FINC 200 Exam 1
Stock prices change over time as what changes?
Conditions change and as investors obtain new information about a company's prospects
Stockholders now have more control of what?
Corporate governance
What are commercial banks?
Department stores of Finance (Bank of America)
What are disadvantages to proprietorships and partnerships?
Difficult to raise capital Unlimited liability Limited life
How is capital transferred between savers and borrowers?
Direct transfers Investment banks Financial intermediaries
What are disadvantages to corporations?
Double taxation Cost off setup and report filing
What are advantages of proprietorships and partnerships?
Ease of formation Subject to few regulations No corporate income taxes
Well-functioning markets promote what?
Economic growth
What is a par value?
Face amount oft eh bond, w which is paid at maturity (assume $1,000)
What are the major areas of finance?
Financial Management Capital Market Investment (Stocks & Bonds)
What are capital markets?
Financial markets for stocks and for intermediate or long-term debt ( one year or longer)
What are money markets?
Financial markets in which funds are borrowed or loaned for short periods of time (under one year)
Who are demanders or users of capital?
Individuals and institutions who need to raise funds to finance their investment opportunities.
Who are the suppliers of capital?
Individuals and institutions with "excess funds"
What is an IPO?
Initial public offering
What is an indexed bond?
Interest rate paid is based upon the rate of inflation
What are financial services corporations?
Large conglomerates (Citicorp)
What are hedge funds?
Like mutual funds, but are unregulated and marketed primarily to institutions and individuals with high net worth
What kind of concept is an intrinsic value?
Long-run
What factors affect managerial behavior?
Managerial compensation packages Direct intervention by shareholders The threat of firing The threat of takeover
What are convertible bonds?
May be exchanged for common stock of the firm, at the holder's option
You hear in the news that a medical research company received FDA approval for one of its products. If the market is highly efficient, can you expect to take advantage of this information by purchasing stock?
No. If the market is efficient, this information will already have been incorporated into the company's stock price. So, it's probably too late.
What are credit unions?
Not-for-profit organizations that exist to serve their members
What are the key features of a bond?
Par Value Coupon interest rate Maturity date Issue date Yield to maturity
Future markets are the place for where what happens?
Participants agree today to buy or sell an asset at a future date.
What is a income bond?
Pays interest only when interest is earned by the firm
What are the types of financial markets?
Physical assets vs. Financial assets Spot vs. Futures Money vs. Capital Primary vs. Secondary Public vs. Private
What is the value of any asset equal too?
Present value of cash flows stream to owners.
Where can you find a stock quote?
Print sources (The Wall Street Journal or the local news paper) and online sources (Yahoo!Finance, CNNMoney, or MSN MoneyCentral)
A small investor has been reading about a "hot" IPO that is scheduled to go public later this week. She wants to buy as many shares as she can get her hands on, and is planning on buying a lot of shares the first day once the stock begins trading. Would you advise her to do this?
Probably not. The long-run track record of hot IPOs is not that great, unless you are able to get in on the ground floor and receive an allocation of shares before the stock begins trading. It is usually hard for small investors to receive shares of hot IPOs before the stock begins trading.
What are the three forms of business organization?
Proprietorship Partnership Corporation
Public companies are subject to additional what?
Regulations and reporting requirements
What are pension funds?
Retirement plans funded by corp's or the gov't for their workers
What is meant by stock market efficiency?
Securities are normally in equilibrium and are "fairly priced" Investors cannot "beat the market" except through good luck or better information Efficiency continuum
Apple Computer decides to issue additional stock with the assistance of its investment banker. An investor purchases some of the newly issued shares. I this a primary market transaction or a secondary market transaction?
Since new shares of stock are being issued, this is a primary market transaction.
What if instead an investor buys existing shares of Apple stock in the open market? Is this a primary or secondary market transaction?
Since no new shares are created, this is a secondary market transaction.
What do financial asset markets deal with?
Stocks, bonds, mortgages, notes, etc
What are life insurance companies?
Take savings in the form of annual premiums and incest in stocks, bonds, etc. and make payments to beneficiaries of the insured parties
What are the types of bonds?
-Mortgage bonds -Debentures -Subordinated Debentures -Investment-grade bonds -Junk bonds
If Rd remains constant what happens?
-The value of a premium bond would decrease over time, until it reached $1,000 -The value of a discount bonds Ould increase over time until it reached $1,000 -The value of a par bond stays at $1,000
What is a bond?
A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.
What is a market?
A market is a venue where goods and services are exchanged
What is a financial market?
A place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds.
The effects of ever-improving information technology have had what effect on business?
A profound effect on all aspects of business finance
Ideally, what should managers avoid?
Actions that reduce intrinsic value,e even if those decisions increase the stock price in the short run
What is a potable bond?
Allows holder to sell the bond back to the company prior to maturity
What is price risk?
