Overview of Finance Flashcards
The study of management or the allocation of capital
Finance
A financial asset or the value of an asset
Capital
Most liquid current asset on the balance sheet
Cash
To exchange something in hope of a return
Invest
Proof of equity ownership of a firm. Gives the holder of the stock the right to vote on matters of the company and to claim to the assets of the company after debt and preferred stock holders have been paid
Stocks
A fixed income financing instrument
Bond
Three important areas in finance
Corporate Finance
Investments
Banking or Financial Institution
Focuses on financial decision making by a firm’s management
Corporate Finance
This area is devoted to understanding the various types of financial instruments, such as stocks, bonds, etc., and how to value thee instruments
Investments
Intermediaries, such as banks, that link those that save to those that need to borrow
Financial Institution
To pay for something
Finance
Money lent by a creditor to provide financing for the borrower
Debt (bonds)
Ownership in an asset such as a company
Equity (stocks)
A debt instrument that is issued by the United States Government in order to raise capital
Treasury Securities
The top line of the income statement
Revenues
The total amount of money a business brings in before subtracting out any costs
Revenues
When tax revenues fall short of covering their projects, what happens?
The U.S. Treasury will issue bonds
A debt instrument that is issued by a corporation in order to raise capital
Corporate Bonds
An equity instrument that is issued by a firm and represents a share of ownership in a particular company
Stocks
The financial market where securities (stocks/bonds) are first sold
Primary Market
A group of intermediaries that is used to oversee the issuance of stocks and/or bonds
Syndicate
Who has the responsibility of determining the value of the security?
The Underwriter
What are the two ways a firm can place bonds with a syndicate?
Competitive sale or a Negotiated Sale
When a public goes out to raise money from the public for the first time by offering a share of its company
Initial Public Offering (IPO)
The financial market where securities are traded after the initial issuance
Secondary Market
Where are assets priced?
Markets
A market with a physical location and where prices are determined by investors’ willingness to pay
Auction Market
The world’s largest secondary financial market
New York Stock Exchange
The New York Stock Exchange is an example of
An Auction Market
A physical trading floor and a computer network where stocks are bought and sold
New York Stock Exchange
A market made up from multiple dealers that hold an inventory of securities and quote prices
Dealer Market
A dealer market does not require
A physical location
The second largest secondary market in the world is
NASDAQ
Typically, technology related companies will go public through this exchange
NASDAQ
NASDAQ is an example of
A Dealer Market
The ability to convert an asset to cash quickly without losing significant value
Liquidity
A market maker on the New York Stock Exchange that holds an inventory of securities and acts as a liquidity provider to those that wish to buy and sell
Specialist
A specialist provides
Liquidity
The possibility that the realized or actual return will differ from our expected return
Risk
Orders used by investors that time sensitive and are executed on a first come-first serve basis
Market Orders
Orders used by investors that are executed only if market prices reach the limit price
Limit Orders
Market orders are ________ sensitive
Time
Limit orders are _________ sensitive
Price
What are the three roles of prices?
Convey information to consumers
Prices Affect Incentives
Prices affect the distribution of income
Another word for net income
Earnings
When a company announces unexpectedly strong earnings, an efficient market will
build up the stock price
How much an investor gets out of an investment divided by how much the investor put into the investment
Return
What are the 2 types of returns?
Dollar Returns
Percentage Returns
The increase or decrease in price that is observed by an investor that buys and holds a particular security
Dollar Returns
The percentage increase or decrease in price that is observed by an investor that buys and holds a particular security
Percentage Returns
The degree to which prices in a market reflect all available information
Market Efficiency
The goal of the firm is to
Maximize shareholder value
Maximized shareholder value is usually accomplished by
Profitable decision-making by management
Investing capital into projects that will increase the firm’s stock price
Avoiding those investments that cost more money than they bring in
The business function responsible for the production of the good or service being sold
Operations
Costs that are incurred when management does not act in the best interests of shareholders
Agency Costs
The costs that result from the principle-agent problem
Agency Costs
Most shareholders/owners have delegated the responsibility of running the day to day operations of the firm to
Management
The business function responsible of generating sales
Marketing
A company’s marketing team may come up with an advertising campaign that might improve
Sales
The top line of the income statement
Sales
The total amount of money a business brings in before subtracting out any costs
Sales
