Unit 2 Overview

Question 1

Finance vs Accounting

Answer 1

Finance looking ahead

Accounting - looking back

Question 2

3 types of Finance

Answer 2

Business/Corporate finance - funding, capital structure of a corporation
Investment - deciding what to invest in, asset pricing
Financial institutions - Banks, insurance, mortgage, pension

Question 3

Main principle of personal and business finance

Answer 3

does benefit outweigh cost

maximize utility

Question 4

Utility

Answer 4

total satisfaction received from consuming goods/services

Question 5

Role of Financial Manager

Answer 5

acts on behalf of owner to manage finances

maximize shareholder/owner wealth

Question 6

3 main tasks of Financial Manager

Answer 6

make investment decisions - most important role, cost/benefit
make financing decisions - may need to issue stocks/bonds
manage working capital - short term obligations

Question 7

Finance

Answer 7

management and allocation of capital or money
objectives of 
investing, 
forecasting, 
budgeting, 
saving, 
borrowing, 
and lending

Question 8

Treasuries

Answer 8

bonds issued by US government to borrow money from the public

Question 9

Corporate Bonds

Answer 9

bonds issued by corporations to borrow money from the public. Bondholders paid back first over shareholders when a company is liquidated

Question 10

money market

Answer 10

financial market used to borrow/lend money over short term

Question 11

capital market

Answer 11

financial market used to borrow/lend money over long term

stock/bond markets

Question 12

Primary market

Answer 12

market where stocks/bonds are first sold

issued with help of a syndicate

Question 13

syndicate

Answer 13

used to oversee issuance of stocks/bonds on primary market

Question 14

2 ways bonds are placed with a syndicate

Answer 14

competitive bid

negotiated sale

Question 15

IPO

Answer 15

first sale of new stocks on primary market

new equity offering

Question 16

secondary market

Answer 16

where securities are traded after initial offering

stock market

Question 17

2 types of secondary markets

Answer 17

auction - physical location, highest bidder, NYSE

dealer - securities bought and sold through network of dealers, which each compete with each other - NASDAQ

Question 18

bid-ask price

Answer 18

difference between bid and ask prices that compensate the specialist for providing liquidity

Question 19

role of financial markets

Answer 19

reduce cost for companies to obtain financing

Question 20

efficient market

Answer 20

prices fully reflect available information about a security

inefficient markets have mispriced securites

Question 21

SEC

Answer 21

Securities and Exchange Commission
independent federal agency that 
- protects investors
- maintains fair, orderly, efficient markets
- facilitates capital formation

Question 22

2 main types of financial institutions

Answer 22

Depository (Banks) - accept deposits, provide loans

Non-depository - does not take deposits, may lend money or be intermediary between savers and lenders

Question 23

3 types of non depository institutions

Answer 23

Securities firms - underwriters, trade on secondary market
Investment firms - mutual funds, hedge funds, investment trusts
Contractual savings institutions - insurance company, pension fund

Question 24

role of Central banks

Answer 24

oversee , manage all other banks i.e. Federal Reserve Bank

Question 25

role of Banks and Credit unions

Answer 25

checking, savings accounts, lending, some financial advice

Question 26

role of insurance

Answer 26

charge premiums to invest in stocks/bonds, pay claims

Question 27

role of mutual funds

Answer 27

offer investments, buy securities on behalf of investors

Question 28

role of pension funds

Answer 28

invest retirement funds, provide retirement payments

Question 29

role of investment banks

Answer 29

underwriting, facilitate mergers, trade securities

Question 30

role of private equity

Answer 30

use money from investors to buy high potential/troubled companies to improve and return profit through public sale

Question 31

3 types of indicators

Answer 31

leading - indicate change before it happens lagging - a change that happens after the economy changes coincident - collected as change happens

Question 32

Yield Curve

Answer 32

type of leading indicator 3 types normal - long term bonds have higher interest rates than short term bonds, growing economy inverted - long term bonds interest rates lower than short term bond interest rates, slowing economy flat - short/long term bond IR same - economy in transition

Question 33

Stock Market return

Answer 33

type of leading indicator rising - growing economy declining - slowing economy need to know reason for rising stock market to determine if it truly reflects growing market

Question 34

lagging indicators

Answer 34

unemployment rate | CPI - inflation rate

Question 35

Coincident indicators

Answer 35

GDP - rising = strong economy, falling = weak economy | Personal Income - rising = strong economy, falling = weak economy

Question 36

2 main priorities of US central banks

Answer 36

regulate inflation and unemployment

Question 37

SEC responsibilities

Answer 37

Protect investors maintain fair, orderly efficient markets facilitate capital formation

Question 38

ethics

Answer 38

accepted standard of conduct

Question 39

morals

Answer 39

beliefs about what is right and wrong

Question 40

ethical dilemma

Answer 40

deciding among multiple options that are not completely ethical

Question 41

agency costs

Answer 41

costs not in shareholder interest

Question 42

agency problem

Answer 42

management does not act in best interest of owner, incurring agency costs

Question 43

examples of confilcts between managers and owners

Answer 43

manager self dealing wasteful spending by manager fraudulent accounting by manager

Question 44

example of conflicts between shareholder and bondholder

Answer 44

shareholder taking on overly risky projects | bondholder setting unreasonable limits on

Question 45

steps in evaluating ethical conflict

Answer 45

1. Identify/define problem. Ask questions. What rules/laws will be violated? What demands are creating the conflict? 2. Consider alternative courses of action, 3. Consider all stakeholders. 4. Consider consequences. 5. Move forward with ethical action.