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Flashcard 1473951960332
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Parent (intermediate) annotation
Open itThe notes disclose the basis of preparation for the financial statements.
Original toplevel document
3.1.5. Financial Notes and Supplementary Schedulesete set of financial statements. The notes provide information that is essential to understanding the information provided in the primary statements. Volkswagen’s 2009 financial statements, for example, include 91 pages of notes. <span>The notes disclose the basis of preparation for the financial statements. For example, Volkswagen discloses in its first note that its fiscal year corresponds to the calendar year, that its financial statements are prepared in accordance with IFRS as adopted
Flashcard 1479185141004
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Open itThe more complex the social system, the more essential is such flexibility in emotional responses.
Original toplevel document (pdf)
cannot see any pdfsFlashcard 1621266664716
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Subject 3. Cash Flow Statement Analysis
CFO. CFO does not include cash outlays for replacing old equipment. Free Cash Flow (FCF) is intended to measure the cash available to a company for discretionary uses after making all required cash outlays. <span>It accounts for capital expenditures and dividend payments, which are essential to the ongoing nature of the business. The basic definition is cash from operations less the amount of capital expenditures required to maintain the company's present productive capacity. &#
Flashcard 1637218127116
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Flashcard 1729440386316
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Open itProbabilistic principal components analysis (PCA) is a dimensionality reduction technique that analyzes data via a lower dimensional latent space (Tipping & Bishop, 1999) .
Original toplevel document
Edward – Probabilistic PCAahora Edward [imagelink] Getting Started Tutorials API Community Contributing Github [imagelink] Probabilistic PCA <span>Probabilistic principal components analysis (PCA) is a dimensionality reduction technique that analyzes data via a lower dimensional latent space (Tipping & Bishop, 1999). It is often used when there are missing values in the data or for multidimensional scaling. We demonstrate with an example in Edward. An interactive version with Jupyter notebook is a
Flashcard 1729626770700
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Open ithead> if a Gaussian process is assumed to have mean zero, defining the covariance function completely defines the process' behaviour. Importantly the non-negative definiteness of this function enables its spectral decomposition using the Karhunen–Loeve expansion. <html>
Original toplevel document
Gaussian process - Wikipedia} can be shown to be the covariances and means of the variables in the process. [3] Covariance functions[edit source] A key fact of Gaussian processes is that they can be completely defined by their second-order statistics. [4] Thus, <span>if a Gaussian process is assumed to have mean zero, defining the covariance function completely defines the process' behaviour. Importantly the non-negative definiteness of this function enables its spectral decomposition using the Karhunen–Loeve expansion. Basic aspects that can be defined through the covariance function are the process' stationarity, isotropy, smoothness and periodicity. [5] [6] Stationarity refers to the process' beha
Flashcard 1731644755212
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Open itIn mathematics, particularly linear algebra and functional analysis, a spectral theorem is a result about when a linear operator or matrix can be diagonalized (that is, represented as a diagonal matrix in some basis).
Original toplevel document
Spectral theorem - Wikipediafor more information. [imagelink] [Help with translations!] Spectral theorem From Wikipedia, the free encyclopedia Jump to: navigation, search <span>In mathematics, particularly linear algebra and functional analysis, a spectral theorem is a result about when a linear operator or matrix can be diagonalized (that is, represented as a diagonal matrix in some basis). This is extremely useful because computations involving a diagonalizable matrix can often be reduced to much simpler computations involving the corresponding diagonal matrix. The concep
Flashcard 1731649735948
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Open itIn mathematics and computer science, a canonical, normal, or standard form of a mathematical object is a standard way of presenting that object as a mathematical expression.
Original toplevel document
Canonical form - Wikipediastrings " madam curie " and " radium came " are given as C arrays. Each one is converted into a canonical form by sorting. Since both sorted strings literally agree, the original strings were anagrams of each other. <span>In mathematics and computer science, a canonical, normal, or standard form of a mathematical object is a standard way of presenting that object as a mathematical expression. The distinction between "canonical" and "normal" forms varies by subfield. In most fields, a canonical form specifies a unique representation for every object, while
Flashcard 1731734408460
has independent increments: for every 
, are independent of the past values 
, 
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Open itThe Wiener process is characterised by the following properties: [1] a.s. has independent increments: for every the future increments , are independent of the past values , has Gaussian increments: is normally distributed with mean and variance , has continuous paths: With probability , is continuous in .
