Bus 201 Chapter 15

Investment Bankers

- Serve as financial specialists in issuing new securities. - Provides the following three services 1. They advise companies on the timing and financial terms for a new issue 2. By underwriting (buying the new securities, they bear some of the risk of issuing a new security.) 3. They create the distribution network that moves the new securities through groups of other banks and brokers into the hands of individual investors.

NASDAQ

- The National Association of Securities Dealers Automated Quotation - Words first electronic stock market

Risk Management

- minimizing the financial effect of accidental losses

Exchange Traded Funds

A bundle of stocks that is in an index that tracks the overall movement of the market.

Financial Planning

A description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds. To plan, financial manager must ask and answer 3 questions. 1. What funds are needed to meet immediate plans? 2. When will the firm need more funds? 3. Where can the firm get the funds to meet both its short-and its long-term needs?

Revolving Credit Agreement

A guaranteed line of credit for which the firm pays the bank interest on funds borrowed, as well as a fee for extending the line of credit.

Market Indexes

A measure of the market value of stocks; provides a summary of price trends in a specific industry or of the stock market as a whole

Commercial Paper

A method of short-run fundraising in which a firm sells unsecured notes for less than the face value and then repurchases them at the face value within 270 days; buyers profits are the difference between the original price paid and the face value.

Bull Markets

A period of rising stock prices; a period in which investors act on a belief that stock prices will rise.

Corporate Bond

A promise by the issuing company to pay the holder a certain amount of money on a specified date, with stated interest payments in the interim; a form of long-term debt financing.

Stockbroker Recommendation

A recommendation to buy a stock by a stockbroker may increase demand and cause its price to increase, while a recommendation to sell may decrease demand and cause the price to fall

Unsecured Loan

A short term loan where a borrower does not have to put up collateral This type of loan means that the amount, duration, interest rate, and payment schedules are negotiated.

Secured Loans

A short-term loan in which the borrower is required to put up collateral.

Lines of Credit

A standing agreement between a bank and a firm in which the bank specifies the maximum amount it will make available to the borrower for a short-term unsecured loan; the borrower can then draw on those funds, when available.

Convertible Bonds

A type of bond that can be converted into the common stock of the issuing company.

Equity Financing

A type of finance where you raise money to meet long-term expenditures by issuing common stock or by retaining earnings.

Promissory Notes

A type of trade credit. When sellers want more reassurance, they sign a legally binding contract before merchandise is sent. The agreement states when and how much money will be paid to the seller

Stock Exchange

A voluntary organization of individuals formed to provide an institutional setting where members can buy and sell stock for themselves and their clients in accordance with the exchanges for rules.

Future Contracts

Agreement to purchase a specified amount of a commodity at a given price on a set date in the future - are available for commodities ranging from coffee beans and live hogs to propane and platinum, as well as for stocks.

The rule of 72

Amount of money it takes to double the money - Divide the annual interest rate into 72.

Trade Draft

An attachment to the merchandise shipment by the seller and states the promised date and amount of payment due. Must be signed by the buyer, then the document becomes a trade acceptance.

Pure Risks

An event that offers no possibility of gain, it offers only the chance of a loss or no loss

Speculative Risk

An event that offers the change for either a gain or a loss

Price Appreciation

An increase in the dollar value of an investment.

Stockbroker

An individual licensed to buy and sell securities for customers in the secondary market; may also provide other financial services.

Debentures

An unsecured bond where no specific property is pledged as security. Have inferior claims on the corporation's assets.

Mutual Funds

Any Company that pools the resources of many investors and uses those funds to purchase various types of financial securities, depending on the funds financial goals. There are many ________ funds that stress socially responsible investing.

Limit Order

Authorizes the purchase of a stock only if its price is less than or equal to a given limit

Bond Quotations

Bond prices change frequently and these changes form the coupon rate, which provides information for firms about the cost of borrowing funds.

Secured Bonds

Borrowers can reduce the risk of their bonds by pledging assets to bondholders in the event of default. This is a bond issues by borrowers who pledge assets as collateral in the event of non-payment.

Open-Book Credit

Buyers receive merchandise along with invoices stating credit terms. Sellers ship products on faith that payment will be forthcoming

Diversification

Buying several different kinds of investments rather than just one. Reduces the risk of loss because although any one stock may tumble, the chances are slim that all of them will decline at the same time.

