Topic 3 - Sources & Valuation of Long-Term Funds Flashcards
How do firms raise funds?
Firms raise funds by issuing financial securities (financial instruments that hold some form of monetary value).
Capital Markets
The place were debt and equity securities are issued and traded on.
Define Primary Market
This is where the securities are first issued between the issuing company and investors.
Define Secondary Market
Once an investor has purchased, they may wish to sell or hold onto them via the secondary market.
What is Primary market price determined by?
- Market demand
- Supply
- Company’s financials
What is Secondary market price determined by?
- Supply and demand
- Investors perceptions of security value
What is an IPO?
Initial Public Offering
When a company sells a new security to the public for the first time.
Market Value
The observed price of an asset in the marketplace ie. secondary market
Intrinsic Value
AKA the fair value is the present value of the asset’s future cash flows.
Value Comparisons
Intrinsic is compared to market.
- If the IV > MV that means the security is undervalued by the market and vice versa.
- If IV = MV, the market is working efficiently.
What is Debt Financing
Loans from financial institutions
- Banks, corporate bonds
What is Equity Financing?
Firms issue securities called shares, which are entitlements to ownership.
What is a bond?
A financial instrument that represents a loan from an investor to a company.
Face Value (par value)
The amount of money the first purchaser pays the issuer for the bond.
- This is also the amount the bond holder will get back at the date of maturity.
Maturity Date
The date in the future on which the investor’s principal will be repaid
