FIN302 1st midterm study guide
FIN302 1st midterm study guide acc
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This 8 page Study Guide was uploaded by odette antabi on Wednesday February 10, 2016. The Study Guide belongs to acc at University of Miami taught by Manny Sicre in Spring 2016. Since its upload, it has received 81 views.
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Date Created: 02/10/16
FIN 302 Chapter 1 Business organizations: Sole proper ship: Owned by a single person who is financially responsible for the actions and obligations of the business Partnership: a business owned by more than one person Corporation: No owner financially responsibly for the actions and obligations of the business. Owned by more than one person, legal entity. Moral Hazard Hidden action problem Efficient level of “effort” If individual does not bear full cost/receive full benefit of action, may prefer other actions Financial systems: Financial markets Financial institutions Financial instruments Real assets: factories, land, human capital make money Financial asset: claims on real asset such as stocks, bonds Derivatives: option, futures, ABS Why use financial instruments? Allocation of capital Consumption smoothing Allocation of risk Separation of management ownership Financial markets Primary market: Firms’ new securities are issued and sold for the first time Secondary markets: previously issued securities are resold (traded) Types of financial intermediaries: Commercial Banks Investment Banks o Full service consultant on issuance of new securities o Frequently take a position in new securities, at least temporarily Mutual Funds o Pooling mechanism to overcome market frictions o Highly regulated Hedge Funds o Similar to mutual funds, but restricted investor base o Less regulation Venture Capital/Private Equity Chapter 2 Investment process: Asset allocation: put money un different things Security selection: once allocation has been made select securities in each asset class in which invest o Security: interest rate, dividend o Company: bankruptcy risk o Market: forecast, regulation Fixed income security/ debt instruments No voting right “borrowing instruments Pay some amount every period Treasury bond , corporate bonds, municipal bonds, mortgage back securities Equity: Voting right Residual claim: a stock is a claim to funds after all debts have been paid Limited liability Bond: Coupon rate: How much you get every year, 8% Face/ par value/ principal: initial payment $1000 Maturity: how long will the payments last, 10 years Period: annually, semiannually Treasury bond Fixed rate Issued by the treasury Semi annual coupon payments Save investment o Treasury note ( 1 year maturity) o Treasury bill ( less than 1 year maturity) o Treasury bond ( 1030 Years maturity) Municipal bond Issued by states and local governments Exempt from federal income tax Exempt from state local tax Revenue bods Corporate bonds Default risk: can pay their debt bankruptcy Commercial paper short term Corporate bond ? Longer term, seniority classes Equity Ownership in a firm Future cash flaws (dividends) Maturity is indefinite Involves risk, variable liquidity Valuation: TVM adjustments + risk adjustment Common stock: voting rights (junior) Preferred stock: non voting right (senior) Market capitalization # shares price (shares) Bankruptcy ( order they pay) Government Employees (wages) Bond holders Preferred stock holders Common stock Derivatives: Security whose cash flows depends on value of other assets Options, futures, swaps., bonds with option feature Valuation: TVM+ risk+ option adjustment Option and futures: Call (put) Option: right to buy (sell) the underlying asset at a specified price (strike Price), on a specified date (maturity) time period Long (short) Futures: obligation to buy (sell) the underlying asset at a specified price (strike Price), on a specified date (maturity) time period. Two kinds commodities or financial Mutual funds Markets: Financial intermediaries that pool funds from investors and buy assets Advantages: o Record keeping and administration o Diversification and divisibility o Professional management and analysis o Lower transaction cost Asset backed securities: Securization is example of financial engineering Mortgages, auto loans, corporate bonds. Credit card receivables Chapter 3 How securities are traded: Price and quantities are set by the market Primary markets: Issued by the first time Raise capital How are new securities floated (sold): o Government securities: typically auctioned o Corporate securities, federal agencies debt, municipal bonds, mortgagebacked securities: typically underwritten by investments banks o Equity: trough initial public offering (IPO) SEO: seasoned equity offering Secondary markets: Track among investors brokers. Independent of the company Brokers help investors trade without taking positions themselves Broker Guarantees counter pay that o An investor can pay for a security he is buying o An investor can deliver a security he is selling How do brokers trade? Exchanges o Traditional floor trading oElectronic limit order book Over the counter (OTC) Markets oTrade with dealers. oNot organized/ no requirements oMatch sellers and buyers Electronic communication investors o Direct among investors o Regulation “national market systems” Limit order book: Lot size: # of securities Price Buy or sell Market maker= dealer Provide a service: immediacy, liquidity It has a price : bid ask spread Broker trades: Type of orders Limit order: protects you from price exchange Market order: highest at moment Stoploss order: combines limit order with a rule Trading cost Explicit cots: commission Implicit cost: bidas spread Special trades: buying on margin: o securities are held as collateral by broker o borrow part of the purchase price of security from the broker o brokers charge interest rate short sale oselling shares of a firm I don’t own by borrowing the security and later replacing it odo profit if price is lower oloose if price goes up: no limit Chapter 4 Time Value of money Timeline; o T=0 Decision time (today) o Ct: cash flow generated during period t Future Value: Value at some future date Interest rate ( discount rate) How long n FV n C* (1+r ) Compounding period mn FV n C( 1+ r/m) Chapter 5 Annuity: an asset that pays the same amount in each period for a specified number of periods – Ex: Mortgage loans – An annuity pays a fixed cash flow C during T years PV= C/(r/m) x (1(1/(1+r/m)n*m)) Future Value of an Annuity – FV(annuity of $C for N years, rate r) Perpetuity: an asset that pays the same amount in each period forever – Ex: Preferred stock. Stockholder are promised a fixed cash dividend every quarter, forever. – Ex: A property. You can rent your property (as long as the property survives) forever PV= C/R Mortgaes: A loan secured be real estate, for homeowners, the home. – Down payment – percentage of property val. – Principal – Amount borrowed at the beginning – What’s left of the original loan to pay – Interest rate – Payments – determined by rate and principal Chapter 6 Perpetuities: – Regular: •Same cash flow, C, every period • Same time interval between cash flows • Perpetual, never ending Growing • First cash flow , second cash flow × (1 + ) , third cash flow × (1 + ) , etc • Other than changing cash flows, same as regular perpetuity PV= C/ rg APR So far we have been using the APR, but haven’t called it that – Always includes % per year and compounding frequency – Calculate Annual Percentage Rate (APR) – – APR = (periodic rate) x m – m is the # of periods in a year – – APR does not account for the number of compounding periods or adjust the annualized interest rate for the time value of money – APR is not a precise measure of the rates involved in borrowing and investing Effective Annual Interest Rate (EAR) – EAR accounts for the number of compounding periods and adjusts the annualized interest rate for the time value of money – – EAR is a more accurate measure of the rates involved in lending and investing – – Can have effective rates at other frequencies as well (quarterly, biennialy, 5 years, etc) 1 + EAR = (1= APR/m) k Mortgages A loan secured be real estate, for homeowners, the home. Down payment – percentage of property val. Principal – Amount borrowed at the beginning – What’s left of the original loan to pay – Interest rate – Payments – determined by rate and principal
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