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Define Asset:
Examples: Cash, UPS Trucks, Buildings
“Provide probable future economic benefit”
Definition of Finance:
How to allocate scarce resources across assets
over time in order to earn a return
What should we invest in?
Should we incur debt?
How do we as individuals make investments,
conduct banking activities, incur debt?
2
The Basics Of Financial Management
3
Why do you need to know finance?
4
Why Study Finance?
Marketing
Budgets, marketing research, marketing financial
products
Accounting
Dual accounting and finance function, preparation
of financial statements
Management
Strategic thinking, job performance, profitability
Personal finance
Budgeting, retirement planning, college planning,
day-to-day cash flow issues
5
The Role Of The Financial Manager
6
Financial Management Decisions
1. Capital Budgeting
The process of planning and managing a firm’s
long-term investments
Evaluating the size, timing, and risk of the future cash
flows
Use NPV finance tool to decide
2. Capital Structure
The mixture of debt and equity
3. Working Capital
The firm’s short-term assets and liabilities
7
The Role Of The Financial Manager
Board of Directors
President and
COO
Treasurer Controller
Operations Financial
markets
Financial
Investments
Financing
Manager
Financial decisions
Capital structure and cost of
capital
Operations Financial
markets
Financial
Investments
Financing
Manager
The goal of financial management
money money
Ф Financial
intermediaries
Return on Return on
investments investments
Financing decisions
Financing
decisions
Stocks Loans
Debt instruments
(bonds, CPs etc.)
Financial markets
Financial markets
Organized exchanges
Primary markets Money market
Over-the-counter
Secondary markets Capital market
Primary and secondary markets
Type of issuer
Government, government
agencies
States (regions,
provinces), municipalities
Corporations
Financial
institutions
Others
Types of financial instruments
Maturity
Short-term instruments
Long-term instruments
Types of financial instruments
Type of yield
Dividend bearing
(stocks)
Discount debt
Instruments
(treasury bills)
By level of risk
http://www.bloomberg.com/markets/rates/ind
ex.html
stockcharts.com/charts/yieldcurve.html
Yield curve could be inverted: short-term interest rates
are higher than long-term interest rates.
Long-term rates should raise because of expectations of
higher interest rates reflecting inflation and risk.
Inverted yield curve could be a signal of recession.
Financial instruments issued by
commercial banks
Banks raise funds by accepting deposits and selling securities.
These funds are used to fund various loans.
Certificates of Deposits (CDs):
Large fixed-maturity deposits.
Minimum deposit is $100 000, and typical deposit is $1 000 000.
Liquid secondary market
Upon maturity, the holder of the certificate receives the funds
from the issuing bank.
5-Year AAA Banking & Finance 4.07 4.05 4.74 4.93 5.07
10-Year AAA Banking & Finance 5.36 5.20 5.57 5.52 5.31
Prime rate in USA
Financial instruments issued by
corporations: goals
To finance operations
To invest in new projects
To expand their business
To repay debt or repurchase shares
Financial instruments issued by
corporations: CPs
Commercial paper – short-term debt with
maturity of not more than 270 days
Issued by larger, known corporations (GE –
$80 bln)
Issued at discount
Higher rates than comparable Treasury bills
because of smaller default risk and less
liquidity than government securities
Financial instruments issued by
corporations: bonds
Corporate bond – long-term debt security,
promising a bondholder interest payments on a
regular basis and payback of a par (face) value at
maturity.
Maturities
Short-term: 1-5 years
Intermediate-term: 5-10 years
Long-term: 10-20 years
Exceptions: Ford and Disney – 100 years
Interest is quoted as a percentage from face value
Financial instruments issued by
corporations: bonds ratings