FIN 401- Book Notes

FIN 401- Book Notes - FIN401Chapter1BookNotes...

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FIN 401- Chapter 1 Book Notes 07/02/2011 10:30:00 Chapter 1- Investments: Background and Issues Investment= The current commitment of money or other resources in the  expectation of reaping future benefits o Sacrifice something of value now, expecting to benefit from that  sacrifice later Real Assets vs. Financial Assets o Real Assets= assets used to produce goods and services (land  equipment, knowledge) Generate net income to the economy o Financial Assets= Claims on real assets or the income generated by  them (stocks and bonds) Define the allocation of income or wealth among investors o Investors’ returns on securities ultimately come from the income  produced by the real assets that were financed by the issuance of  those securities o My asset in Toyota stock, is their liability to  A Taxonomy of financial Assets o Fixed Income (debt securities)= Pay a specified cash flow over a  specific period Corporate bond- fixed amount of interest each year Money Market- fixed income securities that are short-term,  highly marketable, and low risk (Treasury Bills) Capital Markets- long-term securities, safe in terms of default  (Treasury Bonds) o Equity- an ownership share in a corporation Not promised any payment, only dividends if paid Tied directly to the success of the firm-real assets Riskier than debt securities
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o Derivative securities- Securities providing payoffs that depend on the  values of other assets Options and future contracts Used to hedge risks o Financial Markets- The Economy The Informational role of financial Markets Role in the allocation of capital resources (who will live  and who will die, bid up or bid down) Consumption Timing Store wealth in financial assets High-earning and low-earning periods also known as  invest money or sell off assets Allocation of Risk Benefits stockholders who bear risk but reap rewards  Benefits firms that needs to raise capital to finance their  investments When investors are able to select security types that  benefit their preferences, each security can be sold for  the best price -> builds economy’s stock of real assets Separation of Ownership and Management Financial assets and the ability to buy and sell those  assets in the financial markets allow for easy separation  of ownership and management Some avoid risky projects to protect their own jobs=  agency problems Compensation for managers= stock options (managers  wont do well unless stock price goes up) If you don’t perform to expectations of top mangers, or  stockholders, there is a threat of being fired or worse 
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This note was uploaded on 11/15/2011 for the course FIN 401 taught by Professor Staff during the Spring '08 term at Miami University.

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FIN 401- Book Notes - FIN401Chapter1BookNotes...

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