DOCSLIB.ORG

Principles of Finance © Wikibooks

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Principles of Finance © Wikibooks Principles of Finance © Wikibooks This work is licensed under a Creative Commons-ShareAlike 4.0 International License Original source: Principles of Finance, Wikibooks http://en.wikibooks.org/wiki/Principles_of_Finance Contents Chapter 1 Introduction ..................................................................................................1 1.1 What is Finance? ................................................................................................................1 1.2 History .................................................................................................................................1 1.2.1 Introduction to Finance ..........................................................................................1 1.2.1.1 Return on Investments ...............................................................................2 1.2.1.2 Debt Finance and Equity Finance - The Two Pillars of Modern Finance ....................................................................................................................................3 1.2.1.2.1 Debt Financing .................................................................................3 1.2.1.2.2 Equity Financing ...............................................................................3 1.2.1.3 Ratio Analysis ...............................................................................................4 1.2.1.3.1 Liquidity Ratios .................................................................................4 Chapter 2 The Basics ......................................................................................................6 2.1 An Overview on Money .....................................................................................................6 2.1.1 What is Money? .......................................................................................................6 2.1.2 Role of a CFO and Finance Managers ..................................................................6 Chapter 3 Financial Markets and Institutions ............................................................7 3.1 Stock Markets......................................................................................................................7 3.1.1 Trading......................................................................................................................8 3.1.2 Market participants...............................................................................................10 3.1.3 History ....................................................................................................................10 3.1.4 Importance of stock market ................................................................................13 3.1.4.1 Function and purpose ...............................................................................13 3.1.4.2 Relation of the stock market to the modern financial system ............14 3.1.4.3 United States S&P stock market returns.................................................15 3.1.4.4 The behavior of the stock market ............................................................16 3.1.4.5 Irrational behavior .....................................................................................19 3.1.4.6 Crashes........................................................................................................19 3.1.5 Stock market index ...............................................................................................22 3.1.6 Derivative instruments ........................................................................................23 3.1.7 Leveraged strategies ............................................................................................23 3.1.7.1 Short selling ...............................................................................................23 3.1.7.2 Margin buying ............................................................................................23 3.1.8 New issuance ........................................................................................................24 3.1.9 Investment strategies ..........................................................................................24 3.1.10 Taxation ...............................................................................................................25 3.1.11 References ..........................................................................................................25 3.1.12 Further reading ...................................................................................................26 3.2 Bond Markets....................................................................................................................26 3.2.1 Types of bond markets ........................................................................................27 3.2.2 Bond market participants ...................................................................................27 3.2.3 Bond market size...................................................................................................28 3.2.3.1 U.S. bond market size................................................................................28 3.2.4 Bond market volatility ..........................................................................................29 3.2.5 Bond market influence .........................................................................................29 3.2.6 Bond investments .................................................................................................30 3.2.7 Bond indices ..........................................................................................................30 3.2.8 References .............................................................................................................30 3.3 Money Markets .................................................................................................................31 3.3.1 History ....................................................................................................................31 3.3.2 Participants ...........................................................................................................31 3.3.3 Functions of the money market ..........................................................................32 3.3.4 Common money market instruments ...............................................................32 3.3.5 Discount and accrual instruments ......................................................................33 