Corporate Finance
focuses on financial decision making by a firms management
Investments
various types of financial instruments (stocks, bonds,
... [Show More] etc)
Banking or Financial Institutions
make money by paying depositors a smaller interest rate than the interest rate charged to borrowers
Treasury Securities
generally bonds that are issued by the US government
Corporate Bonds
firms borrowing from the public
Stocks
a share of ownership in a company
Primary financial markets
markets where securities are first issued
Syndicate
a group that is temporarily formed to handle a bond or stock issue: generally large investment bank or institutional investors
Underwriter
responsible for determining the value of the security; may purchase all the securities & then resale to investors
Competitive sale
underwriters submit bids offering highest price/lowest interest rate; underwriter resales a slightly higher price
Negotiated sale
underwriters submit bids, go thru interview to be selected
Secondary financial markets
where securities are traded after the initial offering (stock market)
Auction market
has a physical location & prices are determined by the highest price an investor is willing to pay (New York Stock Exchange)
Dealer market
no physical location- securities are bought & sold thru a network of dealers that trade for themselves; multi dealers per stock (NASDAQ)
Role of financial markets
they reduce the cost of borrowing from the public or selling ownership to the public
Role of Specialist (NYSE) or Dealers
provide liquidity for a fair & orderly market; may increase the spread to do so (charge a lower price to seller and a higher price to buyer)
Financial market liquidity
the ease of trading in the market (high frquency traders)
Market orders
time sensitive; sales at current bid price/buys at current asking price when order is placed-immediately
Limited orders
price sensitive; sell occurs when price of stock matches order price
Role of price
convet information to consumers; affect incentives &affect the distribution of income
Dollar Returns
Pt - Pt-1 + CFt (Pt= sold price, Pt-1=bought price, CFt=cash flow-coupons for bonds/dividians for stocks)
Percentage Returns
Pt - Pt-1/Pt-1 + CFt/Pt-1 x 100 (1.2)
(figure for dollar return and divide into bought price)
Goal of company/firm
to maximize shareholder value or maximize profit
Agency costs
costs that are incurred when management doesn't act in the best interests of shareholders
Profit maximizarion
the potential effect of focusing soley on profits
Accounting
is backward-looking and risk free
Finance
is forward-looking and involes massive uncertainty
Income Statement
show results of operation over time; revenues - expenses = net income
Balance Sheet
a "snap shot" of a firm's assests & financing at a paticular point in time; Assets= Liabilities + Owner's Equity
Statement of Cash Flows
tracks all cash in and out of the firm
Cash Accounting
cash in =revenue; cash out=expense
Accrual Accounting
revenues are recognized when the earnings process is complete; expenses are "matched" to recongized revenues
Cash-based income
an informal metric based on cash in & cash out of the firm
Income for tax purposes
based on the government's definition of income, this is the amount of income the government will tax
Accounting income
the income calculated using accrual [Show Less]