BFIN 300
09/25/2025
Financial markets
Securities are purchased and sold
Essential components of a global economy: facilitating the exchange of financial assets. Enabling efficient allocation of resources
Each serves a unique purpose
Stock exchange: all allow buying and selling of shares in public
Commodity market: allows us to trade raw materials
Cotton, oranges, oil
Foreign exchange market:
Derivative market: securities are dependent on another security
Financial markets provide us with a lot of liquidity, quickly allows us to trade assets
Offer us Risk management tools
Facilitate capital
Key participants: investors
Excess funding from investors, excess cash, find places to deploy money
Transfer cash cheaply and efficiently to businesses
Security: A fungible, negotiable financial instrument that holds some type of monetary value
Primary market: first sale of a security
Secondary market: buyers and sellers exchange IPO shares
Stockholders have rights to dividends when they're declared
Theyre entitled
Current price of a security = supply = demand
Might be heavily influenced by a supply and demand imbalance
Company financial performance: investors' demand for stock of a particular company is significantly affected by events that affect how a business performs in the economy
New info comes out: have to reassess
SEC: the Securities and Exchange Commission
Principal regulator or all primary and secondary markets
Securities act of 1934: created the SEC
Responsible for licensing securities professionals’
Primary objective: to provide investors with complete disclosure of all material information of publicly traded companies
Investment bank: a financial institution that work with issuers who sell securities to distribute new securities in the primary market
Link investors to security issuers
They underwrite and purchase securities from the issuer
Once they have it on their balance sheet they distribute their shares and sell it to the public
Sell it at a higher price
Stock exchange: official members of the stock exchange
NY is the largest stock exchange
Money market: short-term debt securities
Foreign exchange market: financial managers understand foreign capital markets and to know how they actually operate
Many raw materials a corp buys its done through foreign currency
Additionaly the company might have assembly plants that are based in other countries
Derivative: A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset.
Derived from something else, of another security
10/7/2025
Security markets: provide a marketplace where buyers/sellers of securities complete these transactions quickly and efficiently
Secondary market*****: exchange shares of post-IPO shares
Stockholders have a right to any dividends declared, to the residual value of the business
Residual value: leftover after all assets are solds to cover liabilities and expenses
Financial regulation: regulation of financial markets
Principal regulator of primary and secondary markets: Securities and Exchange Commission, the SEC
Responsible for licensing security professionals
Responsible for collecting disclosure information
Collect quarterly and annual reports
Enforce security laws in the U.S
Investment banks
Financial institutions, work with issuers to distribute new securities in primary market
Link investors with issuers of securities
Functions: advise issuers, underwrite and distribute shares to the public
Broker: acts to buy stock and bonds or other securities on behalf of clients of a firm, act as an agent
Exchanges:
Stock Exchange: a formal organizations and approve and regulate by the SEC. Traded by the exchange
Money market: debt securities with original maturity of less than 1 year
Transfer funds from market participants with short-term excess money who have short-term needs for those funds
Treasury bills, fed funds, commercial papers, traded in the money market (short-term instruments)
Low risk securities
Sold in millions dollars or more
Long-term securities: traded in capital markets, principal buyers of these are financial insituttions and individual investors
Price fluctuations are more substantial and voltitle than money market securities, longer-dated, more risk
Foreign exchange markets: important for financial managers to understand how foreign capital markets work and how they operate
Many raw materials are being used
Can greatly increase or decrease company's revenue and profits
Derivative security: whose value and payoff are derived or based on the value of another security
Two major big derivatives
Financial securities: a contract between provider of funds and the user of the funds and clearly specify the amount of money thats been provided and the terms and conditions on how theyre going to prepay the provider of the money
Corporations are raising long-term money (capital) by issuing corporate bonds and preferred & common stock
The equilibrium price of any security is the expected rate of return that compensates the investor
Common financial securities;
Debt: fixed payments to the investor, debt holders have priority over equity holders
Debt investors are not owners of the business, however if the cash flows are low that the business is unable to meet its payments, the owners of debt securities, the business will be held in default. (Cant pay your loans)
Equity: obtains a payout only when the businesses’ cash flows are greater than the amount due on the debt
Cash flows to an equity security holder is not fixed. Higher cash flows to the business = high class flows to the equity investor
Low cash flow = equity investors obtain nothing
Debt holders are creditors, not owner of a business, if you provide debt to a company you’re a creditor
Fixed coupon bond: debt securities where business pays a specific amount called a coupon, interest payment pays every period until the bond matures. Maturity, bond will pay face-value, what you invested
Computed by multiplying the face value by the coupon rate (interest rate)
Coupon rate pf the bond is not rwquored rate of return. Es
0 coupon bond: a debt security that promises only one payment at maturity. Payment is fixed. No interest associated with it
Variable rate bond: interest rate is specified in contract
Perpetual bonds: fixed coupon payment bond that has no maturity. Issuer pays fixed interest forever.
