there are also branches of lots of foreign banks, largely doing Eurocurrency business. A Eurocurrency is any currency held outside its country of origin. The first significant Eurocurrency market was for US dollars in Europe, but the name is now used for foreign currencies anywhere in the world. A CB can determine the min lending rate for its national currency it has no control over foreign currencies.

Clearing system – the system of settling payments due from one bank to another. The bank clearing is an arrangement to reduce the amount of funds which needs to be transferred to settle all the payments

A financial intermediary is an institution that specializes in bringing lenders and borrowers together. Commercial banks are financial intermediaries with a government licence to make loans and issue deposits, including deposits against which cheques can be written.

Reserves in terms of accounting are the amount of money or cash, currency and gold that is immediately available in the banks’ vaults to meet depositors' demands. The reserve ratio is the ratio of reserves to deposits. To be a borrower you must be a customer of the bank because the money will be lent to you through a bank account. There are two ways in which you may borrow. The first, and easy, is to spend more money than you have in your current account – to overdraw (to arrange an overdraft ). The second, and the normal way of borrowing larger amounts or for a long period of time is the loan. If the bank grants loans it should bear in mind the question of reserves.

19. SECURITIES: SHARES

Generally speaking, a market is a set of conditions permitting buyers and sellers to work together. According to the character of concluded contracts there are two types of markets:*spot markets - the buying and selling of goods, currency or securities that are available for immediate delivery. *futures markets - the buying and selling of goods, currency or securities for delivery at the future date for a price fixed in advance.

There are also three types of markets according to their functions: *commodity markets (places where raw materials and some manufactured goods are bought and sold), *stock markets (markets where stocks and shares are bought and sold),

foreign exchange markets (markets where foreign currencies are traded). According to the territory: *International * National * regional and so on.

Stock markets are the markets where stocks and shares are bought and sold under fixed rules, but for the price controlled by supply and demand. The main idea of stock exchanges is to enable public companies, the state and local authorities to attract capital by way of selling securities to investors. The process of buying something on the stock market today for the purpose of selling it at higher price tomorrow is speculation. A person that follows - a speculator. The main speculators on the stock exchange are known as "bulls", "bears" and "stags".

A speculator may buy shares, for which he cannot or does not wish to pay at the time, in the hope that "during the account", i.e. before the date of payment, the price rises and he can sell them at profit. A buyer who buys in the hope of a rise in prices is a "bull". Bears are pessimistic speculators who expect a fall in share prices. They sell their shares because, if prices fall as expected, the shares will be available in a few hours or a few days at lower prices than at present. Stags are speculators who operate in the "new issue" market.

Security – is a financial instrument which helps to raise money. It is an integral part of economic and financial life of every country. Securities are bought and sold in: primarymarkets, which issue new securities, and second­arymarkets, where previously issued securities are bought and sold. There are also other classifications of security markets: according to the territory (international, national, regional);according to the company status (listed and unlisted); according to tendencies (bear market and bull market).

According to the form of raising capital: Debt securities (bonds). A bond is a promise by the company or government to pay back a loan + a certain amount of interest over a definite period of time. Equity securities (shares). A share is a security representing a portion of the nominal capital of a company, that gives its shareholder a part of the ownership of a company;

According to the issuer: *industrial and commercial(corporate) *municipal

According to the term of circulation (maturity): *long-term – circulate more than a year *short-term – circulate up to one year ;According to the investment qualities: *according to liquidity – liquid and non-liquid *according to the risk involved – risky and non-risky *according to the yield – profitable and non-profitable. *According to the holder (по форме принадлежности, владения) \registered \bearer \order

