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Download MGT1115-Lecture1.ppt

  1. 1. Overview of Finance <ul><li>What is finance? </li></ul><ul><li>What are the major fields within finance? </li></ul><ul><li>What are typical jobs and career paths in finance? </li></ul>
  2. 2. What is Finance? <ul><li>It’s the study of how to access and allocate a scarce resource, money. </li></ul><ul><li>Financial decisions are cost-benefit decisions that involve RISK and TIME </li></ul>
  3. 3. Why study finance? 5 Reasons <ul><li>1. To manage your personal resources </li></ul><ul><ul><li>“A fool and his money…” </li></ul></ul><ul><ul><li>You have decided to get a car. Lease or buy? </li></ul></ul><ul><ul><li>You are choosing between several investment alternatives </li></ul></ul><ul><ul><li>You are discussing mortgage alternatives with a banker. </li></ul></ul>
  4. 4. Why study finance? 5 Reasons <ul><li>2. To deal with the world of business </li></ul><ul><ul><li>Few business decisions do not have a financial aspect </li></ul></ul><ul><ul><li>Need to know terminology, concepts, techniques </li></ul></ul><ul><ul><li>Do the revenue and cost forecasts justify the investment of scarce resources into a major project? </li></ul></ul>
  5. 5. Why study finance? 5 Reasons <ul><li>3. To pursue interesting and rewarding career opportunities </li></ul><ul><ul><li>We will return to this one shortly </li></ul></ul>
  6. 6. Why study finance? 5 Reasons <ul><li>4. To make informed public choices as a citizen </li></ul><ul><ul><li>Should you vote for a candidate who wants to </li></ul></ul><ul><ul><ul><li>Privatize Social Security? </li></ul></ul></ul><ul><ul><ul><li>Declare a sales tax holiday in Massachusetts? </li></ul></ul></ul><ul><ul><ul><li>Allow businesses to provide less detail on financial statements? </li></ul></ul></ul><ul><ul><ul><li>Allow individuals to buy shares of stock with borrowed money? </li></ul></ul></ul>
  7. 7. Why study finance? 5 Reasons <ul><li>5. It’s brain candy! </li></ul><ul><ul><li>Major branch of applied economics </li></ul></ul><ul><ul><li>Nobel Prizes </li></ul></ul><ul><ul><li>Helps foster understanding of why people, corporations, and governments act the way they do </li></ul></ul>
  8. 8. Major Fields in Finance <ul><li>Corporate Financial Management </li></ul><ul><li>Banking </li></ul><ul><li>Investments </li></ul><ul><li>Insurance </li></ul><ul><li>Real Estate </li></ul>
  9. 9. Fields and Careers: Corporate Financial Management <ul><li>Large corporations often have training programs which rotate key employees through a variety of functional areas, including finance </li></ul><ul><li>Typical positions with significant finance content: </li></ul><ul><ul><li>Budget analyst </li></ul></ul><ul><ul><li>Accounts receivable manager </li></ul></ul><ul><ul><li>Treasurer </li></ul></ul><ul><ul><li>Investor relations </li></ul></ul><ul><ul><li>CFO </li></ul></ul>
  10. 10. Fields and Careers: Banking <ul><li>Banking has numerous subfields: </li></ul><ul><ul><li>Retail banking </li></ul></ul><ul><ul><ul><li>Branch manager, loan officer </li></ul></ul></ul><ul><ul><li>Commercial lending </li></ul></ul><ul><ul><ul><li>Financial analyst, loan officer </li></ul></ul></ul><ul><ul><li>Consumer credit </li></ul></ul><ul><ul><ul><li>Customer service, credit scoring, financial advising </li></ul></ul></ul><ul><ul><li>Mortgage banking </li></ul></ul><ul><ul><ul><li>Mortgage originator, mortgage broker </li></ul></ul></ul>
  11. 11. Fields and Careers: Investments <ul><li>Investment management subfields: </li></ul><ul><ul><li>Securities brokerage </li></ul></ul><ul><ul><ul><li>stockbroker </li></ul></ul></ul><ul><ul><li>Securities analysis </li></ul></ul><ul><ul><ul><li>equity analyst, bond analyst </li></ul></ul></ul><ul><ul><li>Portfolio management </li></ul></ul><ul><ul><ul><li>fund manager, trust advisor, pension fund manager </li></ul></ul></ul><ul><ul><li>Financial planning </li></ul></ul><ul><ul><ul><li>financial advising </li></ul></ul></ul><ul><ul><li>Investment banking </li></ul></ul>
