A main disadvantage of owning equity rather than bond equity is that the holder is a residual claimant and the firm.
The firm must pay all its debt holders before it can pay its equity holders?
An advantage to holding is equity is that equity holders benefit directly from any increase in the corporation's profits or asset value.
Debit holders do not benefit in any increase in the corporation's profits or asset value because their payments are fixed.
A security is a financial instrument that is a claim on the issuer's future income or assets (or any financial claim or piece of property that is subject to ownership)?
Bond's account of 32% of all financial business external financing?
Stock - A security that is a claim on the earnings and assets of a corporation.
A bond is
a debt security that promises to make periodic payments for a specific period of time.
When a firm sells a bond, it is effectively borrowing from the public, instead of the bank.
is basically an IOU and it stipulates that when the corporation owes the bond's buyer a certain stream of payments til the bond matures - when the bond is paid off.
When you purchase stock, you're purchasing a partial ownership of the company.
Stocks are also called equities.
A main advantage of owning equity rather than bond equity is that the holder is a residual claimant.
A financial intermediary is
an institution that pools the savings of a LARGE number of households and channels it in the form of a loan to other households and firms
an institution that pools the savings of a SMALL number of households and channels it in the form of a loan to other households and firms
Financial intermediaries channels funds from lenders
= savers or investors
= dissavers or spenders
Financial intermediaries channel funds to borrowers
Direct financing:
borrowers borrow directly from lenders through financial markets (debt, equity markets) by selling them securities (bonds, stocks)
borrowers borrow indirectly from lenders through financial intermediaries (commercial banks): bank loans
Indirect financing:
borrowers borrow directly from lenders through financial markets (debt, equity markets) by selling them securities (bonds, stocks).
Benefits of well-function financial system
efficient allocation of resources
allows for the timing of purchases for what is desired at prferred times - thus improving the economic welfaire
The rate of return is defined as a payment to the owner plus the change in its value, expressed as a fraction of its purchase.
investment banks
not really banks, help companies raise funds by issuing new securities
accept deposits, make loans for a variety of purposes & some also deal in securities markets
Commercial Banks
accepts deposits, makes loans for variety of purposes & some deal in securities markets
Economic growth
Increase in real GDP, standards of living and productivity
Decrease in real GDP, standards of living and productivity
Present value
value of future dollars in terms of today's dollars
value of 1 dollar today in terms of dollars @ some future time
Yield to Maturity = interest rate that equates the PV of future cash flow payments to its price today
Because corporations do not actually raise any funds in secondary markets, secondary markets are less important to the economy than primary markets are.” Is this statement true, false, or uncertain?
Future value (FV)
If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
Bonds issued by the company
Equities issued by the company
Is everybody worse off when interest rates rise?
Yes
No
Calculate the present value of a $1,000 discount bond with five years to maturity if the yield to maturity is 6%
757.20
747.10
747.26
Money market instruments
are short-term securities whose maturity is less than 1 year
are securities whose maturity is greater than 1 year
undergo lease price fluctuations, and hence, are less risky than long-term instruments in general
Money Market Instruments (involving short-term securities ) include which of the following:
US Treasury bills (T-bills)
Negotiable Certificates of Deposits (CDs)
Commercial Papers (CPs)
Banker's acceptances
Repurchase agreements (Repos)
Federal funds (Fed funds) - interbank loans
Eurodollars (or Eurocurrencies)
Capital Market Instruments:
Instruments whose maturity is GREATER than 1 year
Instruments whose maturity is LESSthan 1 year
Capital Market instruments include:
Stocks
Corporate bonds
US government securities (T-Notes and T-Bonds)
US government agency securities: Ginnie Mae (GNMA), Fannie Mae (FNMA)
Mortgages and Mortgage-backed securities (MBS)
Bank loans: consumer loans
Foreign bonds vs. Eurobonds: international bond markets
