finance6

What it means to buy a company's stock (2013).

https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/stocks-intro-tutorial/v/what-it-means-to-buy-a-company-s-stock

Introduction to Bonds (2014).

https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/bonds-tutorial/v/introduction-to-bonds

Bonds versus Stock (2013).

https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/stocks-intro-tutorial/v/bonds-vs-stocks

Association for Financial Professionals. (2011).

http://business.baylor.edu/don_cunningham/How_Firms_Estimate_Cost_of_Capital_(2011).pdf

Grossman, T., & Livingstone, J. L. (2009) The Portable MBA in Finance and Accounting. Hoboken: John Wiley & Sons, Inc. ISBN: 9780470481301. Chapter 5

Blowing Bubbles: The Emergence of Stock Trading (2008). Video

Human Bondage: The Evolution of Bond Trading (2008). Video

Bonds, Stocks and the Cost of Capital 

Corporations raise long-term funds (that is, capital) mainly by issuing corporate bonds and common stock. These instruments are referred to as securities, financial securities, or financial assets. As you learned in week 2, bonds and stocks trade in financial markets, so their prices are always observable.

In this section of the course, you will learn the basic characteristics of bonds and stocks and utilize lessons learned about time value of money to value (i.e., determine the price of) these securities. Because financial securities offer a potential future cash flow to investors, the price that these securities should trade for, in a competitive, efficient market, is simply the present value of all expected future cash flows discounted at a rate that reflects the riskiness of those cash flows. More important, to financial managers, the prices for which these securities trade represent the cost to a firm of issuing new securities to finance new projects. Thus, bond and stock prices provide managers with a way to estimate the cost of capital.

There are three reasons why you should learn about bonds and stocks. First, over 50 percent of all Americans directly own financial securities (mainly stocks and bonds, either individual or as part of mutual funds) and indirectly essentially everyone owns financial assets of some sort. Banks and other financial institutions invest funds in securities markets. So, if you have a bank or credit union account, or if you have insurance of any sort (health, life, auto, motorcycle), odds are that your financial institution is investing “your” funds in financial securities. Second, the prices of financial assets provide direct evaluation of financial manager performance. All else constant, when the decisions made by financial managers produce positive results, stock and bond prices rise; when financial managers make poor decisions, stock and bond prices fall. Finally, financial managers make long-term investment decisions based on a comparison between the expected return on the investment and the cost of capital. Only those projects that are expected to generate a return greater than the cost of capital should be accepted. 

Review the resources listed in the Books and Resources area below to prepare for this week’s assignment(s).