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EXAM 3 REVIEW Chapters 19, 20, A, B, C, D EXAM 3 REVIEW McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Using Securities Markets for Financing and Investing Opportunities Chapter 19 Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Securities markets are financial marketplaces for stocks and bonds and serve two primary functions: The BASICS of SECURITIES MARKETS The Function of Securities Markets LG1 19-3

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Securities markets are divided into primary and secondary markets: Primary markets handle the sale of newly issued securities. Proceeds go to the company Secondary markets handle the trading of securities between investors with the proceeds of the sale going to the seller. Initial Public Offering (IPO) -- The first offering of a corporations stock. First time a corporation's stock is offered and sold to persons outside of the company. IPOs occur in the primary market! TYPES of SECURITIES MARKETS LG1 The Function of Securities Markets 19-4

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Investment Bankers -- Specialists who assist in the issue and sale of new securities. INVESTMENT BANKERS and INSTITUTIONAL INVESTORS The Role of Investment Bankers LG1 Institutional Investors -- Large organizations such as pension funds or mutual funds that invest their own funds or the funds of others. 19-5

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Stock Exchange -- An organization whose members can buy and sell (exchange) securities on behalf of companies and individual investors. Over-the-Counter (OTC) Market -- Provides companies and investors with a means to trade stocks not listed on the national securities exchanges. Does not need to be listed on one of the major stock exchangesie like NASDAQ STOCK EXCHANGES Stock Exchanges LG2 19-6

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Securities and Exchange Commission (SEC) - - The federal agency responsible for regulating the various stock exchanges; created in 1934 through the Securities and Exchange Act. (prohibits insider trading). Definitely involved with IPOs The SECURITIES and EXCHANGE COMMISSION Securities Regulations and the SEC LG2 19-7

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Issuing Bonds is considered debt financing. Stocks and Bonds Terminology to know Advantages & Disadvantages of Issuing Bonds LG4 19-8 Program Trading -- Giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses. Buying Stock on Margin -- Borrowing some of the stocks purchase cost from the brokerage firm. Issuing stock is considered equity financing Diversification -- Buying several different types of investments to spread the risk of investing.

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Mutual Fund -- An organization that buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors money and buys stocks according to the funds purpose. To reduce the risk of investing in an individual stock, an ownership position in many different companies can be achieved by purchasing shares in a mutual fund. INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDS Investing in Mutual Funds & Exchange- Traded Funds LG8 19-9

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Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Money -- Anything people generally accept as payment for goods and services. WHATS MONEY? What is Money? Barter -- The direct trading of goods or services for other goods or services. LG1 20- 11

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Portability Divisibility Stability Durability Uniqueness not easily duplicated. The US has done its best to prevent duplication of bills. STANDARDS for a USEFUL FORM of MONEY LG1 What is Money? 20- 12

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Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as: M1 -- Money that can be accessed quickly (coins, paper money, travelers checks, etc.). M2 -- M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.). M3 -- M2 + big deposits like institutional money market funds. The MONEY SUPPLY What is the Money Supply? LG2 20- 13

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Why is it important to control the supply of money? The MONEY SUPPLY What is the Money Supply? LG2 20- 14 To control the prices of goods and service. Prices of goods and services are affected by inflation and deflation. Inflation. Too much money chasing too few goodsprices go up. (more money available prices increase) Deflation. Just the opposite. Oversupply of goods compared to the amount of money available to but...prices fall. (less money available prices decrease)

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Who is the Federal Entity in charge of US monetary policy and controlling the US money supply? Basics About the Federal Reserve LG2 20-15 The Federal Reserve Changes in the money supply produce significant changes in inflation, employment and economic growth.

