Finance Week 2 and 3 Notes
Finance Week 2 and 3 Notes FIN302
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This 5 page Class Notes was uploaded by Javier Perez on Sunday September 11, 2016. The Class Notes belongs to FIN302 at University of Miami taught by Frank Peterson in Fall 2016. Since its upload, it has received 7 views. For similar materials see Fundamentals of Finance in FIN at University of Miami.
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Date Created: 09/11/16
FIN 302 Economic Assets: They provide the expectation of a future financial benefit. All investments are economic assets A business is a collection of economic assets Real Assets vs. Financial Assets: Financial Assets establish claim to a stream of payments Financial assets that can be traded publicly in markets are called securities Real assets are used to produce goods and services So why does an economic asset have value? Because of the expected future monetary award from owning it. Value comes from the future rewards of owning it. Law of One Price: if two assets are expected to produce the same future rewards, they should have the same price. Net present value= Difference between value and cost Value is a function of expected future benefits. Two significant complications: 1) time, 2) uncertainty (riskiness) Intro to Investments and Financial Markets A financial asset is a legally enforceable claim to real assets or payments Financial assets traded on public markets are called securities (they have to meet regulatory requirements in order to be legally tradeable) Financial Assets break down into two categories: 1) Privately held assets 2) Marketable securities Marketable Securities breaks down into: 1) Fixed income (debt) a) Money market- maturity from zero to one year b) Capital Market- (bonds and notes) Maturity from a year up until thirty years 2) Equities- stocks 3) Derivatives a) Options b) futures Money market instruments: Very short term, low risk form of debt. Safety but low return. Examples: US Treasury bills, Certificates of Deposit Capital Market: bonds and notes Both are basically the same thing, just different terms of maturity. Notes go from 1- 10, bonds from 10-30 Equities: common stock, preferred stock, ADRs (stock in a foreign company) Derivatives: they’re standardized contracts between buyer and seller, bought and sold on open exchanges Example: Futures contract (a transaction agreed to in advance, predetermined price) neither party can back out Options: same thing as futures contract but buyer party can back out Strike price: the agreed price Two parties: buyer- right to buy, seller- obligation to sell a) Call Options: Here, the buyer has the right to buy, seller ob to sell b) Put Options: Here, the buyer has the right to sell, seller ob to buy Seller gets paid a fee called a premium to enter into this agreement Brokers make commissions on the service they provide, but they don’t take possession of the asset Dealers do take possession of the assets Mid ask spread- dif between wholesale and retail Primary market is when the company sells stock to the public Secondary market is when stockholders trade stock amongst themselves Bull market- stocks going up consistently Bear market- stock prices falling Corporation: Viewed as a separate legal entity Limited liability to owners Potentially infinite life May have a multitude of owners Ownership is transferable (stocks) Double taxation Privately owned firms: Up to 499 shareholders Little SEC regulatory oversight and no required public disclosures Publicly traded companies: Securities can be sold to the general public Investors trade securities on secondary markets IPO- first sale of stock Financial Intermediaries: Any organization that acts as a middle man between two parties in a financial transaction Investment Styles: Active management- chase high returns. The market can be consistently outperformed -try to find undervalued securities -try to time market environments -higher expenses in a search for higher returns Passive management- accept the market average -no attempt to outperform market averages - no attempt to time market movements - hold a diversified portfolio -minimize expenses Mutual fund categories: Money market funds Equity funds -actively managed -index funds -sector funds Bond funds International funds Interest APR is simple interest only, not the effective amount we’re being paid APR IGNORES COMPUNDING It’s an incorrect estimate PV + Interest Rate*PV= FV (after 1 period) FV1= PV(1 + r) ***FV= (1+r)^n*** Can only be done when “r” is constant
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