FINC 409 Chapter 1

Reasons for studying finance

- As a citizen of the US, you should want to make informed economic decisions. Whatever your financial and economic goals may be, you need to be informed participant if you wish to "make a difference" - Having some knowledge about finance, particularly the financial markets or investments component, should be important to you. An understanding of various aspects of personal finance should help you better manage your existing financial resources, as well as provide the basis for making sound decisions for accumulating wealth over time. - To be successful in the business world, it is important to have a basic understanding of business finance in addition to an understanding of institutions, markets, and investments.

The Financial Functions in the Financial System

- Monetary System - Financial Institutions - Financial Markets

Differences between money and capital markets

- Money markets are the markets where debt instruments of one year or less are traded. In contrast, capital markets for debt securities with maturities in excess of one year and corporate stocks.

Financial Markets

- Perform the financial functions of marketing and transferring financial assets

4 Major Components of an effective financial system

- Policy makers, comprised of the President, Congress, the US Treasury and the Federal Reserve Board - An efficient monetary system: This requires a unit of account such as the dollar and a convenient means of paying for everything from a pack of chewing gum to a business worth millions - A system for channeling savings into investment. This requires proper legal instruments and financial institutions so that savers are willing and able to transfer savings to those having a demand for them. - Financial markets and procedures for transferring claims to wealth. This facilitates that investment process since the owner of funds will invest more readily if claims can be converted into cash when there is a need or desire to do so

Differences between primary and secondary markets

- Primary securities markets are markets in which the initial offering of debt and equity the public occurs. - Secondary securities markets are markets where the transfer of existing debt and equity between investors occurs.

What are the major areas for possible careers in finance?

-Business financial management - Depository financial institutions - Contractual savings and real property organizations - Securities markets and investment firms

What topics do the three parts of this book cover?

-Institutions and markets - Investments -Financial management

A basic understanding of business finance is important even if you are interested in a non financial career or professional activity because you will likely need

-To interact with financial professionals within and outside your organization - A basic knowledge of the concepts, tools, and applications of financial management - To make informed career decisions based on a basic understanding of business finance.

The four main types of financial markets are

1. Debt securities markets 2. Equity securities markets 3 .Derivative securities markets 4. Foreign Exchange Markets

Obtain several recent issues of the Wall Street Journal or Bloomberg Businessweek. Identify read and be prepared to discuss at least one article relating to one of the six principles of finance 6 Principles of Finance are

1. Money has a time value 2. Higher returns are expect for taking on more risk 3. Diversification of investments can reduce risk 4. Financial markets are efficient in pricing securities 5. Manager and stockholder objectives may differ. 6. Reputation Matters

6 Principles of Finance

1. Money has a time value 2. Higher returns are expected for taking on more risk 3. Diversification of investments can reduce risk 4. Financial markets are efficient in pricing securities 5. Manager and stockholder objectives may differ 6. Reputation matters

Match

2000: #4 technology stock bubble 2001: #2 US terrorist attack 2006: #5 housing price bubble 2007-08: #3 Financial Crisis 2008-09: #1 Great Recession

When did the Great Recession occur?

2008-2009

Finance is the study of how individuals, institutions, governments, and businesses

Acquire, spend, and manage money and other financial assets.

Equity Securities Markets

Are markets where common stocks are initially sold and traded

Financial Markets

Are physical locations or electronic forums that facilitate the flow of funds

Entry level career opportunities involving business financial management include which of the following?

Capital expenditures analyst

Financial Institutes

Carry out the savings-investment process via the financial functions of accumulating savings and lending/investing savings.

What is the role of a monetary system in an effective financial system?

Create and transfer money

Monetary System

Creating money and transferring money

How do Debt securities and equity securities differ?

Debt securities are obligations to repay borrowed funds. Common stocks are ownership shares in corporations.

Financial principles focus on an individuals

Economic and ethical behavior

The reasons for studying finance are to make informed

Economic, personal and business investment and career decisions

Foreign Exchange Markets

Electronic markets in which banks and institutional traders buy and sell various currencies on behalf of businesses and other clients.

What are the two financial themes carried throughout this book?

Entrepreneurial finance and personal finance.

What are the financial markets where ownership shares in corporations are initially sold and traded?

Equity securities markets

In the past, your firm has been in compliance with regulatory standards relating to product safety. However, you have heard through the "company grapevine" that recently some of your firm's products have failed resulting in injuries to customers. You are considering quitting your job due to personal moral concerns. What would you do?

Ethical behavior is how an individual or organization treats others legally, fairly, and honestly. Your firm has been legally in compliance with regulatory standards relating to product safety. At this time injury related product failures seem to be rumors and product safety regulations do not attempt to ensure there will be no injuries. You probably wold want to wait until actual "facts" are known before taking any actions. Ultimately you should decide whether you believe your firms is treating customers fairly and honestly in addition to legally.

