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  • The major responsibility of financial managers is to develop and implement a financial plan for their organization. The firm’s financial plan is based on forecasts of expenditures and receipts for a specified period and reflects the timing of cash inflows and outflows. The financial managers systematically determine the company’s needs for funds during the period and the most appropriate sources for obtaining them. In short, the financial manager is responsible for both raising and spending money.
  • A. Organizations are placing greater emphasis on measuring and reducing the costs of conducting business as well as increasing revenues and profits. B. Financial managers are executives responsible for developing and implementing their firm's financial plan and for determining the most appropriate sources and uses of funds. C. The finance organization of a typical company consists of three levels, including: •at the top is the CEO -- Chief Executive Officer •second there is the CFO -- Chief Financial Officer •thirdly, there are three executives, who are commonly called the vice president for financial management, the treasurer, and controller.
  • 1. Financial managers develop their organization's financial plan, a document that specifies the funds needed by a firm for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds. 2. Based on forecasts of production costs, purchasing needs, and expected sales activities for the period covered 3. A good financial plan involves financial control, a process of checking actual revenues, costs, and expenses and comparing them against forecasts.
  • Money exchanges based on money permit economic specialization and provide a general basis for purchasing power provided that the form of money used has certain characteristics.
  • Divisible • U.S. Dollar is divided into cents, nickels, dimes, and quarters • Mexico's nuevo peso is broken down into centavos • a British pound is divided into 100 pence Portable -- an important characteristic since a typical dollar bill changes hands around 400 times during its lifetime, staying in the average person's pocket or purse fewer than two days. Durable • U.S. dollar bills survive an average of 12 to 18 months, and they can survive folding some 4,000 times without tearing. • Coins can last 30 years, or longer, which has led to efforts to persuade Americans to use dollars coins instead of dollar bills.
  • Difficult to counterfeit •Widespread distribution of counterfeit money could undermine a nation's monetary system and economy by ruining the value of legitimate money. •The U.S. Treasury has recently re-designed paper bills by adding a letter to each bill's serial number along with the seal of the Federal Reserve.
  • Functions of Money 1. a medium of exchange: a means of facilitating economic transactions and eliminating the need for a barter system 2. a unit of account: a common standard for measuring the value of goods and services 3. a temporary store of value: a way of keeping accumulated wealth until the owner needs it to make new purchases.
  • The total value of all currency and coins in circulation; as well as financial assets that serve as a medium of exchange: traveler's checks, bank checking accounts, and other so-called demand deposit accounts Government reports and business publications use the term M1 to refer to the total value of coins, currency, traveler's checks, bank checking account balances, and the balances in other demand deposit accounts.
  • A. M2 refers to the measure of the money supply including M1 and other financial assets that are almost as liquid as cash, but do not serve directly as a medium of exchange. B. In recent years, the use of credit cards, or "plastic money" has increased significantly, and credit card debt has increased by more than five times.
  • A. Organizations require funds for many reasons, including: •to run day-to-day operations •to compensate employees and hire new ones •to pay for inventory •to make interest payments on loans •to pay dividends to shareholders •to purchase property, facilities, and equipment. B. By comparing these needs with expenditures and expected cash receipts, financial managers determine precisely what additional funds they must obtain at any given time.
  • Debt capital -- represents funds obtained through borrowing Equity capital 1. consists of funds provided by the firm's owners when they reinvest earnings, make additional contributions, or liquidate assets 2. also generated when stock is issued to the general public 3. capital raised from venture capitalists and other investors
  • a. trade credit -- is extended by suppliers when a firm receives goods or services, agreeing to pay for them at a later date b. short-term loans -- can be either unsecured - meaning that specific assets such as inventory are pledged as collateral c. commercial paper -- the interest on commercial paper is typically one or two percent lower than the rate on short-term bank loans; however, only large firms with unquestioned financial strength and stability are able to sell commercial paper.
  • Households, businesses, government, financial institutions, and financial markets together form what is known as the financial system The process by which money flows from savers to users. 1. Savers choose not to spend all of their current income, so they have a surplus of funds. 2. Users spending needs exceed their current income so they have a deficit. 3. Financial institutions have been classified into depository institutions which accept deposits that customers can withdraw on demand, and non-depository institutions.
  • Offer the most services of any financial institution, including: •a wide range of checking and savings deposit accounts •consumer loans •credit cards •home mortgage loans •business loans •trust services
  • a. raise funds by offering a variety of checking and savings deposits to customers, and then pool these deposits and lend most of them out in the form of a variety of consumer and business loans b. make money primarily because the interest rate they charge borrowers is higher than the rate of interest they pay depositors
  • One of the original forms of electronic banking, the ATM, continues to grow in popularity, as the ATM allows customers to make banking transactions 24 hours a day, seven days a week, by inserting an electronic card into the machine and entering a personal identification number. Most banks now offer customers debit cards - also called check cards - which allow customers to make purchases directly from their checking or savings accounts.