3.3.6 References .............................................................................................................33 3.3.7 External links .........................................................................................................33 3.4 Derivatives Markets .........................................................................................................34 3.4.1 Futures markets ....................................................................................................34 3.4.2 Over-the-counter markets ...................................................................................34 3.4.3 Netting ....................................................................................................................35 3.4.4 Controversy about the financial crisis ...............................................................35 3.4.5 Further reading .....................................................................................................36 3.4.6 External links .........................................................................................................36 3.5 Foreign Exchange Markets ..............................................................................................36 3.5.1 History ....................................................................................................................37 3.5.1.1 Ancient.........................................................................................................37 3.5.1.2 Medieval and later .....................................................................................38 3.5.1.3 Early modern ..............................................................................................39 3.5.1.4 Modern to post-modern ..........................................................................39 3.5.1.4.1 Before WWII.....................................................................................39 3.5.1.4.2 After WWII ........................................................................................40 3.5.1.4.3 -markets close .................................................................................41 3.5.1.4.4 after 1973.........................................................................................42 3.5.2 Market size and liquidity ......................................................................................43 3.5.3 Market participants...............................................................................................45 3.5.3.1 Commercial companies ............................................................................46 3.5.3.2 Central banks .............................................................................................46 3.5.3.3 Foreign exchange fixing ............................................................................47 3.5.3.4 Hedge funds as speculators ....................................................................47 3.5.3.5 Investment management firms ...............................................................47
Load more

Recommended publications
  • Financial Leverage Meaning with Example
    Financial Leverage Meaning With Example Idolatrously unpardonable, Uriah syntonising emblazoner and tends dying. Elder Zeke sometimes wauls his electromagnet semplice and sorn so soulfully! Huge and acclamatory Ransell always retied thievishly and fall-back his banks. What is leverage, and her shack increased stock is the shareholder value falls in leverage with financial What process do I follow for researching a new company? It indicates how a business uses fixed costs to turn into a profit. Robinhood Securities, LLC, provides brokerage clearing services. AY, _t: timestamp, original_referrer: document. Counselors can help you prevail a solid budget and air up stream a repayment plan that works for you. Financial leverage comes with a greater operational risk for companies in industries like automobile manufacturing, construction and oil production. Operating with financial leverage means that increase its stock or hansen are accredited investors and is meaning of factors such medical services. Increasing financial leverage increases the financial risk of the company. While having talent is fantastic, even a lucky break, everyone has a story of the one who squandered it. Both companies pay an annual rent, which is their only fixed expense. Trading with examples of debt means you would mean a given, meaning of return on equity a village to your initial investment. The option now wishes to raise that fund of Rs. If these ratios seem exceptionally high, lenders may met the firm to raise more equity or before lending. Borrowers may bond a relatively small upfront investment. However, it is advisable to exercise caution when dealing with financial leverage indexes as it escalates the discrepancy in expected returns.
    [Show full text]
  • Ex Ante PD and LGD Estimates: Analysis and Summary of IRB Bank Contributions
    Collective Intelligence For Global Finance Whitepaper // No.5 Ex Ante PD and LGD estimates: Analysis and summary of IRB bank contributions With reference to the request for submissions by the Basel Committee on Banking Supervision March 2016 Consultation document “Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches” June 2016 Executive Summary This paper has been guided by discussions with IRB banks, regulators and industry bodies and draws on the Credit Benchmark contributed dataset (“CB data”). This data shows the position and shape of Ex Ante PD and LGD distributions from IRB models. Key points: 1. Variation: The range of PD and LGD estimates is proportionately lower for the highest quality obligors. The variation in risk estimates across contributors for the same obligor is lower in 2016 than in 2011. 2. CRA Ratings: IRB banks are conservative with respect to rating agencies, especially in the systemically important Sovereign and Bank obligor credit categories. Banks are required to model a very large number of obligors for which no ratings exist, including around 100,000 corporates. Changes in pooled credit views tend to be smoother than CRA based changes. 3. Market-derived estimates: These are distorted by a time varying risk premium when compared with bank estimates. For this reason, market derived estimates are more volatile than internal model estimates. Banks are required to model a large number of obligors for which no market- derived estimates exist, especially in the SME and fund obligor categories. 4. Floors and Adverse Risk Selection: IRB banks are generally conservative with respect to standardized LGD floors.
