D076 Finance Skills Review/Study Guide

Finance - the study of managing and allocating funds at the personal or business level; forward looking What are the subspecialties of finance? - business finance, investments, and financial institutions Corporate finance - an area of finance that involves activities used to increase shareholder wealth Investments - an area of finance that deals with investment allocation and asset pricing financial institutions - an area of finance that involves organizations that accept deposits, offer investment products, loan money, or broker financial transactions accounting - the system of recording, reporting, and summarizing past financial information and transactions; backward looking What is the goal of business finance? - to maximize owner wealth for a privately held company and to maximize shareholder wealth for a publicly held company What are the goals of personal finance? - maximize an individual's utility What main tasks does a financial manager complete? - making investment decisions, making financing decisions, and managing working capital Investment decisions are made based on what? - costs and benefits of potential projects in achieving the goal of a firm After investment decisions are made who decides how to finance such projects? - financial manager Different areas in the field of finance: - corporate finance, investment banking, private equity, commercial banking, financial planning, insurance, and real estate Financial managers need to pay attention to 1. long term obligations or 2 short term obligations? - 2. short-term obligations What role does finance play in personal decision making? - understanding the management and allocation of money in your personal life is critical for making smart financial decisions Budgeting and investing are... - tools to help us achieve our financial goals What is the purpose of financial markets? - to determine the market price of financial securities based on supply and demand and to provide liquidity The money market is for short-term or long-term borrowing and lending? - short-term Capital market is for short-term or long-term borrowing and lending? - long-term Primary market - where companies sell their financial securities to raise capital; initial issuance of the stocks and bonds secondary market - where securities are traded after the initial issuance; commonly referred to as the stock market What does a specialist do? - provides liquidity and lowers the cost of trading stocks between sellers and buyers What do prices convey? - information, affect incentives, and affect the distribution of income SEC (US securities and exchange commission) - oversees financial markets to protect investors Money Market - a type of financial market that government and corporate entities use to borrow and lend money in the short term. Assets are usually held for less than one year. capital market - more often used for long-term assets that are held for greater than one year (examples: stock markets & bond markets) How does money circulate through financial institutions? - individuals and organizations lend and borrow money & individuals and organizations purchase financial securities to provide capital to companies and receive dividends. Depository institution - accepts monetary deposits and provides loans (ex: savings banks, commercial banks, savings and loan associations, and credit unions) Savings and loans association - type of depository institution also known as a "thrift" institution that places a significant focus on providing loans for residential mortgages and real estate. Non-depository institution - 1. not allowed to accept monetary deposits but may perform functions such as lending money or acting as an intermediary between savers and lenders. (Ex: brokerage firms, investment firms, mutual funds, and hedge funds)