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.
Slide 2
Using Securities Markets for Financing and Investing
Opportunities Chapter 19 Copyright 2013 by The McGraw-Hill
Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Slide 3
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.
Slide 11
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.
Slide 21
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.
Slide 30
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.
Slide 40
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.
Slide 48
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