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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>Cha...
Chapter 17 Financial Management and Institutions
Bizness Quote A bank is a place that will lend you money if you can prove that you don’t need it. Bob Hope
Price College of Business  . . . Other learning opportunities <ul><li>FIN 4413 Commercial Banking </li></ul><ul><li>FIN 47...
Current Events <ul><li>NYT:  “Merck to Offer Big Bonuses to Executives If It Is Taken Over” </li></ul><ul><li>WSJ:  “Wal-M...
Key Job Role:  Internal Auditor <ul><li>The “police squad” of large corporations. </li></ul><ul><li>Principal responsibili...
Company Profile The Cheesecake Factory Incorporated
Cheesecake Factory <ul><li>Evelyn and Oscar Overton began making cheesecakes in their Detroit basement in the 1950s. </li>...
Cheesecake Factory <ul><li>The Overtons continued to open other restaurants in the Los Angeles area over the next several ...
Cheesecake Factory <ul><li>Key competitors:  Chili’s, Ruby Tuesday, Applebee’s, and Outback Steakhouse. </li></ul><ul><li>...
Cheesecake Factory <ul><li>Key strength:  Same-store sales have continued to increase in recent years. </li></ul><ul><li>K...
Final Exam Info <ul><li>Bring a scantron!!  (and one for your neighbor) </li></ul><ul><li>Basics:  Monday, December 13th, ...
Don't Be A Line Victim!!! 89 . . . 79 . . . 69 . . . 59 are the guaranteed cutoffs . . . .
Textbook Tidbits:  Chapter 17 <ul><li>“ Money is power, freedom, a cushion, the root of all evil, the sum of all blessings...
Textbook Tidbits:  Chapter 17 <ul><li>American consumers have more than one billion credit cards </li></ul><ul><li>Benchma...
<ul><li>Identify the functions performed by a firm’s financial managers </li></ul><ul><li>Identify the functions of money ...
<ul><li>Finance:  business function of planning, obtaining, and managing a company’s funds in order to accomplish its obje...
Corporate Financial Managers <ul><li>Chief financial officer —top finance executive of a corporation; usually reports dire...
<ul><li>Organizational Structure  of the Finance Function </li></ul>
FINANCIAL PLAN <ul><ul><li>A document specifying the funds a firm will need for a period of time, the timing  of inflows a...
Characteristics and Functions of Money <ul><li>Characteristics of Money </li></ul><ul><ul><li>Money —anything generally ac...
Characteristics and Functions of Money <ul><li>Characteristics of Money </li></ul><ul><ul><li>Divisibility —Ability to be ...
Characteristics and Functions of Money <ul><li>Characteristics of Money </li></ul><ul><ul><li>Difficulty in Counterfeiting...
Characteristics and Functions of Money <ul><li>Basic Functions of Money </li></ul>
The Money Supply <ul><li>The money supply consists of coins and currency as well as financial assets that also serve as a ...
<ul><li>Components of M1 </li></ul>
The Money Supply <ul><li>Another, broader definition of the money supply is the M2 </li></ul><ul><li>M2 —includes the M1 p...
Why Organizations Need Money <ul><li>Organizations require funds to run day-to-day operations, compensate employees and hi...
Sources of Funds <ul><li>Debt capital —funds obtained through borrowing. </li></ul><ul><li>Equity capital —funds provided ...
<ul><li>Debt and Equity Capital: Two Basic Sources of Funds </li></ul>
<ul><li>Comparison of Debt and Equity Capital </li></ul>
Sources of Funds <ul><li>Short-Term Sources of Funds </li></ul><ul><ul><li>Short-term sources of funds are repaid within o...
Sources of Funds <ul><li>Long-term Sources of Funds </li></ul><ul><ul><li>Long-term sources are repaid over many years </l...
Sources of Funds <ul><li>Long term Sources of Funds </li></ul><ul><ul><li>Public Sale of Stock and Bonds </li></ul></ul><u...
Sources of Funds <ul><li>Long term Sources of Funds </li></ul><ul><ul><li>Private Placements —stock or bond issues sold to...
Financial Leverage <ul><ul><ul><li>Leverage—technique of increasing the rate of return on an investment by financing it wi...
Table 14.2   How Leverage Works
The Financial System and Financial Institutions <ul><li>Financial System —process by which funds are transferred from save...
<ul><li>Overview of the Financial System and Its Components </li></ul>
The Financial System and Financial Institutions <ul><li>Depository Institutions —financial institutions that accept deposi...
The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>Largest and probably most i...
The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>How Banks Operate </li></ul...
<ul><li>Types of Outstanding Bank Loans </li></ul>
The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>Electronic Banking </li></u...
