Corporate Finance
focuses on financial decision making by a firms management
Investments
various types of financial instruments (stocks, bonds, etc)
Banking or Financial Institutions
make money by paying depositors a smaller interest rate than the interest rate charged to borrowers
Treasury Securities
generally bonds that are issued by the US government
Corporate Bonds
firms borrowing from the public
Stocks
a share of ownership in a company
Primary financial markets
markets where securities are first issued
Syndicate
a group that is temporarily formed to handle a bond or stock issue: generally large investment bank or institutional investors
Underwriter
responsible for determining the value of the security; may purchase all the securities & then resale to investors
Competitive sale
underwriters submit bids offering highest price/lowest interest rate; underwriter resales a slightly higher price
Negotiated sale
underwriters submit bids, go thru interview to be selected
Initial Public Offering (IPO)
first time selling of stocks to the public; occurs in primary market
Secondary financial markets
where securities are traded after the initial offering (stock market)
Auction market
has a physical location & prices are determined by the highest price an investor is willing to pay (New York Stock Exchange)
Dealer market
no physical location- securities are bought & sold thru a network of dealers that trade for themselves; multi dealers per stock (NASDAQ)
Role of financial markets
they reduce the cost of borrowing from the public or selling ownership to the public
Role of Specialist (NYSE) or Dealers
to provide liquidity for a fair & orderly market; may increase the spread to do so (charge a lower price to seller and a higher price to buyer)
Bid-ask spread
difference between the bid price & asking price (specialist/dealer's compensation)
Financial market liquidity
the ease of trading in the market (high frquency traders)
Market orders
time sensitive; sales at current bid price/buys at current asking price when order is placed-immediately
Limited orders
price sensitive; sell occurs when price of stock matches order price
Role of price
convet information to consumers; affect incentives &affect the distribution of income
Dollar Returns
Pt - Pt-1 + CFt (Pt= sold price, Pt-1=bought price, CFt=cash flow-coupons for bonds/dividians for stocks)
Percentage Returns
Pt - Pt-1/Pt-1 + CFt/Pt-1 x 100 (1.2)
(figure for dollar return and divide into bought price)
Goal of company/firm
to maximize shareholder value or maximize profit
Agency costs
costs that are incurred when management doesn't act in the best interests of shareholders
Profit maximizarion
the potential effect of focusing soley on profits