SENSEX ….
(Continued from Page 1) Depreciation :
2. Liquidity:
(i) Trading Frequency: The scrip should have been traded on each and every trading day Various Methods
for the last one year. Exceptions can be made for extreme reasons like scrip suspension
etc. (ii) Number of Trades: Number of Trades: The scrip should be among the top 150 In simple words we can say that
companies listed by average number of trades per day for the last one year. (iii) Value of
Shares Traded: Value of Shares Traded: The scrip should be among the top 150
depreciation is the reduction in the value
of an asset due to usage, passage of
companies listed by average value of shares traded per day for the last one year. time, wear and tear, technological
3. Continuity: outdating or obsolescence, depletion,
Whenever the composition of the index is changed, the continuity of historical series of inadequacy or other such factors. he use
index values is re-established by correlating the value of the revised index to the old of depreciation affects the financial
index (index before revision). The back calculation over the last one-year period is carried statements.
Recording Depreciation
out and correlation of the revised index to the old index should not be less than 0.98. This
ensures that the historical continuity of the index is maintained. For historical cost purposes, assets are
4. Industry Representation: recorded on the balance sheet at their
Scrip selection would take into account a balanced representation of the listed companies original cost; this is called the historical
in the universe of BSE. The index companies should be leaders in their industry group. cost. Historical cost minus all
5. Listed History: depreciation expenses recognized on the
The scrip should have a listing history of at least one year on BSE. asset since purchase is called the book
B. Qualitative Criteria: value. Depreciation is not taken out of
Track Record: these assets directly. It is instead
In the opinion of the Index Committee, the company should have an acceptable track recorded in a contra asset account: an
record. asset account with a normal credit
balance, typically called "accumulated
How is SENSEX calculated? depreciation".
SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per this Straight Line Method (SLM)
methodology, the level of index at any point of time reflects the total market value of 30 Straight-line depreciation is the simplest
component stocks relative to a base period. (The market capitalization of a company is and most-often-used technique, in which
determined by multiplying the price of its stock by the number of shares issued by the the company estimates the salvage value
company). An index of a set of combined variables (such as price and number of shares) of the asset at the end of the period
is commonly referred as a 'Composite Index' by statisticians. A single indexed number is during which it will be used to generate
used to represent the results of this calculation in order to make the value easier to work revenues (useful life) and will expense a
with and track over time. It is much easier to graph a chart based on indexed values than portion of original cost in equal
one based on actual values. increments over that period. The salvage
The base period of SENSEX is 1978-79. The actual total market value of the stocks in value is an estimate of the value of the
the Index during the base period has been set equal to an indexed value of 100. This is asset at the time it will be sold or
often indicated by the notation 1978-79=100. The formula used to calculate the Index is disposed of; it may be zero or even
fairly straightforward. However, the calculation of the adjustments to the Index (commonly negative. Salvage value is also known as
called Index maintenance) is more complex. scrap value or residual value.
The calculation of SENSEX involves dividing the total market capitalization of 30
Written Down Value (WDV)
companies in the Index by a number called the Index Divisor. The Divisor is the only link
WDV applicable to machines that have
to the original base period value of the SENSEX. It keeps the Index comparable over high rates of depreciation in the initial
time and is the adjustment point for all Index maintenance adjustments. During market year or two, and later taper it e.g. a car is
hours, prices of the index scrips, at which latest trades are executed, are used by the a usable method.
trading system to calculate SENSEX every 15 seconds and disseminated in real time. Under this method, depreciation is
charged at a fixed rate every year, on the
How is the closing Index calculated? reducing balance. A certain percentage is
The closing SENSEX is computed taking the weighted average of all the trades on applied to the previous year’s book value,
SENSEX constituents in the last 15 minutes of trading session. If a SENSEX constituent to arrive at the current year’s
has not traded in the last 15 minutes, the last traded price is taken for computation of the depreciation/ book value, which shows a
Index closure. If a SENSEX constituent has not traded at all in a day, then its last day's declining balance, weighted for earlier
closing price is taken for computation of Index closure. The use of Index Closure years, and lower and lower for later
Algorithm prevents any intentional manipulation of the closing index value. years, as the machine grows older.
[ Kuldeep Vyas MBA I (Section A] Accelerates depreciation taken in early
years. Reduces the amount taken in later
years. Ignores salvage value; starts with
Initiated, Edited and Compiled By:: depreciable base = asset cost.
Dr. M.S. Pahwa, Professor, IBMR B-School, Gurgaon. [Vandana Rani, MBA I Sec. B IBMR
For publishing your articles mail : finibmr@gmail.com, finibmr@googlegroups.com Gurgaon]
Visit our Website: http://groups.google.co.in/group/finibmr?hl=en
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Empowering Financial Knowledge
Issue : 1 Wednesday 18 November 2009 Total Pages 4
What is SENSEX? Corporates going for IPO?
The SENSEX, short form of the BSE-Sensitive Index, is a The first sale of stock by a private company to the public. IPO’s
"Market Capitalization-Weighted" index of 30 stocks representing are often issued by smaller, younger companies seeking
a sample of large, well-established and financially sound the capital to expand, but can also be done by large privately
companies. It is the oldest index in India and has acquired a owned companies looking to become publicly traded.
unique place in the collective consciousness of investors. The In an IPO, the issuer obtains the assistance of an underwriting
index is widely used to measure the performance of the Indian firm, which helps it determine what type of security to issue
stock markets. SENSEX is considered to be the pulse of the (common or preferred), the best offering price and the time to
Indian stock markets as it represents the underlying universe of bring it to market.
listed stocks at The Stock Exchange, Mumbai. Further, as the IPO’s can be a risky investment. For the individual investor, it is
oldest index of the Indian Stock market, it provides time series tough to predict what the stock will do on its initial day of trading
data over a fairly long period of time (since 1978-79). and in the near future because there is often little historical data
Objectives of SENSEX with which to analyze the company. Also, most IPO’s are of
The SENSEX is the benchmark index of the Indian Capital companies going through a transitory growth period, which are
Markets with wide acceptance among individual investors, subject to additional uncertainty regarding their future values.
institutional investors, foreign investors and fund managers. The The price of a financial asset traded on the market is set by
objectives of the index are: the forces of supply and demand. Newly issued stocks are no
• To measure market movements exception to this rule - they sell for whatever price a person is
Given its long history and its wide acceptance, no other index willing to pay for them. The best analysts are experts at
matches the SENSEX in reflecting market movements and evaluating stocks. They figure out what a stock is worth, and if
sentiments. SENSEX is widely used to describe the mood in the the stock is trading at a discount from what they believe it is
Indian Stock markets. worth, they will buy the stock and hold it until they can sell it
• Benchmark for funds performance for a price that is close to, or above, what they believe is a fair
The inclusion of blue chip companies and the wide and balanced price for the stock. Conversely, if a good analyst finds a stock
industry representation in the SENSEX makes it the ideal
trading for more than he or she believes it is worth, he or she
benchmark for fund managers to compare the performance of
moves on to analyzing another company, or short sells the
their funds.
overpriced stock, anticipating a market correction in the share
• For index based derivative products
price. [Jay Muratr Kumar MBA I Sec. A, IBMR, Gurgaon]
Institutional investors, money managers and small investors all
refer to the SENSEX for their specific purposes The SENSEX is
in effect the proxy for the Indian stock markets. The country's first
derivative product i.e. Index-Futures was launched on SENSEX.
Criteria for selection and review of scrips for the
SENSEX
A. Quantitative Criteria:
1. Market Capitalization:
The scrip should figure in the top 100 companies listed by market
capitalization. Also market capitalization of each scrip should be
more than 0.5 % of the total market capitalization of the Index i.e.
the minimum weight should be 0.5 %. Since the SENSEX is a
market capitalization weighted index, this is one of the primary
criteria for scrip selection. (Market Capitalization would be
averaged for last six months)
(Continued on page no 4)
Money Wise – Be Wise
Finibmr - An inititative of students of IBMR B-
B-School, Gurgaon
 Issue : 1 Wednesday 18 November 2009 Finibmr Page 2 Issue : 1 Wednesday 18 November 2009 Finibmr Page 3

