What are the three types of finances? 1) Personal
2) Public
3) Business
Describe personal finance. Focus: Managing individual or household financial activities
Scope: Budgeting, saving, investing, retirement planning
Objective: Meet financial goals and handle unforeseen expenses
Key activities: Budgeting, debt management, investing, acquiring insurance
Primary stakeholders: Individuals, households
Financial tools: Savings accounts, retirement accounts, personal loans,
investments
Challenges: Debt management, achievement of financial goals, inflation
Decision Making: Based on personal financial goals and risk tolerance
Time Orientation: Short-term and long-term planning
Regulations: Influenced by tax laws and credit regulations
Describe Public Finance. Focus: Managing a government's revenues, expenditures, and debt
Scope: Tax collection, government spending, public debt issuance
Objective: Allocate resources efficiently and promote economic stability
Key activities: Budgeting, taxation, public expenditure, debt management
Primary Stakeholders: Government, taxpayers, public institutions
Financial tools: Tax policies, government bonds, budget reports
Challenges: Budget balancing, economic stability, public debt
Decision Making: Influenced by economic policy, public needs, and political
factors
Time Orientation: Long-term economic stability and growth
Regulations: Governed by fiscal policies, regulations, and public interest
Describe Business Finance. Focus: Managing a company's financial activities and strategies
Scope: Capital investment decisions, financing methods, risk management
Objective: Maximize shareholder value and ensure efficient resource use
Key activities: Financial planning, capital raising, risk management, creating
dividend policies
Primary Stakeholders: Shareholders, management, creditors, investors
Financial tools: Corporate bonds, stocks, loans, financial statements
Challenges: Funding, financial risk, market competition
Decision Making: Driven by profitability, strategic goals, market conditions
Time Orientation: Short-term operational needs and long-term strategic goals
Regulations: Subject to corporate governance, financial regulations, and market
conditions
What are the areas of business finance aka corporate 1. Financial measures are used to help management make decisions (ratio
finance? analysis)
2. Financial analyst use mathematical models to select what projects to invest in
(capital budgeting)
3. Financial analyst use the cost of capital to determine whether these projects
should be financed with either debt or equity and which type of each.
,What are the three roles for business finance? 1. Using financial ratios to manage the business
2. Applying skills with time value of money to determine which projects to invest
in
3. Controlling the risk associated with projects by computing the cost of capital to
determine how to fund the chosen projects
What are the debt and equity instruments? 1) Stocks
2) Bonds
3) Financial derivatives
Define Stocks: Certificates that represent ownership of an asset
What are common stocks? -They are recorded under owner equity on the balance sheet and is very liquid in
publicly traded firms
- primary owners of a company and have voting rights
- allowing them to influence major corporate decisions
- such as electing the board of directors and approving mergers
Benefit from: potential capital appreciation and dividends
- last in line when it comes to claims on assets in the event of liquidation, sitting
behind secured creditors, bondholders, and preferred stockholders.
- Some firms pay dividends to common shareholders, but they typically cannot
be paid until the preferred dividends are paid in full.
- Example: If an investor purchases a share of stock for $10 and a year later sells
it for $12, the capital appreciation is $2 ($12 - $10) or 20 percent ([$12 - $10]/10)
Describe Market Capitalization. - They are the total market value of a company's outstanding shares.
-If you take the number of common shares of stock and multiply it by the price
per share
Describe Dividends The companys earnings distributed to shareholders, usually in the form of cash
or additional stock
Describe Capital appreciation: - Stock bought at a lower price than what it is sold.
Equation: Lower purchase price - higher sales price
What are Preferred stock "hybrid stocks"? A class of ownership in a corporation that has a higher claim on assets and
earning
- No voting rights
-Fixed dividends
- Have a higher claim on earnings
-Normally Utility companies or start ups that are funded by private investors
- Recorded under the owner equity portion of the balance sheet and is relatively
rare in publicly traded stocks.
- Has characteristics of both common stock and bonds
- Firms really want to pay their common dividends, or their stock price takes a big
hit
, Comparison between common and preferred stock - Common stock: offer the potential for higher returns and voting rights but come
with greater risk due to their lower priority in claims on assets
- Preferred stock: provide more stability with fixed dividends and higher priority in
asset claims but usually lack voting rights, offering less control over corporate
governance.
