MIDTERM Flashcards by Justy Malubay

occur when a business sells its stocks or bonds directly to savers, without going
through any type of financial institution. This procedure is
used mainly by small firms, and relatively little capital is raised by

Direct transfers

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securities are involved and the corporation receives the sale proceeds, this
transaction is called

primary market transaction.

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An underwriter facilitates the issuance of securities. The company sells its stocks
or bonds to the investment bank, which then sells these same securities to savers.

Indirect Transfers through Investment Bankers

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an
insurance company, or a mutual fund. Here the ___________obtains funds from
savers in exchange for its securities, uses this money to buy
and hold businesses’ securities, and the savers hold the intermediary’s securities.

Indirect Transfers through a Financial Intermediary

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People and organizations wanting to borrow money are brought together with those who have surplus funds in the

financial markets.

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(also called “tangible” or “real” asset markets) are for products such as wheat,
autos, real estate, computers, and machinery.

Physical asset markets

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deal with stocks, bonds, notes, and mortgages.

Financial asset markets,

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whose values are derived from changes in the prices of other assets.

derivative securities

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are markets in which assets are bought or sold for “on-the-spot” delivery (literally, within a few days).

Spot markets

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markets are markets in which participants agree today to buy or
sell an asset at some future date.

Futures markets

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The financial markets in
which funds are
borrowed or loaned for
short periods (less than
one year).

Money markets

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The financial markets for
stocks and for intermediate- or long-
term debt (one year or
longer).

Capital markets

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Markets in which
corporations raise capital
by issuing new securities.

Primary markets

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Markets in which
securities and other
financial assets are
traded among investors
after they have been
issued by corporations.

Secondary markets

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Markets in which
transactions are worked
out directly between two
parties.

Private Markets

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Markets in which
standardized contracts
are traded on organized
exchanges.

Public Markets

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Financial markets have experienced many changes in recent years. Technological
advances in computers and telecommunications, along with the globalization of
banking and commerce, have led to deregulation, which has increased competition
throughout the world.

RECENT TRENDS

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Changing technology has allowed some individuals and firms to bypass intermediaries
and directly raise money from investors to help fund various projects. This activity is
referred to as

crowdfunding.

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has exposed the need for greater cooperation among regula-
tors at the international level, but the task is not easy. Factors

Globalization

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Any financial asset whose
value is derived from the
value of some other
“underlying” asset.

Derivatives

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An organization that
underwrites and
distributes new
investment securities and
helps businesses obtain
financing.

Investment Bank

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The traditional
department store of
finance serving a variety
of savers and borrowers.

Commercial Bank

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A firm that offers a wide
range of financial
services, including
investment banking,
brokerage operations,
insurance, and
commercial banking.

Financial Services
Corporation

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are often the cheapest source of funds available to individual
borrowers.

Credit Unions

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are retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies.

Pension funds

take savings in the form of annual premiums; invest these funds in stocks, bonds, real estate, and mortgages; and make payments to the beneficiaries of the insured parties.

Life insurance companies

Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.

Mutual Funds

Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.

Money Market Funds

(ETFs) are similar to regular mutual funds and are often operated by mutual fund companies.

Exchange Traded Funds (ETFs)

are also similar to mutual funds because they accept money from savers and use the funds to buy various securities, but there are some important differences.

Hedge funds

are organizations that operate much like hedge funds; but rather than purchasing some of the stock of a firm, private equity players buy and then manage entire firms.

Private equity companies

An exchange where people and organizations can purchase and sell ownership interests in publicly listed corporations is a

STOCK MARKET

Formal organizations having tangible physical locations that conduct auction markets in designated (“listed”) securities.

Physical Location Exchanges

A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.

Over-the-Counter (OTC) Market

Include all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.

Dealer Markets

A corporation that is owned by a few individuals who are typically associated with the firm’s management.

Closely Held Corporation

A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm’s management.

Publicly Owned Corporation

The act of selling stock to the public at large by a closely held corporation or its principal stockholders.

Going Public

The market for stocks of companies that are in the process of going public.

Initial Public Offering (IPO) Market

Returns are price changes in an index or other security that may be captured by investors or traders as profits.

Market returns

The current price of a stock.

Market price:

The price at which the stock would sell if all investors had all knowable information about a stock.

Intrinsic value:

The price that balances buy and sell orders at any given time.

Equilibrium price:

A market in which prices are close to intrinsic values and stocks seem to be in equilibrium.

