question

Proprietorship

answer

An unincorporated business owned by one individual

question

Easily and inexpensively formed, few government regulations, not subject to corporate taxation

answer

Advantages of a proprietorship

question

Difficult to obtain capital, unlimited personal liability, limited to life of its founder

answer

Limitations of a proprietorship

question

Partnership

answer

Exists whenever two or more persons or entities associate to conduct a noncorporate business for profit

question

Limited Partnership

answer

wherein certain partners are designated general partners and other limited partners

question

Limited Partners

answer

In a limited partnership, can lose only the amount of their investment in the partnership, but typically have no control

question

General Partners

answer

In a limited partnership, have unlimited liability and typically control rests solely with

question

Limited Liability Partnership (or limited liability company)

answer

All partners enjoy limited liability with regard to the business's liabilities, and their potential losses are limited to their investments in the business

question

Corporation

answer

A legal entity created under state laws, and it is separate and distinct from its owners and managers.

question

Advantages of a corporation

answer

Unlimited life, easy transferability of ownership interest, limited liability

question

Disadvantages of a corporation

answer

Double taxation (earnings, and earnings paid out as dividends) complex to set up.

question

Charter

answer

Includes information such as the name of the proposed corporation, types of activities it will pursue, amount of capital stock, number of directors, and names and addresses of directors. Filed with Secretary of State. Once started, must file annual/quarterly employment/financial/tax reports w/ state and Fed.

question

Bylaws

answer

A set of rules drawn up by the founders of the corporation. Election of directors, if existing stockholders have first right to new shares, procedures for changing by-laws.

question

Professional Corporation (or professional association)

answer

Has most of the benefits of incorporation but the participants are not relieved of professional (malpractice) liability

question

S Corporations

answer

A small corporation that, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization

question

Initial Public Offering

answer

Occurs when a closely held corporation or its principal stockholders sell stock to the public at large

question

Agency Problem

answer

Occurs when mangers act in their own best interests, rather than in the best interests of the stockholder/owners

question

Corporate Governance

answer

The set of rules that control a company's behavior toward its directors, managers, employees, shareholders, creditors, customers, competitors, and community

question

Market Price

answer

The stock price that we observe in the financial markets

question

Intrinsic/Fundamental Price

answer

The market price when it reflects all relevant information

question

Free Cash Flows (FCF)

answer

The cash flow actually free (available) for distribution to all investors/creditors/stockholders after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations.

question

Weighted Average Cost of Capital

answer

The rate of return required by investors. To determine this rate, one needs managerial finance decisions, interest rates in the economy, risk of firms operations, stock market investor's overall attitude towards risk.

question

Investment Banking House

answer

Organization in which indirect transfers of securities may go through, these organizations underwrite the issue and basically serves as a middleman and facilitates the issuance of securities. Pg 14

question

Financial Intermediary

answer

Middle Man that buys securities with funds that it obtains by issuing ITS OWN securities. An example is a common stock mutual fund that buys common stocks with funds obtained by issuing shares in the mutual fund. Pg14

question

Security

answer

Paper with contractual provisions that entitle their owners to specific rights and claims on specific cash flows or values.

question

Debt Instruments

answer

contractual agreements that have specified payments and maturity.

question

Capital Market Security

answer

Debt that matures in more than a year

question

Money Market Security

answer

Debt that matures in less than a year

question

Equity Instruments

answer

A claim upon a residual value. For example, a company's stockholders are entitled to cash flows after bondholders and other debts have been paid. Remember: since stock has no maturity, it goes for over a year and is considered a capital market security.

