MIDTERM Flashcards
occur when a business sells its stocks or bonds directly to savers, without going
through any type of financial institution. This procedure is
used mainly by small firms, and relatively little capital is raised by
Direct transfers
securities are involved and the corporation receives the sale proceeds, this
transaction is called
primary market transaction.
An underwriter facilitates the issuance of securities. The company sells its stocks
or bonds to the investment bank, which then sells these same securities to savers.
Indirect Transfers through Investment Bankers
an
insurance company, or a mutual fund. Here the ___________obtains funds from
savers in exchange for its securities, uses this money to buy
and hold businesses’ securities, and the savers hold the intermediary’s securities.
Indirect Transfers through a Financial Intermediary
People and organizations wanting to borrow money are brought together with those who have surplus funds in the
financial markets.
(also called “tangible” or “real” asset markets) are for products such as wheat,
autos, real estate, computers, and machinery.
Physical asset markets
deal with stocks, bonds, notes, and mortgages.
Financial asset markets,
whose values are derived from changes in the prices of other assets.
derivative securities
are markets in which assets are bought or sold for “on-the-spot” delivery (literally, within a few days).
Spot markets
markets are markets in which participants agree today to buy or
sell an asset at some future date.
Futures markets
The financial markets in
which funds are
borrowed or loaned for
short periods (less than
one year).
Money markets
The financial markets for
stocks and for intermediate- or long-
term debt (one year or
longer).
Capital markets
Markets in which
corporations raise capital
by issuing new securities.
Primary markets
Markets in which
securities and other
financial assets are
traded among investors
after they have been
issued by corporations.
Secondary markets
Markets in which
transactions are worked
out directly between two
parties.
Private Markets
Markets in which
standardized contracts
are traded on organized
exchanges.
Public Markets
Financial markets have experienced many changes in recent years. Technological
advances in computers and telecommunications, along with the globalization of
banking and commerce, have led to deregulation, which has increased competition
throughout the world.
RECENT TRENDS
Changing technology has allowed some individuals and firms to bypass intermediaries
and directly raise money from investors to help fund various projects. This activity is
referred to as
crowdfunding.
has exposed the need for greater cooperation among regula-
tors at the international level, but the task is not easy. Factors
Globalization
Any financial asset whose
value is derived from the
value of some other
“underlying” asset.
Derivatives
An organization that
underwrites and
distributes new
investment securities and
helps businesses obtain
financing.
Investment Bank
The traditional
department store of
finance serving a variety
of savers and borrowers.
Commercial Bank
A firm that offers a wide
range of financial
services, including
investment banking,
brokerage operations,
insurance, and
commercial banking.
Financial Services
Corporation
are often the cheapest source of funds available to individual
borrowers.
Credit Unions
are retirement plans funded by corporations or government
agencies for their workers and administered primarily by the trust
departments of commercial banks or by life insurance companies.
Pension funds
take savings in the form of annual premiums; invest
these funds in stocks, bonds, real estate, and mortgages; and make payments
to the beneficiaries of the insured parties.
Life insurance companies
Organizations that pool
investor funds to
purchase financial
instruments and thus
reduce risks through
diversification.
Mutual Funds
Mutual funds that invest
in short-term, low-risk
securities and allow
investors to write checks
against their accounts.
Money Market Funds
(ETFs) are similar to regular mutual funds and are
often operated by mutual fund companies.
Exchange Traded Funds (ETFs)
are also similar to mutual funds because they accept money
from savers and use the funds to buy various securities, but there are some
important differences.
Hedge funds
are organizations that operate much like hedge funds;
but rather than purchasing some of the stock of a firm, private equity players
buy and then manage entire firms.
Private equity companies
An exchange where people and organizations can purchase and sell ownership interests in publicly listed corporations is a
STOCK MARKET
Formal organizations
having tangible physical
locations that conduct
auction markets in
designated (“listed”)
securities.
Physical Location
Exchanges
A large collection of
brokers and dealers,
connected electronically
by telephones and
computers, that provides
for trading in unlisted
securities.
Over-the-Counter
(OTC) Market
Include all facilities that
are needed to conduct
security transactions not
conducted on the
physical location
exchanges.
Dealer Markets
A corporation that is
owned by a few
individuals who are
typically associated with
the firm’s management.
Closely Held
Corporation
A corporation that is
owned by a relatively
large number of
individuals who are not
actively involved in the
firm’s management.
Publicly Owned
Corporation
The act of selling stock to
the public at large by a
closely held corporation
or its principal
stockholders.
Going Public
The market for stocks of
companies that are in the
process of going public.
Initial Public Offering
(IPO) Market
Returns are price changes in an index or other security that may be captured by investors or traders as profits.
Market returns
The current price of a stock.
Market price:
The price at which the stock would sell if all investors had
all knowable information about a stock.
