Financial Management - Lecture 05

a very quick summary I'll try to summarize everything in this chapter on the mysteries of the war over here and the financial system components the first component is financial institutions we draw somewhere the second is financial to markets so that's kind of like going to spend two hours building out this little table and then I'll be using the rest of the morn or other things so the first big one that's again I'm only summarizing of what we already did last time will be commercial banks the financial institution which accepts deposits it makes moles next one is the class of non spec and that will be number two finance company is next one is before that had something else.the betrayed insurance insurance investment banks [Music] you guys still talk about the back soon Pablo is somewhere else okay the investment banks seller pious Calvinists make all sorts of laws but they don't accept their heart so it counts as insurance companies make all sorts of insurance but again do not accept deposits investment banks are not best in the business of investment you just take nice fancy name back in the old days in Britain they had a completely different name but it sounded more reputable it sounded warm respectable so they began to call themselves like that they are financial institutions that specialize in issuing securities the explaining on the primary markets and raising funds for big business and corporations now these three these for under a special class recall know that these are Bank financial institutions in the next group or class is investment companies the first investment company is mutual funds the financial institution all of these have the definition of definition which begins with financial institution so mercial Bank is a financial institution again by this time the financial institution insurance company is a financial institution all right so mutual fund is a financial institution that these investors resources and sells in return shares with all these mutual fund shares when you buy a mutual fund share the right side in a mutual fund when you put your money in a future mutual fund in his not deposits you don't deposit you buy it share of the mutual you become a part owner of the middle even the Mitchell HUD makes a profit you make the profit with the Vigilant if the mutual fund takes a loss you take a loss in a mutual fund there is no guarantee of return with a mutual you think all the risks exactly as the mutual fund has no debt there is no quarreling about explaining there is no leverage all they do is they investors body next one is standing for exchange-traded funds and an exchange-traded fund you say you children whose shares are traded on an exchange so you can buy and sell it anytime you want you can buy them at 11 o'clock so as long as it is traded on the exchange meaning as long as the change is open you can buy whatever you want it it can sell whatever you want the easy end would usually function is a collection of a class of investments you may get an oil ETF and it will track the price of one you're gonna gold ETF track of gold you may get up pharmaceutical ETF in the pharmaceutical sorry the pharmaceutical EDF will track the average of 3 5 or 25 part logistical companies ok maybe oil companies do TF it will take care of 15 world companies in equal average the return per unit it may be a technology EDM main industrial it could be agriculture whatever it is it is a mutual fund which invest in this in this class of shares for this you gotta share ok and that shares traded you can buy the line talking selling at ten o'clock in the morning or keep it for a long time the mutual fund you can buy a share only at the end of the day ok in before the next morning that's working in the mutual fund itself is not traded on the exchange okay so the ETF is actually both a financial institution and at the same time say share if trades like the stock it is it's not because a stop the financial [Music] hedge fund is a financial institution we can also set specifically investment companies that specializes in relatively high risk unorthodox or non-standard types of investments it could be investing also in occurrences it could be less important in this it could be invested for speculating or hedging with derivatives so it will use a wide range of conventional and non-conventional investments including shorting the various financial instruments when it would short you sell the instrument and then you buy back when the price falls apart now here is another little thing here they call these private equity firms but we got two of them so how write them out separately what a small venture capital venture capital invested young established timeless companies with a high profit potential they are usually developing a brand new technology or they got a brand new idea which may work and make a fortune or which is more likely to fail here the risk is very high but the returns of rewards are also very high leveraged buyout funds leveraged buyout fund specializes in leverage for miles that's what they do so a leveraged buyout is a purchase of a publicly traded company and private so they publicly traded company usually you believe the publicly traded company maybe you should just come from the so too much leveraged buyout meaning they think the company is run poorly they think the company's mismanaged the market stock market says all this company is very cheap because it's poorly in inefficiently run and the guys are thinking to themselves or publicly this company is poorly run the stock is they're cheap we're gonna buy all the stock we're gonna throw out all the old management's we're putting our people we will restructure the firm grim we will revitalize and make it a lot better well the price of the share will go up and then we'll sell it at the higher price these that the company may cost fifty million five you work things out and after a year or two the company's worth hundred million dollars and when a seller from fifty to hundred million dollars you put in sometimes efforts of salaries and whatnot but you have a gross gain of 50 minutes so that's a very good profit or a very good return if you're able to turn around the company so that's what the leveraged buyout does these are at least the financial institutions which I will expect you to know and you're going to get on the next quiz that these two here are generally known as trying to equity so you're right I write it here right okay so these two companies venture capital and leveraged buyout are known as private equity that was these are not publicly traded takes a public company and makes it right so these are private and all of these he lets this part investor all right now they're going back here next one is a little bit about both financial instruments and financial markets first of all financial instruments isn't assets we've sometimes call it financial assets is a claim on a businesses burnings or assets so you have a claim when we say some acid it has the characteristic that it is both an asset and a liability