ch. 16 financial management and planning
savings account (time desposit)
a bank account that pays low interest and doesn't allow check writing
line of credit
a bank specifies how much it is willing to lend the borrower during a specified period of time
M2
a broader definition of the money supply.. 1. money that can be accessed more quickly and easily (M1) AND 2. money that takes more time to access
demand deposit
a commercial bank's or other financial institution's checking account, from which you may make withdrawals at any time
fianancial control
a company from time to time compares its actual revenues and expenses with those predicted in its budget
commercial bank
a ferderal- or state-charted profit-seeking financial institution that accepts deposits from individuals and businesses and uses part of them to make personal, residential and business loans
derivative
a financial contract that "derives" its value from a wide range of sources, including stocks, loans and market indexes. investors pay a set price in return for possible profits later
factoring accounts receivable
a firm sells its accounts receivable at a discount to a financial institution
pledging accounts receivable
a firm uses its accounts receivable as collateral, or security, to obtain a short-term loan
operating budgets
a firm's sales and production goals and specify the costs required to meet those goals
financial plan
a firm's strategy for reaching its financial goals. it has three parts: 1) forecasting 2) budgeting and 3) financial controls
smart card
a plastic card with built-in microprocessor and memory chips that can combine the functions of credit, debit, phone, bridge-toll, and national-health-care cards
long-term forecasts
a prediction about how money will come into and go out of a firm during the next 1, 5, or 10 years
short term forecasts
a prediction about how money will come into and go out of a firm during the next 4-12 months
cash flow forecast
a prediction about how money will come into and go out of a firm in the near further, usually within the next 1-3 months
term-loan agreement
a promissory note indicating specific installments, sun as months or yearly, for repayment
certificate of deposit (CD)
a savings (time deposits) account that pays interest upon the certificate's maturity date
promissory note
a written contract prepared by the buyer who agrees to pay the seller a certain amount by a certain time (ex. jewlerly)
debit card
allows you to immediately transfer money from you bank account to pay for purchases electronically
NOW account
an account that pays interest and allows you to write an unlimited number of checks, but you have to maintain a minimum monthly balance
FDIC
an independent agency of the us government that insures bank desposits
national credit union administration (NCUA)
an independent federal agency that provides up to $250,000 insurance coverage per individual per credit union
money
any medium of value that is generally accepted as payment for goods and services
secured bonds
backed by some form of the firm's collateral, such as real estate or equipment
unsecured bonds
backed only by the reputation of the firm issuing the bonds
money market accounts
bank accounts that offer interest rates competitive with those of brokerage firm money market funds, but they require higher minimum balances and limit check writing to as few as three per month
financial budgets
capital budgets and cash budgets. they concentrate on the company's financial goals and the resources needed to achieve them.
how banks make money
charging interest on loans, charging fees for other services and by offering other financial products
brokerage firms
companies that buy and sell stocks and bonds for individuals and now compete with banks by offering high-interest-rate combination checking and savings
electronic funds transfer systems or EFTS
computerized systems that move funds from one institution to another over electronic links
commercial paper
consists of unsecured, short-term promissory notes over 100,000 issued by large banks and corportations
bonds
contracts between issuer and buyer in which the purchase price represents a loan by the buyer and for which the issuing firm pays the buyer interest
transaction loan
credit extended by a bank for a specific purpose
budget
defined as a detailed financial plan showing estimated revenues and expenses for a particular future period, usually one year
time deposits
defined as bank funds that can't be withdrawn without notice or transferred by check
money supply
defined as the amount of money the fed makes available for people to buy goods and services. the money supply is customarily referred to in two ways--as M1 (the narrowest messure) or M2 (more generous and more commonly used measure)
credit unions
depositor-owned, nonprofit financial cooperatives that offer a range of banking services to their members
capital budgets
estimate a firm's expenditures for purchasing long-term assets that require significant sums of money
investment bank
financial institution that deals primarily with raising capital, structuring corporate mergers and acquisitions, and handling securities
nonbanks
financial institutions (insurance companies, pension funds, finance companies, and brokerage firms) that offer many of the same services as banks provide.
