bk17.ppt
TRANSCRIPT
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FINAL EXAM BREAKDOWNFINAL EXAM BREAKDOWN
Chapter 1 3 Chapter 2 3 Chapter 3 4 Chapter 4 3 Chapter 5 3 Chapter 6 3 Chapter 7 2 Chapter 8 3 Chapter 9 5 Chapter 10 2
Chapter 11 1 Chapter 12 5 Chapter 13 3 Chapter 14 5 Chapter 15 4 Chapter 16 6 Chapter 17 6 Chapter 18 6 NCE 26 Other 7
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Chapter 17Chapter 17
Financial Management and
Institutions
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Bizness Bizness QuoteQuote
A bank is a place that will lend you money if you can
prove that you don’t need it.
Bob Hope
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Price College of BusinessPrice College of Business . . . . . . Other learning opportunitiesOther learning opportunities
FIN 4413 Commercial Banking FIN 4700 Internship in Finance
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Current EventsCurrent Events
NYT: “Merck to Offer Big Bonuses to Executives If It Is Taken Over”
WSJ: “Wal-Mart Files Argument in Sex-Discrimination Case”
WSJ: “A Green Perk Offered for Green Car”
WSJ: “China Tightens Financial Disclosure Rules for Publicly Traded Companies”
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Key Job Role: Internal AuditorKey Job Role: Internal Auditor
The “police squad” of large corporations. Principal responsibility is to carry out
“compliance” audits, that is, to determine whether employees are complying with applicable company policies and procedures.
A key element of a company’s internal control system.
Unlike independent auditors, internal auditors are not necessarily CPAs.
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Company ProfileCompany Profile
The Cheesecake
Factory Incorporated
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Cheesecake FactoryCheesecake Factory Evelyn and Oscar Overton began making
cheesecakes in their Detroit basement in the 1950s. The popularity of their cheesecakes eventually
convinced the Overtons to move to Los Angeles and establish a wholesale bakery that sold cheesecakes and other desserts to local restaurants.
The Overtons’ son, David, opened the business’s first restaurant in 1978 in Beverly Hills.
Within a few years, that restaurant was grossing $3 million in annual sales.
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Cheesecake FactoryCheesecake Factory
The Overtons continued to open other restaurants in the Los Angeles area over the next several years.
In 1992, the company incorporated and went public.
In the early 1990s, a restaurant industry survey found that cheesecake was the most popular dessert item in restaurants (64% offered cheesecake, compared to 61% that offered apple pie).
Funds raised by the IPO allowed the company to open restaurants in Chicago, Houston, D.C., and other major metropolitan areas.
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Cheesecake FactoryCheesecake Factory
Key competitors: Chili’s, Ruby Tuesday, Applebee’s, and Outback Steakhouse.
Presently has 50 restaurants and annual sales of approximately $500 million.
David Overton serves as the CEO.
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Cheesecake FactoryCheesecake Factory Key strength: Same-store sales have
continued to increase in recent years. Key strength: Company management is
pursuing other expansion opportunities, including locating in major airports.
Key challenge: Critics point out that the company’s leading products are not “health-friendly.”
Key challenge: “Themed” restaurant chains often lose their appeal eventually with the public.
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Final Exam InfoFinal Exam InfoBring a scantron!! (and one for your
neighbor)Basics: Monday, December 13th,
1:30-3:30 P.M., HERE!! Final exam key will be posted to e-
reserve (eventually)
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Textbook Tidbits: Chapter 17Textbook Tidbits: Chapter 17
“Money is power, freedom, a cushion, the root of all evil, the sum of all blessings.” Carl Sandburg
Dollar bills can be folded an average of 4,000 times during their lifetime
Time is money: McDonald’s attempts to complete each customer transaction in 90 seconds
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Textbook Tidbits: Chapter 17Textbook Tidbits: Chapter 17
American consumers have more than one billion credit cards
Benchmark Capital invested $5 million in eBay—that investment is now worth $7 billion
By 2010, one in three households will bank online
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Identify the functions performed by a firm’s financial managers
Identify the functions of money Compare the two major sources of funds for a
business Describe the financial system and the major financial
institutions Explain the functions of the Federal Reserve System
and the tools it uses to control the money supply
LEARNING GOALSLEARNING GOALS LEARNING GOALSLEARNING GOALS
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Finance: business function of planning, obtaining, and managing a company’s funds in order to accomplish its objectives in the most effective possible way.
