Foundations of Finance Notes (BFF1001)
Weeks 1-2: What is Finance, Financial Systems, Financial Markets
• 5 Principles of Finance
• Financial Systems
• Financial Markets
• Key goal of corporations
Week 3&4: Time Value of Money, Time and Money
• Compound Interest vs Simple Interest
• Special Cash Flows: Annuities and Perpetuities
Week 5: Financial Choices and Decisions
• Capital Budgeting Techniques:
➢ Net Present Value (NPV)
➢ Payback Period
➢ Internal Rate of Return (IRR)
Week 6: Debt Markets
• Money Markets
• Bond Markets
Week 7: Stocks and Markets
• Types of Shares
• Share Valuation
• Risk, Returns and CAPM
Week 8: Risk and Financial Protection
• Financial Protection
• Financial Derivatives: Forwards, Futures &Options
Week 9: Finance and Globalisation
• Commodity/Term Currency
• Spot Exchange Rates vs Forward Exchange Rates
• Eurobonds Vs Foreign Bonds
eterminin
Week 10: Financial Markets and Regulation
• Australian Prudential Regulation Authority (APRA)
• Australian Securities and Investment Commission (ASIC)
• Bank for International Settlement (BIS)
• Reserve Bank of Australia (RBA)
Week 11: Financial Institutions
• Authorised Deposit Taking Institutions (ADI’s)
• Bank regulation (Importance)
• PAIRS AND SOARS
• Net Interest Margin
• Securitisation
• Managed Funds
Week 12: CSR, Ethics, and new Financial Strategies
• Microfinance
• Peer-to-Peer Lending
• Crowdfunding
,Week 1&2: What is finance, Financial systems, Financial Markets.
Key goal of the corporations and key corporate decisions
Key goal of the corporation: To maximise shareholder wealth, which is equivalent to maximising the
value of the firm.
• Capital Budgeting decisions: Which long-term investment should the firm undertake?
• Capital Structure decisions: how should the firm funs such investments?
• Working capital management decisions: how should the firm manage its day-to-day
operations and manage its cash flows?
5 Principles of Finance
1. Cash flows are what matters
• Cash flows, not profits, determine money that can be spent and the value of a business
2. Money has a time value
• Money received today is more valuable than money received tomorrow because we can
invest that money to earn interest.
• If benefits or cash inflows>costs, the project creates wealth and should be accepted.
3. Risk requires a reward
• Investors expect a return on their investment that satisfy two requirements:
• Return for delaying consumption, and an additional return for taking on a risk.
4. Market prices are usually correct
• Share prices respond quickly to investor’s assessment of their decisions.
5. Conflicts of interest cause agency problems
• Manager’s decisions can sometimes decrease the value of shares as their ow decisions
may conflict with the interests of shareholders.
Financial Systems
• Financial systems/Institutions facilitate the transfer of funds by providing intermediation
(indirect finance) or can bring borrowers and lenders together without actively taking a role in
the transfer of funds.
Financial Instruments: Represent an entitlement to the holder to a set of future cash flows:
• Debt: Provides the holder with a contractual claim to defined periodic interest repayments
and the repayment of principle. Eg. commercial corporate bond
• Equity: Provides the holder with ownership interest in an asset eg. Ordinary share, preference
share
• Derivatives: Allow management of certain risk, don’t provide funds to borrower. Eg Forwards,
options, swaps.
• Hybrids: incorporates characteristics of debt and equity. Eg. Preference shares.
Surplus units= income>consumption/expenditure= lend funds
Deficit units= income<consumption/expenditure= borrow funds
Direct Financing vs Indirect Financing
Direct financing: Involves the transfer of funds between savers and borrowers without an
intermediary. No transformation of financial claims in the process.
, • Firm seeking cash seels its securities to savers who are willing to purchase them for a large
return
• Broker or dealer may be involved in getting these parties together, however, no
intermediation occurs.
ADVS:
• Cost of intermediation can be avoided
• Can increase access to a diverse range of markets
• Can provide greater flexibility in range of securities that deficit units issue for differing needs
DISADVS:
• Matching of preferences can be difficult
• Liquidity and marketability of a security is dependent upon other party.
• Search and transaction costs may be high.
Indirect financing: Involves the transfer of funds between ultimate savers and ultimate borrowers
via financial institutions.
• Financial intermediary collects the savings of individuals and issues its own (indirect)
securities in exchange for the savings. Then uses the funds from the individual savers to
acquire the business firms (direct) securities, such as stocks or bonds.
ADVS
• Asset transformation: borrowers and savers offered a range of products they can choose
from without having to match preferences of other party.
• Maturity transformation: borrowers and savers offered products with varying maturities.
• Liquidity transformation: ability to convert financial assets into cash. Financial institutions
satisfy different preferences for liquidity by taking the intermediation rate.
Financial Markets
Provide a forum for the creation and exchange of financial instruments.
• Role is to allocate funds from surplus to deficit units and to allocate between alternative use
Primary Market: Where investors purchase instruments from the original issuer, instruments are
first created here (e.g first issue of bonds or shares by a firm)
Secondary Market: Where investors trade securities with other investors. Where previously issued
instruments are exchanged among investors.
Money Market: Short-term (less than 12 months) instruments eg. bank bills, promissory notes
Capital Market: Long-term (more than 12 months) instruments eg. Shares, corporate bonds.
Wholesale Market: Where transactions occur directly between investor and borrowers. (large
transactions)
Retail market: where transactions are conducted with financial intermediaries by the household and
small to medium-sized business sector (small transactions).