  • A major reason people are attracted to online banking is convenience, as customers can transfer money, check account balances, and pay bills, 24 hours a day, seven days a week on their PC's.
  • Banks are among the nation's most heavily regulated businesses. The main purpose of bank regulation is to ensure public confidence in the safety and security of the banking system.
  • Deposit insurance shifts the risk of bank failures from individual depositors to the FDIC.
  • Insurance companies a. households and businesses buy insurance to transfer risk from themselves to the insurance company b. underwriting is the process used by insurance companies to determine whom to insure and what to charge Pension funds a. pension funds provide retirement benefits to workers and their families b. are set up by employees and are fueled by regular contributions made by employers and employees c. because pension funds have predictable long-term cash inflows and very predictable cash outflows, they invest heavily in long-term cash assets, such as common stocks. Finance companies a. consumer and commercial finance companies offer short-term loans to borrowers b. a commercial finance company supplies short-term funds to businesses that pledge tangible assets such as inventory, accounts receivable, machinery, or property as collateral for the loan
  • Also, provides wire transfer facilities, clears checks, replaces worn-out currency, and lends banks money.
  • An important part of the Fed is the Federal Open Markets Committee (FOMC), which is responsible for setting most policies regarding monetary policy and interest rates.
  • The Fed has three major policy tools, including: • Margin requirements - defined as cash in their vaults plus deposits at district Federal Reserve banks - equal to some percentage of what the banks hold in deposits • Discount rate - the interest rate at which Federal Reserve banks make short-term loans to member banks • Open market operations - the one most often used, the technique of controlling the money supply growth rate by buying or selling U.S. Treasury securities.
  • Secured bond a. backed by a specific pledge of company assets b. firms can issue secured bonds at lower interest rates than would be to paid for comparable unsecured bonds. Unsecured bond a. also called a debenture b. is backed only by the financial reputation of the issuing corporation
  • Government bonds a. bonds issued by the U.S. Treasury b. are backed by the full faith and credit of the U.S. government c. they are considered the least risky of all bonds.
  • 1. is the largest, and probably most famous, stock market in the world 2. Today more than 4,000 common and preferred stock issues are traded on the NYSE, and represent most of the largest, best-known companies in the U.S. 3. Buying and selling takes place face-to-face on a trading floor, and buy and sell orders are transmitted to one of 42 posts - each stock is assigned a post - on the floor of the exchange. 4. Even though the NYSE retains a trading floor, the exchange has become highly automated in recent years. 5. Its computer systems automatically match and route most orders, which are typically filled in a few seconds.
  • Choosing a brokerage firm, and a specific stockbroker, is one of the most important decisions investors make.
  • A. Managed by experienced investment professionals whose careers are based on success in analyzing the securities markets and choosing the right mix of securities for their funds B. Many have been developed for investors who want their religious or personal philosophies reflected in the management of the fund.
  • BK17.ppt

    1. 1. FINAL EXAM BREAKDOWN <ul><li>Chapter 1 3 </li></ul><ul><li>Chapter 2 3 </li></ul><ul><li>Chapter 3 4 </li></ul><ul><li>Chapter 4 3 </li></ul><ul><li>Chapter 5 3 </li></ul><ul><li>Chapter 6 3 </li></ul><ul><li>Chapter 7 2 </li></ul><ul><li>Chapter 8 3 </li></ul><ul><li>Chapter 9 5 </li></ul><ul><li>Chapter 10 2 </li></ul><ul><li>Chapter 11 1 </li></ul><ul><li>Chapter 12 5 </li></ul><ul><li>Chapter 13 3 </li></ul><ul><li>Chapter 14 5 </li></ul><ul><li>Chapter 15 4 </li></ul><ul><li>Chapter 16 6 </li></ul><ul><li>Chapter 17 6 </li></ul><ul><li>Chapter 18 6 </li></ul><ul><li>NCE 26 </li></ul><ul><li>Other 7 </li></ul>
    2. 2. Chapter 17 Financial Management and Institutions
    3. 3. Bizness Quote A bank is a place that will lend you money if you can prove that you don’t need it. Bob Hope
    4. 4. Price College of Business . . . Other learning opportunities <ul><li>FIN 4413 Commercial Banking </li></ul><ul><li>FIN 4700 Internship in Finance </li></ul>