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Corporate Financial ManagersCorporate Financial Managers
Chief financial officer—top finance executive of a corporation; usually reports directly to the firm’s CEO.
Other financial managers:VP for Financial ManagementTreasurerController
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Organizational Structure of the Finance Function
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FINANCIAL PLANFINANCIAL PLAN
A document specifying the funds a firm will need for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds.
What funds will the firm require during the appropriate period of operations?
How will it obtain necessary funds? When will it need more funds?
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Characteristics and Functions of MoneyCharacteristics and Functions of Money
Characteristics of MoneyMoney—anything generally
accepted as payment for goods and services.
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Characteristics and Functions of MoneyCharacteristics and Functions of Money
Characteristics of Money
Divisibility—Ability to be broken down into smaller units
Portability—Ability to be easily moved from place to place
Durability—Ability to survive repeated usage over time
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Characteristics and Functions of MoneyCharacteristics and Functions of Money
Characteristics of Money
Difficulty in Counterfeiting—Currency should be hard for anyone, other than the government, to produce
Stability—Should maintain a relatively stable value
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Characteristics and Functions of MoneyCharacteristics and Functions of Money
Basic Functions of Money
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The Money SupplyThe Money Supply
The money supply consists of coins and currency as well as financial assets that also serve as a medium of exchange (traveler’s checks, bank checking accounts, other so-called demand deposit accounts, and credit union share draft accounts)
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Components of M1
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The Money SupplyThe Money Supply
Another, broader definition of the money supply is the M2
M2—includes the M1 plus a number of other financial assets that are almost as liquid as cash, but do not serve directly as a medium of exchangeThese assets include various savings
accounts, certificates of deposit and money market mutual funds
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Why Organizations Need MoneyWhy Organizations Need Money
Organizations require funds to run day-to-day operations, compensate employees and hire new ones, pay for inventory, make interest payments on loans, pay dividends to shareholders, and purchase property, facilities, and equipment
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Sources of FundsSources of Funds
Debt capital—funds obtained through borrowing.
Equity capital—funds provided by the firm’s owners when they reinvest earnings, make additional contributions, or issue stock to investors.
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Debt and Equity Capital: Two Basic Sources of Funds
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Comparison of Debt and Equity Capital
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Sources of FundsSources of Funds
Short-Term Sources of FundsShort-term sources of funds are repaid
within one yearMajor sources of short-term funds include:
Trade creditShort-term loansCommercial paper
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Sources of FundsSources of Funds
Long-term Sources of FundsLong-term sources are repaid over many yearsThree common sources of long-term funds are:
Long-term loansBonds—certificates of indebtedness sold to
raise long-term funds for a corporation or government agency
Equity financing—acquired by selling stock in the company or reinvesting company earnings
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Sources of FundsSources of Funds
Long term Sources of FundsPublic Sale of Stock and Bonds
Sales of stocks and bonds represent a major source of funds for corporations
They provide cash inflows for the issuing firm and either a share in its ownership or a specified rate of interest and repayment at a stated time
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Sources of FundsSources of Funds
Long term Sources of FundsPrivate Placements—stock or bond
issues sold to a small, select group of large investors such as pension funds and life insurance companies
Venture Capitalists—raise money from wealthy individuals and institutional investors and invest these funds in promising firms
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Financial LeverageFinancial Leverage
Leverage—technique of increasing the rate of return on an investment by financing it with borrowed fundsThe key to managing leverage is
ensuring that the company’s earnings remain larger than its interest payments, which increases the leverage on the rate of return on shareholders’ investment
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Table 14.2Table 14.2 How Leverage Works How Leverage Works
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Financial System—process by which funds are transferred from savers to users.
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Overview of the Financial System and Its Components
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Depository Institutions—financial institutions that accept deposits that can be converted into cash demand.
