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