FNCE10002 Lecture Notes - Lecture 1: Financial System, Corporate Finance, Risk Premium
19 Jun 2018
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Department
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Principles of Finance
Lecture 1
Finance is a study of how individuals, businesses and institutions acquire, spend and manage financial
resources. Focuses on cash flows.
Investment analysis is concerned with where and how to invest.
- Valuation of stocks, bonds and derivatives
- Portfolio diversification
- Asset pricing and market efficiency
Corporate finance is concerned with decisions of managers.
- Capital budgeting: what investments to make
- Capital structure: how to finance these investments
- Dividend policy: what to payout to shareholders
Introductory overview of Financial system and Markets:
Financial System: comprises financial institutions, instruments and markets facilitating transactions for GS
and financial transactions.
Arrange the flow of funds between surplus and deficit units
Surplus units- suppliers of funds i.e. lenders, investors, shareholders.
Deficit units- users of funds i.e. borrowers, credit card users, companies/issuers.
Funds can also flow via intermediaries (intermediation) or through financial markets (direct financing).
Contracts: surplus and deficit units are connected via contracts.
Intermediation: indirect financing. Involves the transfer of funds between ultimate savers and ultimate
borrowers via deposit-taking institutions.
E.g. I give money to CBA who then gives money to another person.
Advantages include:
- Asset transformation- borrowers and savers are offered a range of products.
- Maturity transformation- products with a range of terms to maturity.
- Credit risk diversification and transformation- savers credit risk is limited to the intermediary,
who has expertise and information.
- Economies of scale- financial and operational benefits of organisational size and business
volume.
Direct financing: transfer of funds from ultimate savers to ultimate borrowers without an intermediary.
E.g. BHP issues shares and raises capital from shareholders.
Advantages:
- Avoid costs of intermediation
- Increases access to a diverse range of markets
- Increased flexibility in the range of securities users can issue for different financing needs.
Disadvantages:
- Matching of preferences
- Liquidity and marketability of a security
- Search and transaction costs.
find more resources at oneclass.com
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Document Summary
Finance is a study of how individuals, businesses and institutions acquire, spend and manage financial resources. Investment analysis is concerned with where and how to invest. Corporate finance is concerned with decisions of managers. Dividend policy: what to payout to shareholders. Financial system: comprises financial institutions, instruments and markets facilitating transactions for gs and financial transactions. Arrange the flow of funds between surplus and deficit units. Surplus units- suppliers of funds i. e. lenders, investors, shareholders. Deficit units- users of funds i. e. borrowers, credit card users, companies/issuers. Funds can also flow via intermediaries (intermediation) or through financial markets (direct financing). Contracts: surplus and deficit units are connected via contracts. Involves the transfer of funds between ultimate savers and ultimate borrowers via deposit-taking institutions. I give money to cba who then gives money to another person. Asset transformation- borrowers and savers are offered a range of products. Maturity transformation- products with a range of terms to maturity.