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Basics About the Federal Reserve LG2 20-16 The Federal Reserve Chairman is in control of what? The US money supply

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The 12 FEDERAL RESERVE DISTRICT BANKS LG2 Basics About the Federal Reserve 20-17

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Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met. Bankers Acceptance -- A promise the bank will pay some specified amount at a particular time. Money exchange (aka Currency Exchange) allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros). Banks help companies conduct business in other countries by providing three services: International Banking and Banking Services LG7 20-18

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World Bank -- Responsible for financing economic development in less-developed countries International Monetary Fund (IMF) -- monitors the monetary policies of member nations to ensure a global monetary system that works best for all nations LEADING INSTITUTIONS in INTERNATIONAL BANKING LG7 The World Bank and the International Monetary Fund 20-19

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Working within the Legal Environment Bonus Chapter A McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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The Case for Laws Laws are a key part of a civilized society, but must change with the times. Judiciary -- The branch of government chosen to oversee the legal system through a system of courts. The U.S. courts system is organized at the federal, state, and local levels. The NEED for LAWS LG1 A-21

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Product Liability Product Liability -- Holds businesses liable for harm that results from the production, design, or inadequate warnings of products they market. Average case costs businesses $5M Strict Product Liability -- Liability without regard to fault; a company can be held liable for a defective product even if they didnt know of the defect. PRODUCT LIABILITY LAWS LG2 A-22

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Criminal law defines crimes, establishes punishments, and regulates the investigation and prosecution of people accused of committing crimes. Civil law proceedings cover non-criminal acts - divorce, marriages, personal injury lawsuits and more. Business Law -- Refers to the rules, statutes, codes and regulations that provide a legal framework for the conduct of business. These include product liability, sales, compensation, consumer protection. TYPES of LAW LG1 The Case for Laws A-23

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Statutory and Common Law Statutory Law -- Includes state and federal constitutions, legislative enactments, treaties of the federal government and ordinances; written law. Common Law -- The body of law that comes from decisions handed down by Judges/courts; unwritten law. Precedent -- Decisions judges have made in previous cases to guide their handling of new cases. MAJOR AREAS of LAW LG1 A-24

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Administrative Agencies Administrative Agencies -- Federal or state institutions and other government organizations with delegated power to create rules and regulations within their given area of authority. Issue more rulings affecting business than courts do. Examples of Administrative Agencies: The Federal Reserve Board The Securities and Exchange Commission The Equal Employment Opportunity Commission The Federal Trade Commission ADMINISTRATIVE AGENCIES LG1 A-25

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Tort Law Tort -- A wrongful act that causes injury to another persons body, property or reputationexample recent tobacco lawsuits An intentional tort is a willful act that results in injury. Negligence Behavior that causes unintentional harm or injury. WHAT is TORT LAW? LG2 A-26

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Legally Protecting Ideas: Patents, Copyrights and Trademarks Patent -- A document that gives inventors exclusive rights to their inventions for 20 years. PATENTS, COPYRIGHTS, and TRADEMARKS Copyright -- Protects a creators rights to materials such as books, articles, photos, paintings, and cartoons. Lifetime plus 70 years LG3 A-27

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Deregulation vs. Regulation Deregulation -- The government withdraws certain laws and regulations that seem to hinder competition ( these regulations do not always benefit customers..ie lack of competition = lack of choice) DEREGULATING COMMERCE Deregulation efforts were active in: The airline industry Telecommunication Some public utilities LG9 A-28

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Using Technology to Manage Information Bonus Chapter B McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Evolution from Data Processing to Business Intelligence Data Processing (DP) -- primarily used to improve the flow of financial information. Many people use the terms data and information interchangeably but they mean different things Data: are the raw, unanalyzed and unorganized facts and figures. Information: is processed and organized data that managers can use for decision-making. Business TECHNOLOGY in the 1970s was known as: LG1 B-30

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Business Intelligence (BI) -- changes the traditional flow of information so that the database goes to the individual rather than the individual going to the database TECHNOLOGY in the EARLY 2000s LG1 Evolution from Data Processing to Business Intelligence B-31

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Types of Information Business process information point of sale Physical-world observations cameras, sensors, RFID Biological data - fingerprints Public data public sources Data that indicate personal preferences or intentions internet shopping personal likes dislikes KEY TYPES of BUSINESS INFORMATION AVAILABLE LG2 B-32