A share (in British English) or a stock (in American English) is a security representing a portion of the nominal capital of a company, that gives its shareholder a part of the ownership of a company;Classification of shares: According to the right of getting dividends: *Preference shares (or preferred stocks) - They rank before ordinary shares and give their holders preference

over common stock­holders in the payment of dividends and distribution of assets if the company

goes bankrupt. *Ordinary shares (or common stocks) - they rank for dividend and often for capital repayment after the preference shares, and accordingly they carry most of the risk, they are often the only kind of shares with voting rights. 2. According to the issuer:*shares of private limited companies(holders have the right not to sell shares outside the company) *shares of public limited companies (ОАО)3. According to the quality and value: *Growth stocks. They could be subdivided into 3 groups: *High growth stocks of companies that are clearly growing much, faster than average, sell at premium, very risky; *Moderate growth stocks - do not sell at premium; the risk is not very great; *Stocks that grow in line with the economy,

Cyclical shares - are the shares of the companies that do not show any clear growth trend, but where share fluctuate in line with the business cycle, one can make money if he buys it near the bottom of price cycle and sell near the top; Defensive or income stocks and shares - are shares that offer a good yield but only a limited chance of a rise or decline in price.

A limited company is a legal entity separate from its owners, and is only liable for the amount of capital that has been invested in it. If a limited company goes bankrupt, it is wound up and its assets are liquidated (i.e. sold) to pay the debts. If the assets don't cover the liabilities or the debts, they remain unpaid. The creditors simply do not get all their money back. Most companies begin as private limited companies. Their owners have to put up the capital themselves, or borrow from friends or a bank, perhaps a bank specializing in venture capital. The founders have to write a Memorandum of Association (Учредит договор), which states the company's name, its purpose, its registered office or premises, and the amount of authorized share capital. They also write the Article of Association (Устав), which set out the duties of directors and the rights of shareholders. They send these documents to the registrar company.

A successful, growing company can apply to a stock exchange and become a public limited company. New and small companies usually join 'over-the-counter' markets, such as the Alternative Investment Market in London or Nasdaq in New York. Successful businesses can apply to be quoted or listed on major stock exchanges. Publicly quoted companies have to fulfill a large number of requirements, including sending their shareholders an independently-audited report every year, containing the year's trading results and a statement of their financial position.

The act of issuing shares for the first time is known as floating a company. Companies generally use an investment bank to underwrite the issue, i.e. to guarantee to purchase all the securities at the agreed price in a certain day, if they cannot be sold to the public.

If a company wishes to raise more money for expansion it can issue new shares. These are frequently offered to existing shareholders at less than their market price, this is known as a rights issue. Companies sometimes also choose to capitalize part of their profit, i.e. turn it into capital, by issuing new shares to shareholders instead of paying dividends. This is known as a bonus issue.

Buying a share gives its holder a part of the ownership of a company. Shares generally entitle their owners to vote at a company's Annual General Meeting, and to receive a proportion of distributed profits in the form of a dividend - or to receive part of the company's residual value if it goes into liquidation. Shareholders can sell their shares on the secondary market at any time, but the market price of a share may differ radically from its nominal.

20. SECURITIES: BONDS

Generally speaking, a market is a set of conditions permitting buyers and sellers to work together. According to the character of concluded contracts there are two types of markets:*spot markets - the buying and selling of goods, currency or securities that are available for immediate delivery. *futures markets - the buying and selling of goods, currency or securities for delivery at the future date for a price fixed in advance.

There are also three types of markets according to their functions: *commodity markets (places where raw materials and some manufactured goods are bought and sold), *stock markets (markets where stocks and shares are bought and sold),

foreign exchange markets (markets where foreign currencies are traded). According to the territory: *International * National * regional and so on.

Stock markets are the markets where stocks and shares are bought and sold under fixed rules, but for the price controlled by supply and demand. The main idea of stock exchanges is to enable public companies, the state and local authorities to attract capital by way of selling securities to investors. The process of buying something on the stock market today for the purpose of selling it at higher price tomorrow is speculation. A person that follows - a speculator. The main speculators on the stock exchange are known as "bulls", "bears" and "stags".

