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FM Imp Theory

This document discusses several topics related to finance including: 1) Interest rate smoothing policies of central banks, financial intermediation roles, and theories influencing the yield curve shape. 2) Rules for buying and selling interest rate futures contracts depending on being a borrower or depositor. 3) Islamic financing techniques including fixed income and equity modes. 4) Concepts such as the residual theory of dividends, rights issues price, cum rights and ex rights share prices, dividend cover, dividend yield, and the rein Gordon's model.

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Rishi Kumaar
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35 views

FM Imp Theory

This document discusses several topics related to finance including: 1) Interest rate smoothing policies of central banks, financial intermediation roles, and theories influencing the yield curve shape. 2) Rules for buying and selling interest rate futures contracts depending on being a borrower or depositor. 3) Islamic financing techniques including fixed income and equity modes. 4) Concepts such as the residual theory of dividends, rights issues price, cum rights and ex rights share prices, dividend cover, dividend yield, and the rein Gordon's model.

Uploaded by

Rishi Kumaar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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-Interest rate smoothing is the policy of some central banks to move official interest rates in a

sequence of relatively small steps in the same direction,

-Financial intermediaries have a number of important roles.  Risk reduction  Aggregation 


Maturity transformation  Financial intermediation

-PPPT predicts that the country with the higher inflation will be subject to a depreciation of its
currency.

-The shape of the yield curve at any particular point in time is generally believed to be a combination
of three theories acting together:  liquidity preference theory  expectations theory  market
segmentation theory.

-An IRG is an option on an FRA.

-Rules for whether to buy or sell interest rate futures contracts:  For a Borrowing, Sell futures now
and buy them back on close out (BS)  For a Deposit, Buy futures now and sell them on close out
(DB)

-A borrower would buy a cap (to fix its maximum rate paid) and sell a floor. If interest rates fall then it
would get no benefit from the cap but would make a premium from selling the floor. A depositor
would do the opposite

-In Islamic Banking there are broadly 2 categories of financing techniques:  ‘Fixed Income’ modes of
finance – murabaha, ijara, sukuk  Equity modes of finance – mudaraba, musharaka.

-perfect capital market (no taxation, no transaction costs, no market imperfections)

-The residual theory argues that provided the present value of the dividend stream remains the
same, the timing of the dividend payments is irrelevant.

-Do not confuse a scrip issue (which is a bonus issue) with a scrip dividend

-Maximising MV and minimising WACC are identical concepts.

βa = βe × Ve /Ve + Vd (1–T)

-The price at which the new shares are offered to existing shareholders is called the rights
issue price. The share price following the announcement of the rights issue is called the cum
rights price

-The share price after the rights issue has taken place is called the theoretical ex rights price

-Dividend cover = earnings per share / dividend per share

-Dividend yield = Dividend / Price

-Re in gordon model is PAT / Shares + reserves (total equity)

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