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Commercial BanksLargest and probably most important
financial institutionsApproximately 7,900 commercial banks in
the U.S.Total Assets: $7.1 trillionDown from over 18,000 in 1985
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Commercial BanksHow Banks Operate
Banks raise funds by offering checking and savings accounts
They then pool these deposits and lend most of them out to consumers and businesses
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Types of Outstanding Bank Loans
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Commercial BanksElectronic BankingMore and more funds are moving through
Elections Funds Transfer Systems (EFTS)EFTS—computerized systems for
conducting financial transactions over electronic linksIncludes automatic teller machines
(ATMs), debit or check cards, and direct deposit of paychecks
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Commercial BanksOnline Banking
Regular online bank users now 1 out of every 5 U.S. households
Projected to grow to 1 in 3 households by 2010
Two types of online banks:Internet-only banksTraditional bricks and mortar banks
with Web sites
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Bank RegulationWho Regulates Banks?
State chartered banks are regulated by the appropriate state banking authorities
Most are federally insured, and also subject to FDIC regulation
Federally chartered banks are regulated by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency
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The Financial System andThe Financial System andFinancial InstitutionsFinancial Institutions
Bank RegulationFederal Deposit Insurance
Deposits are insured by the FDIC up to a set amount – currently $100,000
Federal deposit insurance was enacted by the Banking Act of 1933 to restore public confidence in the banking system
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Other Financial InstitutionsOther Financial Institutions
Savings Banks and Credit UnionsSavings banks and credit unions are also
important financial institutionsThey offer many of the same services as
commercial banksA series of crises cause many of the
predecessors of savings banks to merge with financially stronger institutions
Credit Unions are cooperative financial institutions, owned by their depositors, all of whom are members
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Other Financial InstitutionsOther Financial Institutions
Nondepository Financial InstitutionsAccept funds from businesses and
households, much of which they then investInsurance CompaniesPension FundsFinance Companies
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The Federal Reserve SystemThe Federal Reserve System
Central bank of the United States. Has four basic responsibilities:Regulating commercial banksPerforming banking-related activities for
the U.S. TreasuryServicing member banksMonetary policy
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The Federal Reserve SystemThe Federal Reserve System
Organization of the Federal Reserve SystemNation is divided into 12 federal reserve
districts, each with its own Federal Reserve Bank
Each district Bank supplies banks within its district with currency and facilitates the clearing of checks
District banks are run by a nine-member board of directors
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The Federal Reserve SystemThe Federal Reserve System
Governing body of the Fed is the Board of GovernorsThe board consists of seven members,
appointed by the president and confirmed by the Senate
The Fed is designed to be politically independentFed Governors are appointed to 14-year terms
– staggered so that a president could not appoint a majority during a single term
Federal Open Markets Committee (FOMC)
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The Federal Reserve SystemThe Federal Reserve System
Check Clearing and the FedClearing of a check—process by which funds
are transferred from the Check writer to the recipient
If both the writer in the recipient have accounts at the same bank, a check will clear in house
If both have accounts at banks in the same town, the two banks may clear the check directly with one another
If one has an account with a bank in a state different than the other, the check will likely be cleared through the Federal Reserve system
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The Federal Reserve SystemThe Federal Reserve System
Monetary PolicyMonetary Policy—managing the growth
rate in the supply of money and credit, usually through the use of interest rates.
Fed’s job is to ensure that the money supply grows at an appropriate rate allowing the economy to expand and inflation to remain in check
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The Federal Reserve SystemThe Federal Reserve System
Monetary PolicyIf money supply grows too slowly economic
growth will slow, unemployment will increase, and the risk of recession will increase
If the money supply grows to rapidly, inflationary pressures build
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Federal Reserve Tools
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U.S. Financial Institutions:U.S. Financial Institutions:A Global PerspectiveA Global Perspective
Major U.S. banks have extensive international operations, with offices that lend money and accept deposits from customers worldwide
Only three of the 20 largest banks are U.S. institutionsThe others are based in France, Germany,
Holland, Japan, Switzerland, and the UK
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Study QuestionsStudy Questions
1. Financial professionals rarely become CEOs of major corporations.
2. Virtually all financial decisions involve a tradeoff between risk and return.
3. “Risk” is the uncertainty regarding the gain or loss on an investment.
