FINC 409 Chapter 1

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

1. Financial management: Entry level opportunities (either in the treasurer's department or the controller's department) include cash management analyst, capital expenditures analyst, credit analyst, financial analyst, cost analyst, and tax analyst 2. Depository financial institutions: Entry level job opportunities include loan analyst, bank teller, and investments research analyst 3. Contractual savings and real property organizations: Entry-level opportunities include insurance agent or broker, research analyst, real estate agent or broker, and mortgage analyst 4. Securities markets and investment firms: Entry-level opportunities include stockbroker or account executive, security analyst, investment banking analyst, and financial planner assistant Entry-level finance job opportunities are also available in government or not for profit organizations. Such jobs may involve management of cash funds, asset acquisition decisions, and borrowing funds. Various entry-level finance job opportunities also are available internationally.

What are the 6 principles of finance?

1. Monet 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

Identify and describe the financial functions in the financial system

1. Monetary system financial functions are: creating money and transferring money 2. Financial institutions carry out the savings investment process via the financial functions of accumulating savings and lending/investing savings 3. Financial markets perform the financial functions of marketing and transferring financial assets

What are the four major components of an effective financial system?

1. Policy Makers 2. An efficient monetary system 3. A system for channeling savings into an investment 4. Financial Markets and procedures for transferring claims to wealth

Identify and briefly describe several reasons for studying finance

A. As a citizen (of the USA or another country), you should want to make informed decisions. Whatever your financial and economic goals may be, you need to be an informed participant if you wish to "make a difference" B/ 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. C. 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.

Policy Makers

Comprised of the President, Congress, the U.S. treasury, and the Federal Reserve Board

How do debt securities and equity securities differ

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

Identify the four types of major financial markets

Debt securities markets, equity securities markets, derivative securities markets, and foreign exchange markets

Foreign Exchange Markets

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

Financial environment

Encompasses the financial system, institutions, markets, and individuals that make the economy operate efficiently

Match the following: 1. 2000 a. Great Recession 2. 2001 b. U.S. terrorist attack 3. 2006 c. Financial crisis 4. 2007-08 d. Technology stock bubble 5. 2008-09 e. Housing price bubble

Great Recession: 2008-09 U.S. terrorist attack: 2001 Financial Crisis: 2007-08 Technology stock bubble: 2000 Housing price bubble: 2006

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 occurs when behavior exceeds basic legal or regulatory standards.

What are the three areas of finance?

Institutions and markets Investments 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

Derivative Securities markets

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

Primary Securities Markets

Markets in which the initial offering of debt and equity the public occurs

Equity Securities Markets

Markets where common stocks are initially sold and traded

Secondary Securities Markets

Markets where the transfer of existing debt and equity between investors occurs

Describe the 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 are markets for debt securities with maturities in excess of one year and corporate stocks.

Financial Markets

Physical locations or electronic forums that facilitate the flow of funds

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

Finance

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

Briefly describe how the financial environment has changed during the past few years

The technology/dot.com stock price bubble burst in 2000. The housing price bubble burst in 2006. Falling housing prices accompanied by falling values of mortgage backed securities led to the 2007-08 financial crisis and the 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.

Describe financial markets and procedures for transferring claims to wealth

This facilitates the 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.

Describe what it means to have 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

Describe 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 can be categorized as: (1) debt securities markets, (2) equity securities markets, (3) derivative securities markets, and (4) foreign exchange markets. Indicate in which of these markets the following securities trade a. Mortgages b. Bonds c. Common stocks d. Currencies

a. 1 b. 1 c. 2 d. 4

The US financial system is comprised of: (1) policymakers, (2) a monetary system, (3) financial institutions, and (4) financial markets. Indicate which of these components is associated with each of the following "roles" a. accumulate and lend/invest savings b. create and transfer money c. pass laws and set fiscal and monetary policies d. market and facilitate transfer of financial assets

a. 3 b. 2 c. 1 d. 4

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. a. Your 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? b. 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?

a. 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 t0 violate securities laws and this you should not purchase shares of stock in your firm prior to the public announcement of this inside information. b. Ethical behavior is how an individual or organization treats others legally, fairly, and honestly. Your firm has been legally in compliance with regulatory standards resulting in 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 would want to wait until actual "facts" are known before taking any actions. Ultimately you should decide whether you believe your firm is treating customers fairly and honestly in addition to legally.

Debt Securities Markets

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