fin mang chapter 2

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fin mang chapter 2
2010-12-11 16:09:58
fin management chapter

financial management chapter 2
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  1. financial markets: transfer of capital
    financial markets help facilitate the transfer of funds from "saving surplus" units to "saving deficit" units (i.e. transfer money from those who have the money to those who need the money")
  2. three ways to transfer capital in the economy
    • direct transfer
    • indirect transfer using investment banker
    • indirect transfer using financial intermediary
  3. direct transfer
    firm seeking funds directly approach a wealthy investor (i.e. business venture seeking funding from venture capitalist)
  4. role of venture capitalist
    easiest way if haven't built reputation yet

    prime source of funding for start up companies and companies in turn around situations- risky but offers high return
  5. indirect transfer (using investment banker)
    investment banker acts as a link between the firm (needing funds and the investors (with surplus funds)
  6. indirect transfer (using fin intermediary)
    fin intermediary collects funds from savers in exchange of its own securities (indirect). Collected funds are used to acquire securities (i.e. stocks, bonds, direct) from firm
  7. if your company wants to become a corporation then you have to go
  8. public offering
    both individuals and institutional investors have opportunity to purchase securities sold by the managing investment bank firm--firm never meets ultimate purchaser of securities
  9. private placement
    securities are offered and sold to a limited number of investors
  10. primary market
    market in which new issues of a securities are sold to initial buyers. Only time issuing firm ever gets any money for the securities
  11. season equity offering
    sale of additional shares by a company whose shares are already publicly traded

    goes with primary marketing
  12. secondary markets
    subsequent trading- previously issued securities are traded. issuing corporation doesn't get any money for stocks traded on the secondary market
  13. money market
    for short term debt instruments (maturity periods of 1 yr or less). telephone or compute market

    treasury bils, commercial paper,Cds, bankers acceptances
  14. capital market
    market for long term financial securities (maturity greater than 1 yr)..corporate bonds, common stocks, treasury bonds, term loans, leases
  15. exchanges
    tangible entities and financial instruments are traded on the premises (NY stock exchange)
  16. benefits of stock exchange
    provides a continuous market, establishes and publicizes fair security prices, helps business raise new capital
  17. over the counter (OTC) market
    all securities marke except organized exchanges

    -if don't want to pay fees, higher reporting requirements, don't meet the requirements of exchanges
  18. sport market
    refers to the cash market, where transaction takes place on the spot/today at the current market price
  19. future market
    make an agreement to buy/sell in the future at a price that is set today
  20. investment banking function
    financial specialists involved as an intermediary in the sale of securities (stocks/bonds). buy the entire issue of securities from the issuing firm and then resell it to the general public
  21. functions of an investment banker
    • underwriting (assuming risk)
    • distributing (once securities are purchased from issuing firm, they are distributed to ultimate investors)
    • advising (on timing of sale, type of security)
  22. negotiated purchase
    issuing firm selects an investment banker to underwrite the issue. firm and investment banker negotiate the terms of the offer
  23. competitive bid
    several investment bankers bid for the right to underwrite the firm's issue. firm selects the banker offering the highest price (risk: can't sell everything they're issued)
  24. best efforts
    issue is not underwritten- no money paid upfront for stocks- no risk for investment banker, attempts to sell it for a commission
  25. privileged subscription
    investment banker helps market new issue to a select group of investors and usually targeted to current stockholders, employees, customers
  26. dutch auction
    investors place bids indicating how many shares they are willing to buy and at what price- price the stock is then sold for becomes the lowest price at which the issuing company can sell all the available shares
  27. direct sales
    issuing firm sells securities directly to the investing public- NO investment banker
  28. private debt placements
    • private placements of debt refers to raising money directly from prominent investors (i.e. life insurance companies)
    • -can have investment banker if want to
  29. flotation costs
    transaction cost incurred when a firm raises funds by issuing securities - underwriter's spread (diff between gross and net proceeds) and issuing costs (printing/engraving security certificates, fees)
  30. higher returns are associated with
    high risk
  31. opportunity cost
    rate of return on next best investment alternative to the investor
  32. standard deviation
    dispersion of variability around the mean rate of return in the financial markets
  33. real return
    return earned about the rate of inflation
  34. maturity premium
    additional return required by investors in long-term securities to compensate for greater risk of price fluctuations on those securities caused by interest rate changes
  35. liquidity premium
    additional return required by investors in securities that can't be quickly converted into cash at a reasonably predictable price
  36. there is a ____ relationship between
    direct; inflation and interest rates
  37. returns are affected by
    • degree of inflation
    • default premium
    • maturity premium
    • liquidity premium
  38. theories to explain the shape of term structure
    • unbiased expectations theory
    • liquidity preference theory
    • market segmentation theory
  39. unbiased theory
    term structure is determined by an investor's expectations about future interest rates
  40. liquidity preference theory
    investors require maturity premiums to compensate them for risk of uncertain future interest rates
  41. market segmental theory
    legal restrictions and personal preferences limit choices for investors to certain rangers of maturities