4. Investments that promise the highest returns tend to be the most risky.
5. Sharp fluctuations in the value of a currency rarely have any significant impact on national economies.
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Study QuestionsStudy Questions 6. “M1” includes currency plus financial
assets that serve as a medium of exchange. 7. Currency accounts for the largest portion
of M1. 8. The amount of outstanding credit card
debt in the U.S. has tripled during the past twenty years.
9. To qualify as an M1 component, a financial asset must serve as a medium of exchange.
10. Mutual fund shares are more “liquid” than checking accounts.
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Study QuestionsStudy Questions
11. Treasury bills are short-term securities issued by the U.S. government.
12. Equity capital represents funds obtained from banks and other lenders.
13. When venture capitalists invest in a start-up business, they almost always contribute debt capital rather than equity capital.
14. Debt capital is always preferable to equity capital for a corporation.
15. Profits are a source of equity capital.
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Study QuestionsStudy Questions
16. Firms often rely on short-term sources to pay for large, permanent assets, such as buildings.
17. A private placement is the sale of a new security issue directly to a large investor such as a life insurance company.
18. Whenever a company borrows, it creates leverage.
19. U.S. households save more, as a percentage of their incomes, than do citizens of most other developed countries.
20. A key feature of bank regulation in the U.S. is federal deposit insurance.
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Study QuestionsStudy Questions 21. Underwriting is the process used by
insurance companies to determine who to insure and what to charge.
22. Credit union deposits are insured by private companies, not by a federal agency.
23. Most banks are federally chartered and, as a result, regulated by federal banking agencies.
24. The Comptroller of the Currency regulates both federally and state chartered banks.
25. If the money supply grows too rapidly, inflationary pressures will begin to build.
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Study QuestionsStudy Questions 26. Raising the reserve requirement tends
to increase the supply of money, lowering interest rates.
27. When the Fed buys government securities, it adds to the supply of money and thus lowers interest rates. T
28. There are 15 Federal Reserve districts. 29. The Fed uses “open market operations”
as a monetary policy tool more often than changes in the reserve requirement.
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Chapter 18Chapter 18
Financing and Investing through Securities Markets
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Distinguish between the primary market for Distinguish between the primary market for securities and the secondary marketsecurities and the secondary market
Compare money market instruments, bonds, Compare money market instruments, bonds, and common stock, and explain why and common stock, and explain why particular investors might prefer each type of particular investors might prefer each type of securitysecurity
Identify the five basic objectives of investors Identify the five basic objectives of investors and the types of securities most likely to help and the types of securities most likely to help them reach each objectivethem reach each objective
Explain the process of buying or selling a Explain the process of buying or selling a security listed on an organized securities security listed on an organized securities exchangeexchange
LEARNING GOALSLEARNING GOALSLEARNING GOALSLEARNING GOALS
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SecuritiesSecurities
Types of BondsSecured Bond—bond backed by specific
pledge of a company’s assets.
Debenture—bond backed by the reputation of the issuer rather than by a specific pledge of a company’s assets.
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SecuritiesSecurities
Types of BondsGovernment Bonds issued by U.S. TreasuryMunicipal Bonds are those issued by
governmentsRevenue bond is a bond whose proceeds
are to be used to pay for a project that will produce revenue (e.g., a toll bridge)
General obligation bond is a bond whose proceeds are used to pay for a non-revenue producing project (e.g., a fire station)
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SecuritiesSecurities Stock
Common StockShare of ownership in a company.Common stock owners can vote on major company
decisionsThey expect to receive cash dividends and to benefit
from capital gains. (Often no dividends are issued.)Preferred Stock
Stock whose holders receive preference in the payment of dividends
Seldom confers voting rightsDividends are fixed
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Securities ExchangesSecurities Exchanges
Stock Exchange—centralized marketplace where primarily common stock are traded.Stock exchanges are secondary markets,
selling securities which have already been issued by firms and sold in the primary market
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Securities ExchangesSecurities Exchanges The New York Stock Exchange
NYSE (Big Board)—the largest, and probably the most famous, stock market in the world
Also one of the oldest, having been founded in 1792
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Securities ExchangesSecurities Exchanges
The NASDAQ Stock MarketNASDAQ stock market—second-largest
stock market in U.S., trading stock issues of firms that are typically smaller, less well-known than those on the NSYE
Unlike trading on the NSYE, which takes place face-to-face or the trading floor, trading on the NASDAQ takes place on an electronic network
World’s largest Intranet
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Buying and Selling SecuritiesBuying and Selling Securities
Brokerage Firm—financial intermediary that buys and sells securities for individual and institutional investors.