    5. 5. Current Events <ul><li>NYT: “Merck to Offer Big Bonuses to Executives If It Is Taken Over” </li></ul><ul><li>WSJ: “Wal-Mart Files Argument in Sex-Discrimination Case” </li></ul><ul><li>WSJ: “A Green Perk Offered for Green Car” </li></ul><ul><li>WSJ: “China Tightens Financial Disclosure Rules for Publicly Traded Companies” </li></ul>
    6. 6. Key Job Role: Internal Auditor <ul><li>The “police squad” of large corporations. </li></ul><ul><li>Principal responsibility is to carry out “compliance” audits, that is, to determine whether employees are complying with applicable company policies and procedures. </li></ul><ul><li>A key element of a company’s internal control system. </li></ul><ul><li>Unlike independent auditors, internal auditors are not necessarily CPAs. </li></ul>
    7. 7. Company Profile The Cheesecake Factory Incorporated
    8. 8. Cheesecake Factory <ul><li>Evelyn and Oscar Overton began making cheesecakes in their Detroit basement in the 1950s. </li></ul><ul><li>The popularity of their cheesecakes eventually convinced the Overtons to move to Los Angeles and establish a wholesale bakery that sold cheesecakes and other desserts to local restaurants. </li></ul><ul><li>The Overtons’ son, David, opened the business’s first restaurant in 1978 in Beverly Hills. </li></ul><ul><li>Within a few years, that restaurant was grossing $3 million in annual sales. </li></ul>
    9. 9. Cheesecake Factory <ul><li>The Overtons continued to open other restaurants in the Los Angeles area over the next several years. </li></ul><ul><li>In 1992, the company incorporated and went public. </li></ul><ul><li>In the early 1990s, a restaurant industry survey found that cheesecake was the most popular dessert item in restaurants (64% offered cheesecake, compared to 61% that offered apple pie). </li></ul><ul><li>Funds raised by the IPO allowed the company to open restaurants in Chicago, Houston, D.C., and other major metropolitan areas. </li></ul>
    10. 10. Cheesecake Factory <ul><li>Key competitors: Chili’s, Ruby Tuesday, Applebee’s, and Outback Steakhouse. </li></ul><ul><li>Presently has 50 restaurants and annual sales of approximately $500 million. </li></ul><ul><li>David Overton serves as the CEO. </li></ul>
    11. 11. Cheesecake Factory <ul><li>Key strength: Same-store sales have continued to increase in recent years. </li></ul><ul><li>Key strength: Company management is pursuing other expansion opportunities, including locating in major airports. </li></ul><ul><li>Key challenge: Critics point out that the company’s leading products are not “health-friendly.” </li></ul><ul><li>Key challenge: “Themed” restaurant chains often lose their appeal eventually with the public. </li></ul>
    12. 12. Final Exam Info <ul><li>Bring a scantron!! (and one for your neighbor) </li></ul><ul><li>Basics: Monday, December 13th, 1:30-3:30 P.M., HERE!! </li></ul><ul><li>Final exam key will be posted to e-reserve (eventually) </li></ul>
    13. 13. Don't Be A Line Victim!!! 89 . . . 79 . . . 69 . . . 59 are the guaranteed cutoffs . . . .
    14. 14. Textbook Tidbits: Chapter 17 <ul><li>“ Money is power, freedom, a cushion, the root of all evil, the sum of all blessings.” Carl Sandburg </li></ul><ul><li>Dollar bills can be folded an average of 4,000 times during their lifetime </li></ul><ul><li>Time is money: McDonald’s attempts to complete each customer transaction in 90 seconds </li></ul>
    15. 15. Textbook Tidbits: Chapter 17 <ul><li>American consumers have more than one billion credit cards </li></ul><ul><li>Benchmark Capital invested $5 million in eBay—that investment is now worth $7 billion </li></ul><ul><li>By 2010, one in three households will bank online </li></ul>
    16. 16. <ul><li>Identify the functions performed by a firm’s financial managers </li></ul><ul><li>Identify the functions of money </li></ul><ul><li>Compare the two major sources of funds for a business </li></ul><ul><li>Describe the financial system and the major financial institutions </li></ul><ul><li>Explain the functions of the Federal Reserve System and the tools it uses to control the money supply </li></ul>LEARNING GOALS
    17. 17. <ul><li>Finance: business function of planning, obtaining, and managing a company’s funds in order to accomplish its objectives in the most effective possible way. </li></ul>
    18. 18. Corporate Financial Managers <ul><li>Chief financial officer —top finance executive of a corporation; usually reports directly to the firm’s CEO. </li></ul><ul><li>Other financial managers: </li></ul><ul><ul><li>VP for Financial Management </li></ul></ul><ul><ul><li>Treasurer </li></ul></ul><ul><ul><li>Controller </li></ul></ul>
    19. 19. <ul><li>Organizational Structure of the Finance Function </li></ul>
