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Chapter 1 Terms-EOC Questions

Chapter 1 Terms-EOC Questions - sCh 1 Terms/EOC Questions...

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sCh 1 Terms/EOC Questions List of Terms 1. Finance : involves the management of money. Decision making in finance looks forward. 2. Corporate Finance : involves how companies raise and invest money and manage their financial resources. Corporate financial managers are the interface between providers of capital (institutional/individual investors) and the financing of the firm. 3. Capital Markets : the financial markets where issuers and investors buy and sell debt and equity securities. 4. Debt : an obligation to repay borrowed monies. Companies can raise capital in the financial markets by selling debt instruments that normally have fixed/variable interest payment + repayment of principal) 5. Stocks : represent ownership in a company. Stocks are sold by companies to investors in financial markets as equity. 6. Market Efficiency : Efficient capital markets are tough to beat, which means that the prices of stocks and bonds in capital markets react very quickly to new information. Technology has increased transactions in quantity and velocity. 7. Asset Allocation : Decision to invest in stocks, bonds, or cash. 8. Diversification: Asset diversification will reduce your risk without cost. Essentially “Don’t put all your eggs in one basket.” 9. Risk: A risky dollar is worth less than a safe dollar. Individual investors are rational and therefore risk averse. Higher returns do require more risk. 10. Markets: Markets react very quickly to new information. Prices in markets are driven on a day-to-day basis by short-term supply and demand conditions. Financial markets need to provide investors with liquidity. Exist so that excess monies from investors can be transferred cheaply/efficiently to those with profitable investment opportunities & shortage of funds. 11. Financial intermediaries: borrows funds from savers/investors by issuing a claim (a savings or checking deposit/ or contract like insurance policy or pension obligation). The funds borrowed are used to make loans or purchase higher yielding securities (riskier). These are the middlemen in the capital markets and link lenders and borrowers. A financial intermediary creates and sells secondary securities and uses proceeds to buy primary securities. 12. Investment Decision: One of 3 basic decisions corporate financial managers make. Company funds must be invested in working capital, tangible & intangible assets to buy/
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build projects, and investments that will be worth more than they cost. Once capital is raised, companies must invest it well to maximize shareholder value. Investments should be made in projects with positive net present value.
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