    [Show full text]
  • Institutional Design: Deliberations, Decisions, and Committee Dynamics Kevin M
    CHAPTER FOUR Institutional Design: Deliberations, Decisions, and Committee Dynamics Kevin M. Warsh Monetary policy is conducted by individuals acting by legislative remit in an institutional setting. Great attention is paid to the individuals atop the largest cen- tral banks. Central bankers today are decidedly recognizable pub- lic fi gures. Some might even be called famous. Th eir newfound status, however, would make them thoroughly unrecognizable to their predecessors. Th e central banks’ responsibilities—the legislative remits with which they are charged—are also subject to considerable scru- tiny. Monetary policymakers are tasked with keeping fi delity to their legislated mandates. Some, like the European Central Bank (ECB), are granted a single mandate, namely to ensure price sta- bility. Others, like the Federal Reserve, are tasked with a so-called dual mandate, which includes ensuring price stability and maxi- mum sustainable employment. Th e fi nancial crisis resurrected yet another objective: ensuring fi nancial stability. Considerably less attention, however, is paid to the institutional setting in which the policymakers meet, deliberate, and ultimately decide on policy. Th ese institutional dynamics alone are not deter- minative of the policy outcome. But I posit that the institutional dynamics infl uence policy decisions more than is commonly appreciated. In business, academia, and government, people and policy con- verge in institutional settings. Th ese settings matter considerably to H6930.indb 173 3/28/16 2:00:44 PM 174 Kevin M. Warsh the ultimate success—or failure—of an endeavor. An institution’s set- ting is a function, in part, of its institutional design; that is, the way in which the entity is originally composed and comprised.
    [Show full text]
  • Event Transcript: the Shift and the Shocks: What We've Learned
    Unedited Rush Transcript Event The Shift and the Shocks: What We've Learned--and Have Still to Learn--from the Financial Crisis Martin Wolf, Financial Times Athanasios Orphanides, MIT Sloan School of Management Kevin Warsh, Hoover Institution, Stanford University Peterson Institute for International Economics, Washington, DC October 9, 2014 Adam Posen: Great man comes and that’s not me. Welcome everyone back to the Peterson Institute for International Economics. It’s a very pleasant evening. We’ve got some people here who are rarely here. We’ve got some people here who’ve been living here all week so it’s a good blend. We have one of the more festive occasions on our pre-meetings calendar, a good friend and a role model of communication Martin Wolf has agreed to premiere his Washington book and premiere his book, excuse me, do the Washington premiere for his book. It’s been a long week, I’m sorry. Do the Washington premiere for his book here at the Peterson Institute and we’re delighted to have him back on our stage. We had a great discussion with him about the Euro area with Jacob Kirkegaard and others a few months ago and tonight, we’re blessed to have two terrific policymakers who will now be able to discuss some of the implications of Martin’s book. But of course the main purpose of all this being economists is to sell. This is the book. The Shifts and the Shocks by Martin Wolf. This book is for sale outside. This book is not coming money to us; it’s money to Martin.
    [Show full text]
  • Quantitative Easing: the Fed’S Tough Decision Around the World, Financial Markets Have Been Talking of Little Else for Weeks
    FOMC PREVIEW QUANTITATIVE EASING: THE FED’s tOUGH DECISION Around the world, financial markets have been talking of little else for weeks. On Wednesday, the waiting game finally comes to an end. REUTERS/ KEVIN LAMARQUE BY PEDRO NICOLACI DA COstA Treasury bond buying from the Federal that, like its promise to keeping interest WASHINGTON, OCT 21 Reserve could ultimately rival the hefty first rates low, the second round of so-called round of asset purchases. quantitative easing will be around for an NE HUNDRED BILLION here, one With expectations of at least $500 billion “extended period” if needed. hundred billion there. Pretty soon already built into financial markets, the Fed The rationale for further monetary we’reO talking real money. may try to counter possible disappointment accommodation has been laid out by It may not be “shock and awe” at first by making its commitment open ended. Chairman Ben Bernanke, whose views on blush, but the ultimate sums involved in It will likely do so by setting parameters policy carry the day at the Federal Open a second, widely anticipated program of vague enough to convince the markets Market Committee. OCTOBER 2010 FOMC PREVIEW OCTOBER 2010 ”DepenDING ON EVOLVING ECONOMIC AND FINANCIAL CONDITIONS, QE2 HAS THE POTENTIAL TO GROW QUITE LARGE.” He has made clear that, with the 9.6 percent unemployment rate far above what might be seen as normal even in a post- recession context and inflation dangling at uncomfortably low levels, policymakers deem the risk of an outright deflationary rut significant enough to justify action. An incremental, flexible approach serves two purposes.