    20. 20. FINANCIAL PLAN <ul><ul><li>A document specifying the funds a firm will need for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds. </li></ul></ul><ul><ul><ul><li>What funds will the firm require during the appropriate period of operations? </li></ul></ul></ul><ul><ul><ul><li>How will it obtain necessary funds? </li></ul></ul></ul><ul><ul><ul><li>When will it need more funds? </li></ul></ul></ul>
    21. 21. Characteristics and Functions of Money <ul><li>Characteristics of Money </li></ul><ul><ul><li>Money —anything generally accepted as payment for goods and services. </li></ul></ul>
    22. 22. Characteristics and Functions of Money <ul><li>Characteristics of Money </li></ul><ul><ul><li>Divisibility —Ability to be broken down into smaller units </li></ul></ul><ul><ul><li>Portability —Ability to be easily moved from place to place </li></ul></ul><ul><ul><li>Durability —Ability to survive repeated usage over time </li></ul></ul>
    23. 23. Characteristics and Functions of Money <ul><li>Characteristics of Money </li></ul><ul><ul><li>Difficulty in Counterfeiting —Currency should be hard for anyone, other than the government, to produce </li></ul></ul><ul><ul><li>Stability —Should maintain a relatively stable value </li></ul></ul>
    24. 24. Characteristics and Functions of Money <ul><li>Basic Functions of Money </li></ul>
    25. 25. The Money Supply <ul><li>The money supply consists of coins and currency as well as financial assets that also serve as a medium of exchange (traveler’s checks, bank checking accounts, other so-called demand deposit accounts, and credit union share draft accounts) </li></ul>
    26. 26. <ul><li>Components of M1 </li></ul>
    27. 27. The Money Supply <ul><li>Another, broader definition of the money supply is the M2 </li></ul><ul><li>M2 —includes the M1 plus a number of other financial assets that are almost as liquid as cash, but do not serve directly as a medium of exchange </li></ul><ul><ul><li>These assets include various savings accounts, certificates of deposit and money market mutual funds </li></ul></ul>
    28. 28. Why Organizations Need Money <ul><li>Organizations require funds to run day-to-day operations, compensate employees and hire new ones, pay for inventory, make interest payments on loans, pay dividends to shareholders, and purchase property, facilities, and equipment </li></ul>
    29. 29. Sources of Funds <ul><li>Debt capital —funds obtained through borrowing. </li></ul><ul><li>Equity capital —funds provided by the firm’s owners when they reinvest earnings, make additional contributions, or issue stock to investors. </li></ul>
    30. 30. <ul><li>Debt and Equity Capital: Two Basic Sources of Funds </li></ul>
    31. 31. <ul><li>Comparison of Debt and Equity Capital </li></ul>
    32. 32. Sources of Funds <ul><li>Short-Term Sources of Funds </li></ul><ul><ul><li>Short-term sources of funds are repaid within one year </li></ul></ul><ul><ul><li>Major sources of short-term funds include: </li></ul></ul><ul><ul><ul><li>Trade credit </li></ul></ul></ul><ul><ul><ul><li>Short-term loans </li></ul></ul></ul><ul><ul><ul><li>Commercial paper </li></ul></ul></ul>
    33. 33. Sources of Funds <ul><li>Long-term Sources of Funds </li></ul><ul><ul><li>Long-term sources are repaid over many years </li></ul></ul><ul><ul><li>Three common sources of long-term funds are: </li></ul></ul><ul><ul><ul><li>Long-term loans </li></ul></ul></ul><ul><ul><ul><li>Bonds —certificates of indebtedness sold to raise long-term funds for a corporation or government agency </li></ul></ul></ul><ul><ul><ul><li>Equity financing —acquired by selling stock in the company or reinvesting company earnings </li></ul></ul></ul>
    34. 34. Sources of Funds <ul><li>Long term Sources of Funds </li></ul><ul><ul><li>Public Sale of Stock and Bonds </li></ul></ul><ul><ul><ul><li>Sales of stocks and bonds represent a major source of funds for corporations </li></ul></ul></ul><ul><ul><ul><li>They provide cash inflows for the issuing firm and either a share in its ownership or a specified rate of interest and repayment at a stated time </li></ul></ul></ul>
    35. 35. Sources of Funds <ul><li>Long term Sources of Funds </li></ul><ul><ul><li>Private Placements —stock or bond issues sold to a small, select group of large investors such as pension funds and life insurance companies </li></ul></ul><ul><ul><li>Venture Capitalists —raise money from wealthy individuals and institutional investors and invest these funds in promising firms </li></ul></ul>
    36. 36. Financial Leverage <ul><ul><ul><li>Leverage—technique of increasing the rate of return on an investment by financing it with borrowed funds </li></ul></ul></ul><ul><ul><ul><ul><li>The key to managing leverage is ensuring that the company’s earnings remain larger than its interest payments, which increases the leverage on the rate of return on shareholders’ investment </li></ul></ul></ul></ul>