Original toplevel document
Wiener process - WikipediaBrownian motion 4.3 Time change 4.4 Change of measure 4.5 Complex-valued Wiener process 4.5.1 Self-similarity 4.5.2 Time change 5 See also 6 Notes 7 References 8 External links Characterisations of the Wiener process[edit source] <span>The Wiener process W t {\displaystyle W_{t}} is characterised by the following properties: [1] W 0 = 0 {\displaystyle W_{0}=0} a.s. W {\displaystyle W} has independent increments: for every t > 0 , {\displaystyle t>0,} the future increments W t + u − W t , {\displaystyle W_{t+u}-W_{t},} u ≥ 0 , {\displaystyle u\geq 0,} , are independent of the past values W s {\displaystyle W_{s}} , s ≤ t . {\displaystyle s\leq t.} W {\displaystyle W} has Gaussian increments: W t + u − W t {\displaystyle W_{t+u}-W_{t}} is normally distributed with mean 0 {\displaystyle 0} and variance u {\displaystyle u} , W t + u − W t ∼ N ( 0 , u ) . {\displaystyle W_{t+u}-W_{t}\sim {\mathcal {N}}(0,u).} W {\displaystyle W} has continuous paths: With probability 1 {\displaystyle 1} , W t {\displaystyle W_{t}} is continuous in t {\displaystyle t} . The independent increments means that if 0 ≤ s 1 < t 1 ≤ s 2 < t 2 then W t 1 −W s 1 and W t 2 −W s 2 are independent random variables, and the similar condition holds for
Flashcard 1735806291212
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Open itDeep Gaussian processes (DGPs) are multi-layer hierarchical generalisations of Gaussian pro- cesses (GPs) and are formally equivalent to neural networks with multiple, infinitely wide hidden layers.
Original toplevel document (pdf)
cannot see any pdfsFlashcard 1735821233420
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Open itIt is also not happenstance that the downfall of the disputational culture roughly coincided with the introduction of new printing techniques in Europe by Johannes Gutenberg, around 1440.
Original toplevel document
The rise and fall and rise of logic | Aeon Essaysich is thoroughly disputational, with Meditations on First Philosophy (1641) by Descartes, a book argued through long paragraphs driven by the first-person singular. The nature of intellectual enquiry shifted with the downfall of disputation. <span>It is also not happenstance that the downfall of the disputational culture roughly coincided with the introduction of new printing techniques in Europe by Johannes Gutenberg, around 1440. Before that, books were a rare commodity, and education was conducted almost exclusively by means of oral contact between masters and pupils in the form of expository lectures in which
Flashcard 1735985859852
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Open itA stochastic process can have many outcomes, due to its randomness, and a single outcome of a stochastic process is called, among other names, a sample function or realization
Original toplevel document
Stochastic process - Wikipediar n {\displaystyle n} -dimensional Euclidean space. [1] [5] An increment is the amount that a stochastic process changes between two index values, often interpreted as two points in time. [48] [49] <span>A stochastic process can have many outcomes, due to its randomness, and a single outcome of a stochastic process is called, among other names, a sample function or realization. [28] [50] [imagelink] A single computer-simulated sample function or realization, among other terms, of a three-dimensional Wiener or Brownian motion process for time 0 ≤ t ≤ 2.