to the same time for those who is shoe we call the party is sure it is a financial liability those who issue alive in it it would say raise capital so issuer raises capital sometimes the state raises funds the correct word is it's a tough one the correct word is raising capital means usually that it's a long term means while in general issuer may be raising short-term long-term short-term Vall term means maturity of more than one year short term means maturity of less than one years maturity itself means that the instruments or the financial instrument will be paid back completely within a period of time so maturity is the time when the instrument will be completely paid back so within six months maturity is six months if you borrow for a house for 20 years the maturity is 20 years okay some games Germans don't mature they live forever flat stocks the stock usually does not mature and it dies with the issuer if the issuer dies like the corporation goes bankrupt or shuts down the stock of the corporation dies but as long as the corporation lives the stock lives and does not mature the mature essentially means when you have to make the last payment and you have no further obligation so long-term maturity more than one here and this one is less than one now long-term instruments we say you gotta keep the camera moving is all start our training on capital markets capital ma so long-term financial instruments are traded on capital markets well exactly the same thing to say that national markets is a financial market where long-term storage are it's the same thing I just changed the words and short term instruments are traded on money markets it's important to understand is not to confuse money markets is not where money is traded money markets is where short term instruments are now there's one very special super short term instrument an instrument that technically does not mature and the issuer is a central bank is called a currency currency is also called in finance in general immediately newspapers back in the old days even today it's called foreign exchange so clearance again is a liability the foreign central bank or the central bank of a foreign government which serves as money in another country so in Japan the Japanese yen is a girl it's issued by the Japanese okay it serves his money in Japan but not here you can take the Russian rule again you should buy central bank so foreign exchange has the character is the directive issued by a foreign central bank a is the money of that particular country for God okay but not country but not currency here all technically and legally US dollar is also considered a foreign exchange in Cambodia for the same reasons it is issued by foreign governments and is the money the currency of the United States okay so it is also foreign exchange so currency trades on currency markets in these currency markets and my google full rates spending for foreign exchange but I'd say what else like that okay so I got this classification here now the next classification is on the classifying a little bit going a step further classified Marian financial markets okay I will offer it today get back together to wrap everything around so is the financial markets where securities are issued remember issued for the first time and we said capital is rates or funds are raised or the issuer raises funds so the key characteristic of primaries the first time when the security is is the first time the security is created when the security matures the securities this form meaning the liability satisfied and there's no more viable so that's the primary market and they have a second is a financial market where financial instruments are already existing financial instruments are training so the stock is already issued of the primary market one time and then it can trade for months years or decades can trade on the secondary market the main purpose of the secondary market is to provide liquidity so if you hold the shares or if your own bonds you can sell them together that's the primary purpose and we studied some other purposes like discovering prize like rating information that's not as interesting to this point you know that's what we do with the study of investments or financial markets and institutions here the basically is you need to understand which are the institutions which are the instruments and which are the markets of the market will be short term long term as in my market capital market primary secondary let's see what else well then here's some very weird little section how securities markets bring investors together and they say step 1 we can do this but it's very weird very not very nice step 1 the corporation sells securities instead one issue securities and I was the firm the business the government the bank issues securities of the primary market step number 2 issuer invests in assets invested pointer asset so they buy a machine equipment building truck whatever so they invest with all in productive assets productive assets machine step number 3 firm distributes cash so they invest in productive assets in generate income is in cash okay so this tribute distributive and number 4 the security trades on secondary market in other words in the issuer invests the third step is the issue makes my impales now the question is actually a little bit one [Music] to step number three that's more interesting part so when a company business makes a product makes filling well even if it doesn't make a profit whenever they operate they contain money out it's called hey that's coming to probably somewhere in the second semester but now all we need to know is when a business makes payments pay out it makes payout to number one the investor and investor is called up David don't now when an investor gives money to the business it's called an investment when the business gives money back to the investor it's color dividend so that's number one the other one is called creditors and your creditors the payment is interest and we'll just throw one father which is school gone nuts so we gotta let this go taxes and finally this is the payout this is to people outside the company but the company may put the money inside so if you have a profit the profit can go pay hours meaning outside the company or it may be paid in so how in other words the money will be reinvested in the company itself they're gonna buy more machines more equipment so this is in Indian reinvestment now how did we call those profits that the business does not pay out but bring less taxes on business retained earnings all right I already explained a little bit about this part I'm back to markets financial markets so let's try again a little bit financial markets they can be primary and secondary they may be short-term long-term short-term is not the market the long-term short-term is an instrument that was financial market return boosters or long term instruments the next classification is debt that is associated with a fixed payment fixed obligation the most common instrument is a equity is an instrument owner you have what we call