  12. 12. Fields and Careers: Insurance <ul><li>Insurance subfields: </li></ul><ul><ul><li>Property and Casualty </li></ul></ul><ul><ul><li>Life </li></ul></ul><ul><ul><li>Health </li></ul></ul><ul><ul><li>Risk Management </li></ul></ul>
  13. 13. Fields and Careers: Real Estate <ul><li>Real estate subfields: </li></ul><ul><ul><li>Brokerage </li></ul></ul><ul><ul><ul><li>Commercial, Residential </li></ul></ul></ul><ul><ul><li>Development </li></ul></ul><ul><ul><li>Property management </li></ul></ul><ul><ul><li>Real Estate Investment Trust (REIT) </li></ul></ul>
  14. 14. Outline <ul><li>The U.S. Financial System </li></ul><ul><li>The Functions of the Federal Reserve System </li></ul>
  15. 15. The U.S. Financial System <ul><li>Technology has changed the U.S. financial system profoundly. </li></ul><ul><li>Ex. In 1914, you did all banking business at the bank, needed an appointment, and were expected to be properly attired. In 2001, you can handle transactions over the internet at 3 AM wearing pajamas! </li></ul>
  16. 16. Deposit Institutions <ul><ul><li>Accept deposits from customers or members and offer checking and savings accounts, loans, and other banking services. </li></ul></ul><ul><li>Commercial Banks </li></ul><ul><li>Thrifts </li></ul><ul><li>Credit Unions </li></ul>
  17. 17. Nondeposit Institutions <ul><li>Offer specific financial services: </li></ul><ul><li>Insurance Companies </li></ul><ul><li>Pension Funds </li></ul><ul><li>Finance Companies </li></ul><ul><li>Brokerage Firms </li></ul>
  18. 18. Banking Services: Checking and Savings, Credit/Debit Cards <ul><li>Checks: </li></ul><ul><ul><li>Written orders that tell the user's bank to pay specific amounts to particular individuals or businesses </li></ul></ul><ul><ul><li>Also known as demand deposits ; no interest </li></ul></ul><ul><ul><li>Debit cards function as checks </li></ul></ul><ul><li>Savings Accounts: </li></ul><ul><ul><li>Nondemand deposits; interest bearing </li></ul></ul><ul><li>Credit Cards: </li></ul><ul><li>buy now and repay the loaned amount plus interest </li></ul>
  19. 19. Loans <ul><li>Banks are a major source of funds for individuals and businesses of all sizes </li></ul><ul><li>Secured Loans: </li></ul><ul><ul><li>Customer puts up property as collateral </li></ul></ul><ul><li>Unsecured Loans or Lines of Credit: </li></ul><ul><ul><li>Backed by customers reputation and promise to pay </li></ul></ul>
  20. 20. Banking Transaction Costs $1.07 $0.29 $0.27 $0.04 Live Teller Debit Card ATM Internet $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20
  21. 21. Deregulation & Competition <ul><li>1980 Depository Institutions and Monetary Control Act </li></ul><ul><ul><li>Blurred lines between banks and other financial institutions </li></ul></ul><ul><ul><li>U.S. banks merged/got taken over </li></ul></ul><ul><li>1999 Financial Services Modernization Act </li></ul><ul><ul><li>Removed barriers between investment activities and banks </li></ul></ul><ul><ul><li>May impose upon individuals privacy </li></ul></ul><ul><li>Community Banks </li></ul><ul><li>Interstate Banking </li></ul>
  22. 22. Bank Safety & Regulation <ul><li>Federal Deposit Insurance Corporation (FDIC) </li></ul><ul><ul><li>$100,000 limit per account </li></ul></ul><ul><ul><li>Established 1933 </li></ul></ul><ul><ul><li>Other deposit institutions have own insurance programs </li></ul></ul><ul><ul><li>Insurance funded by premiums that each bank pays </li></ul></ul>
