Introduction to Finance: Markets, Investments, and Financial Management

Introduction to Finance, 17th Edition offers students a balanced introduction to the three major areas of finance: institutions and markets, investments, and financial management. Updated to incorporate recent economic and financial events, this new edition is an ideal textbook for first courses in finance—reviewing the discipline’s essential concepts, principles, and practices in a clear, reader-friendly manner. Students gain an integrated perspective of finance by learning how markets and institutions influence, and are influenced by, individuals, businesses, and governments. Designed to impart financial literacy to readers with no previous background in the subject, the text provides a solid foundation for students to build upon in later courses in financial management, investments, or financial markets. Equations and mathematical concepts are kept to a minimum, and include understandable, step-by-step solutions. Divided into three parts, the book explains financial markets, discusses the functions of financial systems, reviews savings and investments in different sectors, describes accounting concepts and organizational structures, and more. Real-world examples featured throughout the text help students understand important concepts and appreciate the role of finance in various local, national, and global settings.

Table of Contents:
Preface iv Author Bios xii Part 1 Institutions and Markets 1 The Financial Environment 5 1.1 What is Finance? 6 1.2 Why Study Finance? 8 1.3 Six Principles of Finance 10 1.4 Overview of the Financial System 13 1.5 Financial Markets: Characteristics and Types 17 1.6 Careers in Finance 18 1.7 The Plan of Study 20 Applying Finance To. . . 21 Summary 21 Key Terms 22 Review Questions 22 Exercises 22 2 Money and the Monetary System 24 2.1 The 2007–2008 Financial Crisis and Subsequent Recovery 25 2.2 Process of Moving Savings into Investments 26 2.3 Overview of the Monetary System 28 2.4 Characteristics and Functions of Money 29 2.5 Development of Money in the United States 31 2.6 Money Market Securities 37 2.7 Measures of the U.S. Money Supply 38 2.8 Money Supply and Economic Activity 41 2.9 International Monetary System 42 Applying Finance To. . . 44 Summary 44 Key Terms 45 Review Questions 45 Exercises 46 Problems 47 3 Banks and Other Financial Institutions 49 3.1 Financial Institution Problems During the 2007–2008 Financial Crisis 50 3.2 Types and Roles of Financial Institutions 51 3.3 Overview of the Banking System 55 3.4 Historical Development of the U.S. Banking System 58 3.5 Regulation of the Banking System 60 3.6 Structure of Banks 65 3.7 The Bank Balance Sheet 66 3.8 Bank Management 71 3.9 International Banking and Foreign Systems 75 Applying Finance To. . . 76 Summary 77 Key Terms 78 Review Questions 78 Exercises 79 Problems 79 4 Federal Reserve System 82 4.1 U.S. Central Bank Response to the Financial Crisis and Great Recession 83 4.2 The U.S. Banking System Prior to the Fed 84 4.3 Structure of the Federal Reserve System 86 4.4 Monetary Policy Functions and Instruments 92 4.5 Fed Supervisory and Regulatory Functions 99 4.6 Fed Service Functions 101 4.7 Central Banks in Other Countries 103 Applying Finance To. . . 104 Summary 104 Key Terms 105 Review Questions 105 Exercises 106 Problems 107 5 Policy Makers and the Money Supply 109 5.1 National Economic Policy Objectives 110 5.2 Four Policy Maker Groups 112 5.3 Government Influence on the Economy 114 5.4 Treasury Cash and General Management Responsibilities 116 5.5 Treasury Deficit Financing and Debt Management Responsibilities 120 5.6 Changing the Money Supply 122 5.7 Factors Affecting Bank Reserves 128 5.8 The Monetary Base and the Money Multiplier 131 Applying Finance To. . . 