Lesson 1: The Investment Environment Flashcards
*The art and science of managing money
Finance
- focuses on the determination of value and how to make the best decisions with respect to the use of funds or financial resources
Finance
- focuses on how resources are used to achieve corporate goals
Finance
IS BOTH A SCIENCE AND AN ART OF CORRECT APPLICATION OF THE ECONOMIC AND ACCOUNTING CONCEPTS AND PRINCIPLES TH AT DEFINE THE SYSTEM, STRUCTURE, AND PROCESS OF MANAGEMENT, ALLOCATION, AND UTILIZATION OF FINANCIAL RESOURCES, INVESTMENTS, AND EXPENDITURES.
Finance
- Study of how _________ use scarce resources to produce valuable commodities and distribute them among different people with various needs
societies
- Study of how _________ within a society generally make choices that involve the use of scarce resources from among alternative wants that need to be satisfied
individuals
- The field of finance is actually an outgrowth of economics.
Economics
- In fact, finance is sometimes referred to as ___________.
Financial Economics
- Financial managers must understand the economic framework within which they operate in order to react or anticipate to changes in conditions.
Economics
- The primary economic principle used by financial managers is ______________ which says that financial decisions should be implemented only when benefits exceed costs.
Marginal Analysis
___________ is primarily concerned with the presentation of financial data,
Accounting
the ______________ is primarily concerned with analyzing and interpreting this information for decision-making purposes.
financial manager
primarily responsible for the flow of funds from the lender to the borrower
Financial System
Have a surplus of money that they probably want to generate more money with
Savers
Do not have enough money and therefore may need to borrow money
Borrowers
Control money supply (increase or decrease) in the economy
Central Bank
cash and other liquid assets that the banks are required to keep
Reserve Requirements
rate at which banks can borrow from the central banks
Interest Rates
buying and selling of securities
Open market
Formula of effective Rate
ER = (Nominal rate -earnings on reserves) / (1- reserve ratio)
The current commitment of money or other resources in the expectation of reaping future benefits
Investment
The productive capacity of the economy
Real Asset
Means by which individuals in well developed economies hold their claims on real assets
Financial Asset
accepts savings and places it in any variety of investment vehicle.
Financial Institution
They are intermediaries that channel savings of individuals, businesses and governments into loans or investments
Financial Institution
organized forum in which suppliers and users of funds can transact
Financial Markets
exists as a result of the interaction between the suppliers and demanders of short-term funds (those having a maturity of a year or less).
money Markets
can be executed directly or through an intermediary.
Money Markets
short term, marketable, liquid, low risk
Money Markets
Examples of money market instruments
- Treasury Bills
- Certificate of deposits
- Commercial Papers
is a market that enables suppliers and demanders of long-term funds to make transactions.
Capital markets
Designed with extreme diverse provisions regarding payments provided to the investor and protection against the bankruptcy of the issuer
Capital Markets
Examples of Capital Market
- Bonds
- Equity Securities
- Derivatives
onger term borrowing or debt instruments than those traded in the money market. Fixed income debt instruments
Bond Market
debt instrument issued by the government that matures longer than a year
Treasury Bonds/notes
longer term debt instruments. A means by which private institutions borrow money from the public
Corporate Bonds
bonds with specific collateral backing them in the event of firm bankruptcy
Secured Bonds
lower priority claim to the firm’s assets in times of bankruptcy
Unsecured Bonds
give the firm the option to repurchase the bond from the holder at a stipulated call price
Collateral Bonds
give the bondholder the option to convert each bond into a stipulated number of shares
Convertible Bonds
has a residual claim and a limited liability feature
Common Stock
similar to both equity and bond
Preferred Stock
are accounts held with banks or other savings institutions and held by a variety of depositors.
Cash deposits
Main Charactristics of cash deposits
Capital + Return
Types of deposit accounts
- Instant Access
- Fixed Term
- Notice of accounts
also known as the minimum balance
Maintaining Balance
the minimum amount that the bank account holder must have in the account or must maintain in the account to receive certain benefits and to avoid costs
Maintaining Balance
amount of cash that must be kept in the bank account at all times as part of a loan agreement or contract
Compensating Balance
pools sums of money from resources, which are then invested in financial assets.
Mutual Funds
retirement planning for individuals
Pension Funds
contributions made to charitable or educational institutions
Endowment Funds
assume the risks of adverse events in exchange for a flow of insurance premiums
Insurance Companies
unregulated private investment partnerships which seek to exploit various market opportunities and thereby to earn larger returns than ordinarily available
Hedge Funds
associated with rising levels of GDP, consumption and expenditure, investment expenditure and decreasing levels of unemployment
Recovery
a downturn in economic activity and is associated with falling levels of GDP, consumption and investment expenditure
Recession
a recession that lasts longer and has a larger decline in business activity
Depression
measures the average price of goods consumed by urban wage-earners
measures the average price of all the GNP
The increase in the average price level in the economy
Inflation
Is the percentage of annual increase in the general price level.
Computing for inflation rate:
Inflation rate = CPI (this year) - CPI (last Year) / CPI (last year) x 100
basic interest rate, no inflation, no uncertainties
published rate and the growth rate of your money
reflects that real cost of funds.
Real Interest Rate
This is the nominal rate reduced by the the loss of the purchasing power resulting from inflation.
Real Interest Rate