Interest : Are you interested or not?
When we borrow money, we are expected to pay for using it –
this is known as Interest. Interest is an amount charged to the
borrower for the privilege of using the lender’s money. Interest is
usually calculated as a percentage of the principal balance (the
amount of money borrowed). The percentage rate may be fixed
for the life of the loan, or it may be variable, depending on the
terms of the loan.
What factors determine interest rates?
When we talk of interest rates, there are different types of
interest rates - rates that banks offer to their depositors, rates
that they lend to their borrowers, the rate at which the
Government borrows in the Bond / Government Securities
market, rates offered to investors in small savings schemes like
NSC, PPF, rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly
economy related and are commonly referred to as
macroeconomic factors. Some of these factors are:
• Demand for money
• Level of Government borrowings
• Supply of money
• Inflation rate
The Reserve Bank of India and the Government policies which
determine some of the variables mentioned above.
Prityush Raj MBA I Sec. A, IBMR B-School, Gurgaon
P
Prospectus of a Company
It is a preliminary registration statement that must be filed with the
Securities and Exchange Board of India. It describes the issue
(IPO) and the prospects of the company.
There is no price or issue size stated in the Red Herring. It is
updated several times before being called the final prospectus. It is
called so because it contains a passage in red that states the
company is not attempting to sell its shares before the registration
is approved by the SEBI.

