Overview of Financial Management and Markets, Lecture notes of Financial Management

Download Overview of Financial Management and Markets and more Lecture notes Financial Management in PDF only on Docsity! Fin. Mgt. Quiz 3 1 Fin. Mgt. Quiz 3 Class 2135 Financial Management Type Reviewer - Quiz CB Rnoux How is Capital Transferred between Savers and Borrowers Direct transfers transfer of assets from one type of tax-deferred retirement plan or account to borrower; not considered to be distributions and not taxable as income or subject to any penalties for early distribution advantages of direct transfer are direct transfers convenience and simple to trade between borrower and saver when both borrower and saver agree with the term and condition, the transaction will be in process; it will be save time and cost the transaction can complete online, just taking few days to complete and there is no high commission to pay for intermediate disadvantages are savers will face lack of professional consultation from expertise; this will lead to the saver making wrong investment, facing loss the money and cheat by the business; the business will also facing less efficiency when direct transfer the securities, since there is no expertise to help them promote the securities and it may not planning well when issuance of securities Investment banks financial institution that helps individuals and corporations to raising their capital by underwriting; assumes the risk of selling a new security issue at a satisfactory price act as the client’s agent when issuance of securities such as stock and bond Fin. Mgt. Quiz 3 2 may also help organization involved in mergers and acquisitions  and provides ancillary services underwrite serve as a middleman and facilitates the issuance of securities advantages for this method are the business will get professional suggestion from expertise about the details of selling securities; business can raise the capital more efficient, the reason is the investment banker will buy over the securities and hold to sell for savers; help to business dispense with the pending time to wait saver transfer the money disadvantages for this method are the business may face depress in price of securities; when the business need capital emergency, the investment banker will depress the price of securities in order to make more money; savers may also face receive inaccuracy information from investment banker, reason is the investment banker wants to resell the hold securities, they may give inaccuracy information to the saver. Financial intermediaries consists of “channeling funds between surplus and deficit agents”; a financial institution that connects surplus and deficit agents through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities lending through an intermediary is usually less risky than lending directly; major reason for reduced risk is that a financial intermediary can diversify; will give many loans to different borrower; when mistake happen, the financial intermediary can cover by others loan interest; give savers liquidity and cost advantage Capital Allocation Process in a well-functioning economy; capital flows efficiently from those who supply capital to those who demand it Suppliers of Capital: individuals and institutions with “excess funds”; those who are willing to lend their money or funds at a given time and interest rate to those who are needing them; they aim to save money and look for a rate for their ROI Fin. 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Quiz 3 5 IPO or initial public offering is an offering of primary market where private companies decides to sell stocks to the public for the first time note that securities in this market are directly purchased from the issuer to raise capital or equity in primary market, one can use any of the four ways: (1) public issue - selling securities to public at large such as IPO; (2) rights issue - shares have to be offered to present shareholders on pro-rate basis; (3) private placement - selling securities to restricted number of classy investors like venture capital funds, mutual funds, and banks, and; (4) preferential allotment - issuance of equity shares to selected number of investors at a price that may or may not be pertaining to the market price Secondary Market securities issued in primary market are bought and sold; buy a share directly from a seller and the stock exchange or broker acts as an intermediary between two parties formed by another layer of investors who deal with primary market investor to buy and sell financial securities such as bonds, stocks, and futures; happens in proverbial stock exchange examples are National Stock Exchange and New York Stock Exchange trade happens without any involvement with the company that issued the securities in the primary market divided into two (2): Auction market - buyers and sellers convene at a place and announce the rate at which they are willing to buy or sell securities, also known as bidding; Dealer market - trade happens through electronic networks like fax machines, telephones, or custom order -matching machines; also known as over the counter market Public vs Private Public Market stocks and bonds are traded on public exchanges stocks can be resold even before maturity Fin. 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Quiz 3 6 ex. publicly listed companies Private Market investments are not traded on public exchanges can’t see stocks before maturity ex. private companies Spot vs Futures Spot Market spot market also known as cash market or physical market assets are sold here for cash and is delivered immediately examples are FOREX market, New York Stock Exchange, coin dealer and exchange, etc. influenced solely by supply and demand Futures Market futures are financial contracts giving the buyer an obligation to purchase as asset, the seller an obligation to sell, at a set of price at a future point in time also known as futures contracts; assets traded here are mostly stocks and bonds, commodities, like oil, metals, emissions credits, bandwidth, etc. examples of this market are New York Mercantile Exchange, Minneapolis Grain Exchange, and Chicago Board of Trade great way for companies involved in commodities industry to stabilize their prices and performance influenced by expectations about future prices, storage costs, weather predictions for perishable commodities, and host of other factors Importance of Financial Market facilitate flow of capital from investors to users of capital provide savers with returns on their money invested or saved Fin. 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Quiz 3 7 provide users of capital with necessary funds to finance their investment projects promote economic growth economies perform better Derivatives derivative security’s value is derived from the price of another security like options and futures can be used to hedge or reduce risk speculators can use derivatives to bet on the direction of future stock prices, interest rates, exchange rates, and commodity prices derivatives can increase risk Types of Financial Institutions investment banks commercial banks financial services corporations pension funds mutual funds exchange traded funds hedge funds private equity funds Stock Market Transactions when new shares are created to be issued, it is a primary market transaction when NO new shares are created, or existing shares were bought and resold, the transaction is of a secondary market IPO - additional ‘going public’ enables owners to raise capital from a wide variety of outside investors; once issued, stock trades in the secondary market