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Finance - Week 3 Notes

by: Brianna King

Finance - Week 3 Notes 28-3110-04

Brianna King

GPA 3.5

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On nominal interest rates, Fisher's formula and brief overview of Accounting
Warren C. Frank
Class Notes
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This 2 page Class Notes was uploaded by Brianna King on Tuesday February 16, 2016. The Class Notes belongs to 28-3110-04 at Columbia College Chicago taught by Warren C. Frank in Spring 2016. Since its upload, it has received 23 views. For similar materials see Finance in Entrepreneurship at Columbia College Chicago.


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Date Created: 02/16/16
Finance 2.9.16 I. k = kif + IRP + DRP + MP + LP a. k: nominal interest rate b. kif: real risk-free interest rate (interest-free rate) i. treasury bonds ii. Risk reward c. IRP: Inflation premium i. Inflation has been monitored lately (Fed. Reserve) ii. Pay attention to which way it’s going d. DRP: Default-risk premium i. Deflating prices ii. Stick with higher rated companies e. MP: Maturity risk premium i. Look up… f. LP: Liquidity risk premium i. How fast your assets can turn into cash II. Triple AAA companies: Microsoft, Exxon Mobil & Johnson- Johnson III. Regulators a. Oversee what people are making wise business decisions IV. Rating Agencies a. Rate certain investments V. Fed. Reserve a. Monitor money b. Check money supply VI. Investment bankers a. Advise b. Underwrite—assume risk c. Distribute securities VII. Glass-Steinger Act a. 1930s: large banks and investment companies couldn’t merge (monopoly) b. Reversed in 2008 VIII. Complex Accounting a. Get help b. Be knowledgeable IX. Key components of US Financial System a. 3 ways to transfer capital i. Directly to market ii. Indirectly through investment banker iii. Funds buy mutual stock b. Public offerings & Private Placements i. Private: securities sold to limited number of investors 1. Faster; less regulations ii. Public: institutions and individuals can purchase securities X. Security Exchanges a. Transfer funds from those who have to those who need it b. Regulate c. Facilitate XI. Fisher Formula: k= kif + IRP + (kif)(IRP) [Compounded interest] a. Real risk-free rate: 3 month Treasury bills– inflation rate b. Default risk premium: 30-Year AAA-rated corporate bonds – 30-Year Treasury bonds c. Maturity-risk premium: 30-Year Treasury bonds – 3-month Treasury bills i. Two risk free items (theoretically); 30-Year should offer higher rate and be more than 3-month d. REFER TO PAGES 37 & 38 e. Seeing if something is worth taking the risk XII. Chapter 3: Accounting a. 6 Objectives: i. Income Statement 1. Accounts for revenues & expenses for a specific period of time ii. Balance Sheet 1. List of assets, liabilities & owner’s equity at a particular date 2. Can’t ONLY look at balance sheet a. Specific date b. No cash flows iii. Statement of Cash Flows 1. Could/could not be good if a company has more cash coming in than going out a. Loans, liquidation (blow out sales) 2. Could/could not be good if company has more cash going out than coming in a. Investments in failing companies 3. Cash coming in from operations, investments and financing


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