Finance 301 1st Edition Lecture 1 Outline of Last Lecture I. Syllabus and class expectationsOutline of Current LectureII. Financial MarketIII. Role of Financial MarketIV. Primary vs Secondary MarketsV. Securities Traded in Financial MarketsVI. Valuation of SecuritiesVII. Use of Form to Make Investment DecisionsVIII. International Security TransactionsCurrent LectureI. Financial Marketa. Securities- mutual funds, treasuries, stocks, bills and bonds, CDs, mortgagesb. Financial asset- piece of paper that gives you a claim to its asset that backs it. Piece of paper that gives us a return. Something that gives us a value and a return on your investment c. Financial institution- bank, insurance company, investment brokerage, they transfer capital (invest for us) facilitate the flow of fundsd. Physical assets- farm commodities, real estate deals with land and buildingse. Liquidity- financial assets are more liquidf. Real estate assets generally take longer to sell and transferg. Insurance markets- guaranteed a certain payback with insurances, not guaranteed with bonds and stocksII. Role Of Financial Marketa.Surplus units: participants who receive more money than they spend, such as investors- participants who receive more money than they spend such as b.Deficit units: participants who spend more money than they receive, such as borrowersc. Households- surplus put money in banks, bonds, stocks, d.Corporations and Government- deficit unitse.Securities: represent a claim on the issuersi. Debt securities- bondThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.ii. Equity securities- stockiii. What you owe vs what you ownf.Accommodating the need for corporations to borrow money. By selling stocks we are taking ownership of the company and they are getting money for us to do that. They have to decide how much debt vs equity that they want. g. Borrowing moneyi. Get companies money, they need to expandii. They have to buy good and create inventoryiii. Investing so investors can make a returniv.Intermediaries- help investors advance. Example- bank make things easier for bank to get money and buy investmentsh.III. Primary vs Secondary Marketsa. Primary Market- Facilitate the issuance of IPOi. Where new money or new security happens example giving you a loan, orwhere a company issues new stockii. IPO-initial public offer of stockb. Secondary Market-facilitate the trading of existing securities, which allows for a change in the ownershipi. Liquidity- how easy it is for a security to turn into cash without a loss in valueii. Liquid investments- money market investments, 30 day treasury bill (risk free, never loose money but you don’t make a lot of money either)IV. Securities Traded in Financial Marketsa. Securities can be classified as money market securities, capital market securities, or derivative securities.b. Money markets facilitate the sale of short-term debt securities by deficit units to surplus units.c. Debt securities with a term of less than one year are generally designated to money market instruments rather than bonds.d. Money market securities are very liquid they have a maturity of 12 months or less things like short term treasury bills or a CDe. Capital Market Securities - facilitate the sale of long-term securities by deficit units to surplus units.i. Should go for a year or more TAX REASONS, transaction costs to buy or sell the stockii. Bonds- 2 years or more hold them, long term debtiii. Mortgages- investments in real estate loansiv. Mortgage backed securities- investment in real estate loans for 15 20 years usually v. Stocks- capital gains taxes, different tax treatments depending on how long you hold securitiesvi. Capital gains tax- government encourages you to hold long-term investments. You get taxed less 15%f. Derivative Securities - financial contracts whose values are derived from the values of underlying assetsi. futurist, swap contracts- short term and long term securities where they have physical asset underlying them and its not always real estate ex. Corn, soybeans, rice contract, or it can be an interest rate, another form of security that has an asset behind it, invented for two type of people (farmers and the banks) they use derivatives to hedge risk. ii. Speculation- trying to make big returnsiii. Risk management and hedging- don’t care if they loose as long as they don’t loose bigiv. Hedge and risk- banks and farmers want to avoid disaster so they take outcontracts and they note going in that they may loose money (futurist contract) but they don’t care because they are trying to avoid disaster ex if interest rates move too fast they cant pay off their liabilitiesV. Valuation of Securitiesa. Impact of information on valuations (by investors)i. Estimate future cash flows by obtaining information that may influence a stock’s future cash flows. ii. Use economic or industry information to value a security.iii. Use published opinions about the firm’s management to value a security.b. Impact of Behavioral Finance on Valuationi. Various conditions can affect investor psychology. Behavioral finance can sometimes explain the movements of a security’s price.ii. Price should be based on cash flows for buyingiii. Bond and mortgage- interest getting paidiv. VB=CF/ 1+R show valuec. Industry information example- 10 yrs ago own BP stock, BP stock went down because of the oil spill the cash flow from BP is going to make less money after that oil spill value of the stock should go downd. Analyst ratings- cell ratings and by ratings they know more about the companies than we doe. Always remember that there are two ways stocks move cash flow and behaviorVI. Use of form to make investment decisionsa.VII. International Security Transactiona. Foreign Exchange Market - International financial transactions normally require the exchange of currencies. The foreign exchange market facilitates this exchange.i. New york stock exchange is not the biggest exchange in the country but the biggest market in the world is FOREX foreign exchange market… its anOTC market over the counter market, trading of currencies, foreign countries do have stock