The study of how and under what terms savings (money) are allocated between lenders and borrowers
Role of Management
a) Serves as an arbitrator (middleman) and moderator between conflicting interest groups or stakeholders and objectives b) Creditors, managers, employees, and customers hold contractual claims against the firms revenues c) Shareholders have residual claims against the company Also act on the best interest of the shareholder
Role of Financial Manager
a) Getting the funds and investing it in the right things and hopefully getting the return back to the investors b) Long term investments and look to generate ideas c) Decisions such as using debt or equity to fund organization d) Their objective is to "MAXIMIZE SHAREHOLDER WEALTH"
Six Principles of Finance
Time Value of Money, Risk-Return trade off, Diversification of investments, Efficient Financial markets, Management-Owner objectives, Reputation matters
Tangible things owned by persons and businesses. Examples include: land, building, machinery
What one individual has lent to another. Examples include: consumer credit, loans, mortgages
Functions of Money
Medium of exchange, Standard of Value, Store of Value
Work to facilitate the transfer of funds, these people will transfer the nature of securities to something else. Invest funds on behalf of others and change the nature of the transactions. Ex. Banks, insurance companies, pension funds, mutual funds.
Core activity is acting as deposit takers and lenders, these are the most important financial intermediaries
Takes in premiums and pay off when an incident occurs, also called contractual saves because premiums are paid on a monthly basis
Take in contributions and provide payments after plan members retire
Acts as a pass through. Convenient way to invest in the equity and debt markets. Provides two major functions: pool sums of money so that people can make investments that would not be possible for smaller investors, and offer expert advice
Lender provides money directly to the ultimate borrower. Ex. relative lending you money.
Help is needed from a broker through market intermediaries
An entity that facilitates the working of markets and helps provide direct intermediation but does not change the nature of the transaction
Intermediary lends the money to the ultimate borrowers but raises the money itself by borrowing directly from other individuals
Market intermediaries help inviduals
Market intermediaries help financial intermediaries
Cash goes to company, involves the issue of new securities by the borrower in return for cash from investors
Trading environment that permit investors to buy and sell existing securities. Consists of auction/exchange markets and dealer/OTC markets
Involve bidding process at a specific location
Do not have a physical location - consists of a network of dealers who trade directly with one another
Long term debt and sales trade
Trading of securities directly between investors without the involvement of brokers or dealers
Unsecured debt, backed only by general assets of the issuing corporation
Debt secured by specific assets
In default, holders get payments only after other debt holders get their full payment
In default, holders get payment before other debt holders
A bond bought at a lower price than the face value
Bonds with below investment grade rating
The common stockholders are the owners of the corporation's equity. Do not have a specified maturity date and the firm is not obliged to pay dividends to shareholders. Returns come from dividends and capital gains.
Have face value, predetermined periodical (dividend) payments with priority over common stockholders
Commercial bank lending
Prime rate loans and bank term loans.
Prime rate loans
Loans in which the borrowing rate is based on the prime rate of interest
Bank term loans
Business loans with maturities greater than one year. May be secured or unsecured, the funds can be used to buy inventory or to finance plant and equipment.
Include options and futures. Prices are influenced by demand and supply. Reflect market expectations regarding the future.
Total market value of the securities of an entity
Money market securities
Short term debt instruments
Capital market securities
Debt securities with maturities less than one year
Bonds that are issued by corporations and that can be converted to shares of the issuing company's stock at the bondholder's discretion
A bond that can be redeemed by the issuer prior to its maturity
A bond that features an option for the holder to force the issuer to redeem the bond before maturity at par value
Collateral is required on a bond when standard issue bonds are not available due to heightened risk of non performance