savings and loan associations (S&Ls)
financial institutions that accept deposits and were originally intended to make loans primarily for home mortgages
risk-return trade-off
financial managers continually try to balance the firm's investment risk with the expected return, or payoffs, from its investments
mutual saving banks
for-profit financial institutionals similar to savings and loans, except that they are owned by their depositors rather than by shareholders
cash budgets
forecast inflows and outflows for a stated period, usually 1-3 months
venture capital
funds acquired from wealthy individuals and institutions that invest in promising startups or emerging companies in return for their giving up some ownership
currency
gov-issued coins and paper money
private placements
involve selling stock to only a small group of large investors
public offerings
involve selling stock to the general public in securities markets
subprime loans
loans for people with blemished or limited credit histories, which carried a higher rate of interest than prime loans to compensate for increased credit risk
capital expenditures
major investment in tangible or intangible assets
reasons firms borrow money
managing everyday business activities, extending credit to their customers, keeping enough product available, and making major investments
three functions of money
medium of exchange store of wealth standard of value
e-cash
money held, exchanges, and represented in electronic form and transacted over the Internet
insurance companies
non deposit companies that accept payments (called premiums) from policyholders-individuals or firms who have purchased insurance policies that guarantee financial protection in the event something goes wrong
finance companies
non deposit companies that make short-term loans at higher interest rates to individuals or businesses that don't meet the credit requirements of regular banks
pension funds
non-deposit institutions that provide retirement benefits to workers and their families
SAIF
now part of FDIC, insures depositors with accounts in savings and loan associations
standard of value
or unit of account, it can be used as a common standard to measure the values of goods and services
commercial finance companies
organizations willing to make short-term loans to borrowers who can offer collateral ex. wells fargo and b of a
store of wealth
people can save it until they need to make new purchases
characteristics of money
portability, divisibility, durability, uniqueness, stability
forecasting
predicting revenues, costs, and expenses for a certain period of time three types: cash flow, short-term, and long term
terms of trade
refers to the condition the supplier (seller) gives the buyer when offering short-term credit.
revolving credit
resembles a line of credit, except that the bank guarantees the loan and is obligated to loan funds up to the credit limit
trade credit
short-term financing by which a firm buys a product, then receives a bill (an invoice) from the supplier, then pays it later (usually in 30-90 days)
medium of exchange
that it makes economic transactions easer and eliminates the need to barter
collateral
the asset that is pledged to secure the loan and can be seized by the lender if the borrower does not repay the loan
unsecured loan
the borrower does not pledge some sort of asset as collateral (usually only given to people the lender has known for a long period)
secured loan
the borrower pledges some sort of asset, such as personal property, that is forfeited if the loan is not repaid
finance (corporate finance)
the business function of obtaining funds for a company and managing them to accomplish the company's objectives
fed reserve system
the central bank of the us and controls the us money supply
open-market operations
the federal reserve controls the money supply by buying and selling US treasury securities, or gov bonds, to the public
discount rate
the interest rate at which the federal reserve makes short-term loans to member banks
financial management
the job of acquiring and managing funds is called financial management
net period
the length of time for which the supplier (seller) extends credit
m1
the narrowest definition of the money supply, defined as money that can be accessed quickly and easily
financial managers
the people responsible for planning and controlling the acquisition and uses of funds
reserve requirements
the percentage of total checking and savings deposits that a bank must keep as cash in its vault or in a non-interest-bearing deposit at its regional federal reserve bank
interest rate
the price paid for the use of money over a certain period of time
cost of capital
the rate of return a firm must earn to cover the cost of generating funds in the marketplace
financial leverage
the technique of using borrowed funds to increase a firm's rate of return
indenture terms
the terms of the lending agreement
barter
the trading of goods and/or services for other goods and/or services
master budgets
tie together the above three budgets-operating, capital, and cash budgets-to present the company's overall plan of action for a particular period of time