    [Show full text]
  • Working Paper Series
    Working Paper Series SOVEREIGN DEBT CRISES WITH SPECIAL REFERENCE TO EURO ZONE: VIEWED FROM AN ISLAMIC PERSPECTIVE Prof. Dr. Munawar Iqbal Circulation Limited King Abdulaziz University - Islamic Economics Institute ﺟﺎﻣﻌﺔ ﺍﻟﻤﻠﻚ ﻋﺒﺪ ﺍﻟﻌﺰﻳﺰ - ﻣﻌﻬﺪ ﺍﻻﻗﺘﺼﺎﺩ ﺍﻻﺳﻼﻣﻲ P.O.Box: 80214 Jeddah 21589 Saudi Arabia -Tel.: 6400789 - Fax: 6403458 ﺹ.ﺏ: ٨٠٢١٤ - ﺟﺪﺓ ٢١٥٨٩- ﺍﻟﻤﻤﻠﻜﺔ ﺍﻟﻌﺮﺑﻴﺔ ﺍﻟﺴﻌﻮﺩﻳﺔ - ﺕ:٦٤٠٠٧٨٩ - ﻑ:٦٤٠٣٤٥٨ The Islamic Economics Institute is an academic institution seeking to contribute effectively to build a global economic thought which would realize welfare and social justice by creat- ing an active research environment, in which the Institute's resources are mustered, to realize a pioneering academic status and create pioneering generations in the field of Islamic Economics. 1396 In (1976) King Abdul Aziz University (KAU) organized the first international conference on Islamic Economics in the world in which a number of Finance Ministers of Muslim Countries participated, (along) with a number of Shar'ah scholars and economists. The Conference came up with number of recommendations, including the establishment of a 1397 research centre in Islamic Economics at KAU. In 1977, the University responded positively to the recommendation by establishing Islamic Economics and Research Center 35 (IERC). Ever since its establishment, the Centre has been consolidating its research status; KAU 1432 built for it a strong Research infrastructure, such as library, a journal and sound academic 14331427 reputation. 14013 20 After 35 years of academic research, the University took an important decision to expand the scope of the Centre's activities to include education and training. In 2011, the Centre was transformed into the Islamic Economics Institute.
    [Show full text]
  • The Federal Funds Rate in Extraordinary Times
    For release on delivery 1:00 p.m. EDT May 21, 2008 The Federal Funds Rate in Extraordinary Times Remarks by Kevin Warsh Member Board of Governors of the Federal Reserve System at the Exchequer Club Washington, D.C. May 21, 2008 This may be the most pronounced time of testing for central banks in a generation.1 Let me recount just a few of our challenges: significant market turmoil, unsatisfactory economic growth, historic housing price declines, dramatic commodity price run-ups, risk of a secular reversal of global inflation trends, sharp changes in exchange rates, uneven and unprecedented contours of economic growth—and policy responses—across major trading partners, and significant domestic debate regarding optimal economic and regulatory policies. Mind you, my intention is not to declare, oh, woe is us. Thanks in no small measure to the scores of professionals long found in the four walls of the Federal Reserve System—and ample access to information—the Fed possesses both the commitment and resources to tackle these policy challenges. And, by virtue of the Fed's institutional credibility, bequeathed to today's Federal Open Market Committee by its predecessors, the policy response tends to be as highly anticipated as it is consequential. But in affirming our formidable assets, it is similarly not my intention to suggest that we have devised error-free policies to painlessly and smoothly achieve agreed-upon objectives. On Monetary Policy...Today The Fed is not omniscient. Neither are our tools uniquely and perfectly suited to ensure that the ills of yesterday do not recur.