Income bonds: features of fixed and variable interest paying bonds. Income carry a promise to pay fixed interest payment
Convertible bonds: allows security holder to convert to another security. Convert usually into equity. Debt to equity
Callable bonds: similar to fixed coupon ond. Except the business has the right to reprchase it as a predetermined price
Equities: contrary to debt, theyre more uniform across companies. Equity holders have a residual claim on the business's cash flows. Equity holders are owners of the business and as owners they have a say in the operating decisions of the business. Equity holders have control privileges, have the right to vote on important matters.
Equity voting rights: management calls a general shareholder meeting, majority voting
Owner of shared stock can expect cash flows from two types
Dividends: paid from net income after tax, after all payments have been made. Dividends are residual cash flow. Businesses are not required to pay dividends. Not guaranteed cash flow
Sale of shares/securities: note that the price they receive is the prevailing market price of the stock. Not guaranteed cash flow
10/09/2025
Preferred stock will have a stated par value, just like a bond
Stated fixed dividend
Two features make it seem more like a debt security
Private placement
Initial public offering
Security has a claim on cash flows, assets of a company****
Most common: corporate bonds, preferred stock, common stock
Traded in financial or securities markets
Two ways a company can issue new securities in a primary market to raise capital
Private placement and initial public offering
Private placement: direct sale of new securities to individual investors
Company prints out new securities, allows employees to directly purchase
Larger ones involve financial institutions, an investment bank
Initial public offering: An IPO, or initial public offering, is the term for the first time that a private company sells shares of its stock to the public on a stock exchange.
Secondary markets
Public trading of stock on organized exchange is more common than trading bonds
Most bond trading takes place in large institutional vessels, dont go through an exchange
Largest and best known exchange is the NY Stock Exchange
Process of trading on all exchanges is the same, applies to all exchanges, all major firms on Wall St. are members of the NY stock exchange
No physical location, NASDQ, links deals together to buy and sell securities to the public
Dealer: that person is similar to a specialist, one specialist for most stocks, theres many dealers from most stocks that trade OTC
Referred to as market makers, they have to list big and ask prices, ask for buy and sell price
Two most popular embassies in the us
Dow Jones Industrial Average
Price-weighted average
To maintain consistency through time, the number has to be changed when the company splits stocks or removed from the DOW or replaced by another
Movement on and off is rare it does occur, no longer represent their industry or mainstream America
THE S&P
A valued index as opposed to the DOW which is price weighted
500 stocks
These stocks are the most dominant and influential on the NY stock exchange
To compute the closing index, the market values, meaning price per share x shares outstanding, of all 500 stocks are added together. The value is then compared
End of financial securities
Time value of money
Rate of interest
Time period
Present value
Future value
Bank deposit
Compounded** earning interest on interest, process of earning interest on the initial principal and interest earned on previous periods
Installments
10/16/2025
Time value of money: earn interest, invest
As inflation increases, purchasing power decreases
Compounding: earning interest on the interest received
Exponential vs linear
10/21/2025
Financial security, markets, 5 and 6, time value of money, and discounted cash flow
Chapter 5
10/23/2025
Review: Financial securities
Financial markets exist so that money from investors can be transferred cheaply to businesses, governments,and officials if they need money
In return for use of money, the user of funds is gonna sell an investor a security
A security is a claim of assets or cash flow of a company
Issuers of securities receive funds directly from the initial sale of securities, primary market. Primary market, IPO
Provide liquidity, use of financial markets
Ease of owner of security can sell to an investor or security markets without diminish in value
Security markets provide buyers and sellers of securities can complete transactions quickly
Secondary market: get together to trade securities, occurs after the initial public offering,
Examples: exchange of post IPO securities
Equity claim: common stock, the investor of funds receives ownership rights and have right to any dividends declared
Residual value: whats left over after all assets are sold to cover expenses and liabilities
Fundamental determinant of a price of a security in a secondary market: supply and demand
Principal regulator: SEC, security exchange commission
Responsible for licensing security professionals
Collecting public disclosure information
Investment bank: financial insitutitons work with issuers
Advise issuers
Underwrite: im giving you the money beforehand, no shares, take risks on balance sheet, purchasing securities at a fixed price so a company can get their cash immediately, distribute and sell it to the public
Broker: an agent, businesses act to buy and sell stocks and bonds and other securities for or on behalf of clients of a firm
Execute orders
Price discovery, liquidity
To minimize search costs, its helpful to have a physical central trading location
Exchange, nothing is made or issued at the exchange
Stock exchanges are formal organizations and are approved and regulated by the SEC
Money market: debt securities and have an original maturity of 1 year or less, short term securities, they serve to transfer money or funds from market apritcipants with short term excess funds to governments, agencies that have a liquidity problem
Investors usually purchase money market instruments as temporary to use later
What ares securities traded in the money market
Are they low risk?