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Open ita way to understand why managers do not always act in the best interests of stakeholders. Managers and shareholders may have different goals. They may also have different attitudes towards risk. <span>Information asymmetry. Managers almost always have more information than shareholders. Thus, it is difficult for shareholders to measure managers' performance or to hold them accountable for their performance. <span><body><html>
Original toplevel document
Subject 3. Principal-Agent and Other Relationships in Corporate GovernanceShareholder and Manager/Director Relationships Problems can arise in a business relationship when one person delegates decision-making authority to another. The principal is the person delegating authority, and the agent is the person to whom the authority is delegated. Agency theory offers a way to understand why managers do not always act in the best interests of stakeholders. Managers and shareholders may have different goals. They may also have different attitudes towards risk. Information asymmetry. Managers almost always have more information than shareholders. Thus, it is difficult for shareholders to measure managers' performance or to hold them accountable for their performance. Controlling and Minority Shareholder Relationships Ownership structure is one of the main dimensions of corporate governance. For firms with controllin
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Parent (intermediate) annotation
Open ittives employed by the company should be compensated. Contractual agreements with creditors ; indentures, covenants, collaterals and credit committees are tools used by creditors to protect their interests. <span>Employee laws, contracts, codes of ethics and business conduct , and compliance offer(s) are all means a company can use to manage its relationship with its employees. Contractual agreements with customers and suppliers . Laws and regulations a company must follow to protect the rights of specific groups. </sp
Original toplevel document
Subject 4. Stakeholder Managementgroups and on that basis managing the company's relationships with stakeholders. The framework of corporate governance and stakeholder management reflects a legal, contractual, organizational, and governmental infrastructure. <span>Mechanisms of Stakeholder Management Mechanisms of stakeholder management may include: • General meetings. o The right to participate in general shareholder meetings is a fundamental shareholder right. Shareholders, especially minority shareholders, should have the opportunity to ask questions of the board, to place items on the agenda and to propose resolutions, to vote on major corporate matters and transactions, and to participate in key corporate governance decisions, such as the nomination and election of board members. o Shareholders should be able to vote in person or in absentia, and equal consideration should be given to votes cast in person or in absentia. A board of directors, which serves as a link between shareholders and managers, acts as the shareholders' monitoring tool within the company. The audit function. It plays a critical role in ensuring the corporation's financial integrity and consideration of legal and compliance issues. The primary objective is to ensure that the financial information reported by the company to shareholders is complete, accurate, reliable, relevant, and timely. Company reporting and transparency. It helps reduce of information asymmetry and agency costs. Related-party transactions. Related-party transactions involve buying, selling, and other transactions with board members, managers, employees, family members, and so on. They can create an inherent conflict of interest. Policies should be established to disclose, mitigate, and manage such transactions. Remuneration policies. Does the company's remuneration strategy reward long-term or short-term growth? Are equity-based compensation plans linked to the long-term performance of the company? o Say on pay is the ability of shareholders in a company to actively vote on how much executives employed by the company should be compensated. Contractual agreements with creditors; indentures, covenants, collaterals and credit committees are tools used by creditors to protect their interests. Employee laws, contracts, codes of ethics and business conduct, and compliance offer(s) are all means a company can use to manage its relationship with its employees. Contractual agreements with customers and suppliers. Laws and regulations a company must follow to protect the rights of specific groups. <span><body><html>
Flashcard 1742678134028
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Open itA board of directors , which serves as a link between shareholders and managers, acts as the shareholders' monitoring tool within the company.
