Finc 409 chapter 1 key terms

What are the six 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

The six principles of finance are:

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.

The four main types of financial markets are:

1. debt securities markets, 2. equity securities markets, 3. derivative securities markets, and 4. foreign exchange markets

technology stock bubble

2000

2 U.S. terrorist attack

2001

housing price bubble

2006

financial crisis

2007-08

great recession

2008-09

How do debt securities and common stocks differ?

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

Briefly describe the terms entrepreneurial finance and personal finance

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.

Describe what is meant by ethical behavior.

Ethical behavior is 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.

. 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 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.

What is finance?

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

Briefly 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.

What are the differences between primary and secondary securities markets?

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

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.

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.

What are the three areas of finance?

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

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?

The violation of U.S. laws is both illegal, which could result in prison time, and unethical. U. S. 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.

create and transfer money

a monetary system

Identify and briefly describe several reasons for studying finance

a. As a citizen (of the U.S.A. or another country), you should want to make informed economic 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.

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

a. 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 b. Depository financial institutions. 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 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.

11. Identify and briefly describe the financial functions in the U.S. financial system

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

What are the basic requirements of an effective financial system?

a. Policy makers. Comprised of the President, Congress, the U.S. Treasury, and the Federal Reserve Board. b. 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. c. 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. d. 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.

bonds

debt securities markets

mortgages

debt securities markets

common stocks

equity securities markets

accumulate and lend/invest savings

financial institutions

market and facilitate transfer of financial assets

financial markets

currencies

foreign exchange markets

pass laws and set fiscal and monetary policies

policy makers