overview (bus322) 1 the four basic areas of finance investments corporate finance international...

Overview (BUS322) 1

The Four Basic Areas of Finance

•Investments

•Corporate Finance

•International Finance

•Financial Institutions and Markets

Overview (BUS322) 2

Investment•Investment instruments

•Issue new securities?

•Security Markets

•Get Listed

•Investment banks versus Investment

•Goldman Sachs, Merrill Lynch, JPMorgan, Lehman Brother, Saloman Smith Barney, Morgan Stanley

•underwriting: Underwrites IPOs, SEOs, places private equity ...

•Brokage: execute security transaction, offers M&A advisory

services ...

Overview (BUS322) 3

Corporate Finance

•Capital Budgeting

•Financial Policy

•Dividend Policy

•Ownership Structure

•Risk Management

•Merger and Acquisition

Overview (BUS322) 4

International Finance

•Foreign Exchange Risk

•Political Risk

•Terms like LIBOR, EURO, Eurodollar

•What would be the impact on Japanese products if Yen Strengthens against Dollar?

Overview (BUS322) 5

Financial Institutions and Markets

Overview (BUS322) 6

Overview of Financial System

1. Function and Structure of Financial Markets

2. Function and Structure of Financial Intermediaries

3. Regulations

Overview (BUS322) 7

Overview (BUS322) 8

Function of Financial Markets

1. Allows transfers of funds from person or business without investment opportunities to one who has them

2. Improves economic efficiency

Overview (BUS322) 9

Classifications of Financial Markets

1. Debt Markets Short-Term (maturity < 1 year) Money Market

Long-Term (maturity > 1 year) Capital Market

2. Equity Markets Common Stock

Overview (BUS322) 10

Classifications of Financial Markets

1. Primary MarketNew security issues sold to initial buyers

2. Secondary MarketSecurities previously issued are bought and sold

Overview (BUS322) 11

Classifications of Financial Markets

1. Exchanges

Trades conducted in central locations

(e.g., New York Stock Exchange)

2. Over-the-Counter Markets

Dealers at different locations buy and sell

Overview (BUS322) 12

Internationalization of Financial Markets

International Bond Market1. Foreign bonds

2. Eurobonds—Now larger than U.S. corporate bond market

World Stock MarketsU.S. stock markets are no longer always the largest: at one point, Japan's was larger

Overview (BUS322) 13

TerminologyForeign bond: a bond sold in a foreign country and denominated in

that country’s currency

Eurobond: a bond denominated in a currency other than the country in which it’s sold

Examples:• A UK company sells bonds in US denominated in US$

• A UK company sells bonds in US denominated in Pounds

• A US company sells bonds in UK denominated in US$

• A US company sells bonds in UK denominated in Pounds

• A UK company sells bonds in UK denominated in Pounds

Overview (BUS322) 14

Function of Financial Intermediaries

Financial Intermediaries1. Engage in process of indirect finance

2. More important source of finance than securities markets

3. Needed because of transactions costs and asymmetric information

Overview (BUS322) 15

Function of Financial Intermediaries

Transactions Costs

1. Financial intermediaries make profits by reducing transactions costs

2. Reduce transactions costs by developing expertise and taking advantage of economies of scale

Overview (BUS322) 16

Asymmetric Information: Adverse Selection and Moral Hazard

Adverse Selection1. Before transaction occurs2. Potential borrowers most likely to produce

adverse outcome are ones most likely to seek loan and be selected

Overview (BUS322) 17

Asymmetric Information: Adverse Selection and Moral Hazard

Moral Hazard1. After transaction occurs2. Hazard that borrower has incentives to engage

in undesirable (immoral) activities making it more likely that won't pay loan back

Financial intermediaries reduce adverse selection and moral hazard problems, enabling them to make profits

Overview (BUS322) 18

Financial Intermediaries

Overview (BUS322) 19

Size of Financial Intermediaries

Overview (BUS322) 20

Regulation of Financial Markets

1. Increase Information to Investors A. Decreases adverse selection and moral hazard problems B. SEC forces corporations to disclose information

2. Ensuring the Soundness of Financial IntermediariesA. Prevents financial panicsB. Chartering, reporting requirements, restrictions on assets and

activities, deposit insurance, and anti-competitive measuresC. Regulation Q

Overview (BUS322) 21

3. Improving Monetary ControlA. Reserve requirements

B. Deposit insurance to prevent bank panics

Regulation of Financial Markets

Overview (BUS322) 22

Regulatory Agencies