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Finance D 76 > Unit 2 Overview > Flashcards

Unit 2 Overview Flashcards

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1
Q

Finance vs Accounting

A

Finance looking ahead

Accounting - looking back

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2
Q

3 types of Finance

A

Business/Corporate finance - funding, capital structure of a corporation
Investment - deciding what to invest in, asset pricing
Financial institutions - Banks, insurance, mortgage, pension

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3
Q

Main principle of personal and business finance

A

does benefit outweigh cost

maximize utility

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4
Q

Utility

A

total satisfaction received from consuming goods/services

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5
Q

Role of Financial Manager

A

acts on behalf of owner to manage finances

maximize shareholder/owner wealth

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6
Q

3 main tasks of Financial Manager

A

make investment decisions - most important role, cost/benefit
make financing decisions - may need to issue stocks/bonds
manage working capital - short term obligations

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7
Q

Finance

A 
management and allocation of capital or money
objectives of 
investing, 
forecasting, 
budgeting, 
saving, 
borrowing, 
and lending
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8
Q

Treasuries

A

bonds issued by US government to borrow money from the public

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9
Q

Corporate Bonds

A

bonds issued by corporations to borrow money from the public. Bondholders paid back first over shareholders when a company is liquidated

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10
Q

money market

A

financial market used to borrow/lend money over short term

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11
Q

capital market

A

financial market used to borrow/lend money over long term

stock/bond markets

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12
Q

Primary market

A

market where stocks/bonds are first sold

issued with help of a syndicate

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13
Q

syndicate

A

used to oversee issuance of stocks/bonds on primary market

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14
Q

2 ways bonds are placed with a syndicate

A

competitive bid

negotiated sale

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15
Q

IPO

A

first sale of new stocks on primary market

new equity offering

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16
Q

secondary market

A

where securities are traded after initial offering

stock market

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17
Q

2 types of secondary markets

A

auction - physical location, highest bidder, NYSE

dealer - securities bought and sold through network of dealers, which each compete with each other - NASDAQ

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18
Q

bid-ask price

A

difference between bid and ask prices that compensate the specialist for providing liquidity

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19
Q

role of financial markets

A

reduce cost for companies to obtain financing

20
Q

efficient market

A

prices fully reflect available information about a security

inefficient markets have mispriced securites

21
Q

SEC

A 
Securities and Exchange Commission
independent federal agency that 
- protects investors
- maintains fair, orderly, efficient markets
- facilitates capital formation
22
Q

2 main types of financial institutions

A

Depository (Banks) - accept deposits, provide loans

Non-depository - does not take deposits, may lend money or be intermediary between savers and lenders

23
Q

3 types of non depository institutions

A

Securities firms - underwriters, trade on secondary market
Investment firms - mutual funds, hedge funds, investment trusts
Contractual savings institutions - insurance company, pension fund

24
Q

role of Central banks

A

oversee , manage all other banks i.e. Federal Reserve Bank

25
Q

role of Banks and Credit unions

A

checking, savings accounts, lending, some financial advice

26
Q

role of insurance

A

charge premiums to invest in stocks/bonds, pay claims

27
Q

role of mutual funds

A

offer investments, buy securities on behalf of investors

28
Q

role of pension funds

A

invest retirement funds, provide retirement payments

29
Q

role of investment banks

A

underwriting, facilitate mergers, trade securities

30
Q

role of private equity

A

use money from investors to buy high potential/troubled companies to improve and return profit through public sale

31
Q

3 types of indicators

A

leading - indicate change before it happens
lagging - a change that happens after the economy changes
coincident - collected as change happens

32
Q

Yield Curve

A

type of leading indicator
3 types
normal - long term bonds have higher interest rates than short term bonds, growing economy
inverted - long term bonds interest rates lower than short term bond interest rates, slowing economy
flat - short/long term bond IR same - economy in transition

33
Q

Stock Market return

A

type of leading indicator
rising - growing economy
declining - slowing economy
need to know reason for rising stock market to determine if it truly reflects growing market

34
Q

lagging indicators

A

unemployment rate

CPI - inflation rate

35
Q

Coincident indicators

A

GDP - rising = strong economy, falling = weak economy

Personal Income - rising = strong economy, falling = weak economy

36
Q

2 main priorities of US central banks

A

regulate inflation and unemployment

37
Q

SEC responsibilities

A

Protect investors
maintain fair, orderly efficient markets
facilitate capital formation

38
Q

ethics

A

accepted standard of conduct

39
Q

morals

A

beliefs about what is right and wrong

40
Q

ethical dilemma

A

deciding among multiple options that are not completely ethical

41
Q

agency costs

A

costs not in shareholder interest

42
Q

agency problem

A

management does not act in best interest of owner, incurring agency costs

43
Q

examples of confilcts between managers and owners

A

manager self dealing
wasteful spending by manager
fraudulent accounting by manager

44
Q

example of conflicts between shareholder and bondholder

A

shareholder taking on overly risky projects

bondholder setting unreasonable limits on

45
Q

steps in evaluating ethical conflict

A
  1. Identify/define problem. Ask questions. What rules/laws will be violated? What demands are creating the conflict?
  2. Consider alternative courses of action,
  3. Consider all stakeholders.
  4. Consider consequences.
  5. Move forward with ethical action.

Finance D 76 (5 decks)

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