BU111 Final - Economic Factors

Financial Institutions

facilitate the flow of money from sectors with surpluses to those with deficits

4 Financial Pillars

1) chartered banks

2) alternate banks (trust companies, credit unions)

3) specialized lending & saving intermediaries

4) investment dealers

Financial pillar #1: chartered banks

-a privately owned, profit-seeking financial intermediary that serves individuals, businesses & non-business organizations

-main source of short-term loans for business firms

Financial Pillar #2: alternate banks

-trust companies - safeguards funds and estates entrusted to it; may also serve as trustee, transfer agent, and registrar for corporations

ex: a corporation selling bonds to investors appoints a trustee, usually a trust company to protect the bondholders interests

OR

-credit unions - cooperative savings and lending association formed by a group with common interests

ex: lend money to businesses & consumers who use the money to buy durable goods

Financial Pillar #3: specialized lending & saving intermediaries

- Life insurance companies -shares risk with its policyholder in return for payment of a premium from policyholders

- factoring companies - buys accounts receivable from a firm for less than their face value then collects the face values of receivables

Financial Pillar #4: Investment dealers

-primary distributors of new stock and bond\ issues

-facilitate secondary trading of stocks and bonds, both on exchanges and over the counter stock and bond markets

Bonds

-Certificates of debt that carry a promise to buy back the bonds at a higher price

-a company/ government borrows money from you (investor). they pay interest (coupon) each year and pay off the debt (face value) on an agreed date (maturity date)

Yield

- percentage return on any investment

-helps compare investments

- yield = what you made/ what you paid

Interest on a bond

coupon rate x face value

Capital gain on a bond

face value - purchase price

Approximate yield to maturity

(coupon rate x (face value + (face value - price paid)/ years to maturity) / price paid

What impacts the coupon rate at bond issue

-environment: prevailing interest rates

-company: credit rating of issuer

-product: features

What impacts bond price when traded?

- environment: changes in prevailing rates of interest; inflation

-company: changes in credit rating

- product: coupon rate relative to the return on other equally risky investments

Stocks

Securities that represent part ownership or equity in a corporation

Common stock

the most basic form of ownership, including voting rights on major issues, in a company

preffered stock

Preferred stock typically has limited or no voting rights, but its holders are paid dividends or receive repayment priority in the event the corporation is liquidated

Impacts of stock price

-present value of expected future cash flows

-anything that effects demand and supply of stock

What effects expected future returns?

- environment: economy, interest, PEST, industry conditions, changing dynamics

-company: choices, strategies & changes in diamond E

Leverage

value of initial investment is greater than dollars available to invest

Buying on margin

paying a small percentage of a stock's price as a down payment and borrowing the rest

Going Long

purchase stock with your money only

Selling short

selling stock that has been borrowed from a brokerage firm and must be replaced at a later date

-buy low, sell high