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Thursday, January 26, 2012 Key Slides from Class

Thursday, January 26, 2012 Key Slides from Class . Key Concept: “Stock” Vs. “Bond”. SITUATION: You and your 3 roommates get a $600 TV (the TV is like a “business”). 2 ways to pay for it: Each roomie puts in $150 = “stock” or ownership (you each own ¼ of the TV).

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Thursday, January 26, 2012 Key Slides from Class

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  1. Thursday, January 26, 2012 Key Slides from Class

  2. Key Concept: “Stock” Vs. “Bond” • SITUATION: You and your 3 roommates get a $600 TV (the TV is like a “business”). • 2 ways to pay for it: • Each roomie puts in $150 = “stock” or ownership (you each own • ¼ of the TV). • You borrow $200 from each roomie, and promise to pay them back at • end of the semester = “bond” or loan (you own the TV). • What happens if: “STOCKS” “BONDS” TV Breaks: * Each gets $0 * $200 / roomie * Each loses $150 * You lose $600 Sell for $400: * Each gets $100 * $200 / roomie * Each loses $50 * You lose $200 Sell for $600: * Each gets $150 * $200 / roomie * Each breaks even * You break even Sell for $800: * Each gets $200 * $200 / roomie * Each makes $50 * You make $200

  3. Key Concept: Mutual Fund … An investment company that holds multiple securities … Individual (3) Mutual Fund Shares (1) $ Mutual Fund (2) $ $ $ $ Other Securities $ IBM McD’s GM Bond Exxon (1) Individual investors provide $$ to the Mutual Fund company… (2) … The Fund invests that pool of funds in a portfolio of stocks and / or bonds… (3) … The investors then own shares of the Mutual Fund.

  4. The 3 Sections of the Textbook PART 1 Institutions & Markets PART 2 PART 3 Financial Management Investments PART 1: Institutions = organizations and intermediaries that: (1) help accumulate savings, and (2) get those funds to individuals, businesses, and governments that will spend or invest them. Markets = forums that facilitate the flow of funds among individuals, businesses, and government. PART 2: Investments = the analysis, valuation, and sale of securities, and the management of the associated risk. PART 3: Financial Management = financial planning, asset management, and fund-raising decisions for a business.

  5. CHAPTER 1 The Financial Environment

  6. The Six Principles of Finance (1) “There is a time value to money” (2) “More risk demands more reward” (3) “Risk can be reduced by diversifying” (4) “Financial markets are efficient at determining the value of securities” (5) “Managers’ objectives often differ from owners’ objectives” (6) “Reputation matters”

  7. Financial System: Components, Players, & Roles • Government Policy Makers • Laws & Policies • Federal Reserve • & Banks • Create & Transfer Money Monetary System Financial Institutions Financial Markets • Stock, Bond, Currency, • etc., Markets • Banks, Insurance Cos, Stock • Brokers, Mutual Funds, etc. • Accumulate & Lend / Invest Savings • Market & Transfer Financial Assets

  8. Financial System: Components, Players, & Roles • President • Congress • Federal Reserve System • Treasury • Pass laws • Make fiscal, monetary, & debt mgmt policy Policy Makers Monetary System • Federal Reserve • Commercial Banks • Create money • Transfer money Financial Institutions Financial Markets • Depository Inst. • Contractual Savings Inst. • Securities Firms • Finance Firms • Securities Markets • Mortgage Markets • Derivatives Markets • Currency Exchange Mkts • Market financial assets • Facilitate xfer of finl assets • Accumulate savings • Lend / invest savings

  9. CHAPTER 2 Money and the Monetary System

  10. Financial System: Components, Players, & Roles • President • Congress • Federal Reserve System • Treasury • Pass laws • Make fiscal, monetary, & debt mgmt policy Policy Makers Monetary System • Federal Reserve • Commercial Banks • Create money • Transfer money Financial Institutions Financial Markets • Depository Inst. • Contractual Savings Inst. • Securities Firms • Finance Firms • Securities Markets • Mortgage Markets • Derivatives Markets • Currency Exchange Mkts • Market financial assets • Facilitate xfer of finl assets • Accumulate savings • Lend / invest savings

  11. Money “Money” = “anything that is generally accepted as payment for goods, services, and debts” Functions of Money (1) (2) (3) Medium of Exchange Store of Value Standard of Value * Used to purchase stuff * Used for future purchases * Must be fairly liquid * Prices are expressed in terms of it

  12. Money Supply Measures M1 = “liquid”: (1) Currency (2) Traveler’s Checks (3) Demand Deposits M1 M2 M3 • M2 = “liquid + store of value”: M1 plus… • Savings accts • Small “time deposits” • (3) Money market funds • M3: “liquid + more store”: M2 plus… • (1) Large “time deposits” • Inst’l money mkt funds • Eurodollars Cash (i.e., “currency”) = about 50% of M1, 10% of M2, and 7% of M3 M1 = $ 2.2 Trillion M2 = $ 9.7 Trillion M3 = No longer reported As of December, 2011

  13. Money Supply & Economic Activity “Gross Domestic Product (GDP)” = “a measure of the output of goods and services in an economy” o MONETARISTS: “The amount of money in circulation determines the level of GDP” GDP = Money Supply (MS) X Velocity of Money (VM) … versus … o KEYNESIANS: “Economic activity results from changes in interest rates, which are affected by the money supply” GDP = Real Output (RO) X Price Level (PL)

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