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Managing Information 1. Quality accurate and reliable 2. Completeness - enough to make a decision 3. Timeliness gets to manager in time to make critical decisions 4. Relevance too much data. Managers must learn which questions to ask to get the correct data FOUR CHARACTERISTICS that MAKE INFORMATION USEFUL LG2 B-33

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Software Shareware -- Is copyrighted, but is distributed free of charge with a request that users send a specific fee to the developer if they decide to use it. Public Domain Software (Freeware) -- Software that is free for the taking. SOFTWARE: TELLING the COMPUTER WHAT to DO LG5 B-34 Major types: Word processors, spreadsheets, databases, graphics, communicating, and accounting.

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Intranet -- A companywide network closed to public access that uses Internet-type technology. A firm would use an intranet if it wanted to enable its employees to use and share data without allowing outsiders to gain access Extranet -- A semiprivate network that lets more than one company access the same information or allows people on different servers to collaborate. BEYOND the INTERNET The Road to Knowledge: The Internet LG3 B-35

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Computer Networks Network Computing System -- the tasks are performed by personal computers using information stored in databases controlled by a server. Also known as client/server systems. Networks can be expensive. Expensive to maintain and expensive to upgrade. COMPUTER NETWORKS LG4 B-36

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Virus -- A piece of programming code inserted into other programming that usually lies dormant until triggered; then causes unexpected, undesired events. Phishing attempts to trick victims into giving important information to a bogus website. VIRUSES and PHISHING LG6 Security Issues B-37

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Cyberterrorism is the idea that terrorist hackers could shut down: Entire communications Money supply Electricity Transportation When it comes to computers and information technology, government and corporate security officials are now most worried about cyberterrorism CYBERTERRORISM LG6 Security Issues B-38

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Managing Risk Bonus Chapter C McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Managing Risk Risk -- The chance of loss, the degree of probability of loss, and the amount of possible loss. WHATS RISK? LG2 C-40 Two kinds: Speculative Risk -- A chance of either profit or lossentrepreneur takes speculative risk when starting a business Pure Risk -- The threat of loss with no chance for profitchance of fire, accident or theftmost concerns business people

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Understanding Business Risks Companies adopt risk management procedures to minimize the chance of business failure due to unplanned events such as security breaches, terrorist attacks, and natural disasters. Goals of enterprise risk management (ERM): 1) Defining which risks the program will manage. 2) What risk management processes, technologies, and investments will be required. 3) How risk management efforts will be coordinated across the firm. WHATS ENTERPRISE RISK MANAGEMENT? LG1 C-41

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Insurable Risk -- A risk that the typical insurance company will cover, using the following guidelines: 1) The policyholder must have an insurable interest. 2) The loss must be measurable. 3) The chance of loss must be measureable. 4) The loss must be accidental. 5) The insurance companys risk should be dispersed among different areasone of the reasons for high price of earthquake insurance 6) The insurance company can set standards for accepting risks. WHAT RISKS are INSURABLE? LG2 Buying Insurance to Cover Risk C-42

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BASICS of INSURANCE POLICIES Rule of Indemnity -- An insured person or organization cant collect more than the actual loss from an insurable risk. LG3 Understanding Insurance Policies C-43

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Health Insurance Health Maintenance Organizations (HMOs) -- Offer a full range of healthcare benefits, members do not receive bills and do not have to fill out claim forms but must obtain the HMO's approval before medical treatment is provided Health Savings Accounts (HSAs) -- are tax- deferred accounts that allow people to save money for medical costs such as prescription drugs, office visits, and routine medical procedures. EMPLOYER HEALTH INSURANCE OPTIONS LG4 C-44

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Disability Insurance and Workers Compensation Disability insurance replaces part of your income if you become disabled and cant work. Important for younger people because they are more likely to be disabled by accident or disease than death. OTHER TYPES of INSURANCE LG4 C-45

