Financial Markets and Business
Production and Time Production takes time Investment takes time Capital Increases Labor Productivity Financial Intermediaries Interest Rate-annual interest expressed as the amount borrowed
Consumption and time Paying More to consume now
The Market for Loans Demand for Loans Supply of Loans Market Interest rate Equilibrium interest rate
Banks as Intermediaries Financial intermediaries- accumulate funds from savers and lend funds to borrowers Credit- ability to borrow now, based on a promise to repay in the future Serving savers and borrowers
Banks as Intermediaries Banks specialize in loans Reducing risk through Diversification- lend to several borrowers Line of Credit- draw on credit without having to fill out loan application each time
Why Interest rates differ Prime rate- lowest interest rate charge to most trustworthy borrowers Risk Collateral- asset sold to pay loan default Duration of Loan- longer more interest Cost of Administration- less interest on larger loans Tax Treatment
Corporate Finance Corporate Stock Corporate borrowing IPO (initial public offering) Dividends- profits paid to stock holders Corporate borrowing Bond- corporations promise to pay back the holder a fixed sum of money at a given date Securities Exchange Stocks and bonds are securities- owners free to sell them
Profit and Growth Corporate profits and growth Franchises- right o sell product in a given region (McDonalds)
Corporate Mergers Mergers Horizontal mergers- firms merge who make same product (Exon, BP) Vertical mergers- merge with the resource producer or one who you sell resource to (Steel, car maker) Conglomerate merger- combination of firms in different industries( plastics, electronics) Four large merger waves
Multinational Corporations Corporation that operates globally Running Multinationals Headquarters Development production Problems with multinationals Adapting to cultures Coordination Different regulations, tax laws, currency Take jobs Exploit workers