Unit 2 Overview Flashcards
Finance vs Accounting
Finance looking ahead
Accounting - looking back
3 types of Finance
Business/Corporate finance - funding, capital structure of a corporation
Investment - deciding what to invest in, asset pricing
Financial institutions - Banks, insurance, mortgage, pension
Main principle of personal and business finance
does benefit outweigh cost
maximize utility
Utility
total satisfaction received from consuming goods/services
Role of Financial Manager
acts on behalf of owner to manage finances
maximize shareholder/owner wealth
3 main tasks of Financial Manager
make investment decisions - most important role, cost/benefit
make financing decisions - may need to issue stocks/bonds
manage working capital - short term obligations
Finance
management and allocation of capital or money objectives of investing, forecasting, budgeting, saving, borrowing, and lending
Treasuries
bonds issued by US government to borrow money from the public
Corporate Bonds
bonds issued by corporations to borrow money from the public. Bondholders paid back first over shareholders when a company is liquidated
money market
financial market used to borrow/lend money over short term
capital market
financial market used to borrow/lend money over long term
stock/bond markets
Primary market
market where stocks/bonds are first sold
issued with help of a syndicate
syndicate
used to oversee issuance of stocks/bonds on primary market
2 ways bonds are placed with a syndicate
competitive bid
negotiated sale
IPO
first sale of new stocks on primary market
new equity offering
secondary market
where securities are traded after initial offering
stock market
2 types of secondary markets
auction - physical location, highest bidder, NYSE
dealer - securities bought and sold through network of dealers, which each compete with each other - NASDAQ
bid-ask price
difference between bid and ask prices that compensate the specialist for providing liquidity
role of financial markets
reduce cost for companies to obtain financing
efficient market
prices fully reflect available information about a security
inefficient markets have mispriced securites
SEC
Securities and Exchange Commission independent federal agency that - protects investors - maintains fair, orderly, efficient markets - facilitates capital formation
2 main types of financial institutions
Depository (Banks) - accept deposits, provide loans
Non-depository - does not take deposits, may lend money or be intermediary between savers and lenders
3 types of non depository institutions
Securities firms - underwriters, trade on secondary market
Investment firms - mutual funds, hedge funds, investment trusts
Contractual savings institutions - insurance company, pension fund
role of Central banks
oversee , manage all other banks i.e. Federal Reserve Bank
role of Banks and Credit unions
checking, savings accounts, lending, some financial advice
role of insurance
charge premiums to invest in stocks/bonds, pay claims
role of mutual funds
offer investments, buy securities on behalf of investors
role of pension funds
invest retirement funds, provide retirement payments
role of investment banks
underwriting, facilitate mergers, trade securities
role of private equity
use money from investors to buy high potential/troubled companies to improve and return profit through public sale
3 types of indicators
leading - indicate change before it happens
lagging - a change that happens after the economy changes
coincident - collected as change happens
Yield Curve
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
Stock Market return
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
lagging indicators
unemployment rate
CPI - inflation rate
Coincident indicators
GDP - rising = strong economy, falling = weak economy
Personal Income - rising = strong economy, falling = weak economy
2 main priorities of US central banks
regulate inflation and unemployment
SEC responsibilities
Protect investors
maintain fair, orderly efficient markets
facilitate capital formation
ethics
accepted standard of conduct
morals
beliefs about what is right and wrong
ethical dilemma
deciding among multiple options that are not completely ethical
agency costs
costs not in shareholder interest
agency problem
management does not act in best interest of owner, incurring agency costs
examples of confilcts between managers and owners
manager self dealing
wasteful spending by manager
fraudulent accounting by manager
example of conflicts between shareholder and bondholder
shareholder taking on overly risky projects
bondholder setting unreasonable limits on
steps in evaluating ethical conflict
- Identify/define problem. Ask questions. What rules/laws will be violated? What demands are creating the conflict?
- Consider alternative courses of action,
- Consider all stakeholders.
- Consider consequences.
- Move forward with ethical action.