question

Derivatives

answer

Securities whose claims (value) depends on what happens to the value of some other asset. Futures and option are two important types, and their values depend on what happens to the prices of other assets. Therefore, the value of these securities comes from the value of an underlying real asset or other security

question

Securitization

answer

A process in which some securities are created from packages of other securities

question

Savings and Loan Associations (S&Ls)

answer

Organization that at one time made most mortgages, took in the vast majority of their deposits from individuals in nearby neighborhoods, pooled these deposits and then lent money to others in the neighborhood in the form of fixed-rate mortgages

question

Mortgage Securitization

answer

i. Local S&Ls, not allowed to branch (disequilibrium during 1950s East expansion). ii. Short-term liabilities but long term assets meant S&Ls could not respond to supply/demand/interest rate changes. Money market bankrupted them. iii. Government allowed branching and long-term debt (to go along with short-term deposits). Managers did not know how to deal and made bad decisions. iv. Demise of S&Ls meant demand for mortgages was high but supply low, which led to mortgage securitization. Banks, S&Ls, and mortgage firms would originate a mortgage and sell it to an investment bank. The investment bank would bundle several and use them as collateral to sell bonds. The investment bank will use the bundled-funds-payments (from homeowners) to pay interest on the bonds. The bonds are more liquid than the mortgages, which also helps investors. v. After mortgage securitization, there is more money for aspiring homeowners, mortgage firms have less risk, and there is more opportunity for risk-willing investors to make more money (more liquidity, in this).

question

Interest Rate

answer

The rate users pay providers for debt

question

Cost of Equity

answer

The rate users pay providers for equity

question

Four most fundamental factors affecting the cost of money

answer

Production Opportunities (ability to turn capital into benefits such as the benefits of borrowing for education are higher expected salary, etc), Time Preferences For Consumption (Japan has a lower time consumption rate, so interest rates are higher there to induce lending), Risk, Inflation Note: economic factors include fed reserve policy, fed budget deficit or surplus, level of business activity, and international factors such as foreign exchange rate, international business climate and foreign trade balance.

question

Fed Reserve's Open Market Policy

answer

Fed buys T-bills from bank, bank has more cash, and if demand does not go up, will have to lower interest rate to get rid of it. Fed reserve is demanding more T-bills, so demand is up. Supply is constant, then prices go up and interest rates go down. ???

question

Country Risk

answer

The risk that arises from investing or doing business in a particular country and it depends on the country's economic , political, and social environment

question

Exchange Rate Risk

answer

Risk associated with the value of an investment depending on what happens to exchange rates

question

Investment Banks' Jobs

answer

i. advise corporations regarding design/pricing of new securities (and even things like mergers/acquisitions) ii. Buy these securities from the issuing corporation iii. Resell them to investors (remember, this is a primary market transaction b/c same security is being bought and sold)

question

Mutual Savings Banks (MSBs)

answer

Operate similiar to S&Ls, mostly in northeastern states

question

Credit unions

answer

Cooperative associations whose members have a common bond, which loans members' savings only to other members

question

Commercial Banks

answer

raise funds from depositors and issue stock and bonds to investors

question

Mutual Funds

answer

Corporations that accept money from thousands of savers and then use these funds to buy financial instruments, they pool funds which allows them to reduce risks by diversification and achieve economies of scale in analyzing securities, managing portfolios, and buying/selling securities. Most traditional mutual funds only allow investor to redeem share at the close of business.

question

Money Market Funds

answer

Invest in short term, low risk securities, such as Treasury bills and commercial paper

question

Exchange Traded Fund (ETF)

answer

Allows investors to sell their share in a mutual fund at any time during normal trading hours, usually have very low management expenses and are rapidly gaining in popularity.

question

Hedge Funds

answer

Raise money from investors and engage in a variety of investment activities, limited to institutional investors and a relatively small number of high net worth individuals. Less regulated than mutual funds due to supposed "sophistication of investors."

question

Private Equity Funds

answer

Similar to hedge finds in that they are limited to a relatively small number of large investors, but they differ in that they own stock in other companies and often control those companies, whereas hedge funds usually own many different types of securities. Often turn public companies private.