    37. 37. Table 14.2 How Leverage Works
    38. 38. The Financial System and Financial Institutions <ul><li>Financial System —process by which funds are transferred from savers to users. </li></ul>
    39. 39. <ul><li>Overview of the Financial System and Its Components </li></ul>
    40. 40. The Financial System and Financial Institutions <ul><li>Depository Institutions —financial institutions that accept deposits that can be converted into cash demand. </li></ul>
    41. 41. The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>Largest and probably most important financial institutions </li></ul></ul><ul><ul><li>Approximately 7,900 commercial banks in the U.S. </li></ul></ul><ul><ul><li>Total Assets: $7.1 trillion </li></ul></ul><ul><ul><li>Down from over 18,000 in 1985 </li></ul></ul>
    42. 42. The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>How Banks Operate </li></ul></ul><ul><ul><ul><li>Banks raise funds by offering checking and savings accounts </li></ul></ul></ul><ul><ul><ul><li>They then pool these deposits and lend most of them out to consumers and businesses </li></ul></ul></ul>
    43. 43. <ul><li>Types of Outstanding Bank Loans </li></ul>
    44. 44. The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>Electronic Banking </li></ul></ul><ul><ul><li>More and more funds are moving through Elections Funds Transfer Systems (EFTS) </li></ul></ul><ul><ul><li>EFTS —computerized systems for conducting financial transactions over electronic links </li></ul></ul><ul><ul><ul><li>Includes automatic teller machines (ATMs), debit or check cards, and direct deposit of paychecks </li></ul></ul></ul>
    45. 45. The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>Online Banking </li></ul></ul><ul><ul><ul><li>Regular online bank users now 1 out of every 5 U.S. households </li></ul></ul></ul><ul><ul><ul><li>Projected to grow to 1 in 3 households by 2010 </li></ul></ul></ul><ul><ul><ul><li>Two types of online banks: </li></ul></ul></ul><ul><ul><ul><ul><li>Internet-only banks </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Traditional bricks and mortar banks with Web sites </li></ul></ul></ul></ul>
    46. 46. The Financial System and Financial Institutions <ul><li>Bank Regulation </li></ul><ul><ul><li>Who Regulates Banks? </li></ul></ul><ul><ul><ul><li>State chartered banks are regulated by the appropriate state banking authorities </li></ul></ul></ul><ul><ul><ul><li>Most are federally insured, and also subject to FDIC regulation </li></ul></ul></ul><ul><ul><ul><li>Federally chartered banks are regulated by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency </li></ul></ul></ul>
    47. 47. The Financial System and Financial Institutions <ul><li>Bank Regulation </li></ul><ul><ul><li>Federal Deposit Insurance </li></ul></ul><ul><ul><ul><li>Deposits are insured by the FDIC up to a set amount – currently $100,000 </li></ul></ul></ul><ul><ul><ul><li>Federal deposit insurance was enacted by the Banking Act of 1933 to restore public confidence in the banking system </li></ul></ul></ul>
    48. 48. Other Financial Institutions <ul><li>Savings Banks and Credit Unions </li></ul><ul><ul><li>Savings banks and credit unions are also important financial institutions </li></ul></ul><ul><ul><li>They offer many of the same services as commercial banks </li></ul></ul><ul><ul><li>A series of crises cause many of the predecessors of savings banks to merge with financially stronger institutions </li></ul></ul><ul><ul><li>Credit Unions are cooperative financial institutions, owned by their depositors, all of whom are members </li></ul></ul>
    49. 49. Other Financial Institutions <ul><li>Nondepository Financial Institutions </li></ul><ul><ul><li>Accept funds from businesses and households, much of which they then invest </li></ul></ul><ul><ul><ul><li>Insurance Companies </li></ul></ul></ul><ul><ul><ul><li>Pension Funds </li></ul></ul></ul><ul><ul><ul><li>Finance Companies </li></ul></ul></ul>
    50. 50. The Federal Reserve System <ul><li>Central bank of the United States. Has four basic responsibilities: </li></ul><ul><ul><li>Regulating commercial banks </li></ul></ul><ul><ul><li>Performing banking-related activities for the U.S. Treasury </li></ul></ul><ul><ul><li>Servicing member banks </li></ul></ul><ul><ul><li>Monetary policy </li></ul></ul>
    51. 51. The Federal Reserve System <ul><li>Organization of the Federal Reserve System </li></ul><ul><ul><li>Nation is divided into 12 federal reserve districts, each with its own Federal Reserve Bank </li></ul></ul><ul><ul><li>Each district Bank supplies banks within its district with currency and facilitates the clearing of checks </li></ul></ul><ul><ul><li>District banks are run by a nine-member board of directors </li></ul></ul>