Original toplevel document
Subject 4. Stakeholder Managementgroups and on that basis managing the company's relationships with stakeholders. The framework of corporate governance and stakeholder management reflects a legal, contractual, organizational, and governmental infrastructure. <span>Mechanisms of Stakeholder Management Mechanisms of stakeholder management may include: • General meetings. o The right to participate in general shareholder meetings is a fundamental shareholder right. Shareholders, especially minority shareholders, should have the opportunity to ask questions of the board, to place items on the agenda and to propose resolutions, to vote on major corporate matters and transactions, and to participate in key corporate governance decisions, such as the nomination and election of board members. o Shareholders should be able to vote in person or in absentia, and equal consideration should be given to votes cast in person or in absentia. A board of directors, which serves as a link between shareholders and managers, acts as the shareholders' monitoring tool within the company. The audit function. It plays a critical role in ensuring the corporation's financial integrity and consideration of legal and compliance issues. The primary objective is to ensure that the financial information reported by the company to shareholders is complete, accurate, reliable, relevant, and timely. Company reporting and transparency. It helps reduce of information asymmetry and agency costs. Related-party transactions. Related-party transactions involve buying, selling, and other transactions with board members, managers, employees, family members, and so on. They can create an inherent conflict of interest. Policies should be established to disclose, mitigate, and manage such transactions. Remuneration policies. Does the company's remuneration strategy reward long-term or short-term growth? Are equity-based compensation plans linked to the long-term performance of the company? o Say on pay is the ability of shareholders in a company to actively vote on how much executives employed by the company should be compensated. Contractual agreements with creditors; indentures, covenants, collaterals and credit committees are tools used by creditors to protect their interests. Employee laws, contracts, codes of ethics and business conduct, and compliance offer(s) are all means a company can use to manage its relationship with its employees. Contractual agreements with customers and suppliers. Laws and regulations a company must follow to protect the rights of specific groups. <span><body><html>
Flashcard 1743952678156
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Open itBelief propagation, also known as sum-product message passing, is a message-passing algorithm for performing inference on graphical models, such as Bayesian networks and Markov random fields. </sp
Original toplevel document
Belief propagation - Wikipediast of references, but its sources remain unclear because it has insufficient inline citations. Please help to improve this article by introducing more precise citations. (April 2009) (Learn how and when to remove this template message) <span>Belief propagation, also known as sum-product message passing, is a message-passing algorithm for performing inference on graphical models, such as Bayesian networks and Markov random fields. It calculates the marginal distribution for each unobserved node, conditional on any observed nodes. Belief propagation is commonly used in artificial intelligence and information theor
Flashcard 1744130936076
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Parent (intermediate) annotation
Open itBelief propagation, also known as sum-product message passing, is a message-passing algorithm for performing inference on graphical models, such as Bayesian networks and Markov random fields.
Original toplevel document
Belief propagation - Wikipediast of references, but its sources remain unclear because it has insufficient inline citations. Please help to improve this article by introducing more precise citations. (April 2009) (Learn how and when to remove this template message) <span>Belief propagation, also known as sum-product message passing, is a message-passing algorithm for performing inference on graphical models, such as Bayesian networks and Markov random fields. It calculates the marginal distribution for each unobserved node, conditional on any observed nodes. Belief propagation is commonly used in artificial intelligence and information theor
Flashcard 1744147189004
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Open itAmong the topologies of vector spaces, those that are defined by a norm or inner product are more commonly used, as having a notion of distance between two vectors.
Original toplevel document
Vector space - Wikipediaroperties, which in some cases can be visualized as arrows. Vector spaces are the subject of linear algebra and are well characterized by their dimension, which, roughly speaking, specifies the number of independent directions in the space. <span>Infinite-dimensional vector spaces arise naturally in mathematical analysis, as function spaces, whose vectors are functions. These vector spaces are generally endowed with additional structure, which may be a topology, allowing the consideration of issues of proximity and continuity. Among these topologies, those that are defined by a norm or inner product are more commonly used, as having a notion of distance between two vectors. This is particularly the case of Banach spaces and Hilbert spaces, which are fundamental in mathematical analysis. Historically, the first ideas leading to vector spaces can be traced back as far as the 17th century's analytic geometry, matrices, systems of linear equations, and Euclidean vectors.
Flashcard 1744159247628
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Open itWhile the Riemann integral considers the area under a curve as made out of vertical rectangles, the Lebesgue definition considers horizontal slabs that are not necessarily just rectangles, and so it is more flexible.