What are Bonds= represent loans (IOU)? - Debt securities issued by corporations or government to raise capital, where
issuers agrees to pay back the principal along with interest on specified dates
- Bond investors buy bonds because they are loaning their money to the issuing
entity.
- Bonds are loans that various entities (like businesses, governments, or
individuals) issue, or sell, to raise capital.
- The proceeds benefit the issuer, who is known as the creditor
- Bonds are typically in denominations of $1,000 per bond
-By issuing bonds, a company can borrow money directly from the market
instead of relying solely on a bank loan.
Describe Coupon Rate: The annual interest rate paid by a bond issuer on the bonds face value,
expressed as a percentage
What does Bond Maturity mean? The date on which the principal amount of a bond or other debt instrument is to
be paid in full
What are the reasons on why entities issue bonds? - Secure long-term funding without diluting ownership, unlike issuing stock.
- Governments issue bonds: to finance public projects and manage fiscal
policies,
- Corporations issue bonds: to raise funds for business operations and growth.
- Investors buy bonds: for various reasons, including the pursuit of steady and
predictable income, lower risk compared to stocks, and portfolio diversification.
What do bonds provide? A fixed income stream through interest payments and the return of principal at
maturity, making them attractive to risk-averse investors, such as retirees
seeking stable income.
What is the purpose of rating agencies? Reflect the risk of default
- These ratings help investors make informed decisions by indicating the relative
safety of the bonds.
What are considered investment grade bonds that are - AAA, AA, A, and BBB
low risk?
- AAA are the least risky bond but has the lowest yield
- Yield: The income generated by an investment typically expressed as a
percentage of the investments cost or current market value (The interest rate
earned by the investor for lending the money to the firm issuing the bond)
What other name do you call BB and below bonds? Speculative bond or junk bonds
- Junk bonds are high yield, high risk bonds issued by companies with lower
credit rating, typically offering higher interest rates to attract investors
Two main type of bonds? Public and corporate
2) Public
3) Business
Describe personal finance. Focus: Managing individual or household financial activities
Scope: Budgeting, saving, investing, retirement planning
Objective: Meet financial goals and handle unforeseen expenses
Key activities: Budgeting, debt management, investing, acquiring insurance
Primary stakeholders: Individuals, households
Financial tools: Savings accounts, retirement accounts, personal loans,
investments
Challenges: Debt management, achievement of financial goals, inflation
Decision Making: Based on personal financial goals and risk tolerance
Time Orientation: Short-term and long-term planning
Regulations: Influenced by tax laws and credit regulations
Describe Public Finance. Focus: Managing a government's revenues, expenditures, and debt
Scope: Tax collection, government spending, public debt issuance
Objective: Allocate resources efficiently and promote economic stability
Key activities: Budgeting, taxation, public expenditure, debt management
Primary Stakeholders: Government, taxpayers, public institutions
Financial tools: Tax policies, government bonds, budget reports
Challenges: Budget balancing, economic stability, public debt
Decision Making: Influenced by economic policy, public needs, and political
factors
Time Orientation: Long-term economic stability and growth
Regulations: Governed by fiscal policies, regulations, and public interest
Describe Business Finance. Focus: Managing a company's financial activities and strategies
Scope: Capital investment decisions, financing methods, risk management
Objective: Maximize shareholder value and ensure efficient resource use
Key activities: Financial planning, capital raising, risk management, creating
dividend policies
Primary Stakeholders: Shareholders, management, creditors, investors
Financial tools: Corporate bonds, stocks, loans, financial statements
Challenges: Funding, financial risk, market competition
Decision Making: Driven by profitability, strategic goals, market conditions
Time Orientation: Short-term operational needs and long-term strategic goals
Regulations: Subject to corporate governance, financial regulations, and market
conditions
What are the areas of business finance aka corporate 1. Financial measures are used to help management make decisions (ratio
finance? analysis)
2. Financial analyst use mathematical models to select what projects to invest in
(capital budgeting)
3. Financial analyst use the cost of capital to determine whether these projects
should be financed with either debt or equity and which type of each.
