Finance CH1 n 2

intermediaries

Financial institutions are ____________ that channel the savings of individuals, businesses, and governments into loans or investments.

financial institution, financial markets, and private placements

Firms that require funds from external sources can obtain them in three ways:

unlimited and limited

In sole proprietorships, owners have ___________ liability; whereas, in corporations, owners have __________ liability.

current ratio

Measures the ability of the firm to meet short term obligations

marketable securities

Most money market transactions are made in __________ ___________ which are short-term debt instruments, such as: U.S. Treasury bills issues by the federal government commercial paper issued by businesses negotiable certificates of deposit issued by financial institutions

profit maximization does not consider risk

Profit maximization as the goal of the firm is not ideal because ________.

sole proprietorships

Which of the legal forms of organization has the ease of dissolution

Investment banks

are institutions that: assist companies in raising capital advise firms on major transactions such as mergers or financial restructurings engage in trading and market making activities

Commercial banks

are institutions that: provide savers with a secure place to invest their funds offer loans to individual and business borrowers

Institutional investors

are investment professionals, such as banks, insurance companies, mutual funds, and pension funds, that are paid to manage and hold large quantities of securities on behalf of others.

Broker markets

are securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities

Common stock

are units of ownership interest or equity in a corporation.

Agency costs

arise from agency problems that are borne by shareholders and represent a loss of shareholder wealth.

Individual investors

investors who own relatively small quantities of shares so as to meet personal investment goals.

private placement

involves the sale of a new security directly to an investor or group of investors.

partnership

is a business owned by two or more people and operated for profit

Preferred stock

is a special form of ownership that has features of both a bond and common stock.

principal-agent relationship

is an arrangement in which an agent acts on the behalf of a principal. For example, shareholders of a company (principals) elect management (agents) to act on their behalf.

Managerial finance

is concerned with the duties of the financial manager working in a business

money market

is created by a financial relationship between suppliers and demanders of short-term funds.

Ordinary income

is earned through the sale of a firm's goods or services

Bonds

long-term debt instruments used by businesses and government to raise large sums of money, generally from a diverse group of lenders.

Incentive plans

management compensation plans that tie management compensation to share price; one example involves the granting of stock options.

double taxation

occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend amount.

Federal Deposit Insurance Corporation

provides insurance for deposits at banks and monitors banks to ensure their safety and soundness.

Corporate governance

refers to the rules, processes, and laws by which companies are operated, controlled, and regulated.

Securities Act of 1933

regulates the sale of securities to the public via the primary market

Securities Exchange Act of 1934

regulates the trading of securities such as stocks and bonds in the secondary market.

Dealer markets

such as Nasdaq, are markets in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that "make markets" in the given security.

capital gain

the amount by which the sale price of an asset exceeds the asset's purchase price.

Financial Services

the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments.

primary market

the financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction.

average tax rate

the firm's taxes divided by taxable income.

Securities Exchange Commission

the primary government agency responsible for enforcing federal securities laws.

Securitization

the process of pooling mortgages or other types of loans and then selling claims or securities against that pool in a secondary market

marginal tax rate

the rate at which additional income is taxed.

finance

the science and art of managing money.

Business ethics

the standards of conduct or moral judgment that apply to persons engaged in commerce.

Performance plans

tie management compensation to measures such as EPS or growth in EPS. Performance shares and/or cash bonuses are used as compensation under these plans.

Glass-Steagall Act

was an act of Congress in 1933 that created the federal deposit insurance program and separated the activities of commercial and investment banks. It was repealed it 1999 by Congress.

repay their loans

A primary risk associated with mortgage-back securities is that homeowners may not be able to, or may choose not to

stakeholders

are groups with a direct economic link to a firm

collection and presentation of financial data.

Accountants devote most of their attention to the _________?

the agency problem

The conflict between the goals of a firm's owners and the goals of its non-owner managers is ________.

Eurocurrency market

The international equivalent of the domestic (U.S.) money market is the __________

individuals, businesses, and governments

The key suppliers and demanders of funds are _________, ___________, and ____________

marginal cost-benefit analysis

The primary economic principle used in managerial finance is ________. The economic principle that states that financial decisions should be made and actions taken only when the added benefits exceed the added costs

maximizing wealth

The primary goal of a financial manager is ________.

individuals, businesses, governments

____________are net suppliers of funds, while _____________ and ______________ are net demanders of funds.

sole proprietorship

a business owned by one person and operated for his or her own profit.

foreign bond market

a market for bonds issued by a foreign corporation or government that is denominated in the investor's home currency and sold in the investor's home market.

capital market

a market that enables suppliers and demanders of long-term funds to make transactions.

Financial managers

administer the financial affairs of all types of businesses—private and public, large and small, profit-seeking and not-for-profit.

efficient market

allocates funds to their most productive uses as a result of competition among wealth-maximizing investors and determines and publicizes prices that are believed to be close to their true value.

Gramm-Leach-Bliley Act

allows business combinations (e.g. mergers) between commercial banks, investment banks, and insurance companies, and thus permits these institutions to compete in markets that prior regulations prohibited them from entering.

international equity market

allows corporations to sell blocks of shares to investors in a number of different countries simultaneously

behavioral finance

an emerging field that blends ideas from finance and psychology, argue that stock prices and prices of other securities can deviate from their true values for extended periods.

corporation

an entity created by law. ________________ have the legal powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name

Secondary markets

are financial markets in which preowned securities (those that are not new issues) are traded.

Financial markets

are forums in which suppliers of funds and demanders of funds can transact business directly.

Mortgage-backed securities

claims on the cash flows generated by a pool of mortgages and can be purchased by individual investors, pension funds, mutual funds, or virtually any other investor.

Eurobond market

corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States.

shadow banking system

describes a group of institutions that: engage in lending activities, much like traditional banks but do not accept deposits are not subject to the same regulations as traditional banks

Quick ratio

excludes inventory which is generally the last liquid asset