    52. 52. The Federal Reserve System <ul><li>Governing body of the Fed is the Board of Governors </li></ul><ul><ul><li>The board consists of seven members, appointed by the president and confirmed by the Senate </li></ul></ul><ul><ul><li>The Fed is designed to be politically independent </li></ul></ul><ul><ul><ul><li>Fed Governors are appointed to 14-year terms – staggered so that a president could not appoint a majority during a single term </li></ul></ul></ul><ul><ul><li>Federal Open Markets Committee (FOMC) </li></ul></ul>
    53. 53. The Federal Reserve System <ul><li>Check Clearing and the Fed </li></ul><ul><ul><li>Clearing of a check —process by which funds are transferred from the Check writer to the recipient </li></ul></ul><ul><ul><li>If both the writer in the recipient have accounts at the same bank, a check will clear in house </li></ul></ul><ul><ul><li>If both have accounts at banks in the same town, the two banks may clear the check directly with one another </li></ul></ul><ul><ul><li>If one has an account with a bank in a state different than the other, the check will likely be cleared through the Federal Reserve system </li></ul></ul>
    54. 54. The Federal Reserve System <ul><li>Monetary Policy </li></ul><ul><ul><li>Monetary Policy —managing the growth rate in the supply of money and credit, usually through the use of interest rates. </li></ul></ul><ul><ul><li>Fed’s job is to ensure that the money supply grows at an appropriate rate allowing the economy to expand and inflation to remain in check </li></ul></ul>
    55. 55. The Federal Reserve System <ul><li>Monetary Policy </li></ul><ul><ul><li>If money supply grows too slowly economic growth will slow, unemployment will increase, and the risk of recession will increase </li></ul></ul><ul><ul><li>If the money supply grows to rapidly, inflationary pressures build </li></ul></ul>
    56. 56. <ul><li>Federal Reserve Tools </li></ul>
    57. 57. U.S. Financial Institutions: A Global Perspective <ul><li>Major U.S. banks have extensive international operations, with offices that lend money and accept deposits from customers worldwide </li></ul><ul><li>Only three of the 20 largest banks are U.S. institutions </li></ul><ul><ul><li>The others are based in France, Germany, Holland, Japan, Switzerland, and the UK </li></ul></ul>
    58. 58. Study Questions <ul><li>1. Financial professionals rarely become CEOs of major corporations. </li></ul><ul><li>2. Virtually all financial decisions involve a tradeoff between risk and return. </li></ul><ul><li>3. “Risk” is the uncertainty regarding the gain or loss on an investment. </li></ul><ul><li>4. Investments that promise the highest returns tend to be the most risky. </li></ul><ul><li>5. Sharp fluctuations in the value of a currency rarely have any significant impact on national economies. </li></ul>
    59. 59. Study Questions <ul><li>6. “M1” includes currency plus financial assets that serve as a medium of exchange. </li></ul><ul><li>7. Currency accounts for the largest portion of M1. </li></ul><ul><li>8. The amount of outstanding credit card debt in the U.S. has tripled during the past twenty years. </li></ul><ul><li>9. To qualify as an M1 component, a financial asset must serve as a medium of exchange. </li></ul><ul><li>10. Mutual fund shares are more “liquid” than checking accounts. </li></ul>
    60. 60. Study Questions <ul><li>11. Treasury bills are short-term securities issued by the U.S. government. </li></ul><ul><li>12. Equity capital represents funds obtained from banks and other lenders. </li></ul><ul><li>13. When venture capitalists invest in a start-up business, they almost always contribute debt capital rather than equity capital. </li></ul><ul><li>14. Debt capital is always preferable to equity capital for a corporation. </li></ul><ul><li>15. Profits are a source of equity capital. </li></ul>
    61. 61. Study Questions <ul><li>16. Firms often rely on short-term sources to pay for large, permanent assets, such as buildings. </li></ul><ul><li>17. A private placement is the sale of a new security issue directly to a large investor such as a life insurance company. </li></ul><ul><li>18. Whenever a company borrows, it creates leverage. </li></ul><ul><li>19. U.S. households save more, as a percentage of their incomes, than do citizens of most other developed countries. </li></ul><ul><li>20. A key feature of bank regulation in the U.S. is federal deposit insurance. </li></ul>
