Fina 363 Exam 1 Study Guide
Fina 363 Exam 1 Study Guide FINA 363 001
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FINA 363 001
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This 4 page Study Guide was uploaded by Madeline Lacman on Tuesday September 20, 2016. The Study Guide belongs to FINA 363 001 at University of South Carolina taught by Ozgur Ince in Fall 2016. Since its upload, it has received 46 views. For similar materials see Introduction to Finance in Finance at University of South Carolina.
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Date Created: 09/20/16
Finance 363 Exam 1 Study Guide History of Finance Finance: the field that deals with the study of investments Finance is a technology that enables the allocation of resources over time Emerged in Mesopotamia around 3,000 BCE Babylonia 2000 BCE o Temples collected deposits/made loans o Emergence of banking Code of Hammurabi – 1754 BCE o Law 88: a merchant may collect interest of 33 and 1/3 percent on a loan of grain and 20% interest may be charged on a loan of silver o Law 48: if a person is in debt and loses a crop because of a natural disaster the contract shall be changed so that person will not owe the creditor any interest for the year o Emergence of central banking and financial regulation Ancient Greece – 4 century BCE o Athens had population in 100,000s and had outgrown its local agricultural capacity o Long/risky voyages to import crops o Wealthy citizens invested in voyages o Emergence of partnerships Renaissance Europe- birth of modern financial system st o In 1172 Venice issued 1 government bond o In 1300s beginning of bond market in Venice o Honor del Bazacle- 1372 World’s first modern corporation o Amsterdam Bourse- 1602 First modern stock market What does finance do? 1. It reallocates capital 2. It reallocates risk 3. It reallocates economic value through time The Financial System Purpose: to efficiently move funds from those with a surplus (suppliers) to those with a need (users) Financial Markets Transfer money from the suppliers to users of capital through trading of securities Security: a transferable instrument representing rights to debt or ownership interest o Debt securities that represent money that is borrowed and must be repaid or with terms that define the amount borrowed, interest rate, and maturity date o Equity securities (or stock or share) that represent ownership interest held by shareholders in a corporation Finance 363 Exam 1 Study Guide Profits from increases in the value of their ownership interest (capital gains) No maturity date 2 types of markets by the maturity of securities o Money markets: the market for short-term securities Maturity ranging between overnight and 1 year Typically debt instruments Very liquid and low cost source of short-term funds Issued by companies, banks, and governments in need of short- term financing o Capital markets: the market for long-term securities Original maturity of more than a year Long-term bonds and equity Issued by companies, banks, and governments for long-term capital needs 2 types of markets by the identity of the seller: o Primary markets For securities offered for sale by the issuer for the 1 time Issuer (corporation or government) receives the funds Important source of external capital for businesses Intermediated by investment banks due to severe information asymmetry problems between issuers and invesstrs IPO (initial public offering): when a firm 1 offers shares to the public and becomes a public company SEO (seasoned equity offering): when an already public company sells more shares to the public to raise more capital o Secondary markets For securities traded among investors after their initial sale Proceeds from the sale go to the selling investor, not issuer Provide the means for investors to tailor their investment horizons Investors may want to sell to other investors Efficiency: Accurate pricing of securities Liquidity: easy to buy/sell without affecting the price too much 2 Types of Markets by whether Trading is centralized o Auction markets: Centralized All trading funnels through one location Trading managed by a single “specialist” for each security Only 1 best price for a given security at a given time Example: New York Stock Exchange o Dealer Markets: Decentralized Trading takes place in a variety of places Managed by a number of dealers (“market makers”) in each security Brokers’ responsibility to find the best deal Example: NASDAQ (National Association of Securities Dealers Automated Quotation) Finance 363 Exam 1 Study Guide Financial Intermediaries Suppliers and users of capital usually transact through a variety of “financial intermediaries” Mutual Funds: buy a large number of publicly traded stocks and bonds on behalf of their investors Hedge Funds: invest in any kind of investment to maximize returns Pension Funds: manage retirement savings Endowments: manage funds donated to the university to support the university’s budget Venture capital funds: buy stock of private high-tech start-up entrepreneurial firms Private equity funds: purchase a whole company using large amounts of debt Summary Finance isn’t all good or bad Good o Engine of economic growth and innovation by allocating society’s savings into their most efficient use o Democratizes entrepreneurship and investing o Reduces household economic risk Bad o Excessive debt o Market bubbles resulting in financial crises and crashes o Financial fraud, Ponzi schemes, etc Formulas to know: Simple interest = PV x i Future value with compounded interest: FV = PV x FVIF nhere F0IF = (1i,n i,n n n FV n PV x 01+i) Total interest earned (or owed): Interest = FV – PV n 0 Solving for the interest rate: i = [FV / PV n 0 1/– 1 Solving for the number of years: n = ln(FV /PV ) / ln(1+0) FV with non-annual compounding: FV =PV x [1+ (n/m)] 0 nxm Effective interest rate: EIR = [1 + (i/m)] – 1 m n Present value of a single sum: PV = FV x 0VIF n i,nwhere PVIF i,n 1/(1+i) PV = 0 FV n (1+i) n PV with non-annual compounding: PV =FV /[1+(i/m)] nxm 0 n Finance 363 Exam 1 Study Guide
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