    [Show full text]
  • US Treasury Markets: Steps Toward Increased Resilience
    U.S. Treasury Markets Steps Toward Increased Resilience DISCLAIMER This report is the product of the Group of Thirty’s Working Group on Treasury Market Liquidity and reflects broad agreement among its participants. This does not imply agreement with every specific observation or nuance. Members participated in their personal capacity, and their participation does not imply the support or agreement of their respective public or private institutions. The report does not represent the views of the membership of the Group of Thirty as a whole. ISBN 1-56708-184-3 How to cite this report: Group of Thirty Working Group on Treasury Market Liquidity. (2021). U.S. Treasury Markets: Steps Toward Increased Resilience. Group of Thirty. https://group30.org/publications/detail/4950. Copies of this paper are available for US$25 from: The Group of Thirty 1701 K Street, N.W., Suite 950 Washington, D.C. 20006 Telephone: (202) 331-2472 E-mail: [email protected] Website: www.group30.org Twitter: @GroupofThirty U.S. Treasury Markets Steps Toward Increased Resilience Published by Group of Thirty Washington, D.C. July 2021 G30 Working Group on Treasury Market Liquidity CHAIR Timothy F. Geithner President, Warburg Pincus Former Secretary of the Treasury, United States PROJECT DIRECTOR Patrick Parkinson Senior Fellow, Bank Policy Institute PROJECT ADVISORS Darrell Duffie Jeremy Stein Adams Distinguished Professor of Management and Moise Y. Safra Professor of Economics, Professor of Finance, Stanford Graduate School of Harvard University Business WORKING GROUP MEMBERS William C. Dudley Masaaki Shirakawa Senior Research Scholar, Griswold Center for Economic Distinguished Guest Professor, Aoyama-Gakuin University Policy Studies at Princeton University Former Governor, Bank of Japan Former President, Federal Reserve Bank of New York Lawrence H.
    [Show full text]
  • Of the Guide to the Targeted Review of Internal Models (TRIM)
    ECB-PUBLIC February 2017 Information on the current version (February 2017) of the guide to the Targeted Review of Internal Models (TRIM) Dear Members of the Management Body, As announced in the invitation you have received on 6 February 2017 for the conference on the Targeted Review of Internal Models (TRIM) organised by the ECB on 28 February 2017, we are pleased to share with you the current version (February 2017) of the guide to TRIM. This guide sets out the ECB’s view on the appropriate supervisory practices. It further spells out how the ECB intends to interpret the relevant EU law on internal models for credit, market and counterparty credit risks and on general model governance topics. The aim pursued by the guide is to ensure a harmonised interpretation and application of the existing legal framework as well as also ensuring close alignment with upcoming changes in the regulation on internal models. The guide to TRIM will be presented to the institutions in scope for TRIM during the conference on 28 February 2017 and will be made public consecutively via the ECB Banking Superivsion website. Until this publication, this version shall not be shared with any other third party. We also invite you to provide feedback on this version of the guide to TRIM in order to identify where further clarifications or reconsiderations of the defined principles could be helpful. To that extent, you will find attached feedback templates for each chapter, including some instructions. We kindly ask you to send back these feedback templates to [email protected] by Thursday, 13 April 2017.