Original toplevel document
Lebesgue integration - Wikipediaes, Fourier transforms, and other topics. The Lebesgue integral is better able to describe how and when it is possible to take limits under the integral sign (via the powerful monotone convergence theorem and dominated convergence theorem). <span>While the Riemann integral considers the area under a curve as made out of vertical rectangles, the Lebesgue definition considers horizontal slabs that are not necessarily just rectangles, and so it is more flexible. For this reason, the Lebesgue definition makes it possible to calculate integrals for a broader class of functions. For example, the Dirichlet function, which is 0 where its argument is
Flashcard 1744162393356
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Open itAs later set theory developments showed (see non-measurable set), it is actually impossible to assign a length to all subsets of ℝ in a way that preserves some natural additivity and translation invariance properties. This suggests that picking out a suitable class of measurable subsets is an essential prerequisite
Original toplevel document
Lebesgue integration - Wikipediaa useful abstraction of the notion of length of subsets of the real line—and, more generally, area and volume of subsets of Euclidean spaces. In particular, it provided a systematic answer to the question of which subsets of ℝ have a length. <span>As later set theory developments showed (see non-measurable set), it is actually impossible to assign a length to all subsets of ℝ in a way that preserves some natural additivity and translation invariance properties. This suggests that picking out a suitable class of measurable subsets is an essential prerequisite. The Riemann integral uses the notion of length explicitly. Indeed, the element of calculation for the Riemann integral is the rectangle [a, b] × [c, d], whose area is calculated to be
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Open itThe most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, hav
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open itstead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, <span>for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), the
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open it13; have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; <span>the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exch
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open ith the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. <span>The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money dep
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
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Parent (intermediate) annotation
Open ite of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. <span>The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requiremen
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
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Parent (intermediate) annotation
Open itpotential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. <span>Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span><body><html>
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
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Parent (intermediate) annotation
Open itDefinitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such curre
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open itplus other savings and deposits with financial institutions. There is also a “broad measure of liquidity” that encompasses M3 as well as a range of other liquid assets, such as government bonds and commercial paper. <span>Money Measures in the United Kingdom The United Kingdom produces a set of four measures of the money stock. M0 is the narrowest measure and comprises notes and coins held outside the Bank of England, plus Bankers’ deposits at the Bank of England. M2includes M0, plus (effectively) all retail bank deposits. M4 includes M2, plus wholesale bank and building society deposits and also certificates of deposit. Finally, the Bank of England produces another measure called M3H, which is a measure created to be comparable with money definitions in the EU (see above). M3H includes M4, plus UK residents’ and corporations’ foreign currency deposits in banks and building societies. <span><body><html>
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open itBoth internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capital Needs Internal Factors (Bill Cosby) <span>External Factors Company size and growth rates Organizational structure Sophistication of working capital management Borrowing and investing positions/activities/capacities Banking services Interest rates New technologies and new products The economy Competitors <span><body><html>
Original toplevel document
Reading 38 Working Capital Management Introand collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. <span>Both internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capital Needs Internal Factors External Factors Company size and growth rates Organizational structure Sophistication of working capital management Borrowing and investing positions/activities/capacities Banking services Interest rates New technologies and new products The economy Competitors The scope of working capital management includes transactions, relations, analyses, and focus: Transactions include payments for trade, financing, and investment. Relations with financial institutions and trading partners must be maintained to ensure that the transactions work effectively. Analyses of working capital management activities are required so that appropriate strategies can be formulated and implemented. Focus requires that organizations of all sizes today must have a global viewpoint with strong emphasis on liquidity. In this reading, we examine the different types of working capital and the management issues associated with each. We also look at methods of evaluating the effectiveness of working capital management. <span><body><html>
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Open itInvestors gather and analyze vast amounts of information about security markets on a continual basis. Because this work can be both time consuming and data intensive, investors often use a single measure that consolidates this information and reflects the performance of an entire security market. Security market indexes were first introduced as a simple measure to reflect the performance of the US stock market. Since then, security market indexes have evolved into i
Original toplevel document