,What are the three roles for business finance? 1. Using financial ratios to manage the business
2. Applying skills with time value of money to determine which projects to invest
in
3. Controlling the risk associated with projects by computing the cost of capital to
determine how to fund the chosen projects
What are the debt and equity instruments? 1) Stocks
2) Bonds
3) Financial derivatives
Define Stocks: Certificates that represent ownership of an asset
What are common stocks? -They are recorded under owner equity on the balance sheet and is very liquid in
publicly traded firms
- primary owners of a company and have voting rights
- allowing them to influence major corporate decisions
- such as electing the board of directors and approving mergers
Benefit from: potential capital appreciation and dividends
- last in line when it comes to claims on assets in the event of liquidation, sitting
behind secured creditors, bondholders, and preferred stockholders.
- Some firms pay dividends to common shareholders, but they typically cannot
be paid until the preferred dividends are paid in full.
- Example: If an investor purchases a share of stock for $10 and a year later sells
it for $12, the capital appreciation is $2 ($12 - $10) or 20 percent ([$12 - $10]/10)
Describe Market Capitalization. - They are the total market value of a company's outstanding shares.
-If you take the number of common shares of stock and multiply it by the price
per share
Describe Dividends The companys earnings distributed to shareholders, usually in the form of cash
or additional stock
Describe Capital appreciation: - Stock bought at a lower price than what it is sold.
Equation: Lower purchase price - higher sales price
What are Preferred stock "hybrid stocks"? A class of ownership in a corporation that has a higher claim on assets and
earning
- No voting rights
-Fixed dividends
- Have a higher claim on earnings
-Normally Utility companies or start ups that are funded by private investors
- Recorded under the owner equity portion of the balance sheet and is relatively
rare in publicly traded stocks.
- Has characteristics of both common stock and bonds
- Firms really want to pay their common dividends, or their stock price takes a big
hit
, Comparison between common and preferred stock - Common stock: offer the potential for higher returns and voting rights but come
with greater risk due to their lower priority in claims on assets
- Preferred stock: provide more stability with fixed dividends and higher priority in
asset claims but usually lack voting rights, offering less control over corporate
governance.
What are Bonds= represent loans (IOU)? - Debt securities issued by corporations or government to raise capital, where
issuers agrees to pay back the principal along with interest on specified dates
- Bond investors buy bonds because they are loaning their money to the issuing
entity.
- Bonds are loans that various entities (like businesses, governments, or
individuals) issue, or sell, to raise capital.
- The proceeds benefit the issuer, who is known as the creditor
- Bonds are typically in denominations of $1,000 per bond
-By issuing bonds, a company can borrow money directly from the market
instead of relying solely on a bank loan.
Describe Coupon Rate: The annual interest rate paid by a bond issuer on the bonds face value,
expressed as a percentage
What does Bond Maturity mean? The date on which the principal amount of a bond or other debt instrument is to
be paid in full
What are the reasons on why entities issue bonds? - Secure long-term funding without diluting ownership, unlike issuing stock.
- Governments issue bonds: to finance public projects and manage fiscal
policies,
- Corporations issue bonds: to raise funds for business operations and growth.
- Investors buy bonds: for various reasons, including the pursuit of steady and
predictable income, lower risk compared to stocks, and portfolio diversification.
What do bonds provide? A fixed income stream through interest payments and the return of principal at
maturity, making them attractive to risk-averse investors, such as retirees
seeking stable income.
What is the purpose of rating agencies? Reflect the risk of default
- These ratings help investors make informed decisions by indicating the relative
safety of the bonds.
What are considered investment grade bonds that are - AAA, AA, A, and BBB
low risk?
- AAA are the least risky bond but has the lowest yield
- Yield: The income generated by an investment typically expressed as a
percentage of the investments cost or current market value (The interest rate
earned by the investor for lending the money to the firm issuing the bond)
What other name do you call BB and below bonds? Speculative bond or junk bonds
- Junk bonds are high yield, high risk bonds issued by companies with lower
credit rating, typically offering higher interest rates to attract investors
Two main type of bonds? Public and corporate