133 Summary 133 Key Terms 134 Review Questions 134 Exercises 135 Problems 135 6 International Finance and Trade 137 6.1 International Monetary System 138 6.2 European Unification 140 6.3 Currency Exchange Markets and Rates 142 6.4 Factors that Affect Currency Exchange Rates 145 6.5 Conducting Business Internationally 149 6.6 Financing International Trade 151 6.7 Developments in U.S. International Transactions 157 Applying Finance To. . . 161 Summary 161 Key Terms 162 Review Questions 162 Exercises 163 Problems 164 6.8 Exchange Rate Risks in Global Business 166 Hedging Cash Flows 167 Speculating or Taking Educated Guesses on Exchange Rate Movements 168 Where to Invest? 168 Summary 169 Review Questions 170 Part 2 Investments 7 Savings and Investment Process 173 7.1 Gross Domestic Product and Capital Formation 174 7.2 Federal Government Receipts and Expenditures 177 7.3 Role and Major Sources of Savings 180 7.4 Factors Affecting Savings 184 7.5 Capital Market Securities 187 7.6 Mortgage Markets 189 7.7 Role of the Individual in the 2007–2008 Financial Crisis and Today 191 Applying Finance To. . . 193 Summary 193 Key Terms 194 Review Questions 194 Exercises 195 Problems 195 8 Interest Rates 197 8.1 Supply and Demand for Loanable Funds 198 8.2 Components of Market Interest Rates 203 8.3 Default Risk-Free Securities: 8.4 Term or Maturity Structure of Interest Rates 210 8.5 Inflation Premiums and Price Movements 213 8.6 Default Risk Premiums 218 Applying Finance To. . . 220 Summary 220 Key Terms 221 Review Questions 221 Exercises 222 Problems 223 9 Time Value of Money 225 9.1 Basic Time Value Concepts 226 9.2 Compounding to Determine Future Values 228 9.3 Discounting to Determine Present Values 232 9.4 Finding Interest Rates and Time Requirements 237 9.5 Future Value of an Annuity 239 9.6 Present Value of an Annuity 242 9.7 Interest Rates and Time Requirements for Annuities 245 9.8 Determining Periodic Annuity Payments 247 9.9 More Frequent Time Intervals and the Cost of Consumer Credit 249 Applying Finance To. . . 252 Summary 253 Key Terms 253 Review Questions 254 Exercises 254 Problems 254 9.10 Annuity Due Problems 257 Future Value of an Annuity Due 257 Present Value of an Annuity Due 258 Interest Rates and Time Requirements for Annuity Due Problems 259 Summary 260 Questions and Problems 260 10 Bonds and Stocks: Characteristics and Valuations 262 10.1 Long-Term External Financing Sources for Businesses 263 10.2 Bonds 264 10.3 Different Types of Bonds 271 10.4 Corporate Equity Capital 275 10.5 Dividends and Stock Repurchases 279 10.6 Valuation Principles 283 10.7 Valuation of Bonds 286 10.8 Valuation of Stocks 293 Applying Finance To. . . 298 Summary 298 Key Terms 299 Review Questions 300 Problems 301 10.9 Holding Period Returns 305 Annualized Rates of Return 305 Summary 307 Problems 307 11 Securities and Markets 308 11.1 Issuing Securities: Primary Securities Markets 309 11.2 The Facebook IPO 313 11.3 Other Ways to Assist Issuing Firms 316 11.4 Cost of Going Public 318 11.5 Investment Banking Firms: Other Functions Innovations Regulations 321 11.6 Trading Securities – Secondary Securities Markets 323 11.7 Security Transactions 326 11.8 Over-the-Counter Market 330 11.9 What Makes a Good Market? 331 11.10 Security Market Indexes and Trading Foreign Securities 333 11.11 Inside Information and Other Ethical Issues 336 Applying Finance To. . . 338 Summary 339 Key Terms 340 Review Questions 341 Problems 341 11.12 Why Do Derivatives Exist? 344 Futures Contracts 345 Options 346 Option Profit/Loss Diagrams 349 Summary 350 Key Terms 350 Discussion Questions 350 Problems 351 12 Financial Return and Risk Concepts 352 12.1 Historical Return for a Single Financial Asset 353 12.2 Historical Risk Measures for a Single Financial Asset 355 12.3 Where Does Risk Come from? 358 12.4 Expected Measures of Return and Risk 360 12.5 Historical Returns and Risk of Different Assets 364 12.6 Efficient Capital Markets 365 12.7 Portfolio Returns 368 12.8 Variance and Standard Deviation of Return On a Portfolio 369 12.9 Portfolio Risk and the Number of Investments in the Portfolio 372 12.10 Capital Asset Pricing Model 374 Applying Finance To. . . 