Interest rate on money market securities are lower
Capital market security: long term securities, bonds, stocks,
Foreign capital markets
Many raw materials that a corporation buys
Derivative: security whose value is predicated on another value of a security interest rate swaps
Corporations typically raise long-term money: capital
Issuing corporate bonds, preferred and common stock
The instruments are referred to as securities, traded in the securities markets
Many types of securities markets, all of them provide the same function,
Price discovery occurs at financial markets
Expected rate of return
Financial security: claim on assets and on cash flows
2 types of securities: debt and equity
Debt investors are not owners of the business
Cash flows to the business are so low that they're unable to satisfy their debt obligatio,n
Equity investors: owns shares in a business and unlike debt investors, theyre owners of a firm , Recieve cash flow leftover after the business have made all of their obligatory payments
Cash flow to an equity security are NOT fixed
Equity is known as a residual claim
Debt securities: have a claim on the firms cash flows prior to equity holders, additionally the payment to debt holders is fixed. If business does well in cash flow, the debt holders will obtain their promised cash flows. They are not owners of the firm, they are creditors. As a result, they dont vote on operations of the firm. If the business is in financial distress, theres a good change itll go bankrupt. Debt holders have more say on day to day operations.
Fixed coupon bonds: debt securities where business pays a specific amount called a coupon to an investor every period until the bond matures and at maturity ans the amount invested will be paid to the bond holders
0 coupon bonds: 0 is a debt security that promises 1 payment at maturity ans the payment is fixed. 0 coupon bond is a fixed coupon bond with a 0 coupon rate. 0 interest is paid
Variable rate: pay periodically but its not fixed, the size of the coupon is tied to the prevailing interest rate
Perpetual bond: no maturity, last forever, paying a fixed coupon payment every period forever
Income bond: some features of fixed and variable, carry and promise to pay a fixed coupon.
Convertible bond: convertible debt security, allows to convert into other security
Callable bonds: fixed coupon bond except the issuer is the business and they have the right to repurchase the bond at a set price, because if the interest rate decline, they can refinance it, if the bond is in the market and below par, the company can buy it back and get a better gain
Equtiy debt is unfiroma cross companies, equity holders have a residual claim on company cash flows, they receive leftovers. Equity voting rights.
Cash flows for an equity security: dividends, paid from net income after tax, after all payments are made. Residual cash flow, the business is not required to pay
Equity holders have no guaranteed cash flow from dividends
Sale of shares: the price you receive when you sell shares, prevailing market price, no guaranteed cash flow
Dividend payment on preferred stock is at the discretion of the board of directors
Companies rarely forego dividend payments
Time value of money - chapter 5
Simple interest:
Present value: assets current value, which are discounted at an appropriate interest rate
Chapter 6
Perpetuity: fixed cash flow forever, a financial arrangement where fixed cash flows received are fixed forever. Paid at regular intervals
Annuity: series of equal or constant cash flows at the end of a period for a fixed number of periods, this ends
Auto loans, an annuity is a financial arrangement involves a series of equal payments
Based on time value of money
Ordinary annuity; most common type of annuity, in this arrangement, payments are made at the end of each period, and the timing affects how interest is calculated
Examples: mortgage, car loans, student installments
Annuity due: payments are made at the beginning of each period
Pure discounted loans: short-term loans
Treasure bills: discounted loan,
Interest only loans:
Corporate bonds; interest only loan, then pay a lump sum in the future \