(Hybrid Financing:) Preferred Stock

- Has features of corporate bonds and some features of common stock. - Has flexibility - Never matures - Usually issued with a stated per value, such as $100.

Long Term Loans Advantages

Can be arranged quickly, the duration of the loan is easily matched to borrowers needs, and if the firm's needs change, the loan usually contains clauses making it possible to change the terms.

Load Funds

Carry a charge of between 2 and 8 percent of the invested funds.

Rumours

Claims that a company has made a big gold strike.

(Short-Term Expenditures:) Accounts Receivable

Funds due from customers who have bought on credit

Call Option

Gives its owner the right to buy a particular stock at a certain price, with that right lasting until a particular date

Put Option

Gives its owner the right to sell a particular stock at a specified price, with that right lasting until a particular date.

Principal Protected Notes

Guarantees that investors will get their original investment back at a certain time, but they do not guarantee that any additional returns will be forthcoming.

Primary Securities Markets

Handle the buying and selling of new shares (Initial public offerings, IPO) of stocks and bonds by firms or government A market where bonds and stocks are sold.

Short Selling

Hedge funds often engage in this practice Betting that a company's stock price will go down

Leveraging

Hedge funds often engage in this practice Borrowing money against principal

Objectives of the Financial Manager

Increase a firm's value and stockholder's wealth Does several things to increase value >Collect funds, pay debts, establish trade credit, obtain loans, control cash balances, and plan for future financial needs.

Stop Order

Instructs the broker to sell a stock if its price falls to a certain level.

Work in Process Inventory

Inventory goods part-way through the production process

No load Funds

Investors in this fund are not charged a sales commission when they buy into or sell out of the mutual funds.

Secondary Securities market

It is a market for existing stocks and bonds. Companies do not receive any money when shares of stock are bought and sold in the secondary securities market. A market where bonds and stocks are sold.

Finished Goods Inventory

Items in the inventory that are ready for sale

Long Term Loans Disadvantages

Large borrowers may have trouble finding lenders to supply enough funds. Long term borrowers may also have restrictions placed on them as conditions of the loan. They may have to agree not to take on any more debt until the borrowed funds are repaid.

Blue Sky Laws

Laws regulating how corporation must back up securities

Cash Flow management

Managing the pattern in which cash flows into the firm in the form of revenues and out of the firm in the form of debt payments This activity is when financial managers keep enough funds on hand to purchase the materials and human resources that it needs to produce goods and services.

Inventories

Materials and goods currently held by the company that will be sold within the year. Too little inventory can cost a firms sales, while too much means tied up funds that cannot be used.

Callable Bonds

May call the bond in and pay them off before the maturity date at a price stipulated in the indenture.

Equity Financing Characteristics

Most expensive type of financing

Debt Financing Characteristics

Most risky type of financing. indebtedness increases the risk that a firm will be unable to meet its obligations and will go bankrupt.

Full Service Broker

Offer services to clients who are either not very well informed about investment possibilities, or who are simply not interested in the details of investing.

Discount Brokers

Offer well-formed individual investors a fast, low-cost way to participate in the market.

The Over-the-Counter Market

Organization of securities dealers formed to trade stock outside the formal institutional setting of the organized stock exchanges.

Venture Capital

Outside equity funding provided in return for part ownership of the firm.

Financial Manager

Plans and control the acquisition and dispersal of the company's financial assets.

Hedge Funds

Private pools of money that try to give investors a positive return regardless of stock market performance.

Accounts Receivable as Collateral

Process is called pledging accounts receivable. In even of non-payment, the lender may seize the receivable.

Asset Allocation

Proportion of funds invested in each of the investment alternatives.

Fantasy Stock Markets

Provides fantasy stock markets to help you learn about the world of financial investments.

Investor Relations

Publicizing the positive aspects of a company's financial condition to financial analysts and financial institutions

Factoring

Raise funds by selling (factoring) its accounts receivable.

Debt Financing

Raising money to meet long-term expenditures by borrowing from outside the company; usually takes the form of long-term loans or the sale of corporate bonds.

Registered Bonds

Registers the names of holders with the company, which then mails out cheques to the bondholders

Capital Structure

Relative mix of a firm's debt and equity financing

Round lot order

Requests 100 shares or some multiple thereof.

Market Order

Requests the broker buy or sell a certain security at the prevailing market price at the time

Bearer (or Coupon) Bonds

Require bondholders to clip coupons from certificates and send them to the issuer to receive payment.

