PRINCIPLES OF

FINANCE
TCH 302
Lecturer: Chu Mai Linh, Ms.

Email: [email protected]

Introduction to Finance 1
 • ATTENDANCE

ASSIGNMENTS Attendance is compulsory in accordance with FTU regulations. Students

& are strongly advised not to miss lecture hours since success is closely
related with attendance.
ASSESSMENTS
• ASSIGNMENTS & ASSESSMENTS

% Form of Size of the Feedback

Contribution Assessment assessment method
Duration
10% of the Attendance
final mark
30% of the Examination 45 minutes Correct
final mark (4 pages) answers
Multiple Choices and
Short answer questions

60% of the Examination 60 Minutes Correct

final mark answers

Introduction to Finance 2
 TEXTBOOKS

1. The Economics of Money, Banking, and

Financial Markets, Frederic S. Mishkin,
11th edition, 2016

2. Money, Banking and Financial Markets,

S.G. Cecchetti and K. L. Schoenholtz,
5th edition, 2017

3. Finance: Applications and Theory,

Marcia M. Cornett, 2nd edition, 2012

4. Lawrence J. Gitman, Michael D. Joehnk

and Randy Billingsley (2011). Personal
Financial Planning. South-Western,
Cengage Learning,12E.

5. Bodie & Merton (2000). Finance,

Prentice Hall

Introduction to Finance 3
 SYLLABUS PLAN
Modules Compulsory readings
Mishkin, Chapter 1,2,3
Introduction to Finance
Cecchetti, Chapters 1,2 & 3
Cornett, Chapter 1

Time Value of Money Mishkin, Chapter 4

Bodie & Merton Chapter 3,4,5
Personal Finance Lawrence, Chapters 4,5,6,7

Understanding Financial Mishkin, Chapter 8

Cecchetti, Chapter 11
Markets and Institutions Bodie & Merton, Chapter 1,2

Valuation of securities Bodie & Merton, Chapters 7,8,9

Return and Risk Cecchetti, Chapters 5

Managing financial health Cornett, Chapters 2 & 3

Bodie & Merton Chapter 3

Introduction to Finance 4
1 INTRODUCTION TO FINANCE

Mishkin, Chapter 1,2

Cecchetti, Chapters 1,2 & 3
Cornett, Chapter 1

Introduction to Finance 5
 Content
1. Defining Finance
2. Why study Finance?
3. The Financial System
4. Six Parts of the Financial System
5. Flows of Funds through the Financial System

Introduction to Finance 6
 Finance in Business and in Life
Example #1

• Lucas has a plan to provide an online learning platform for

students. He has finally designed the websites and feels that he is
offering a perfect educational service, combining tutorial and
self-learning. As the result, his business runs well and starts
bringing some profits. Lucas would like to invest more in this
website and expand the customer base. Lucas needs more money
to upgrade the technology and hire and train more people.

• How can he get the capital he needs to expand?

• Finance is the set of activities that allow the financing of economic

agents with a need, by those with a surplus.

Introduction to Finance 7
 Source of funds

EQUITY Borrowings

8
 Finance in Business and in Life
Example #2
• Song is interested in finance and would like to invest some money
in stocks. However, she has heard about loss and failure of the
corporations. In the past years, Song learned about the delisting of
CotecLand (2021), the bankruptcy cases of Lehman Brothers
(2008). These firm stockholders lost their entire money in these
firms.

• Song would like to know what guarantee she has as an investor

against losing her investment.

Introduction to Finance 9
 Finance in Business and in Life
Example #3
• Suppose you have some savings money. What
kinds of financial assets should you choose these
days?

• Finance is the study of applying specific value to

things we own, services we use, and decision we
make. E.g.: shares of stock in a company,
payments on a home mortgage, the purchase of
an entire firms.

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 Defining Finance

•Finance is a study of how people

allocate scare resource over the time.

•In finance, cash flow is the term that

describes the process of paying and
receiving money.

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 Why study Finance?
1. To manage your personal resources (e.g. to
borrow money to buy a new car, to refinance your
shop house at a lower rate…)

2. To deal with the world of business

3. To pursue interesting and rewarding career

opportunities

4. To make informed public choices as a citizen

5. To expand your mind

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 Financial Decisions

1. Financial decisions of households

2. Financial decision of firms
3. Financial decision of government

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Financial decisions of households

•Households face 4 basic types of financial

decision:
• 1. Consumption and saving decisions
• 2. Investment decisions
• 3. Financing decisions (if they borrow, they
incur a liability = debt,
• Their wealth or net worth = assets –
liabilities)
• 4. Risk-management decisions

Introduction to Finance 14
 Financial decision of firms

•The branch of finance dealing with

financial decisions of firms is called
business finance or corporate finance.
• Capital budgeting process such as
whether to build a plant or produce a
new product.
• Capital structure decision such as how
much debt and how much equity it
should have in its capital structure.
• Working capital management, such as
whether it should extend credit to
customer or demand cash on delivery.

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 Financial decision of
government

• A government budget is a government

document presenting the government's
proposed revenues and spending for a
financial year that is often passed by the
legislature (parliament", "congress", and
"assembly“)- - Government budgets are of
three types:
• Balanced Budget: when government
revenue and expenditure are equal.
• Surplus Budget: when anticipated revenues
exceed expenditure.
• Deficit Budget: when anticipated
expenditure is greater than revenues.

