Lecture 1 Flashcards
Finance
how individuals, institutions, governments and businesses acquire and spend money and other financial assets
Financial environment
encompass the financial system, institutions, markets and individuals that make the economy operate efficiently
Entrepreneurial finance
how performance focused firms manage operations and assets
Personal finance
how individuals prepare for financial emergencies
Three areas of finance
- institutions and markets
- financial management
- investments
Institutions
help the financial system operate efficiently and can transfer funds
Markets
physical locations or electronic forums that facilitate the flow of funds
Investment area
involves sale / marketing, analysis of securities and management of investment risk through diversification
Financial management
involves financial planning, asset management and fund raising decisions to enhance firms value
What happened to tech price bubble in 2000
it burst
What exaggerated 2001 recession
9/11
What happened to housing price bubble in 2006
in burst resulting in steep decline in prices
Six principles of finance
- time value of money
- risk return tradeoff
- diversification of investments
- efficient financial market
- management vs owner objectives
- reputation matters
Time value of money
money in hand today is worth more now than the promise of receiving it in the future
Risk return tradeoff
high risk usually results in high reward
Diversification of investments
some risk can be removed by splitting up investments into several assets or securities helping to absorb loss
Efficient financial markets
having information efficient markets
Information efficient markets
when the prices of securities reflect all information available at any point in time
Management vs owner objectives
managers objectives may differ from owners, also known as Principe agent problem
(owners may want to increase return, managers may want to gain more sales)
Reputation matters
high reputation reflects high quality ethical behaviour
Four main components of the US monetary system
- policy makers
- monetary system
- financial institutions
- financial markets
Who are the 4 policy makers
- president
- congress
- US treasury
- federal reserve board
What is the role of policy makers
to pass laws and set fiscal and monetary policies
What two entities make up the US monetary system
- federal reserve central bank
- commercial banking system
What is the role of the monetary system
create and transfer money
What are the four types of financial institutions
- depository instituions
- contractual savings organisations
- securities firms
- finance firms
What is the role of financial institutions
accumulate and lend / invest savings
What are the four types of financial markets
- debt securities markets
- equity securities markets
- derivative securities markets
- foreign exchange markets
What is the role of financial markets
to market and facilitate transfer of financial assets
Money markets
where debt securities of one year or less are traded
Four features of money market securities
- high liquidity
- can be easily sold old traded with little loss in value
- short lives
- low risk low return
Capital markets
where debt securities with maturities longer than one year or corporate stocks are issued or traded
Primary markets
where the initial offering or origination of debt and equity securities take place
Secondary markets
physical locations or electronic forums where debt and equity securities are traded
Debt securities markets
where money markets securities, bonds and mortgages are originated and traded
Equity securities markets
where corporate ownership shares are initially sold and traded
Derivative securities markets
where financial contracts that derive their values from underlying debt and equity securities are originated and traded
Foreign exchange markets
electronic markets where traders buy and sell currencies on behalf of business / other clients
