Lecture 1 Flashcards
What is finance?
How individuals, institutions, governments acquire, spend and manage money and other financial assets
What is financial environment?
Encompass the financial system, institutions, markets and individuals that make the economy operate efficiently
What are the 2 themes of finance?
Entrepreneurial finance
Personal finance
What is entrepreneurial finance?
How growth-driven, performance-focused firms raise funds and manage operations and assets
What is personal finance?
How individuals prepare for financial emergencies and accumulate wealth
What are the 3 areas of finance?
Institutions & markets
Investments
Financial management
What does institutions & markets area of finance refer to?
Institutions help the financial system operate by transferring funds from savers and investors to people seeking to spend the funds
Markets are physical locations or electronic forums that facilitate the flow of funds
What does the investments area of finance refer to?
Sale or marketing of securities
Analysis of securities
Management of risk through portfolio diversification
What does the financial management area of finance refer to?
Financial planning, asset management, fund-raising decisions to enhance firm value
What are securities?
Tradable financial assets
(Stocks, bonds, ETFs, preferred shares)
What are the 6 principles of finance?
Time value of money
Risk-return trade off
Diversification of investments
Efficient financial markets
Management vs owner objectives
Reputation matters
What does time value of money principle in finance refer to?
Money in hand is worth more than the promise of receiving the same amount in the future
What does the risk-return trade off principle in finance refer to?
Rational investors would choose a riskier investment only if they feel the expected return is high enough to justify the risk
What does diversification of investments mean?
Risk is minimised by investing in several assets or securities
What does efficient financial markets mean?
A financial market is “information efficient”
Information directly impacts the market
Information efficient markets provide liquidity and fair prices