    62. 62. Study Questions <ul><li>21. Underwriting is the process used by insurance companies to determine who to insure and what to charge. </li></ul><ul><li>22. Credit union deposits are insured by private companies, not by a federal agency. </li></ul><ul><li>23. Most banks are federally chartered and, as a result, regulated by federal banking agencies. </li></ul><ul><li>24. The Comptroller of the Currency regulates both federally and state chartered banks. </li></ul><ul><li>25. If the money supply grows too rapidly, inflationary pressures will begin to build. </li></ul>
    63. 63. Study Questions <ul><li>26. Raising the reserve requirement tends to increase the supply of money, lowering interest rates. </li></ul><ul><li>27. When the Fed buys government securities, it adds to the supply of money and thus lowers interest rates. T </li></ul><ul><li>28. There are 15 Federal Reserve districts. </li></ul><ul><li>29. The Fed uses “open market operations” as a monetary policy tool more often than changes in the reserve requirement. </li></ul>
    64. 64. Chapter 18 Financing and Investing through Securities Markets
    65. 65. <ul><li>Distinguish between the primary market for securities and the secondary market </li></ul><ul><li>Compare money market instruments, bonds, and common stock, and explain why particular investors might prefer each type of security </li></ul><ul><li>Identify the five basic objectives of investors and the types of securities most likely to help them reach each objective </li></ul><ul><li>Explain the process of buying or selling a security listed on an organized securities exchange </li></ul>LEARNING GOALS
    66. 66. Securities <ul><li>Types of Bonds </li></ul><ul><ul><li>Secured Bond —bond backed by specific pledge of a company’s assets. </li></ul></ul><ul><ul><li>Debenture —bond backed by the reputation of the issuer rather than by a specific pledge of a company’s assets. </li></ul></ul>
    67. 67. Securities <ul><li>Types of Bonds </li></ul><ul><ul><li>Government Bonds issued by U.S. Treasury </li></ul></ul><ul><ul><li>Municipal Bonds are those issued by governments </li></ul></ul><ul><ul><ul><li>Revenue bond is a bond whose proceeds are to be used to pay for a project that will produce revenue (e.g., a toll bridge) </li></ul></ul></ul><ul><ul><ul><li>General obligation bond is a bond whose proceeds are used to pay for a non-revenue producing project (e.g., a fire station) </li></ul></ul></ul>
    68. 68. Securities <ul><li>Stock </li></ul><ul><ul><li>Common Stock </li></ul></ul><ul><ul><ul><li>Share of ownership in a company. </li></ul></ul></ul><ul><ul><ul><li>Common stock owners can vote on major company decisions </li></ul></ul></ul><ul><ul><ul><li>They expect to receive cash dividends and to benefit from capital gains. (Often no dividends are issued.) </li></ul></ul></ul><ul><ul><li>Preferred Stock </li></ul></ul><ul><ul><ul><li>Stock whose holders receive preference in the payment of dividends </li></ul></ul></ul><ul><ul><ul><li>Seldom confers voting rights </li></ul></ul></ul><ul><ul><ul><li>Dividends are fixed </li></ul></ul></ul>
    69. 69. Securities Exchanges <ul><li>Stock Exchange —centralized marketplace where primarily common stock are traded. </li></ul><ul><ul><li>Stock exchanges are secondary markets, selling securities which have already been issued by firms and sold in the primary market </li></ul></ul>
    70. 70. Securities Exchanges <ul><li>The New York Stock Exchange </li></ul><ul><ul><li>NYSE (Big Board)—the largest, and probably the most famous, stock market in the world </li></ul></ul><ul><ul><li>Also one of the oldest, having been founded in 1792 </li></ul></ul>
    71. 71. Securities Exchanges <ul><li>The NASDAQ Stock Market </li></ul><ul><ul><li>NASDAQ stock market—second-largest stock market in U.S., trading stock issues of firms that are typically smaller, less well-known than those on the NSYE </li></ul></ul><ul><ul><li>Unlike trading on the NSYE, which takes place face-to-face or the trading floor, trading on the NASDAQ takes place on an electronic network </li></ul></ul><ul><ul><li>World’s largest Intranet </li></ul></ul>
    72. 72. Buying and Selling Securities <ul><li>Brokerage Firm —financial intermediary that buys and sells securities for individual and institutional investors. </li></ul>
    73. 73. Costs of Trading <ul><li>Direct Investing </li></ul><ul><ul><li>A growing number of corporations offer investors a direct way of purchasing stock through dividend reinvestment plans (DRIPs) </li></ul></ul><ul><ul><li>With DRIPs, the company uses the dividends paid on shares owned by an investor to buy additional shares of the company stock -- bypassing brokers -- and their fees </li></ul></ul><ul><ul><li>Another form of direct investing is the stock purchase program </li></ul></ul>