Short Sales

Selling borrowed shares of stock in the expectation that their price will fall before they must be replaced, so that replacement shares can be bought for less than the original shares were sold for.

Margin Trading

Shares of stock can be purchased on margin.

The Risk-Return Relationship

Shows the amount of risk and the likely rate of return on various financial instruments.

Stock Quotations

Shows the type of information newspapers provide about daily market transactions of individual stocks

Bond Indenture

Spells out the terms of the bond, including the interest rate that will be paid, the maturity date of the bond, and which of the firm's assets, if any, are pledged as collateral.

Steps of Risk Management

Step 1) Identify Risks and Potential Losses Step 2) Measure the Frequency and Severity of Losses and their Impact Step 3) Evaluate Alternatives and Choose Techniques that will best handle losses Step 4) Implement the Risk Management Program Step 5) Monitor Results

Securities

Stocks, bonds, and mutual funds representing secured, or asset based, claims by investors against issuers Stock and bonds are known as this because they represent a secured (asset based) claim on the part of investors.

Risk Avoidance

Stopping participation in or refusing to participate in ventures that carry any risk

Risk Control

Techniques to prevent, minimize, or reduce losses or the consequences of losses

Par Value

The arbitrary value of a stock set by the issuing company's board of directors and stated on stock certificated; used by accountants but of little significance to investors.

Raw Materials Inventory

The basic supplies a firm buys to use in its production process.

Finance

The business function involving decisions about a firm's long-term investments and obtaining the funds to pay for those investments Involves four responsibilities 1. Determining a firm's long term investments 2. Obtaining funds to pay for those investments 3. Conducting the firm's everyday financial activities 4. Managing the risks that the firms takes.

Call price

The cash price that is surrendered in a callable preferred stock.

Risk Retention

The covering of a firm's unavoidable losses with its own funds

Market Value

The current price of one share of a stock in the secondary securities market; the real value of a stock.

Market Capitalisation

The dollar value (market value) of stocks listed on a stock exchange

Serial bonds

The firm retires portions of the bond issue in a series of different pre-set dates.

Trade Credit

The granting of credit by a selling firm to a buying firm. Short term loan

Sinking Fund Provisions

The issuing company of Callable Bonds is required to put a certain amount of money into a special bank account annually.

Callable

The issuing firm of Preferred stock can require the preferred stockholders to surrender their shares in exchange for a cash payment.

Margin

The percentage of the total sales price that a buyer must put up to place an order for stock or a future contract.

Financial Control

The process of checking actual performance against plans to ensure that the desired financial status is achieved Discrepancies indicate the need for financial adjustments so that resources are used to the best advantage.

Stock Options

The purchased right to buy or sell a stock

Factor

The purchaser of the receivables.

Dividends

The rate of return from dividends paid to shareholders is called current dividend yield ( or in the case of interest from a loan, the current interest yield)

Total Return

The sum of an investment's current dividend (or interest) yield, plus any capital gain. Total return (%) = (Current dividend payment + Capital gain) / (Original investment) x 100

Risk Transfer

The transfer of risk to another individual or firm, often by contract

Book Value

The value of a common stock expressed as total stockholder's equity (the company's common stock par value, retained earnings, and additional paid-in capital) divided by the number of shares of stock.

Long-Term (Capital) Expenditures

These Expenditures pose different problems 1. Unlike inventories and other short-term assets, they are not normally sold or converted to cash 2. Their acquisition requires a very large investment 3. They represent a binding commitment of company funds that continues long into the future.

Long Term Loans

These loans are usually matched with long-term assets Interest rates are negotiated between the borrower and lender

Risk

Uncertainty about future events

(Short-Term Expenditures:) Accounts payable

Unpaid bills owed to suppliers plus wages and taxes due within a year. This is the largest single category of short-term debt.

Retaining the Firms Earning

Using retained earning means that the firm will not have to borrow money and pay interest on loans or bonds.

Inventory as Collateral

When a loan is made with inventory as a collateral asset, the lender lends the borrower some portion of the stated value of the inventory.

Default

When company fails to make a bond payment.

Accredited Investors

When hedge funds has been limited to wealthy people

Private Placements

When new securities are sold to one buyer or a small group of buyers which then allow the businesses that use them to keep their plans confidential.