A speculator may buy shares, for which he cannot or does not wish to pay at the time, in the hope that "during the account", i.e. before the date of payment, the price rises and he can sell them at profit. A buyer who buys in the hope of a rise in prices is a "bull". Bears are pessimistic speculators who expect a fall in share prices. They sell their shares because, if prices fall as expected, the shares will be available in a few hours or a few days at lower prices than at present. Stags are speculators who operate in the "new issue" market.

Security – is a financial instrument which helps to raise money. It is an integral part of economic and financial life of every country. Securities are bought and sold in: primarymarkets, which issue new securities, and second­arymarkets, where previously issued securities are bought and sold. There are also other classifications of security markets: according to the territory (international, national, regional);according to the company status (listed and unlisted); according to tendencies (bear market and bull market).

According to the form of raising capital: Debt securities (bonds). A bond is a promise by the company or government to pay back a loan + a certain amount of interest over a definite period of time. Equity securities (shares). A share is a security representing a portion of the nominal capital of a company, that gives its shareholder a part of the ownership of a company;

According to the issuer: *industrial and commercial(corporate) *municipal

According to the term of circulation (maturity): *long-term – circulate more than a year *short-term – circulate up to one year ;According to the investment qualities: *according to liquidity – liquid and non-liquid *according to the risk involved – risky and non-risky *according to the yield – profitable and non-profitable. *According to the holder (по форме принадлежности, владения) \registered \bearer \order

A bond is an emission long-term security, whose owner has a right to get from issuer of a bond its nominal value by money or in the form of other property equivalent in fixed period of time.Bonds are securities issued by companies, governments and financial institutions when they need to borrow money. Companies prefer to issuing bonds, because it is a process of landing money from creditors, rather than shares, which are the bought part of your company.

There are some types of investors: *Individuals are investor clients who are purchasing bonds for their own investment portfolios. *Pension’s funds make investments on behalf of their members for their retirement monies. *Mutual funds are very popular form of investmentfor individuals and constitute a very large source of savings in the country. *Long-tem investors/buy-and-hold investors are investors who can obtain on their bond investments by holding them to maturity.

Bond-issuing companies are rated by private ratings companies such as Moody’s and Standard & Poors, and given an ‘investment grade’ according to their financial situation and performance. Aaa being the best, and C the worst, ie. nearly bankrupt. There also SD level – selective default and D level – default on debt obligations. Obviously, the higher the rating, the lower the interest rate at which the company can borrow. High rating is essential for companies, because it gives them confidence that investors will be interested in it, that it is transparent and it can be relied.

Most bonds are bearer certificates, so after being issued (on the primary market), they can be traded on the secondary bond market until they mature. Bonds are therefore liquid, although of course their price on the secondary market fluctuates according to changes in interest rates. Consequently, the majority of bonds on the secondary market are traded either above or below par. A bond’s yield at any particular time is thus its coupon (the amount of interest it pays) expressed as a percentage of its price on the secondary market.

Classification of Bonds1. According to the nature of the issuer*Government bonds are issued by governments*Finance bonds are issued by banks or other non-bank financial institutions.*Company bonds are issued by shareholding companies. Some countries also allow the non-shareholding companies to issue bonds.2. By interest charge method*Simple interest bonds mean that the interest is charged on the principal alone.

· Compound bonds mean that the amount of income interest at the end of the contract adds to the principal and this sum is the basis for calculating income for the next period.

· Discount bondsare bonds that are placed or sold in the secondary market at a price lower than face value, but they are redeemed at par.

· Accumulative interest rate bonds mean that the interest is calculated based on accumulative rate year by year.

4. According to the terms of maturity *Long-term.* Short-term.* Middle-term. 5. By forms of holders *Registered bonds mean that the names and addresses of the bonds’ holders are entered in a register which shows the amount of bonds they hold.* Bearer bonds mean that the right to such securities passes to another person by delivery. 6. According to the interest rate *A convertible bond is exchangeable for equity or stock. It looks like an ordinary bond, it pays a fixed interest rate, it has a final maturity date, but it also has a feature that permits the holder to redeem it for shares in the borrower. * Junk bonds– high yield securities issued by companies that are seen to have a very high risk of default. * Floatingratenotes – the interest rate on these bonds is variable and depends on the levels of interest rates in the market place.

