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| The study of how individuals, institutions, governments, and businesses acquire, spend, and manage financial resources. |
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| Financial system, institutions, markets, businesses, individuals, and global interactions that help the economy operate efficiently. |
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| Three Areas of Finance within the Financial System |
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Definition
1. Institutions and Markets
2. Investments
3. Financial Management
(Note: they do not act in isolation, but intertwine and interact with each other) |
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| Help the financial system operate efficiently and transfer funds from savers to investors. |
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| Physical locations or electronic forums that facilitate the flow of funds. |
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| Area involves sale or marketing of securities, analysis of securities, and management of investment risk |
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| Involves financial planning, asset management, and fund raising decisions to enhance firm value. |
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| Two Themes Within Financial Topic |
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Definition
1. Entrepreneur Finance
2. Personal Finance |
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| Study of how growth-driven, performance-focused, early-stage firms raise funds and manage operations and assets |
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| Study of how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth |
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Definition
1. To make informed economic decisions
2. To make informed personal and business investment decisions
3. To make informed career decisions based on a basic understanding of business finance |
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| Six Principles of Finance |
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Definition
1. Money has a time value
2. Higher returns are expected for taking on more risk
3. Diversification of investments can reduce risk
4. Financial markets are efficient in pricing securities
5. Manager and stockholder objectives may differ
6. Reputation matters |
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Definition
Money in hand today is worth more than the promise of receiving the same amount of money in the future
Time value of money exists because a sum of money today could be invested and “grow” over time |
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Risk is the uncertainty about the outcome or payoff of an investment in the future
Rational investors would choose a riskier investment only if they feel the expected return is high enough to justify the greater risk |
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| Diversification of Investments |
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Definition
All investment risk is not the same
Some risk can be removed or diversified by investing in several different assets or securities |
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| Efficient Financial Markets |
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Definition
A financial market is “information efficient” if at any point in time the prices of securities reflect all information available to the public
When new information becomes available, prices quickly change to reflect that information
Information efficient markets provide liquidity and fair prices |
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| Management v.s. Owner Objectives |
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Definition
Management objectives may differ from owner objectives (called principal-agent problem)
Owners or equity investors want to maximize the returns on their investments
Managers may seek to emphasize the size of firm sales, assets, or other perks
Solution: tie manager compensation to performance measures beneficial to owners |
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Definition
Ethical Behavior
High reputation value reflects high quality ethical behavior, so employing high ethical standards is the “right” thing to do |
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Definition
| How an individual or organization treats others legally, fairly, and honestly |
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| Overview of Financial System |
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Definition
1. Policy Makers - Role: Pass laws & set fiscal & monetary policies
2. Monetary System - Role: Create & transfer money
3. Financial Institutions - Role: Accumulate & lend/invest savings
4. Financial Markets - Role: Market & facilitate transfer of financial assets |
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| President, Congress & U.S. Treasury Federal Reserve Board |
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| Federal Reserve Central Bank Commercial Banking System |
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| Depository Institutions, Contractual Savings organizations, Securities Firms, and Finance Firms |
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Definition
| Securities Markets, Mortgage Markets, Derivatives Markets, and Currency Exchange Markets |
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