Flashcards in Fin 4319-Lecture 1 Deck (23):
What is the definition of Investment?
Forego current consumption in return for greater expected future consumption
What is the definition of a Real Asset?
Something that provides benefits (cashflows) to its owner on the basis of its own intrinsic qualities
What is the definition of SSU?
Surplus Savings Unit: economic unit whose savings exceeds investment in real assets
* Net lender
What is the definition of DSU?
Deficient Savings Unit: economic unit whose savings less than investments in real assets
* Net borrower
What is a Primary market?
Securities 1st issued to public
What is a Secondary market?
Trading after issuance
What is an Investment Bank?
Primary Market Dealer and Brokers
What is an underwriter?
Dealer: If a company issues a bond, they can use an underwriter, a financial middlemen, who will buy the entire bond issuance below full price and take the risk of selling the entire thing at full price. This is considered the Primary market.
What is an underwriter on best effort basis?
Broker: The underwriter, will try to sell IPO at this reserve price but don't make any guarantees.
What is the value of the secondary market?
It helps the underwriter price better and lower risk and helps capital formations.
What are some examples of Tangible Real assets?
roads, factories, bridges, machines, real estate, natural resources
What are some examples of Intangible Real assets?
technology, patents, intellectual property, education (invest in human capital)
What are some examples of Financial Assets?
Stocks, bonds, notes, loans
What is a Financial Bank?
What is Financial liability?
The "Flipside" of Financial Assets. For every financial asset on a balance sheet there's a financial liability on someone else's balance sheet.
What is Burn Rate?
It's the rate of money burned from the IPO (Initial Public Offering) of a new company. Using up money while not making money. For Bonds there is a day of reckoning, a due date of whether or not the principal will be paid back but for Stocks, there's no day or maturity date. In 2001/2002 when they stocks failed.
What is a Financial Asset?
"IOU" (I owe you ...) : Claim on another economic unit. No intrinsic value.
What do financial people forget to look at?
The professor said that real assets are important when valuing securities. Japan's real estate was over valued and they lost 2 decades. When a financial asset is in a bubble is when it's overvalued and does not reflect the value of real assets. In 2001/2002, the technology stocks prices so high that there was a bubble that eventually popped.
What is the purpose of Financial Markets?
Provide a mechanisum to transfer surplus savings to DSU
What is the Savings formula?
Savings = Y - C
Y=Income -> Capital gain/loss
What is a SSU?
Surplus saving unit: Economic unit whose savings is greater than investments in real assets
* Net Lender
What is a DSU?
Deficient saving unit: Economic unit whose savings is less than investments
* Net Borrower