378 Summary 378 Key Terms 379 Review Questions 379 Problems 380 12.11A Estimating Beta 384 12.11B Security Market Line 386 Summary 387 Problems 387 Part 3 Financial Management 13 Business Organization and Financial Data 391 13.1 Starting a Business 392 13.2 Forms of Business Organization in the United States 394 13.3 Accounting Principles 398 13.4 Income Statement 401 13.5 The Balance Sheet 402 13.6 Statement of Cash Flows 405 13.7 Financial Statements of Different Companies 407 13.8 Goal of a Firm 410 13.9 Corporate Governance 414 13.10 Finance in the Organization Chart 418 Applying Finance To. . . 420 Summary 420 Key Terms 421 Review Questions 421 Problems 422 13.11A Income Tax 427 13.11B Depreciation Basics 429 13.11.1 A Few Words on Depreciation Methods 430 Summary 431 Review Questions and Problems 431 14 Financial Analysis and Long-Term Financial Planning 432 14.1 Financial Statement Analysis 433 14.2 Liquidity Ratios and Analysis 436 14.3 Asset Management Ratios and Analysis 438 14.4 Financial Leverage Ratios and Analysis 441 14.5 Profitability Ratios and Analysis 445 14.6 Market Value Ratios and Analysis 447 14.7 Dupont Method of Ratio Analysis 449 14.8 Long-Term Financial Planning 452 14.9 Cost–Volume–Profit Analysis 455 14.10 Degree of Operating Leverage 456 Applying Finance To. . . 458 Summary 459 Key Terms 460 Review Questions 460 Problems 461 15 Managing Working Capital 466 15.1 Importance of Working Capital 467 15.2 Operating and Cash Conversion Cycles 468 15.3 Investments in Receivables Inventory and Payable Financing 472 15.4 Cash Budgets 475 15.5 Management of Current Assets 480 15.6 Getting – and Keeping – the Cash 488 15.7 Accounts Receivable Management 490 15.8 Inventory Management 494 15.9 Technology and Working Capital Management 495 Applying Finance To. . . 497 Summary 497 Key Terms 498 Review Questions 498 Problems 499 16 Short-Term Business Financing 503 16.1 Strategies for Financing Working Capital 504 16.2 Factors Affecting Short-Term Financing 507 16.3 Providers of Short-Term Financing 512 16.4 Nonbank Short-Term Financing Sources 516 16.5 Additional Varieties of Short-Term Financing 521 16.6 Inventory Financing and Other Secured Loans 525 16.7 The Cost of Short-Term Financing 527 Applying Finance To. . . 528 Summary 528 Key Terms 529 Review Questions 530 Problems 530 17 Capital Budgeting Analysis 533 17.1 Mission, Vision, and Capital Budgeting 534 17.2 Capital Budgeting Process 537 17.3 Capital Budgeting Techniques – Net Present Value 540 17.4 Capital Budgeting Techniques – Internal Rate of Return 543 17.5 Capital Budgeting Techniques – Modified Internal Rate of Return 547 17.6 Capital Budgeting Techniques – Profitability Index 549 17.7 Capital Budgeting Techniques – Payback Period 549 17.8 Conflicts Between Discounted Cash Flow Techniques 550 17.9 Estimating Project Cash Flows 552 17.10 Keeping Managers Honest 558 17.11 Risk-Related Considerations 559 Applying Finance To. . . 561 Summary 561 Key Terms 563 Review Questions 563 Problems 564 17.12 Project Stages and Cash Flow Estimation 567 Initial Outlay 567 Cash Flows During the Project’s Operating Life 568 Salvage Value and NWC Recovery at Project Termination 568 17.13 Applications 569 Cash Flow Estimation for a Revenue Expanding Project 569 Cash Flow Estimation for a Cost-Saving Project 571 Setting a Bid Price 574 Summary 576 Review Questions 576 Problems 576 18 Capital Structure and the Cost of Capital 578 18.1 Why Choose a Capital Structure? 579 18.2 Required Rate of Return and the Cost of Capital 582 18.3 Cost of Capital 583 18.4 Weighted Average Cost of Capital 587 18.5 Planning Growth Rates 592 18.6 EBIT/eps Analysis 594 18.7 Combined Operating and Financial Leverage Effects 597 18.8 Insights from Theory and Practice 601 Applying Finance To. . . 607 Summary 607 Key Terms 608 Review Questions 609 Problems 610 Appendix A-1 Glossary G-1 Index I-1