question

Life Insurance Companies

answer

Take premiums, invest these funds in stocks, bonds, real estate, and mortgages, and them make payments to beneficiaries

question

Pension Funds

answer

Retirement plans funded by corporations or government agencies, invest primarily in bonds, stocks, mortgages, hedge funds, private equity, and real estate

question

Financial Markets

answer

Bring together people and organizations needing money with those having surplus funds

question

Physical Asset Market

answer

Markets for such tangible products as wheat, autos, real estate and machinery

question

Financial Asset Markets

answer

markets that deal with stocks, bonds, notes, and other financial instruments

question

Spot Markets

answer

markets where assets are being bought or sold for "on-the-spot" (within a few days).

question

Future Markets

answer

Markets where assets are bought and sold and delivered on some future date

question

Money Markets

answer

Markets for short term highly liquid debt securities

question

Capital Markets

answer

Markets for corporate stocks and debt maturing more than a year in the future

question

Mortgage Markets

answer

Markets dealing with loans on residential, agricultural, commercial, and industrial real estate

question

Consumer Credit Markets

answer

Markets involving loans for autos, appliances, education, vacation, etc

question

Primary Markets

answer

Markets in which corporations raise new capital

question

Secondary Markets

answer

Markets in which existing, already outstanding securities are traded among investorsd. The corporations whose securities/stock is being traded does not receive any money from this transaction.

question

Private Markets

answer

Markets where transactions are worked out directly between two parties. These securities are tailor-made but less liquid.

question

Public Markets

answer

Markets where standardized contracts are traded on organized exchanges. More liquid but subject to greater standardization, since investors do not have the time to study a new contract for every sale.

question

auction

answer

example is the CBOT where traders meet in a pit and sellers and buyers communicate with one another through shouts and hand signals

question

Dealer markets

answer

Markets where market makers keep an inventory of the stock in much the same way that any merchant keeps and inventory, they then list bid and ask quotes which are the prices at which they are willing to buy or sell

question

Electronic Communications Network (ECN)

answer

participants post their orders to buy and sell and this automatically matches orders

question

Market Order

answer

An order to buy stock at current market price. "Buy/sell 2000 shares"

question

Limit Order

answer

An order to buy or sell securities with limitations. "Sell 1000 shares, but at X price."

question

Seasoned Equity Offering

answer

After going public, this is when a company decides to sell additional shares to raise new equity after the IPO, this is still a primary market

question

National Association of Securities Dealers (NASD)

answer

a self regulatory body that licenses brokers and oversees trading practices

question

Federal Reserve Actions

answer

If our prices fall compared to other countries, our goods will sell better because they are cheaper. If the Fed lowers interest rates below other countries, then investors will sell our bonds and buy ones that will have higher interest rates. This will bring down our bond price and bring up our interest rates (interest rates in general or just on the bonds??). If Yen weakens compared to the dollar, then yen will buy fewer dollars. A US investor would have less U.S. money when a Japanese bond matured.

question

Oversubscribed

answer

When there are more offers to buy stock/securities than the supply can allow.

question

Real rate of return

answer

The rate of return you get when adjusted for inflation. [ (1 + Rate_nominal) / ( 1 + Rate_inflation) ] - 1.0 [ ( 1 + 1.06) / (1 + 1.03) ] - 1.0 = 2.91

question

Opportunity cost rate

answer

Interest rate offered on another investment/project having a similar risk. Used in TVM (time value of money) equations to find the corresponding present and future values of investment.

question

NPV of Individual Irregular Cash flows (no lump sum)

answer

1. To get first, CFj0 = 1. Then CFj1 value, interest and NPV 2. To get second, CFj0 = CFj1 = 0, CFj2 value, interest and NPV 3. To get total, put all in starting with CFj0.

question

NFV

answer

Net future value 1. Starting with 0, enter cash flows, interest rate and then [NPV] [D arrow] [SWAP]

Financial Management Theory and Practice Chapter 1 – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards