BUSINESS AND FAITH INTEGRATION

1. Understand how financial markets and institutions channel savings to corporate investment.

2. Understand the basic structure of mutual funds, pension funds, banks, and insurance companies.

3. Explain the functions of financial markets and institutions.

4. Understand the main events behind the financial crisis of 2007–2009.

Financial Markets

· Financing Decision

· Source of Funds (Capital)

· Capital Structure

Chapter 2 Outline

· The Financing Decision

· The Flow of Savings to Corporations

· Closely Held Corporations vs. Public Corporations

· Financial Markets

· Types

· Information Provided by Financial Markets

· Financial Intermediaries

· Financial Institutions

· Function of Financial Markets and Intermediaries

· The Financial Crisis of 2007-2009

Note: Contrast the Financing Decision with the Investment Decision presented in Chapter 1.

Definitions

Financing Decision – The form and amount of financing of a firm’s investments.

Capital Structure – The mix of long-term debt and equity financing.

The Flow of Capital: Closely Held Corporations

The Flow of Capital: Public Corporations

· Financial Market – Market where securities are issued and traded.

· Primary Market – Market for the sale of new securities by corporations.

· Secondary Market – Markets in which previously issued securities are traded among investors.

Financial Markets

· Initial Public Offering (IPO) – First offering of stock to the general public.

· Fixed-Income Market – Market for debt securities.

Financial Markets: Markets for Debt

· Capital Markets are used for long-term financing

· Example of long-term debt: Bonds

· Money Markets are used for short-term financing (less than one year).

· Example of short-term debt: Commercial Paper

Note: What is meant by over the counter?

Information Provided by Financial Markets:

· Commodity Prices

· Interest Rates

· Company Value

· Cost of Capital

Cost of Capital – Minimum acceptable rate of return on capital investment

Note: How is the value of a company measured by the market?

Financial Intermediaries

· Financial Intermediary – An organization that raises money from investors and provides financing for individuals, corporations, or other organizations

· Mutual Fund – An investment company that pools the savings of many investors and invests in a portfolio of securities

· Hedge Fund – A private investment pool, open to wealthy or institutional investors, that is only lightly regulated and therefore can pursue more speculative policies than mutual funds

· Pension Fund – Fund set up by an employer to provide for employees’ retirement

Flow of Cash Example: Mutual Fund

$

$

Investors

Explorer Fund

Bank of America

Issues shares

Sells shares

Mutual Fund – An investment company that pools the savings of many investors and invests in a portfolio of securities.

A Closer Look: Financial Institutions

· Commercial Bank

· Investment Bank

· Insurance Bank

Financial Institution – A bank, insurance company or similar financial intermediary

Companies and Intermediates

Company