Which of the following is a principle of finance?

Financial markets are efficient in pricing securities.

Ethical Behavior

How an individual or organization treats others legally, fairly, and honestly. Laws and regulations ensure minimum levels of protection and compliance and the difference between unethical and ethical behavior. High ethical behavior exceeds basic legal or regulatory standards.

What of the following is the sequencing of the three parts covered in this book's plan of study?

Institutions and markets, investments and financial management.

What are the three areas of finance?

Institutions and markets, investments, and financial management.

Financial Institutions

Intermediaries that help the financial system operate efficiently and assist the savings-investment process.

Investments

Involve the marketing of securities, securities analysis, and the management of investment risk

Financial Management

Involves financial planning, asset management, and fund raising decisions to enhance the value of firms.

What are the financial functions carried out by financial markets in an effective financial system?

Marketing financial assets and transferring financial assets.

Derivative Securities Markets

Markets for financial contracts (or instruments) that derive their values from underlying debt and equity securities.

Debt Securities Markets

Markets where money market securities, bonds (corporate, financial institution, and government) and mortgages are originated and traded.

What are financial markets, where debt securities with maturities of one year of less are issued and traded, called?

Money Markets.

What are the four major components of the US financial system?

Policy makers, a monetary system, financial institutions and financial markets.

Which principle of finance is not an economic principle

Reputation matters

What are financial markets that are physical locations or electronic forums where debt and equity securities are traded called?

Secondary markets

Entrepreneurial Finance

Studies how growth-driven, performance-focused, early-stage firms raise financial capital and manage their operations and assets.

Personal Finance

Studies how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time.

what are the 3 areas of finance?

The 3 areas of finance are within the financial environment and financial system are institutions and markets, investments, and financial management.

What is meant by the term financial environment

The financial environment encompasses the financial system, institutions, markets, and individuals that make the economy operate efficiently.

Identify the four types of major financial markets

The four types of financial markets are debt securities markets, equity securities markets, derivative securities markets, and foreign exchange markets.

Finance

The study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial resources.

How the financial environment has changed during the past few years

The technology stock price bubble burst in 2000. The housing bubble burst in 2006. Falling housing prices accompanied by falling values of mortgage-backed securities led to the 2007-08 financial crisis and resulting 2008-09 Great Recession. Economic activity has been slow to recover and unemployment rates remained at high levels at the end of the first decade of the twenty-first century.

You boss has just told you that there will be an announcement tomorrow morning that the Federal Drug Administration has approved your firm's marketing of a new breakthrough drug. As a result of this information, you are considering purchasing shares of stock in your firm this afternoon. What would you do?

The violation of US laws is both illegal which could result in prison time and unethical US securities laws prohibit officers, employees and others from taking advantage of "inside" information which when released will impact security prices. This situation seems to violate securities laws and thus you should not purchase shares of stock in your firm prior to the public announcement of this inside information.

The US financial system is comprised of 1: policy makers 2: a monetary system 3: Financial institutions 4: Financial markets. Indicate which of these components is associated with each of the following "roles"

a) Accumulate and lend/invest savings: #3 Financial Institutions b) Create and Transfer Money: #2 A monetary System c) Pass laws and set fiscal and monetary policies: #1 Policy Markets d) Market and Facilitate Transfer of Financial Assets: #4 Financial Markets

Indicate some of the career opportunities in finance available to business graduates today

a. Financial Management- entry level opportunities (either the treasurers' department or the controller's department) include cash management analyst, capital expenditures analyst, credit analyst, financial analyst, cost analyst, and tax analyst. b. Depository Financial Institutes: Entry level job opportunities include loan analyst, bank teller, and investments research analyst c. Contractual Savings and Real Property Organizations: Entry level opportunities include insurance agent or broker, research analyst, real estate agent or broker and mortgage analyst d. Securities Markets and Investment Firms: Entry level opportunities include stockbroker or account executive, security analysts, investment banking analyst and financial planner assistant Entry level financial job opportunities are also available in government or not for profit organizations. Such Jobs may involve management of cash funds, assets acquisitions decisions, and borrowing funds. Various entry level finance job opportunities also are available internationally.

Financial markets may be categorized as 1. Debt securities markets 2. Equity securities markets 3. Derivative Securities Markets 4. Foreign Exchange Markets Indicate in which of these markets the following securities trade

a. Mortgages: #1 Debt Securities Markets b. Bonds: #1 Debt Securities Markets c. Common Stocks: #2 Equity Securities Markets d. Currencies: #4 Foreign Exchange Markets

In business, ethical dilemmas or situations occur frequently. Laws and regulations exist to define unethical behavior. However, the practicing of high quality ethical behavior often goes beyond just meeting laws and regulations. Indicate how you would respond to the following Situations

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In what part of the book is the financial management of businesses covered?

part 3