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Flow of Funds Through the
Financial System

Introduction to Finance 17
 Six Parts of the Financial System
1. Money
2. Financial Instruments
3. Financial Markets
4. Financial Institutions
5. Regulatory Agencies
6. Central Bank

Introduction to Finance 18
 Financial System
• Financial system is defined as the set of
markets and other institutions used for financial
contracting and exchange of assets and risks.

• The financial system includes markets, stocks,

bonds and other financial instruments, financial
intermediaries and the regulatory bodies that
govern all of these institutions.

Introduction to Finance
 Money

•Money is the medium of exchange and to

store value

•Money is at the heart of the payments

system.
……………………………………………………………….

• What is the difference between wealth and income?

• What about liquidity?

Introduction to Finance 20
 Financial Instruments
• The written legal obligation of one party to
transfer something of value, usually money, to
another party at some future date, under certain
conditions.

Introduction to Finance 21
 Financial Instruments
1. Financial instruments act as a means of payment (like money).
Employees take stock options as payment for working.
2. Financial instruments act as stores of value (like money).
Financial instruments generate increases in wealth that are larger than
from holding money.

Financial instruments can be used to transfer purchasing power into

the future.
3. Financial instruments allow for the transfer of risk (unlike money).
Examples: Insurance contracts, future contracts.

Introduction to Finance 22
 Features of Financial Instruments
• These contracts are very complex.
This complexity is costly, and people do not want
to bear these costs.
• Standardization of financial instruments
overcomes potential costs of complexity.
Most mortgages feature a standard application
with standardized terms.

•
Introduction to Finance 23
 Features of Financial Instruments

• Financial instruments also communicate

information, summarizing certain details about the
issuer.

• Financial instruments are designed to handle the

problem of asymmetric information.

Introduction to Finance 24
 Financial Markets
Financial markets are places where financial instruments are bought and sold.
• These markets are the economy’s central nervous system.
• These markets enable both firms an individuals to find financing for their
activities.
• These markets promote economic efficiency.
They ensure resources are available to those who put them to their best use.
They keep transactions costs low.

Introduction to Finance 25
Stock Market Indexes

Introduction to Finance 26
 Financial Institutions
• Firms that provide access to the financial
markets, both to savers who wish to purchase
financial instruments directly and to borrowers
who want to issue them.
• Also known as financial intermediaries.
▫ Examples: commercial banks, investment
banks, insurance companies,
securities firms, and pension funds.
Introduction to Finance 27
 Government regulatory agencies

• Government regulatory agencies provide

wide-ranging financial regulation – rules
and supervision.
Increasing Information Available to Investors

Ensuring the Soundness of Financial Intermediaries (Restrictions on

Entry, Disclosure, Restrictions on Assets and Activities, Deposit
Insurance, Limits on Competition, Restrictions on Interest Rates)

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Government regulatory agencies

Introduction to Finance 29
 Central banks
• Central banks began as large private banks to
finance wars.
• Central banks control the availability of
money and credit to ensure low inflation,
high growth and stability of financial
system

Introduction to Finance 30
 Financial Field
• Return of
capital to investors

------------------------------------------------------------------
• Not all of the cash
will return to the investors

Introduction to Finance 31
 Defining Finance
• Investments

----------------------------------------------------------------
• Financial managements

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 Defining Finance
Investments
• methods and techniques for making decisions

about:

• what kinds of securities to own, which firms’ securities to buy,

• and how to pay the investor back in the form that the investors

wishes (e.g., the timing and certainty of the promised

cashflows).

Introduction to Finance 33
 Defining Finance
Financial Management

• deals with a firm’s decisions in acquiring and

using the cash that is received from investors or

from retained earnings.

Introduction to Finance 34
 Defining Finance
Financial Management

1. How to or organize the firm in a manner that will attract

capital

2. How to raise capital (e.g., bonds versus stocks).

3. Which projects to fund.

4. How much capital to retain for ongoing operations and

new projects.

5. How to minimize taxation.

6. How to pay back capital providers.

Introduction to Finance 35
 Defining Finance
Financial Institutions and Markets

• The organization that

facilitate the flow of
capital between investors
and companies.
• e.g.: banks, insurance
companies, stock
companies, mutual funds

Introduction to Finance 36
 Defining Finance
International Finance

The use of finance

theory in a global
business environment.
e.g.: law, risks and
business relationships
across different countries

Introduction to Finance 37
 Let’s try it now #: Net worth
• Joe and Mike purchase identical houses for $200,000. Joe makes a down
payment of $40,000, while Mike puts down only $10,000; for each individual,
the down payment is the total of his net worth. Assuming everything else is
equal, who is more highly leveraged? If house prices in the neighborhood
immediately fall by 10 percent (before any mortgage payments are made),
what would happen to Joe’s and Mike’s net worth?

Lecture 1 38
 Summary
A healthy and constantly evolving financial system is the
foundation for economic efficiency and economic growth. It has
six parts:
1. Money is used to pay for purchases and to store wealth.
2. Financial instruments are used to transfer resources and risk.
3. Financial markets allow people to buy and sell financial
instruments.
4. Financial institutions provide access to the financial markets,
collect information and provide a variety of other services.
5. Government regulatory agencies aim to make the financial
system operate safely and reliably.
6. Central banks stabilize the economy.

Introduction to Finance 39