Download Finance Review: Maximizing Value through Assets and Markets (Ch. 1-5) and more Study notes Finance in PDF only on Docsity! Finance Test Review CH. 1-5 02/11/2013 Chapter 1 Finance: discipline that deals with decisions concerning how money is raised Main goal: maximize value Great Depression: 1929-1933 Value: worth of future cash flows, stated in current dollars, that an asset is expected to generate during its life Sustainability: concept that we should improve the quality of life of all stakeholders for all generations both current & future Stakeholders: anyone affected by firms decisions Lean manufacturing: system that integrates the entire production process so that the least amount of resources are used Chapter 2 Real assets: physically observable or touchable item Financial asset: promise to distribute cash flows @ some future time Par value: face value of a stock or bond Debt: loan to an individual, company or government Features: short term & long term o Principle value, face, maturity & par value o Interest payments o Maturity Bond example: o Principle = $1,000, interest rate = 8%, maturity = 10 yrs. Interest rates: Variable Fixed Types of bonds Government bonds: issued by US government, state governments, and local or municipal governments (municipal bonds) Corporate bonds: long-term debt instruments issued by corporations Mortgage bond: backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds Debenture: long term bond that is not secured by a mortgage on specific property Bond contract features Commercial banks Credit unions Thrift institutions: cater to saver for small amounts of money to deposit or need long term loans to purchase houses Mutual funds: investment companies that accept funds from savers to invest in such financial assets as stocks and bonds Whole Life insurance companies: insurance and savings. Firms that receive premiums from individuals Pension funds: employee retirement plans Fractional reserve system: increases/creates money in the economy to satisfy requests for withdrawals is less than 100% of total deposits MAXIMUM CHANGE IN MS = excess/reserve requirement Responsibilities Monetary policy: fed manages nations MS Open market operations: fed buys/sells securities to expand MS Reserve requirements: must retain in the vault Discount rate: interest rate fed charges on loans it makes to banks to meet temporary shortages in required reserves Chapter 5 Realized Returns (yields) Dollar return = dollar income + capital gain Capital gain = ending value – beginning value Yield = dollar return / beginning value Yield = (dollar income + capital gain) / beginning value Jan 1 – purchase bond $980 Dec 31 – interest of $100 Dec 31 – sell for $990.25 Dollar return: $110.25 Yield: 11.25% Rate of return = RRF + RP (DRP + LP + MRP) RRF = REAL RATE + IP (inflation premium) Supply & Demand: money demand decreases as MS increases & IR decreases Increase demand – increase rate – graph: moves right Increase supply – decrease rate – graph: moves right Future interest rates using Expectations Theory: Year: Expected IR: Expected IP: 2010 2% 2/1 x 100 = 2% 2011 4% 2+4/2 x 100 = 3% 2012 6% 2+4+6/3 x 100 = 4% Year: Real Rate: IP: T-Bond (RRF) : 1 3% + 2% 5% 2 3% + 3% 6% 3 3% + 4% 7% Yield on a 2 yr. bond = (IR yr. 1) + (IR yr. 2) / 2 (5+7)= 12/2 = 6% yield