residual claim residual bang means after all obligations all bonds taxes salaries electricity utilities are in an era everything to everybody that you own whatever is left to you is your residual plain equity owners have a residual claim and the financial instruments for equities stock some kind of coal shares or chairs one share two or three share is blue okay you can buy the stocks 100 stocks or 100 shares all right let's see what else we got so debt equity but let's do some of the basic characteristics of debt debt then characteristics first that will have a principal this is the amount of money for okay usually the bond will have a typical principal of one thousand US dollars you may have others but that's the standard one principal is also called face there number two they'll have a coupon which is does payment interest which is the payment that must be made like $70 is not the interest that the coupon will have a coupon rate coupon great and the coupon rate is a percentage of the face value that must be paid for a year then the coupon may be paid of one time a year or most common most commonly at least in the United States and many advanced countries the coupon is paid out twice we call this same and so tuples are usually two times stocks will pay dividends usually four times a year ago is for tournament or the semi-annual coupon let's see if we got anything else that's good enough now there's some stuff over here skip here's not much discussed let's zoom in here camera this is the little table Wow raisin and show it since today okay this is the thing and this is the table that you'll basically need to learn understand and I'll be working on and we'll go there it shows a table two and Table three so we go back to let's see table will be two and these are pages for the two what we call money market instruments so all right they're in financial money market is a financial market where money market instruments are traded and now I'm go through six of them number one US Treasury bills Treasury bill is a financial instrument all of these definitions begin with the words financial instruments they usually say it's maturity in Asia financial instrument was a short term financial instruments issued by the central government now it will fit the Japanese government German government with the British government but in general Treasury bill is issued by the central government okay short term it's considered to have little or no default risk now I am jumping back over here to write for debt must make payments on a regular basis death pays coupons or interest on a regular basis in inability to feign interest or principal all time and influence called default and the rest so going back now and walking back Treasury bills have a practically no default risk because the government can always suppress the money whatever they want all right we're gonna do a few more and then take a little break because I got a lot to come number two bankers of sentence you guys got a textbook practice it in the textbook in the table but so bankers acceptance is hey we say hi guys so much talk between each other money market instrument issued by a corporation corporation and accepted by a commercial bank so now they explain the word except - except for a commercial bank the bank acceptance means that the bank agrees to pay if the issuer meaning the business defaults so bank reserve sectors is extremely low risk the risk is that the issuer the corporation fails to pay and then the bank goes bankrupt and doesn't pay again either so in but the risk is that both of them fail at the same time in practice this pretty much never happens so there have a very low risk number three commercial a commercial paper is is issued by strong credit worthy low-risk very well-known corporations like Sony or Honda for Apple or Samsung Toyota right he's a big famous companies that are well-known within with investors and they sell the paper directly to investments we call this particular paper commercial paper it's used for commercial meaning business but financial operation a commercial bank will issue commercial book but when a commercial bank issues the similar thing it has a very special things we call it see deposit this is a time depart in Ottawa it is a deposit with a fixed maturity 30 days six today's 290 days years one two three four six nine months possibly 12 months so up to 12 months will be the money market instrument which the commercial bank must be all maturity a does not have to be so mad jumping back deposits all deposits in a bank are classified only in two ways they are demand deposits or time deposit but demand deposit can be withdrawn at any time that the depositor wishes whenever you want a time deposit cannot be withdrawn whenever the depositor wishes it can't be drawn only on the native maturity before that the bank is not required to pay back and the depositor has goes right with his money back on a time bomb so a CV is a CV is very nice inconvenient because a lot of times it will trade on a secondary market and it will be liquid so even though you can't get your money back from be sure you can sell it but yes they'll usually Bob there's an active market for financial market for CDs but two more two more number money market we have a nice short market mutual funds and money market mutual fund again is a financial institution which all right now getting back to hear the truth is a financial institution that invests only in money market instructions so a money market mutual funds is a financial institution that invest only in short term they're both bristle instruments it's the certain extremely low risk it is considered high liquid literally withdraw your money for any okay now money market mutual fund again use one of those things similar to an ETF which is a financial and at the same time of financial instruments so the money market mutual fund is an institution the instrument is simply a share of the financial institution so when I say money market mutual fund it is not quite clear do you talk about the institution or the share of institutions okay so it has two meanings we call this in English ambiguous it's not clear if you talk about losing fusion the rain storm so sad how in the status you'll have to always clarify which money to talk about alright number six for the break number six is it just bit sharp concision credit which the courses short-term consumer credit consumer credit and consumer credit include credit card and other stuff this is against non mortgage now explaining mortgage the brand shorter so all of these with my somehow and all of these are part of money mine so these things are money market instruments on the money market secondary market so these will certainly trade on the primary market when they're easier to first time in band on the secondary market will train them so they are relatively liquid the best and most liquid will be the money market mutual cost the treasurer all right take the break

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Length: 49min 38sec (2978 seconds)

Published: Mon Nov 07 2016