The concern that rising Rd will causes the value of a bond to fall
What is the yield to maturity?
The rate o f return earned on a bond held until maturity (also called the "promised yield"
What is Finance?
The study of how money is managed and the actual process of acquiring needed funds
Managers are naturally includes to act in whose interests?
Their own (which are not always the same interests as stockholders)
Why are stockholders are more likely to prefer riskier projects?
They receive more of the upside if the project succeeds.
Online additions of the Wall Street Journal list what?
Trading for each day the most actively-traded investment-grade, high-yield, and convertible bonds.
What are advantages to corporations?
Unlimited life Easy transfer of ownership Limited liability Ease of raising capital
What is automation?
Using robots in businesss
What is the issue date?
When the bond was issued
What are primary markets?
Where corporations raise capitals by issuing new securities
What are secondary markets?
Where securities and other financial assets are traded among investors after they have been issued by corporations
Public markets are what?
Where standardized contracts are traded on organized exchanges
What are private markets?
Where transactions are worked out between two parties
What is the maturity date?
Years until the bond must be repaid.
What are derivatives?
a derivative security's value is "derived" from the price of another security (ex: options and futures)
Demanders or users of capital are willing to pay what?
a rate of return on the capital they borrow
What are mutual funds?
accept money from avers and use those funds to buy stocks, bonds, etc
Spot markets are the place where what are bought or sold?
assets are bought or sold for "on-the spot" delivery
Economies with well-developed markets perform better or worse then economies with poorly-functioning markets?
better
How do bondholders attempt to protect themselves?
by including covenants in bond agreements that limit the use of additional debt and constrain managers' actions
To the extent that investor perceptions are incorrect, a stock's prices in the short run may what?
deviate from its intrinsic value
Most significant decisions are evaluated in terms of what?
financial consequences
What are investment banks?
help companies raise capital (Goldman Sachs)
Has globalization of business increased or decreased?
increased
Because the value of any bond must equal its par value at maturity, if interest rates, hence the required rate of return, remain constant over time what happens to the bond vape?
it must move towards its par value as the maturity date approaches, so the value of a premium bond decreases to $1,000, and the value of a d account bond increases to $1,000 (barring default)
In equilibrium, a stocks price should equal what?
its "true" or intrinsic value
At maturity, the value of bond must equal what?
its par value (plus accrued interest)
The Wall Street Journal reports what?
key developments in the Treasury, corporate, and municipal markets.
Most bonds are owned by and traded among who?
large financial institutions
What are private equity companies?
like Hedge funds, but and manage entire firms
What are bondholders receiving fixed payments more interested in?
limiting debt
What is a warrant?
long-term option to buy a stated number of shares of common stock at a specific price.
Managers recognize that being socially responsible is not inconsistent with what?
maximizing shareholder value
The 10-year bond is more sensitive to interest rate changes and hence has what?
more price risk
What are exchange traded funds (ETS's) similar too?
mutual funds
In relation to the New York Stock Exchange and Nasdaq (electronic dealer-based market) the differences are what?
narrowing
Where are bonds primarily traded?
over-the-counter (OTC) market
What are physical asset markets for?
products such as wheat, autos, real estate, computers and machinery
"Going public" enables a company's owners to what?
raise capital from a wide variety of outside investors. Once issued, the stock trades in the secondary market.
Markets provide savers with what?
returns on their money saved/invested, which provide them money in the future.
Suppliers of capital are groups who are what?
saving money and looking for a rate of return on their investment
What is the primary financial goal of management?
shareholder wealth maximization, which translates to maximizing stock price.
What is a coupon interest rate
stand interest rate (generally fixed) paid by the issuer. Multiple by par value to get dollar payment of interest
What is reinvestment risk?
the concern that Rd will fall, and future Bfs will have to be reinvested at lower rates, hence reducing income.
If an issuer defaults, investors receive less than the promised return. Therefore, what happens?
the expected return on corporate and municipal bonds is less than the promised return
Well-functioning financial markets facilitate what?
the flow of capital from investors to the users of capital
What is default risk influenced by?
the issuer's financial strength and the terms of the bonds contract.
Markets provide users of capital with what?
the necessary funds to finance their investment projects
What are bondholders particularly concerned about?
the use of additional debt
In a well-functioning economy, capital flows efficiently from who?
those who supply capital to those who demand it
When can derivatives be used?
to "hedge" or reduce risk.
When can speculators use derivatives?
to bet on the direction of future stock prices, interest rates, exchange rates, and commodity prices. In many cases, these transactions produce high returns fi you guess right, but large losses if you guess wrong. Here, derivatives can increase risk
When does an IPO occur?
when a company issues stock in the public market for the first time.
An importer, whose profit falls when the dollar loses value, could purchase currency futures that do well when eh dollar weakens is an example of what?
when derivatives can be ued