Finance and Banking

Financial management

The job of acquiring and managing a firm's funds to accomplish its objectives.

Risk-return trade-off

The balance financial managers must maintain between the firm's investment risk and the expected return from its investments.

Corporate Finance

The field that includes investment decisions, financing decisions, and working capital management.

Investment decisions

Capital budgeting that involves allocating resources to projects for the best return.

Financing decisions

Concerns how to fund operations, balancing debt and equity.

Working Capital Management

Focuses on efficiently managing short-term assets and liabilities to ensure smooth operations.

Federal Reserve policy tools

The three tools are the reserve requirement, open-market operations, and the discount rate.

Reserve requirement

The percentage of deposits banks must hold in reserve.

Open-market operations

Involves the Fed buying and selling U.S. Treasury securities.

Discount rate

The interest rate at which the Fed makes short-term loans to member banks.

Syndicated loan

A single lending transaction where a corporation engages with multiple banks at once, used for exceptionally large loans.

Characteristics of money

The five characteristics are portability, divisibility, durability, uniqueness, and stability.

Pledging

When a firm uses its accounts receivable as collateral to obtain a short-term loan.

Factoring

When a firm sells its accounts receivable at a discount to a financial institution to receive funds immediately.

Federal Open Market Committee (FOMC)

The Federal Reserve's chief body for monetary policymaking.

Solvency

The ability to pay debts.

Efficiency in financial management

Managing money optimally.

Purpose of financial statements

To provide essential information about a business's financial performance and position.

Creation of the Federal Reserve System

Originally created in 1913 to achieve two primary goals.

Cryptocurrency

A digital or virtual currency that uses cryptography for security.

Blockchain

A decentralized digital ledger that records transactions across many computers.

Peer-to-peer transactions

Transactions that occur directly between users without an intermediary.

Board of Governors

The seven members who oversee the Federal Reserve System.

Federal Reserve Bank of New York

One of the 12 regional banks in the Federal Reserve System, with a president who is a voting member.

Interest Rates

Rates set by the Federal Reserve to promote maximum employment and stable prices.

Balance Sheet

A financial statement providing a snapshot of a company's assets, liabilities, and equity at a specific moment.

Income Statement

Also known as the profit and loss statement, it shows a business's profitability over a period.

Cash Flow Statement

A financial statement outlining the movement of cash, highlighting operating, investing, and financing activities.

Federal Reserve

Created in response to banking panics, its original objectives were to help banks acquire emergency cash reserves and facilitate payments.

FinTech

Innovations in technology that are changing how firms raise capital and how consumers conduct transactions.

E-cash

A digital form of cash that allows for electronic transactions.

Crowdfunding

A method of raising capital through the collective effort of friends, family, customers, and individual investors.

Capital Budgeting

The process of planning and managing a firm's long-term investments.

Capital Structure

The mix of debt and equity financing used by a firm.

Commercial Banks

Financial institutions that provide services such as accepting deposits and making loans.

Federal Reserve Regional Banks

The 12 banks that operate under the Federal Reserve System, each serving a specific district.

Accounts Receivable

The total amount owed to a firm from customers who have purchased goods or services on credit.

Asset-Based Lending

Loans that are backed up by some form of collateral, which the bank will take ownership of if the corporation defaults on the loan.

Barter

The trading of goods and/or services for other goods and/or services with no money changing hands.

Brokerage Firms

Companies that buy and sell stocks and bonds for individuals and compete with banks by offering certain high-interest-rate accounts. Also known as securities investment dealers.

Budget

A detailed financial plan showing estimated revenues and expenses for a particular future period, usually one year.

Commercial Bank

A federal- or state-chartered profit-seeking financial institution that accepts deposits from individuals and businesses and uses part of them to make personal, residential, and business loans.

Commercial Paper

Unsecured, short-term promissory notes over $100,000 issued by large banks and corporations, usually due in 30 to 90 days.

Corporate Bonds

Contracts between an issuer and a buyer in which the purchase price represents a loan by the buyer, for which the issuing firm pays the buyer interest.

Cost of Capital

The rate of return a firm must earn to cover the cost of generating funds in the marketplace.

Credit Unions

Depositor-owned, nonprofit financial cooperatives that offer a range of banking services to their members.

Dual Mandate

The two main priorities given to the Federal Reserve by Congress in 1978: to focus on stable prices and maximum employment.

E-cash (Electronic Cash)

Money held, exchanged, and represented in electronic form and transacted over the Internet.

Equity Financing

Raising money by selling ownership shares (stock) in the firm, retaining earnings, or receiving venture capital.

Federal Deposit Insurance Corporation (FDIC)

An entity that insures bank deposits up to $250,000 and covers mostly commercial banks.

Federal Reserve System (The Fed)

The central bank of the United States, formed in 1913, which controls the U.S. money supply.

Finance Companies

Nondeposit companies that make short-term loans at higher interest rates to individuals or businesses that do not meet the credit requirements of regular banks.

Financial Control

The process where a company periodically compares its actual revenues and expenses with those predicted in its budget.

Financial Leverage

The technique of using borrowed funds to increase a firm's rate of return.

Financial Plan

A firm's strategy for reaching its financial goals, typically including forecasting, budgeting, and financial controls.

FinTech (Financial Technology)

The integration of technology and finance, representing a shift in the financial industry driven by digital innovation.

Interest Rate

The price paid for the use of money over a certain period of time.

Letters of Credit

A trade financing product where an importer's bank issues a letter guaranteeing payment to an exporter once goods are shipped.

M1

The portion of the U.S. money supply that can be accessed quickly and easily.

M2

The portion of the U.S. money supply defined as M1 plus money that takes more time to access.

Money

Any medium of value that is generally accepted as payment for goods and services.

Nonbanks

Financial institutions—such as insurance companies, pension funds, and finance companies—that offer many of the same services as banks.

Peer-to-Peer (P2P) Lending

A system, also known as social lending, that allows individuals to borrow and lend money while bypassing financial institutions.

Pension Funds

Nondeposit institutions that provide retirement benefits to workers and their families.

Promissory Note

A written contract prepared by a buyer who agrees to pay the seller a certain amount by a certain time.

Savings and Loan Associations (S&Ls)

Financial institutions that accept deposits and were originally intended to make loans primarily for home mortgages.

Secured Loan

A loan where the borrower pledges some sort of asset (collateral) that is forfeited if the loan is not repaid.

Trade Credit

Short-term financing by which a firm buys a product, receives a bill, and pays it later, usually in 30 to 90 days.

Unsecured Loan

A loan where the borrower does not pledge an asset as collateral.

Venture Investment Capital

Funds acquired from wealthy individuals and institutions that invest in promising startups or emerging companies in return for some ownership.

Working Capital

The funds available to run day-to-day operations, calculated as current assets minus current liabilities.