7. According to the function * Long-term securities: government bonds – gilt-edged securities (gilts –GB, treasury bonds – US ) * Short-term bonds are sold and bought by GB and US central banks as a way of regulating money supply (Treasury Bills)

Debt financing is issuing and selling bonds. Equity financing is issuing and selling stocks and shares. For companies, the advantage of debt financing over equity financing is that bond interest is tax deductible. In other words, a company deducts its interest payments from its profits before paying tax, whereas dividends are paid out of already-taxed profits. (‘tax shield’).On the other hand, increasing debt increases financial risk: bond interest has to be paid, even in a year without any profits from which to deduct it, and the principal has to be repaid when the debt matures, whereas companies are not obliged to pay dividends or repay share capital. Thus companies have a debt-equity ratio that is determined by balancing tax savings against the risk of being declared bankrupt by creditors. Trading bonds investors realize their gains through the price appreciation that may accrue to a bond during the time while investors hold it. The price of bond is directly related to the level of interest rate in the economy. If interest rates fall, the value of bond that you purchased yesterday increases, and wise versa.

Bonds are obligations that are issued by companies and governments that are promises to pay investors for a fixed rate of interest, that is a fixed repayment schedule and a date in the future at which the money will be returned. They are differ from stocks, which have an uncertain future pay-off depending on a company’s performance and no final maturity date, so long as the company remains active and solvent.Governments unlike companies do not have the option of issuing equities. Consequently they issue bonds when public spending exceeds receipts from income tax. Long-term

government bonds are known as gilt-edged securities, or simply gilts, in Britain, and Treasury Bonds in the US. The British and American central banks also sell and buy short-term(three-month) Treasury Bills as a way of regulating the money supply. To reduce the money supply, they sell these bills to commercial banks, and withdraw the cash received from circulation; to increase the money supply they buy them back, paying with newly created money which is put into circulation in this way. For investors bonds represent an investment that carries a moderate degree of risk. And investors like to hold a diversified portfolio of investments in order to decrease a risk. Government securities have a very low risk of non-payment or default. Stocks have much higher risk. Bonds provide a moderate level of risk.

From the perspective of a given country, the global bond market can be classified into two markets: an internal bond market and an external bond market. The internal bond market is also called the national bond market. It can be decomposed into two parts: the domestic bond market and the foreign bond market.

The domestic bond market is where issuers domiciled in the country issue bonds and where those bonds are subsequently traded. The foreign bond market of a country is where bonds of issuers not domiciled in the country are issued and traded. (In the USA - Yankee bonds, in Japan - Samurai bonds). The external bond market is commonly referred to as the offshore bond market, or more popularly, the Eurobond Market. The Eurobond Market is divided into different submarkets depending on the currency in which the issue is denominated.

21. FINANCIAL INSTRUMENTS: FUTURE AND DERIVATIVES

Market- place where sellers and buyers meet together.

Types of markets: Terminal – the market dealing mainly in commodities that will be avaliable in future (FUTURES) rather than goods that are available immediately (ACTUALS); Stock market is the market where stocks and shares are bought and sold under fixed rules, but at prices controlled by supply and demand.

Stock markets could be classified: According to territory : international, national/domestic, regional; According to the number of transferrings: Primary markets issue and trade new securities, an investor who purchases new securities is participating in a primary financial market; and secondary markets which trade previously issued securities, an investor who resells existing securities is participating in a secondary financial market. According to the company status and place of salethere are two basic types of stock markets – organized exchanges, like the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE) which trade listed/quoted securities for/of successfully growing companies and the less formal over-the-counter markets that sell and buy unlisted securities for/of smaller and newer companies. The prices of the securities are established by supply and demand. According to tendencies: a bear market when share prices fall because there are more sellers than buyers and a bull market when share prices rise because there are more buyers than sellers. According to maturity: money markets which deal in short –term securities having maturities of one year or less capital markets which deal in long-term securities having maturities more than one year.