  23. 23. The Functions of the Federal Reserve System <ul><li>Created in 1913/1914—established system of 12 district banks </li></ul><ul><li>Commonly known as “the Fed” </li></ul><ul><li>Most powerful financial institution in the U.S. </li></ul><ul><li>Serves as central bank </li></ul><ul><li>Three main functions: </li></ul><ul><ul><li>Influencing the U.S. money supply </li></ul></ul><ul><ul><li>Supplying currency </li></ul></ul><ul><ul><li>Clearing checks </li></ul></ul>
  24. 24. Influencing the U.S. Money Supply <ul><li>Changes in the Money Supply can have a major impact on economic conditions. Here are measures: </li></ul><ul><li>Currency: </li></ul><ul><ul><li>Bills and coins that make up a country's money stock </li></ul></ul><ul><li>Demand Deposits: </li></ul><ul><ul><li>Money that customers can use at any time, such as checking accounts </li></ul></ul><ul><li>Time Deposits: </li></ul><ul><ul><li>Bank accounts that pay interest and require some advance notice before money can be withdrawn </li></ul></ul>
  25. 25. How the Money Supply Is Measured <ul><li>M1: </li></ul><ul><ul><li>Consists of currency, demand deposits, and NOW accounts </li></ul></ul><ul><li>M2: </li></ul><ul><ul><li>A broader measure; consists of M1 plus savings and small-time deposits </li></ul></ul><ul><li>M3: </li></ul><ul><ul><li>The broadest measure of the money supply; consists of M1 and M2 plus large time deposits and other restricted deposits </li></ul></ul>The most commonly used measure
  26. 26. The Total Money Supply Oct. ‘01: M1 = $1,157 M2 = $$5,400 M3 = $7,909
  27. 27. Tools for Influencing the Money Supply <ul><li>Reserve Requirement: </li></ul><ul><ul><li>Percentage of a bank's deposit that must be set aside an on which banks may not earn interest (Oct ‘01: 10%) </li></ul></ul><ul><li>Discount Rate: </li></ul><ul><ul><li>Interest rate the Federal Reserve charges on loans to commercial banks </li></ul></ul><ul><li>Prime Interest Rate (Prime): </li></ul><ul><ul><li>Lowest interest rate banks offer on short‑term loans to preferred borrowers </li></ul></ul><ul><li>Open-Market Operations: </li></ul><ul><ul><li>Federal Reserve’s purchase or sale of government bonds on the open market </li></ul></ul><ul><li>Selective Credit Controls: </li></ul><ul><ul><li>Federal Reserve's power to set credit terms on various types of loans </li></ul></ul>
  28. 28. Interest Rates: 1985-2001
  29. 29. Influencing the Money Supply To INCREASE money supply To DECREASE money supply Decrease Lower Buy Fewer Increase Raise Sell More Reserve Requirements Discount Rate Open-Market Operations Selective Credit Controls
  30. 30. Supplying Currency & Clearing Checks <ul><li>Regional Federal Reserve Banks provide member banks with adequate amounts of currency (Federal Reserve Notes) throughout the year </li></ul><ul><li>Money on deposit in banks or other financial institutions is recorded in computerized ledger entries </li></ul><ul><li>The Fed acts as clearing house for the checks </li></ul>
  31. 31. How the Fed Clears Checks Ms. Rich lives in Boston, where she has a checking account. While vacationing in Dallas, she buys some gifts and pays for them by check. Dallas Store deposits her check into its account at a Dallas bank. Store’s Dallas Bank deposits the check for credit in its account at the Federal Reserve Bank of Dallas. Federal Reserve Bank of Dallas sends the check to the Federal Reserve bank of Boston for collection. Federal Reserve Bank of Boston forwards the check to Ms. Rich’s Boston bank. Ms. Rich’s Boston Bank deducts the amount of the check from Ms. Rich’s bank account. Boston Bank authorizes the Federal Reserve Bank of Boston to deduct the amount of the check from its deposit account with the Reserve Bank. Federal Reserve Bank of Boston pays the Federal Reserve Bank of Dallas. Federal Reserve Bank of Dallas Credits the deposit account of the Dallas store’s bank. Store’s Dallas Bank Credits the storekeeper’s account