The final version of a prospectus for a public offering of
securities. This document is complete in all details concerning
the offering and is referred to as a "statutory prospectus" or
"offering circular."

Because open-end mutual funds are continuously offering
shares to the public, a fund prospectus is usually updated
annually and made available to the public. Mutual fund
prospectuses are all of the "final" variety.

With public offerings of securities, investors first receive what is
called a preliminary prospectus, commonly called a "red herring"
because of the pinkish color of the paper on which it is printed.
Subsequently, the final prospectus is made available to
investors who are considering a purchase of the security in
question. A key difference between a final prospectus and a
preliminary prospectus is that the final prospectus contains the
security's price.
Renu Shekhawat MBA I Sec. B
Finance – Its all about Money…Honey
Finance is a field that studies and addresses the ways in
which individuals, businesses, and organizations raise,
allocate, and use monetary resources over time, taking into
account the risks entailed in their projects. The term finance
may thus incorporate any of the following:
• The study of money and other assets;
• The management and control of those assets;
• Profiling and managing project risks;
• The science of managing money;
• As a verb, "to finance" is to provide funds for
business or for an individual's large purchases (car,
home, etc.).
The activity of finance is the application of a set of techniques
that individuals and organizations (entities) use to manage
their financial affairs, particularly the differences between
income and expenditure and the risks of their investments.
An entity whose income exceeds its expenditure can lend or
invest the excess income. On the other hand, an entity whose
income is less than its expenditure can raise capital by
borrowing or selling equity claims, decreasing its expenses, or
increasing its income. The lender can find a borrower, a
financial intermediary, such as a bank or buy notes or bonds
in the bond market. The lender receives interest, the borrower
pays a higher interest than the lender receives, and the
Sinking Fund Method of Depreciation
In modern finance, a sinking fund is a method by which an
organization sets aside money over time to retire its
indebtedness. More specifically, it is a fund into which money can
be deposited, so that over time its preferred stock, debentures or
stocks can be retired. The amount invested in sinking fund can
also be used for purchasing various assets for the company. The
companies put some money into sinking fund account and after
some years when the asset (like machinery) becomes old the
company can use this money for purchasing the new asset.
A method of depreciation under which the depreciation expense is
an amount of an Annuity so that the amount of the annuity at the
end of the useful life would equal the Acquisition Cost of the
asset. Theoretically, the depreciation charge should include
interest on accumulated depreciation at the beginning of the
period. This method is rarely used in practice.
EXAMPLE: If you have an asset which you want to depreciate
using the Sinking Fund Method, this calculator solves for Asset
Value, Salvage Value, Depreciation Charge, and Book Value at
time = t with sinking fund rate of return = j.
Depreciation at time = t is denoted:
Dt = ((Asset Value - Salvage Value)/sn) * (1 + t)j-1
where sn = ((1 + j)n - 1) / j
Book Value at time = t is denoted:
Bt = Asset Value - ((Asset Value - Salvage Value)/sn) * st
where sn = ((1 + j)n - 1) / j and st = ((1 + j)t - 1) / j.

y
financial intermediary pockets the difference.
:

