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36 Cards in this Set
- Front
- Back
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What is finance? |
money is managed and the actual process of acquiring needed funds... find a better answer from class? |
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How do people and business evauate investments and raise capital to fund them? |
(a) Asset pricing(Focus of this course): How to price financial instruments such as bonds and stock. (b) Capital budgeting: What long-term investments should the firm undertake? (c) Capital structure: How should firm raise money to fund these investments? Debt or equity? (d) Working capital management: How can the firm best manage its cash flows as they arise in its day-to-day operations? |
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Five principles of finance. |
Money has a time value. There is a risk-return tradeoff. Cash flows are the source of value. Market prices reflect information. Individuals respond to incentives. |
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Number of owners? Are owners liable for the firm’s debt? Do owners manage the firm? Does an ownership change dissolve the firm? Access to capital? Taxation ?
Sole proprietorship Partnership Corporations
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One, Yes, Yes, Yes, Very limited, Personal taxes
Unlimited Yes; each partner has unlimited liability, Yes, Yes, Very limited, Personal taxes
Unlimited, No, No, No, Very easy access, Double taxations: Earnings taxed at corporate level. Dividends taxed at personal level |
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Money Suppliers aka Savers |
Individuals Firms Government |
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Money Demanders aka Borrowers |
Individuals Firms Government |
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Financial institutions (intermediaries) |
Commercial Banks Finance Companies Insurance Companies Investment Companies (Mutual Fund, Hedge Fund, ETF, Private Equity [Venture Capital, Leveraged buyouts] ) |
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Money Markets |
Short term debt instrument. One year or less |
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Capital Markets |
long term financial instruments. Extend beyond a year. |
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National boundaries on financial markets? |
nope |
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Commercial Banks |
Banks can loan money to industrial corportaions banks are prohibited by law from owning them. Can't loan to industrial firms they own. Make money by charging higher rate to people who borrow and lower to savers. |
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Finance Companies |
GE capital provides commercial loans, financing programs, commercial insurance, equipment leasing of every kind. They are not banks even though they do similar. |
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Insurance Companies |
Sell insurance to protect investments. Hold a reserve of funds. They also provide financial serves, equipment leasing, insurance premium financing, And credit default swap (debt and loan insurance, which includes selling guarantees to lenders that reimburse them should the loans they made go into default. )
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Investment Banks (not in her notes) |
Specialized that help companies and governments raise money and provide advisory services to client firms when they enter into major transactions such as buying or merging with other firms.
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Investment firms |
pool the savings of individuals savers and invest the money , purely for investment purposes, in the securities issued by other companies.
Mutual Funds, ETF, Hedge Funds, Private Equity Firms |
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Mutual Funds |
widely known, where individuals can invest in virtually all of the securities offered in the financial markets. Shares in a mutual funds grant ownership claim to a proportion of the mutual fund's portfolio. It is not like a share of stock, you are getting a mutual find percentage of all there shares... Mutual fund has a net asset value (NAV) ..caculated daily on the total value of fund divided by the number of mutual fund shares outstanding. Load fund - with broker who takes commission No load fund - no commission usually deal with website |
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ETF |
Similar to mutual fund, except for the ownership shares in the ETF can be bought and sold on the stock exchange.
Both etf and mutual fund is a cost effective way to diversify your stock when you have little to invest. |
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Hedge Fund |
like a mutual find but are less regulated and more risky. Actively influences the managers of the corporations they invest in Only accredited investor, which means an individual with a net worth that exceeds 1 million, can invest in a hedge fund. Management fees are higher. |
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Private Equity firm
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Invests in equities that are not traded on the public capital markets Two types : Venture capital and leveraged buyouts VC: raise money from wealthy investors to provide financing for startups Leveraged buyout : acquire established firms that typically are not performing well with objective to make them profitable again. They have alot of money 262 billion |
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Securities |
instruments that represents financial claims |
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Primary Market |
is were new securities are bought and sold for the first time. Firms issue new securities to raise money that they can help finance the business. The key feature is the firms selling securities actually receive the raised money.
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Secondary Market |
subsequent trading of previously issued securities takes place trasfered from one investor to the next. firm does not receive any new financing purpose is liquidity |
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Short term debt |
Treasury bills Commercial Papers Certificates of Deposit (CD) Consumer Credit |
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Long term debt |
DEBT Treasury Notes Treasury bonds Mortgage Corporate bonds
Equity( long term) preferred stock common stock |
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Characteristics of securities
Voting rights Dividend or interest payment Claim for income Claim for assets in case of bankruptcy Risk Expected return
Debt, preferred, common |
Debt Preferred stock Common stock Voting rights No No YES Dividend or interest payment Interest,obligatory, fixed Dividend, fixed Dividend, discretionary Claim for income 1st 2nd 3rd Claim for assets in case of bankruptcy 1st 2nd 3rd Risk 3rd(lowest) 2nd 1st(highest) Expected return 3rd(lowest) 2nd 1st(highest)
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Financial crisis |
People started defaulting on their mortgages they couldn't pay. The banks started lending money to risk borrowers to make fast cash and sold the debt to investors. House prices went down and people lost their jobs so regular people started defaulting on their house. |
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Present value(PV) |
What a cash flow is worth at the beginning of an investment period |
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Future value(FV) |
What a cash flow is worth in the future. |
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r i t m |
r |
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annuity |
is a series of 1) equal dollar payments that are made at the end of 2) equidistant points in time such as monthly, quarterly, or annually ect over a 3) finite period of time |
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ordinary annuity |
If payments are made at the end of each period, |
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annuity due |
If payments are made at the beginning of each period |
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Amortized loan |
a loan where the principal of the loan is paid down over the life of the loan according to an amortized loan schedule, typically through equal payments. It is different from bullet loan where the principal is paid at one shot at the maturity date.
first payment principle x interest rate per period = amount of interest payed for that period. |
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amortized schedule |
first payment principle x interest rate per period = amount of interest payed for that period.
payment=principal repayment+interest payment. |
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Perpetuity
Level perpetuity
Growth perpetuity: |
A stream of standardized cash flows that has no maturity
payments are constant over time.
payments grows at a constant rate over time. |
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Complex cash flows: |
any stream of cash flows. They can be a mixture of positive and negative cash flows. They can be in different dollar amount or they can occur at non-equidistant points in time.Oftentimes, they consists of multiple sets of annuities or different cash flow amounts mixed in with annuities. |