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Liability Insurance Professional liability insurance covers people found liable for professional negligence; also known as malpractice insurance stock brokers, doctors, real estate agents Product liability insurance covers liability arising out of the sale of good to customers. LIABILITY INSURANCE LG4 Photo Courtesy of: Paul Wilson C-46

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Managing Personal Finances Bonus Chapter D McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Financial Planning Begins with Making Money An investment in education pays the best interest rate: A typical full-time worker with a four-year degree earns about $50,000, 62% more than a person with a high school diploma. The lifetime earnings of a family with bachelors degrees will be about $1.6 million more than a family with high school diplomas. FINANCIAL PLANNING BEGINS with MAKING MONEY LG1 D-48

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Building Your Financial Base Live frugally. If married, try to live on one income. Your first major investment might be a low-priced home. Buy for the long term and dont live beyond your means. BUILDING YOUR FINANCIAL BASE LG2 D-49

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Real Estate: Historically, a Relatively Secure Investment Once they've accumulated enough money, buying a low-priced home is often a good investment for young adults. Paying for a home is a good way of forcing yourself to save. FINANCIAL BENEFITS of BUYING a HOME Interest paid on your home loan is tax deductible. Three keys to optimal return on your home are: location, location, location. LG2 D-50

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Where to Put Your Savings & Learning to Manage Credit Contrarian Approach -- Buying stock whenever everyone else is selling or vice versa. Take courage to do invest this way. When stocks fall this is the time to invest. This is the way the rich get richer SAVING and MANAGING CREDIT LG2 D-51

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Where to Put Your Savings & Learning to Manage Credit Credit cards serve useful purposes and are important to own but must be used discriminately. Three advantages of using a credit card are: (1) You may need a credit card to buy certain goods or rent a car, (2) credit cards allow you to easily track your expenses, and (3) they are more convenient than carrying cash or writing checks. SAVING and MANAGING CREDIT LG2 D-52

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Learning to Manage Credit If you use a credit card to make purchases, you should make a strong effort to pay off the balance in full each month. Disadvantage of using credit cards: they can make it easy to pile up a large amount of debt quickly CREDIT CARDS and DEBT LG2 D-53

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401(k) Plans 401(k) Plan -- An employer-sponsored savings plan that allows you to deposit a set amount of pretax dollars and collect compounded earnings tax-free until withdrawal. 401(k) PLANS LG4 D-54 Only retirement many individuals have Only 70% of employees contribute some employers match up to 50 centers on the dollar

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Estate Planning Estate planning Will -- A document that names the guardian for minor children, states how you want your assets distributed and names the executor for your estate. Executor -- Person who assembles and values your estate, files income and other taxes, and distributes assets. PLANNING for THOSE WHO WILL INHERIT LG4 D-55

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Protecting Your Financial Base: Buying Insurance Term Insurance -- A pure insurance protection for a given number of years that typically costs less the younger you buy it. Recommended for most people because it is cheaper than whole. Whole Life Insurance -- Combines pure insurance with savings, so you buy both insurance and a savings plan. INSURING YOUR LIFE LG3 D-56

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Health & Other Insurance Disability Insurance -- is a relatively low cost way of protecting yourself from lost income due to an accident or prolonged illness. Umbrella Policy -- Combining all your insurance (life, health, homeowners, auto) from one company is less costly. Insurance companies usually give a discount to families who buy several types of insurance coverage from them. OTHER INSURANCE PROTECTION LG3 D-57

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EXAM 1 60 minutes to complete 50 multiple choice x 4 pts each = 200 pts 50 T/F x 2 pts each = 100 pts 100 questions total no written 300 points totals Must have a pencil and Red full size scantron Chap 19 : 8 x T/F and 8 x multiple choice Chapter 20: 8x T/F and 8 x multiple choice Chapter A: 8T/F and 8x multiple choice Chap B: 8 T/F and 8 x multiple choice Chap C: 9x T/F and 9 x multiple choice Chap D: 9x T/F and 9 x multiple choice EXAM 3 Structure 5-58