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Costs of TradingCosts of Trading
Direct InvestingA growing number of corporations offer
investors a direct way of purchasing stock through dividend reinvestment plans (DRIPs)
With DRIPs, the company uses the dividends paid on shares owned by an investor to buy additional shares of the company stock -- bypassing brokers -- and their fees
Another form of direct investing is the stock purchase program
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Stock IndexesStock Indexes
Stock indexes reflect the general activity of the stock market
The most common indices include the Dow Jones Average (Dow), the Standard & Poor’s 500, and the NASDAQ composite
Foreign indices include the DAX (Germany), the FT-100 or “Footsie” (London), and the Nikkei (Tokyo)
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Mutual FundsMutual Funds
Mutual Fund—financial institution that pools investment money from purchases of its shares and uses the money to acquire diversified portfolios of securities consistent with the fund’s investment objective.Investors who buy shares of a mutual fund
become part owners of a large number of securities, thereby lessening their individual risk
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Distribution of Mutual Fund Assets by Type of Fund
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Study QuestionsStudy Questions 1. When a company first sells stock to the public, it is
selling stock in the primary securities market. 2. Advertisements announcing stock and bond
offerings, which appear almost daily in financial publications, are referred to as “bulletins.”
3. Most new corporate and municipal securities issues are sold through investment banking firms.
4. The New York Stock Exchange is a secondary market.
5. Treasury bills and commercial paper are both money market instruments.
6. Money market instruments are generally low risk securities.
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Study QuestionsStudy Questions 7. Most federal securities legislation came about as
a result of the 1929 stock market crash. 8. As market interest rates rise, bond prices fall. 9. The fundamental reason to invest in a common
stock is the belief that, as the given firm grows and prospers, the value of its common stock will rise.
10. While a number of variables cause stock prices to fluctuate in the short run, in the long run stock prices tend to be closely correlated with a company’s profits.
11. Institutional investors include life insurance companies, mutual funds, and pension funds.
12. For most investors, current income is the main motive for investing.
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Study QuestionsStudy Questions 13. The percentage of Americans who own
stocks has risen sharply in recent years. 14. The dividend yield on a firm’s common stock
usually exceeds the rate of interest on the firm’s bonds.
15. The key investment objective of a young worker who is investing for retirement purposes should be “liquidity.”
16. In terms of the dollar value of securities traded, the NYSE is the largest stock market in the world.
17. The NASDAQ stock market is actually a computerized communications network.
18. Stock trading is normally done in “round lots” of 1,000 shares.
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Study QuestionsStudy Questions 19. NASDAQ-listed companies tend to be smaller
and lesser known that NYSE companies. 20. The Tokyo stock exchange is the largest
outside of the U.S. 21. A “market order” is a stock purchase order to
buy the given security at the best possible price. 22. If a stock’s current price is $50 per share, its
earnings are $4 per share, and it is paying a dividend of $1.50 per share, then its P/E ratio is 12.5.
23. If a stock’s current price is $40 per share, its earnings are $2 per share, and it is paying a dividend of $1 per share, then its dividend yield is 5%.
24. A bond’s price is quoted as the percentage of the bond’s face value.
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Study QuestionsStudy Questions
25. A stock that has a P/E ratio of 14, earnings per share of $5, and an annual dividend of $2 per share must be selling currently for $42 per share.
26. Which of the following stocks has remained a component of the DJIA ever since that stock index was first calculated in the late 1800s—GM, AT&T or GE?
27. Which stock market index—the DJIA or the S&P 500—is considered the best measure of overall stock market activity?
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Study QuestionsStudy Questions 28. A key feature that makes mutual funds
attractive is “diversification.” 29. A mutual fund pools investment money from
purchasers of its shares and then uses those funds to acquire a diversified portfolio of securities.
30. A mutual fund’s net asset value is the market value of the securities owned by the fund divided by the number of outstanding shares.
31. The federal government’s approach to securities regulation can be summed up by the phrase “full and fair disclosure.”