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30 Cards in this Set
- Front
- Back
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Financial Management |
- analyze and forecast a firms performance - evaluate investment opportunities |
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Financial markets and instituions |
-the flow of funds through institutions - markets in which financial assets are sold - impact of interest rates on that flow of funds |
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Investments |
locate, select, and manage money producing assets. |
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Financial Analysis from prospective of investor |
stockholders are owners of the firm bondholders are creditors of the firm - rate of return on a security is most important |
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Risk Return Tradeoff |
Investors prefer high return to low returns and low risk to high risk |
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Duties of financial managers |
-measure a firms performance -forecast financial consequences -recommend new investment -locate external financing -recommend best financing mix - determine financial expectations of owners |
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Financial System |
purpose of financial system is to bring together individuals, businesses, and government entities that generate and spend funds. |
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surplus economic units |
have funds left over after spending all they wish to spend. |
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Securities |
-to enable funds to move through the financial system, funds are exchanged for securities - securities are documents that represent the right to receive funds in the future. |
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Financial Intermediaries |
help facilitate the securities process |
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Primary market |
where deficit economic units sell new securities |
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secondary market |
where investors trade previously issued securities with each other |
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Market efficiency |
refers to ease, speed, and cost of trading securities |
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necessary for market efficiency |
-transparency -property rights -consistent valuation -information - regulatory structure |
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Money Market |
trade short term (1 year or less) debt instruments Ex: T bills, commercial paper |
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Money Market securities |
-T Bills - Certificates of deposit - Commercial Paper - Eurodollars - Bankers Acceptances |
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Treasury Bills |
-short term securities issued by the federal government - after initial sale they have an active secondary market - Bought at a discount and at maturity the investor receives the full face value |
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Negotiable CD's |
-interest bearing securities issued by financial institutions - have maturities of one year of less |
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commerical paper |
-unsecured debt issued by corporations with good credit ratings - most buyers are large institutions |
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Euro dollars |
-dollar denominated deposits located in non us banks -buyers and sellers are large institutions |
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Bankers Acceptances |
- debt securities that have been guaranteed by a bank -used to facilitate international transactions |
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Capital Market securities |
-Bonds: treasury, municipal, corporate -Stocks: common stock, preferred stock |
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Bonds |
-IOU issued by the borrower and sold to investors - the issuer promises to repay the face amount on the maturity date and to pay |
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Interest rates determined by |
-real rate of interest -expected inflation -default risk -maturity risk -illiquidity risk |
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Real rate of interest |
compensates for the lenders lost opportunity to consume |
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Expected inflation |
-inflation erodes the purchasing power of money |
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Nominal Risk Free Rate |
the real rate of interest plus the expected inflation combined to indicate the risk free rate |
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Default Risk |
-risk that borrower will not repay the interest and or principle on time or at all - greater chance of default = greater interest rate |
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Maturity Risk |
-If interest rates rise, lenders may find that their loans are earning rates that are lower than what they could get on new loans. -risk of this occurring is higher for longer maturity loans -lenders will adjust the premium they charge for this risk depending on whether they believe rates will go up or down |
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Illiquidity Risk |
-investments that are easy to sell without losing value are more liquid - illiquid securities have a higher interest rate |
