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

An overview of financial management and markets. It covers topics such as capital transfer, investment banks, financial intermediaries, capital allocation process, IPO, secondary market, public vs private market, spot vs futures market, derivatives, and types of financial institutions. the advantages and disadvantages of different methods of capital transfer and investment, as well as the importance of financial markets in facilitating the flow of capital and promoting economic growth. It also discusses the different types of financial institutions and their roles in the financial system.

Typology: Lecture notes

2021/2022

Available from 07/23/2023

rnoux
rnoux 🇵🇭

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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
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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

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

asset being represented, like stocks, bonds, funds, etc. it’s usually held in bank investments, accounts receivables, company goodwill, patents, copyrights; they are recorded in a firm’s balance sheet to represent the value held may lose value to changes in market interest rates, fall in investment returns or stock market prices

Money vs Capital

Money Market for short-term funds, not longer than a year deals with monetary assets like treasury bills, commercial paper, and certificates of deposits; maturity does not exceed one year carry lower risk and reasonable rate of return for investors, generally in interest Capital Market instruments with medium and long-term maturity are trades here; maximum interchange of money happens helps companies access money through equity capital, preference share capital, etc. provides investors access to invest in the company's equity share capital and be a party to the profits earned by the company an organized market where securities trading occurs between investors

Primary vs Secondary

Primary Market also known as new issues market; market for issuing long-term equity capital; also responsible for issuance of security certificates as they issue securities directly to investors transaction is conducted between issuer and buyer; they create new securities and offers them to the public

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

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

public companies are subject to additional regulations and reporting requirements

Stock Market Efficiency

Securities are normally in equilibrium and are “fairly priced.” Investors cannot “beat the market” except through good luck or better information. Efficiency continuum

Possible Implications for Market Efficiency

It is costly and/or risky for traders to take advantage of mispriced assets. Cognitive biases cause investors to make systematic mistakes that lead to inefficiencies. This is an area of research known as “behavioral finance.” Behavioral finance borrows insights from psychology to better understand how irrational behavior can be sustained over time. Some examples include: Evaluating risks differently in up and down markets. Investors become "anchored" to certain viewpoints and fail to optimally respond to new information that conflicts with their existing views.