Bulls are people who buy securities expecting their price to rise so they can resell them before the next settlement day. Bears sells shares hoping to buy them back at a lower price before the next settlement day. Stags are people who buy new share issues, hoping to resell them at a profit (if the issue is over-subscribed it).

securities can be classified: 1. According to the form of raising the capital (financing): Debt securities (bonds). It’s a promise by the company or government to pay back a certain amount of interest over a definite period of time.; Equity securities (shares). A share gives its holders the part of ownership of a company. 2. According to the issuer: Industrial and commercial; Government; Municipal; 3. According to the form of issuing: Scrip; Inscribed; 4. According to the holder: Registered; Bearer; Order; 5. According to the term of circulation: Long-term; Short-term; 6. According to the resource the security is based on: Primary; Secondary; 7. According to the investment qualities: Liquidity; Risk involved; Yielding.

The word “derivatives” is a general name for financial instruments whose price depends on the movement of another price. Futuresare contracts to buy or sell fixed quantities of a commodity, currency, or financial asset at a future date, at a price fixed at the time of making the contract. They are different from forward contracts, because they can be sold only on stock exchanges. Futures are standardized deals for fixed quantities and time periods and forward contracts are individual, non-standard, “over-the-counter” deals.

Hedging means making contracts to buy or sell commodity or financial asset at a pre-arranged price in the future as a protection or “insurance” against price changes; Speculation is the process of buying securities or other assets in the hope of making a capital gain by selling them at a higher price or by buying them back at a lower price. Options are contracts giving the right, but not the obligation, to buy or sell a security, a currency, or a commodity at a fixed price during a certain period of time. A call option gives the right to buy securities (or currency, commodity) at a certain price during a certain period of time. A put option gives the right to sell as asset at a certain price during a certain period of time. These options allow organizations to hedge their equity investments. Options and short selling allow a speculator to profit from movements in stock’s price without holding the stock itself.

Many companies nowadays also arrange currency swapsand interest rate swaps with other companies or financial institutions. Swaps can be defined as transactions in which two parties swap financial assets by linking a foreign exchange transaction in cash to an opposite futures business in the same currency, financial instruments designed to achieve interest rate savings.

All types of derivatives have recently begun to appear regularly in the news as various banks, companies and local governments have suffered serious problems or even bankruptcy as a result of using derivatives. For example, in the mid-1990s some of such institutions made spectacular losses with derivatives. The most famous was Barings Bank, which was bankrupted when a single trader in Singapore lost over $1 billion by speculating disastrously on futures and options on the Nikkei 225 stock index. Or, for instance, a multinational company “Procter & Gamble” also lost over $100 million on interest rate swaps. For such giant losses there are, of course, some reasons.: 1. banks are as much to blame as the end-users in taking on risks or misusing derivatives; 2. management don’t have a clear policy on derivative usage; 3. some people use the same derivatives for both hedging and speculating. The ways to avoid losses can be like that: 1. If a derivative is used to take on risk, to increase returns, then it requires a more hands-on management approach. A company needs stop-loss limits, it also needs to conduct scenario analysis to see how that transactions behaves under various conditions and it has to judge whether the Profit and Loss account’s impact of that transaction can be withstood in the firm; 2. Any industry has to realize that it has to police itself, because, if they don’t police themselves the regulation will come on them; 3. The major risk of a transaction have to be explained to customers, and the sensitivity and scenario analysis should be offered unsolicited to customers, and that these analyses should be done as objectively as possible; 4. And the last and the most important fact, as I think, that an understanding of derivatives should came from senior management themselves to front line managers.

Date: 2015-12-17; view: 1365