Seema Mehra MBA I Sec. B, IBMR Business School, Gurgaon

A bank aggregates the activities of many borrowers and
A document signed by borrower promising to repay a loan under agreed upon terms, known as promissory note OR
A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a
lenders. A bank accepts deposits from lenders, on which it
pays the interest. The bank then lends these deposits to
STOCK MARKET
payee on demand or at a specified future date. A promissory note is a document known as a promise to pay. When a loan of some type
borrowers. Banks allow borrowers and lenders, of different A market in which securities are bought and sold. Its basic
is given by a bank, private investor or other loan company, it will have the borrower sign a legal document or contract, detailing when
sizes, to coordinate their activity. Banks are thus function is to enable public companies, governments and local
the recipient of the loan will pay the loan back in full and how long it will take the recipient to pay the loan back.
compensators of money flows in space. authorities to raise capital by selling securities to investors.
Once a promissory note is signed, the recipient is legally agreeing to the terms and amount the investor has outlined, and it must be
A specific example of corporate finance is the sale of stock by Following are main stock exchanges in India
paid, or legal action may be taken. The promissory note also assures the loan recipient to the terms and amount originally agreed on,
a company to institutional investors like investment banks, BOMBAY STOCK EXCHANGE (BSE): It was established as
and these terms may not be changed unless both parties agree.
who in turn generally sell it to the public. The stock gives Native And Stock Brokers in 1875.It is the oldest exchange in
Types of promissory Note
whoever owns it part ownership in that company. If you buy Asia. The Bombay Stock Exchange uses Sensex as the market
Personal Promissory Note
one share of XYZ Inc, and they have 100 shares outstanding index in Asia and India. It earned a formal status under security
When friends and family loan money to one another, there is usually a verbal agreement of when the loan will be paid back and how
(held by investors), you are 1/100 owner of that company. Of and exchange board of India in 1956. With demutualisation, BSE
long it will take the pay the loan back in full. This verbal agreement will not stand up legally in court because there is no proof the loan
course, in return for the stock, the company receives cash, has two of world's best exchanges, Deutsche Börse and
did in fact take place. However, a personal promissory note is a legal document the family members and friends draw up with one
which it uses to expand its business in a process called Singapore Exchange, as its strategic partners. BSE continues to
another, ensuring the money will be paid back. The terms in the personal promissory note, such as interests or what happens if the
"equity financing". Equity financing mixed with the sale of innovate. In recent times, it has become the first national level
borrower defaults should be listed.
bonds (or any other debt financing) is called the company's stock exchange to launch its website in Gujarati and Hindi to
Commercial Promissory Note
capital structure. reach out to a larger number of investors.
Commercial promissory notes outline specific terms that the borrower and lender have agreed to. The commercial lender can legally
Finance is used by individuals (personal finance), by NATIONAL STOCK EXCHANGES(NSE)
place a lien on any assets the borrower may have if she defaults on repaying her loan. When a borrower defaults on a commercial loan,
governments (public finance), by businesses (corporate The National Stock Exchange of India Limited (NSE), is a
the lender does not have to wait to receive her money in installments, but can instead demand full payment immediately.
finance), etc., as well as by a wide variety of organizations Mumbai-based stock exchange. It is the largest stock exchange in
Investment Promissory Note
including schools and non-profit organizations. In general, the India in terms of daily turnover and number of trades, for both
When investors invest in a company, they are taking the risk of their investment losing money, instead of raising money, which is why
goals of each of the above activities are achieved through the equities and derivative trading. NSE is mutually-owned by a set of
some investors choose to invest with an investment loan, requiring the business or individual company they have invested with repays
use of appropriate financial instruments, with consideration to leading financial institutions, banks, insurance companies and
the money, regardless of the company's success. The borrower will sign the investment promissory note and will be required to pay all
their institutional setting. other financial intermediaries in India but its ownership and
monies the lender initially invested, unless the note states otherwise. Some investors seek ownership in the company versus a return
Finance is one of the most important aspects of business management operate as separate entities.
on their investment. If this is the case, the promissory note must state this, or the original loan amount must be paid in full.
management. Without proper financial planning a new REGIONAL STOCK EXCHANGES started clustering from the
Real Estate Promissory Note
enterprise is unlikely to be successful. Managing money (a year 1894, when the first RSE, the Ahmedabad Stock Exchange
A real estate promissory note is different from other promissory notes. It does secure that the loan taken by the borrower must be paid,
liquid asset) is essential to ensure a secure future, both for the (ASE) was established.There are around 21 regional exchanges
but in case the borrower defaults, the lender is not completely in the clear and may have to pay the loan. The lender should place a
individual and an organization. [Yash Sharma MBA I(Sec. A)] in India. [ Swati Ohri MBA I IBMR Business School, Gurgaon]
mortgage or lien to secure the loan. This will be made public record and gives the lender security that if the borrower defaults on the loan, it's
the borrower's obligation because the loan has been secured. Varun Khullar MBA I Sec B IBMR B-School, Gurgaon

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Finibmr - An inititative of students of IBMR B-
B-School, Gurgaon