    74. 74. Stock Indexes <ul><li>Stock indexes reflect the general activity of the stock market </li></ul><ul><li>The most common indices include the Dow Jones Average (Dow), the Standard & Poor’s 500, and the NASDAQ composite </li></ul><ul><li>Foreign indices include the DAX (Germany), the FT-100 or “Footsie” (London), and the Nikkei (Tokyo) </li></ul>
    75. 75. Mutual Funds <ul><li>Mutual Fund —financial institution that pools investment money from purchases of its shares and uses the money to acquire diversified portfolios of securities consistent with the fund’s investment objective. </li></ul><ul><ul><li>Investors who buy shares of a mutual fund become part owners of a large number of securities, thereby lessening their individual risk </li></ul></ul>
    76. 76. <ul><li>Distribution of Mutual Fund Assets by Type of Fund </li></ul>
    77. 77. Study Questions <ul><li>1. When a company first sells stock to the public, it is selling stock in the primary securities market. </li></ul><ul><li>2. Advertisements announcing stock and bond offerings, which appear almost daily in financial publications, are referred to as “bulletins.” </li></ul><ul><li>3. Most new corporate and municipal securities issues are sold through investment banking firms. </li></ul><ul><li>4. The New York Stock Exchange is a secondary market. </li></ul><ul><li>5. Treasury bills and commercial paper are both money market instruments. </li></ul><ul><li>6. Money market instruments are generally low risk securities. </li></ul>
    78. 78. Study Questions <ul><li>7. Most federal securities legislation came about as a result of the 1929 stock market crash. </li></ul><ul><li>8. As market interest rates rise, bond prices fall. </li></ul><ul><li>9. The fundamental reason to invest in a common stock is the belief that, as the given firm grows and prospers, the value of its common stock will rise. </li></ul><ul><li>10. While a number of variables cause stock prices to fluctuate in the short run, in the long run stock prices tend to be closely correlated with a company’s profits. </li></ul><ul><li>11. Institutional investors include life insurance companies, mutual funds, and pension funds. </li></ul><ul><li>12. For most investors, current income is the main motive for investing. </li></ul>
    79. 79. Study Questions <ul><li>13. The percentage of Americans who own stocks has risen sharply in recent years. </li></ul><ul><li>14. The dividend yield on a firm’s common stock usually exceeds the rate of interest on the firm’s bonds. </li></ul><ul><li>15. The key investment objective of a young worker who is investing for retirement purposes should be “liquidity.” </li></ul><ul><li>16. In terms of the dollar value of securities traded, the NYSE is the largest stock market in the world. </li></ul><ul><li>17. The NASDAQ stock market is actually a computerized communications network. </li></ul><ul><li>18. Stock trading is normally done in “round lots” of 1,000 shares. </li></ul>
    80. 80. Study Questions <ul><li>19. NASDAQ-listed companies tend to be smaller and lesser known that NYSE companies. </li></ul><ul><li>20. The Tokyo stock exchange is the largest outside of the U.S. </li></ul><ul><li>21. A “market order” is a stock purchase order to buy the given security at the best possible price. </li></ul><ul><li>22. If a stock’s current price is $50 per share, its earnings are $4 per share, and it is paying a dividend of $1.50 per share, then its P/E ratio is 12.5. </li></ul><ul><li>23. If a stock’s current price is $40 per share, its earnings are $2 per share, and it is paying a dividend of $1 per share, then its dividend yield is 5%. </li></ul><ul><li>24. A bond’s price is quoted as the percentage of the bond’s face value. </li></ul>
    81. 81. Study Questions <ul><li>25. A stock that has a P/E ratio of 14, earnings per share of $5, and an annual dividend of $2 per share must be selling currently for $42 per share. </li></ul><ul><li>26. Which of the following stocks has remained a component of the DJIA ever since that stock index was first calculated in the late 1800s—GM, AT&T or GE? </li></ul><ul><li>27. Which stock market index—the DJIA or the S&P 500—is considered the best measure of overall stock market activity? </li></ul>
    82. 82. Study Questions <ul><li>28. A key feature that makes mutual funds attractive is “diversification.” </li></ul><ul><li>29. A mutual fund pools investment money from purchasers of its shares and then uses those funds to acquire a diversified portfolio of securities. </li></ul><ul><li>30. A mutual fund’s net asset value is the market value of the securities owned by the fund divided by the number of outstanding shares. </li></ul><ul><li>31. The federal government’s approach to securities regulation can be summed up by the phrase “full and fair disclosure.” </li></ul>
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