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Busfin Readings

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14 views3 pages

Busfin Readings

Uploaded by

ryrque
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FINANCE VERSUS ECONOMICS AND ACCOUNTING

Economists developed the notion that an assets value is based on future cash flows asset will
provide. Accountants provided information regarding the likely size of the cash flow. Finance
grew and lies between accounting and economics. People in charge of finance need
knowledge of two fields.

THE ROLE OF FINANCIAL INSTITUTION


The flow of money begins with individual who deposits in the bank, a financial
institution. This depositor opens up a bank account and earns interest from this account. In
turn, these funds are lent by the banks to businesses, the borrowers, who either startup a new
project, a new line of product or merely expand operation. As the business earns profit, the
borrower of the fund is able to pay the interest of the loan. The depositor receives an interest
on his bank.

FINANCIAL INSTRUMENTS AND FINANCIAL MARKETS


Financial instruments are tools that help a business’ daily operations and eventually
make it grow. These tools help the finance manager and handle his cash, his short term
operating requirements and long term business requirements.
Money market instruments are inexpensive way for government and financial
institutions to raise funds. These funds are available for short term.

FINANCIAL INSTRUMENT BASIC CHARACTERISTICS


Money Market debt:
● Issued by the government
TREASURY BILLS ● Matures within one year
● Default free
● Issued by businesses
● Matures in nine months
COMMERCIAL PAPERS ● Low default risk
● Issued by banks or mutual funds
companies
MONEY MARKET FUNDS ● No specific maturity date
● Low default risk
● Issued by banks, credit unions, finance
CREDIT CARD DEBT companies
● Maturity date varies
● Default risk varies
FINANCIAL INSTRUMENT(Long Term) BASIC CHARACTERISTICS
● Issued by the government
Treasury notes and bonds ● Matures in two to ten years
● Default free

● Issued by local governments


Municipal bonds ● Matures longer
● More risky than government securities

Corporate bonds ● Issued by corporations


● Matures in forty years
● More Risky

FINANCIAL INSTITUTIONS AND FINANCIAL SERVICES

Financial institutions help in funding important government projects and extend


advisory services to help in nation building. A financial institution be a bank or
nonbank.
Different kinds of banks:
1. Thrift Banks are deposit taking financial institution that extend credit to
the consumer market. Thrift banks usually cater rural areas.

2. Commercial Banks are mainly deposit-taking financial institutions that


extend credit to the retail and consumer market also lends money of
savers/depositors to small medium enterprises that will pay them an
interest regularly in exchange for the use of their funds. It is the
traditional department store of finance serving a variety of savers and
borrowers.

3. Universal Banks lends to multinational companies with global presence.


Their transactions are larger than commercial banks and are dominated by
multi currencies.

4. Investment Banks it is an organization that underwrites and distributes


new investment securities and helps businesses obtain financing.
Different kinds of non-banks:

1. Leasing Companies are not governed by central banks. It extends credit


or financing to companies that need it for their project.

2. Investment Companies are regulated by Securities and Exchange


Commission. They can provide funding to companies or raise funds
through bond issuances or initial public offering.

3. Mutual Funds are collective investments or funds of small investors


pooled together and managed to be able to reach maximum returns.

4. Insurance Companies sells insurance coverage to provide guarantee of


compensation for specified death, illness, accident, loss or damage to
property in return for payment of a premium. Purchasing insurance
protects the owner from the unforeseen events that may happen.

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