Efficient market:

(EMH) remains one of the cornerstones of modern finance theory.

efficient markets hypothesis

A medium of exchange that is centralized, generally accepted, recognized, and facilitates transactions of goods and services. is anything that is acceptable as payment for goods and services.

Money

Money should be scarce enough to have some value but not so scarce as to be unavailable. Any item used as money must be durable. Money must be easily moved around. Money must be capable of being divided into smaller parts.

Scarcity: Durability Portability: Divisibility:

money makes transactions easier. Having a common form of payment is much less complicated than having a barter system, wherein goods and services are exchanged for other goods and services. Money allows the exchange of products to be a simple process.

medium of exchange,

With a form of money whose value is accepted by all, goods and services can be priced in standard units. This makes it easy to measure the value of products and allows transactions to be recorded in consistent terms.

a standard of value.

money is used to hold wealth. It retains its value over time, although it may lose some of its purchasing power due to inflation.

store of value,

An operating license issued to a bank by the federal government or a state government; required for a commercial bank to do business.

bank charter

Profit-oriented financial institutions that accept deposits, make business and consumer loans, invest in government and corporate securities, and provide other financial services.

commercial banks

Not-for-profit, member-owned financial cooperatives.

credit unions

Cash held in the form of coins and paper money.

currency

Money kept in checking accounts that can be withdrawn by depositors on demand.

demand deposits

The process in which financial institutions act as intermediaries between the suppliers and demanders of funds.

financial intermediation

The purchase or sale of U.S. government bonds by the Federal Reserve to stimulate or slow down the economy.

open market operations

Large pools of money set aside by corporations, unions, and governments for later use in paying retirement benefits to their employees or members.

pension funds

Depository institutions formed specifically to encourage household saving and to make home mortgage loans.

thrift institutions

Deposits at a bank or other financial institution that pay interest but cannot be withdrawn on demand.

time deposits

is used to describe the total amount of readily available money in the system and includes currency and demand deposits.

includes all M1 monies plus time deposits and other money that is not immediately accessible.

Financial Intermediaries

- Commercial banks - Saving banks - Credits union and pension funds

are major suppliers of funds. Policyholders make payments (called premiums) to buy financial protection from the

Insurance Companies

institutions include insurance companies, pension funds, brokerage firms, and finance companies.

Nondepository Financial Institutions

also called corporate finance, is defined as the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization.

Financial management

developed the notion that an asset’s value is based on the future cash flows the asset will provide

Economists

Financial management – focuses on decisions relating to:

* How much and what types of assets to acquire, * How to raise the capital needed to buy assets, and * How to run the firm so as to maximize its value.

investments in noncurrent assets

capital budgeting)

investments in current assets

(working capital management).

relates to the raising of finance from various resources which will depend on decision on type of source, period of financing, cost of financing and the returns thereby.

. Financial decision

refers to the net profit distribution.

Dividend decision

dividend and the rate of it has to be decided.

Dividend for shareholders

– amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the firm.

Retained earnings

primary goal is to maximize the value of his or her firm’s stock, and value is based on the firm’s future cash flows.

A manager’s

Financial statements can provide information on:

* How a firm is doing * Its current resources, and * Its financial policies

Statement of Financial Position

(fundamental equation: Assets = Liabilities + Net Worth)

e (summarizes a firm’s revenues, expenses, and profits)

Statement of Income

(how much cash is the firm generating); 3 sections: operating, financing, investing.

Statement of Cash Flows

(how much a firm’s equity changed during the year and why this change occurred)

Statement of Changes in Shareholders’ Equity

Organizations have intertwined accounting and finance function. Financial management is something more than an art of accounting and bookkeeping. Accounting functions as the processing of financial data using the accounting cycle. Accounting is entrusted with recording the business activities to the books of accounts and summarize it for the purpose of presenting the financial statements.

Financial Management and Accounting

Financial managers can do better decision if they will integrate economic factors to come up with business decisions. Financial managers are given the task to properly utilize scarce resources of the organization while keeping in mind of increasing the value of the organization’s wealth. Good financial management has a sound grasp to financial and economic principles that will impact the profitability of the organization.

Financial management and Economics

Financial Instruments

Corporate Bonds Leases Preferred stocks Common stocks Treasury bills Banker acceptance Commercial paper Negotiable certificates of deposit Money market mutual funds Mortgages state and gov. bonds Bond

MIDTERM Flashcards

(83 cards)