The Financial System and Financial Institutions <ul><li>Commercial Banks </li></ul><ul><ul><li>Online Banking </li></ul></...
The Financial System and Financial Institutions <ul><li>Bank Regulation </li></ul><ul><ul><li>Who Regulates Banks? </li></...
The Financial System and Financial Institutions <ul><li>Bank Regulation </li></ul><ul><ul><li>Federal Deposit Insurance </...
Other Financial Institutions <ul><li>Savings Banks and Credit Unions </li></ul><ul><ul><li>Savings banks and credit unions...
Other Financial Institutions <ul><li>Nondepository Financial Institutions </li></ul><ul><ul><li>Accept funds from business...
The Federal Reserve System <ul><li>Central bank of the United States. Has four basic responsibilities: </li></ul><ul><ul><...
The Federal Reserve System <ul><li>Organization of the Federal Reserve System </li></ul><ul><ul><li>Nation is divided into...
The Federal Reserve System <ul><li>Governing body of the Fed is the Board of Governors </li></ul><ul><ul><li>The board con...
The Federal Reserve System <ul><li>Check Clearing and the Fed </li></ul><ul><ul><li>Clearing of a check —process by which ...
The Federal Reserve System <ul><li>Monetary Policy </li></ul><ul><ul><li>Monetary Policy —managing the growth rate in the ...
The Federal Reserve System <ul><li>Monetary Policy </li></ul><ul><ul><li>If money supply grows too slowly economic growth ...
<ul><li>Federal Reserve Tools </li></ul>
U.S. Financial Institutions: A Global Perspective <ul><li>Major U.S. banks have extensive international operations, with o...
Study Questions <ul><li>1. Financial professionals rarely become CEOs of major corporations.  </li></ul><ul><li>2. Virtual...
Study Questions <ul><li>6. “M1” includes currency plus financial assets that serve as a medium of exchange.  </li></ul><ul...
Study Questions <ul><li>11.  Treasury bills are short-term securities issued by the U.S. government.  </li></ul><ul><li>12...
Study Questions <ul><li>16.  Firms often rely on short-term sources to pay for large, permanent assets, such as buildings....
Study Questions <ul><li>21.  Underwriting is the process used by insurance companies to determine who to insure and what t...
Study Questions <ul><li>26.  Raising the reserve requirement tends to increase the supply of money, lowering interest rate...
Chapter 18 Financing and Investing through Securities Markets
<ul><li>Distinguish between the primary market for securities and the secondary market </li></ul><ul><li>Compare money mar...
Securities <ul><li>Types of Bonds </li></ul><ul><ul><li>Secured Bond —bond backed by specific pledge of a company’s assets...
Securities <ul><li>Types of Bonds </li></ul><ul><ul><li>Government Bonds issued by U.S. Treasury </li></ul></ul><ul><ul><l...
Securities <ul><li>Stock </li></ul><ul><ul><li>Common Stock </li></ul></ul><ul><ul><ul><li>Share of ownership in a company...
Securities Exchanges <ul><li>Stock Exchange —centralized marketplace where primarily common stock are traded. </li></ul><u...
Securities Exchanges <ul><li>The New York Stock Exchange </li></ul><ul><ul><li>NYSE  (Big Board)—the largest, and probably...
Securities Exchanges <ul><li>The NASDAQ Stock Market </li></ul><ul><ul><li>NASDAQ stock market—second-largest stock market...
Buying and Selling Securities <ul><li>Brokerage Firm —financial intermediary that buys and sells securities for individual...
Costs of Trading <ul><li>Direct Investing </li></ul><ul><ul><li>A growing number of corporations offer investors a direct ...
Stock Indexes <ul><li>Stock indexes reflect the general activity of the stock market  </li></ul><ul><li>The most common in...
Mutual Funds <ul><li>Mutual Fund —financial institution that pools investment money from purchases of its shares and uses ...
<ul><li>Distribution of Mutual Fund Assets by Type of Fund </li></ul>
Study Questions <ul><li>1. When a company first sells stock to the public, it is selling stock in the primary securities m...
Study Questions <ul><li>7. Most federal securities legislation came about as a result of the 1929 stock market crash.  </l...
Study Questions <ul><li>13.  The percentage of Americans who own stocks has risen sharply in recent years.  </li></ul><ul>...
Study Questions <ul><li>19.  NASDAQ-listed companies tend to be smaller and lesser known that NYSE companies.  </li></ul><...
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 pe...
Study Questions <ul><li>28.  A key feature that makes mutual funds attractive is “diversification.”  </li></ul><ul><li>29....
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BK17.ppt

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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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