Weeks 1-2: What is Finance, Financial Systems, Financial Markets
• 5 Principles of Finance
• Financial Systems
• Financial Markets
• Key goal of corporations
Week 3&4: Time Value of Money, Time and Money
• Compound Interest vs Simple Interest
• Special Cash Flows: Annuities and Perpetuities
Week 5: Financial Choices and Decisions
• Capital Budgeting Techniques:
➢ Net Present Value (NPV)
➢ Payback Period
➢ Internal Rate of Return (IRR)
Week 6: Debt Markets
• Money Markets
• Bond Markets
Week 7: Stocks and Markets
• Types of Shares
• Share Valuation
• Risk, Returns and CAPM
Week 8: Risk and Financial Protection
• Financial Protection
• Financial Derivatives: Forwards, Futures &Options
Week 9: Finance and Globalisation
• Commodity/Term Currency
• Spot Exchange Rates vs Forward Exchange Rates
• Eurobonds Vs Foreign Bonds
eterminin
Week 10: Financial Markets and Regulation
• Australian Prudential Regulation Authority (APRA)
• Australian Securities and Investment Commission (ASIC)
• Bank for International Settlement (BIS)
• Reserve Bank of Australia (RBA)
Week 11: Financial Institutions
• Authorised Deposit Taking Institutions (ADI’s)
• Bank regulation (Importance)
• PAIRS AND SOARS
• Net Interest Margin
• Securitisation
• Managed Funds
Week 12: CSR, Ethics, and new Financial Strategies
• Microfinance
• Peer-to-Peer Lending
• Crowdfunding
,Week 1&2: What is finance, Financial systems, Financial Markets.
Key goal of the corporations and key corporate decisions
Key goal of the corporation: To maximise shareholder wealth, which is equivalent to maximising the
value of the firm.
• Capital Budgeting decisions: Which long-term investment should the firm undertake?
• Capital Structure decisions: how should the firm funs such investments?
• Working capital management decisions: how should the firm manage its day-to-day
operations and manage its cash flows?
5 Principles of Finance
1. Cash flows are what matters
• Cash flows, not profits, determine money that can be spent and the value of a business
2. Money has a time value
• Money received today is more valuable than money received tomorrow because we can
invest that money to earn interest.
• If benefits or cash inflows>costs, the project creates wealth and should be accepted.
3. Risk requires a reward
• Investors expect a return on their investment that satisfy two requirements:
• Return for delaying consumption, and an additional return for taking on a risk.
4. Market prices are usually correct
• Share prices respond quickly to investor’s assessment of their decisions.
5. Conflicts of interest cause agency problems
• Manager’s decisions can sometimes decrease the value of shares as their ow decisions
may conflict with the interests of shareholders.
Financial Systems
• Financial systems/Institutions facilitate the transfer of funds by providing intermediation
(indirect finance) or can bring borrowers and lenders together without actively taking a role in
the transfer of funds.
Financial Instruments: Represent an entitlement to the holder to a set of future cash flows:
• Debt: Provides the holder with a contractual claim to defined periodic interest repayments
and the repayment of principle. Eg. commercial corporate bond
• Equity: Provides the holder with ownership interest in an asset eg. Ordinary share, preference
share
• Derivatives: Allow management of certain risk, don’t provide funds to borrower. Eg Forwards,
options, swaps.
• Hybrids: incorporates characteristics of debt and equity. Eg. Preference shares.
Surplus units= income>consumption/expenditure= lend funds
Deficit units= income<consumption/expenditure= borrow funds
Direct Financing vs Indirect Financing
Direct financing: Involves the transfer of funds between savers and borrowers without an
intermediary. No transformation of financial claims in the process.
, • Firm seeking cash seels its securities to savers who are willing to purchase them for a large
return
• Broker or dealer may be involved in getting these parties together, however, no
intermediation occurs.
ADVS:
• Cost of intermediation can be avoided
• Can increase access to a diverse range of markets
• Can provide greater flexibility in range of securities that deficit units issue for differing needs
DISADVS:
• Matching of preferences can be difficult
• Liquidity and marketability of a security is dependent upon other party.
• Search and transaction costs may be high.
Indirect financing: Involves the transfer of funds between ultimate savers and ultimate borrowers
via financial institutions.
• Financial intermediary collects the savings of individuals and issues its own (indirect)
securities in exchange for the savings. Then uses the funds from the individual savers to
acquire the business firms (direct) securities, such as stocks or bonds.
ADVS
• Asset transformation: borrowers and savers offered a range of products they can choose
from without having to match preferences of other party.
• Maturity transformation: borrowers and savers offered products with varying maturities.
• Liquidity transformation: ability to convert financial assets into cash. Financial institutions
satisfy different preferences for liquidity by taking the intermediation rate.
Financial Markets
Provide a forum for the creation and exchange of financial instruments.
• Role is to allocate funds from surplus to deficit units and to allocate between alternative use
Primary Market: Where investors purchase instruments from the original issuer, instruments are
first created here (e.g first issue of bonds or shares by a firm)
Secondary Market: Where investors trade securities with other investors. Where previously issued
instruments are exchanged among investors.
Money Market: Short-term (less than 12 months) instruments eg. bank bills, promissory notes
Capital Market: Long-term (more than 12 months) instruments eg. Shares, corporate bonds.
Wholesale Market: Where transactions occur directly between investor and borrowers. (large
transactions)
Retail market: where transactions are conducted with financial intermediaries by the household and
small to medium-sized business sector (small transactions).