Intrinsic value:
The price that balances buy and sell orders at any given time.
Equilibrium price:
A market in which prices are close to intrinsic values and
stocks seem to be in equilibrium.
Efficient market:
(EMH) remains one of the cornerstones of modern
finance theory.
efficient markets hypothesis
A medium of exchange that is centralized, generally accepted, recognized, and facilitates transactions of goods and services. is anything that is acceptable as payment for goods and services.
Money
Money should be scarce enough to have some value but not so scarce as to be unavailable.
Any item used as money must be durable.
Money must be easily moved around.
Money must be capable of being divided into smaller parts.
Scarcity:
Durability
Portability:
Divisibility:
money makes transactions easier. Having a common form of payment is much less
complicated than having a barter system, wherein goods and services are exchanged for other goods and
services. Money allows the exchange of products to be a simple process.
medium of exchange,
With a form of money whose value is accepted by all, goods and
services can be priced in standard units. This makes it easy to measure the value of products and allows
transactions to be recorded in consistent terms.
a standard of value.
money is used to hold wealth. It retains its value over time, although it may lose some of its
purchasing power due to inflation.
store of value,
An operating license issued to a bank by the federal government or a state government;
required for a commercial bank to do business.
bank charter
Profit-oriented financial institutions that accept deposits, make business and consumer
loans, invest in government and corporate securities, and provide other financial services.
commercial banks
Not-for-profit, member-owned financial cooperatives.
credit unions
Cash held in the form of coins and paper money.
currency
Money kept in checking accounts that can be withdrawn by depositors on demand.
demand deposits
The process in which financial institutions act as intermediaries between the
suppliers and demanders of funds.
financial intermediation
The purchase or sale of U.S. government bonds by the Federal Reserve to stimulate or slow down the economy.
open market operations
Large pools of money set aside by corporations, unions, and governments for later use in paying retirement benefits to their employees or members.
pension funds
Depository institutions formed specifically to encourage household saving and to make home mortgage loans.
thrift institutions
Deposits at a bank or other financial institution that pay interest but cannot be withdrawn on demand.
time deposits
is used to describe the total amount of readily
available money in the system and includes currency and demand deposits.
M1
includes all M1 monies plus time deposits and other money that is not
immediately accessible.
M2
Financial Intermediaries
- Commercial banks
- Saving banks
- Credits union and pension funds
are major suppliers of funds. Policyholders make payments (called premiums) to buy
financial protection from the
Insurance Companies
institutions include insurance companies, pension funds, brokerage firms, and finance companies.
Nondepository Financial Institutions
also called corporate finance, is defined as the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization.
Financial management
developed the
notion that an asset’s value is based on the future cash flows the asset will provide
Economists
Financial management – focuses on decisions relating to:
- How much and what types of assets to acquire,
- How to raise the capital needed to buy assets, and
- How to run the firm so as to maximize its value.
investments in noncurrent assets
capital
budgeting)
investments in current assets
(working capital
management).
relates to the raising of finance from various resources
which will depend on decision on type of source, period of financing, cost of
financing and the returns thereby.
. Financial decision
refers to the net profit distribution.
Dividend decision
dividend and the rate of it has to be
decided.
Dividend for shareholders
– amount of retained profits has to be finalized
which will depend upon expansion and diversification plans of the
firm.
Retained earnings
primary goal is to maximize the value of his or her firm’s stock, and
value is based on the firm’s future cash flows.
A manager’s
Financial statements can provide information on:
- How a firm is doing
- Its current resources, and
- Its financial policies
Statement of Financial Position
(fundamental equation: Assets = Liabilities
+ Net Worth)
e (summarizes a firm’s revenues, expenses, and profits)
Statement of Income
(how much cash is the firm generating); 3 sections: operating, financing, investing.
Statement of Cash Flows
(how much a firm’s equity
changed during the year and why this change occurred)
Statement of Changes in Shareholders’ Equity
Organizations have intertwined accounting and finance function. Financial
management is something more than an art of accounting and bookkeeping.
Accounting functions as the processing of financial data using the accounting
cycle. Accounting is entrusted with recording the business activities to the books
of accounts and summarize it for the purpose of presenting the financial
statements.
Financial Management and Accounting
Financial managers can do better decision if they will integrate economic
factors to come up with business decisions. Financial managers are given the task to properly utilize scarce resources of the organization while keeping in mind of increasing the value of the organization’s wealth. Good financial management has a sound grasp to financial and economic principles that will impact the profitability of the organization.
Financial management and Economics
Financial Instruments
Corporate Bonds
Leases
Preferred stocks
Common stocks
Treasury bills
Banker acceptance
Commercial paper
Negotiable certificates
of deposit
Money market mutual
funds
Mortgages
state and gov. bonds
Bond