    [Show full text]
  • US Economic Autumn Outlook | August 31, 2015 MORGAN STANLEY RESEARCH
    US Economic Autumn Outlook | August 31, 2015 MORGAN STANLEY RESEARCH August 31, 2015 MORGAN STANLEY & CO. LLC Ellen Zentner US Economic Autumn Outlook [email protected] +1 212 296-4882 Ted Wieseman Sobering Up On Supply Side [email protected] +1 212 761-3407 Paula Campbell Roberts [email protected] +1 212 761-3043 Domestic momentum should be enough to lead the Fed to deliver a Robert Rosener December rate hike as downside risks to inflation ease. Thereafter, [email protected] +1 212 296-5614 depressed productivity and lower potential growth take center stage. Forecast Highlights: More muted growth outlook—productivity picks up only moderately; potential GDP growth and NAIRU are lower. Slower path for policy tightening—we have removed 50bps of tightening in 2016 via one less rate hike and delayed balance sheet action. Job growth slows sharply in 2017—we expect 50k average monthly job growth by the end of 2017 on a gradual rise in productivity and renewed downtrend in participation, just enough to keep the unemployment rate steady. Outlook for inflation little changed—headline inflation remains largely oil-driven. For core inflation, housing-led upside in core services prices is offset by dollar appreciation and weakness in more globally-driven core goods prices. Downward revision to growth in 2015/16—2015 GDP revised lower to 2.4%Y vs 2.5% previously, 2016 comes down by 0.8pp to 1.9%Y and we initiate 2017 at 1.8%Y. A US recession enters the bear case—in our bear case we explore the possibility of a US recession within the next 12 months.
    [Show full text]
  • Glass–Steagall Act
    Glass–Steagall Act The Glass–Steagall Act is a term often applied to the entire Banking Act of 1933, after its Congressional sponsors, Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama.[1] The term Glass–Steagall Act, however, is most often used to refer to four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms.[2] This article deals with that limited meaning of the Glass–Steagall Act. A separate article describes the entire Banking Act of 1933. Starting in the early 1960s federal banking regulators interpreted provisions of the Glass– Steagall Act to permit commercial banks and especially commercial bank affiliates to engage in an expanding list and volume of securities activities.[3] By the time the affiliation restrictions in the Glass–Steagall Act were repealed through the Gramm–Leach–Bliley Act of 1999 (GLBA), many commentators argued Glass–Steagall was already “dead.”[4] Most notably, Citibank’s 1998 affiliation with Salomon Smith Barney, one of the largest US securities firms, was permitted under the Federal Reserve Board’s then existing interpretation of the Glass–Steagall Act.[5] President Bill Clinton publicly declared "the Glass–Steagall law is no longer appropriate."[6] Many commentators have stated that the GLBA’s repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the late-2000s financial crisis.[7][8][9] Some critics of that repeal argue it permitted
    [Show full text]
  • What the Financial Services Industry Puts Together Let No Person Put Asunder: How the Gramm-Leach-Bliley Act Contributed To
    Florida A&M University College of Law Scholarly Commons @ FAMU Law Journal Publications Faculty Works 2010 What the Financial Services Industry Puts Together Let No Person Put Asunder: How the Gramm- Leach-Bliley Act Contributed to the 2008 - 2009 American Capital Markets Crisis Joseph Karl Grant [email protected] Follow this and additional works at: http://commons.law.famu.edu/faculty-research Part of the Commercial Law Commons, Consumer Protection Law Commons, and the Law and Politics Commons Recommended Citation Joseph Karl Grant, What the Financial Services Industry Puts Together Let No Person Put Asunder: How the Gramm-Leach-Bliley Act Contributed to the 2008 - 2009 American Capital Markets Crisis, 73 Alb. L. Rev. 371 (2010) This Article is brought to you for free and open access by the Faculty Works at Scholarly Commons @ FAMU Law. It has been accepted for inclusion in Journal Publications by an authorized administrator of Scholarly Commons @ FAMU Law. For more information, please contact [email protected]. ARTICLES WHAT THE FINANCIAL SERVICES INDUSTRY PUTS TOGETHER LET NO PERSON PUT ASUNDERt: HOW THE GRAMM-LEACH-BLILEY ACT CONTRIBUTED TO THE 2008- 2009 AMERICAN CAPITAL MARKETS CRISIS Joseph Karl Grant* ABSTRACT The current subprime financial crisis has shaped up to be one of the most dramatic and impactful events in the past few decades. No one particularfactor fully accounts for why the American economy suffered setbacks unseen since the Great Depression of the 1930s. Some of the roots of the current financial crisis started taking hold in 1999 when Congresspassed the FinancialServices Modernization Act, also known as the Gramm-Leach-Bliley Act.
    [Show full text]