Reading 45 Security Market Indexes (Intro)Investors gather and analyze vast amounts of information about security markets on a continual basis. Because this work can be both time consuming and data intensive, investors often use a single measure that consolidates this information and reflects the performance of an entire security market. Security market indexes were first introduced as a simple measure to reflect the performance of the US stock market. Since then, security market indexes have evolved into important multi-purpose tools that help investors track the performance of various security markets, estimate risk, and evaluate the performance of investment managers. They also form the basis for new investment products. in·dex, noun (pl. in·dex·es or in·di·ces) Latin indic-, index, from indicare to indicate: an indicator, sign, or measure of something. ORIGIN OF MARKET INDEXES Investors had access to regularly published data on individual security prices in London as early as 1698, but nearly 200 years passed before they had access to a simple indicator to reflect security market information.1 To give readers a sense of how the US stock market in general performed on a given day, publishers Charles H. Dow and Edward D. Jones introduced the Dow Jones Average, the world’s first security market index, in 1884.2 The index, which appeared in The Customers’ Afternoon Letter, consisted of the stocks of nine railroads and two industrial companies. It eventually became the Dow Jones Transportation Average.3Convinced that industrial companies, rather than railroads, would be “the great speculative market” of the future, Dow and Jones introduced a second index in May 1896—the Dow Jones Industrial Average (DJIA). It had an initial value of 40.94 and consisted of 12 stocks from major US industries.4 , 5 Today, investors can choose from among thousands of indexes to measure and monitor different security markets and asset classes. This reading is organized as follows. Section 2 defines a security market index and explains how to calculate the price return and total return of an index for a single per
Flashcard 1744635563276
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Corporate Governance Overview
Corporate governance can be defined as: “the system of internal controls and procedures by which individual companies are managed. It provides a framework that defines the rights, roles and responsibilities of various groups . . . within an organization. At its core, corporate governance is the arrangement of check
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Open itThe agency theory is a supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships due to unaligned goals or different aversion levels to risk. The most common agency relationship in finance occurs between shareholders (principal) and company executives (agents).
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Agency TheoryWhat is the 'Agency Theory' <span>The agency theory is a supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships due to unaligned goals or different aversion levels to risk. The most common agency relationship in finance occurs between shareholders (principal) and company executives (agents). BREAKING DOWN 'Agency Theory' Agency theory addresses problems that arise due to differences between the goals or desires between the principal and a
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Open itties of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. <span>Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securit
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Reading 49 Equity Valuation: Concepts and Basic Tools (Intro)Analysts gather and process information to make investment decisions, including buy and sell recommendations. What information is gathered and how it is processed depend on the analyst and the purpose of the analysis. Technical analysis uses such information as stock price and trading volume as the basis for investment decisions. Fundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings. Whereas technical analysts use information to predict price movements and base investment decisions on the direction of predicted change in prices, fundamental analysts use information to estimate the value of a security and to compare the estimated value to the market price and then base investment decisions on that comparison. This reading introduces equity valuation models used to estimate the intrinsic value (synonym: fundamental value ) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics. The fundamentals to be considered depend on the analyst’s approach to valuation. In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securities. This reading is organized as follows. Section 2 discusses the implications of differences between estimated value and market price. Section 3 introduces three major categor
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Open itIndustry analysis is the analysis of a specific branch of manufacturing, service, or trade. Understanding the industry in which a company operates provides an essential framework for the analysis of the individual company—that is, company analysis . Equity analysis and credit
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Reading 48 Introduction to Industry and Company Analysis (Intro)Industry analysis is the analysis of a specific branch of manufacturing, service, or trade. Understanding the industry in which a company operates provides an essential framework for the analysis of the individual company—that is, company analysis . Equity analysis and credit analysis are often conducted by analysts who concentrate on one or several industries, which results in synergies and efficiencies in gathering and interpreting information. Among the questions we address in this reading are the following: What are the similarities and differences among industry classification systems? How does an analyst go about choosing a peer group of companies? What are the key factors to consider when analyzing an industry? What advantages are enjoyed by companies in strategically well-positioned industries? After discussing the uses of industry analysis in the next section, Sections 3 and 4 discuss, respectively, approaches to identifying similar companies and industry
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Open itn out $640 to another person. Thus, BOA creates $640 of money supply. The process goes on and on. With each deposit and loan, more money is created. However, the money creation process does not create an infinite amount of money. <span>The money multiplier is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5. <span><body><html>
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Subject 1. What is Money?liquid of all assets, due to its function as the medium of exchange. However, many methods of holding money do not yield an interest return and the purchase power of money will decline during a time of inflation. <span>The Money Creation Process Reserves are the cash in a bank's vault and deposits at Federal Reserve Banks. Under the fractional reserve banking system, a bank is obligated to hold a minimum amount of reserves to back up its deposits. Reserves held for that purpose, which are expressed as a percentage of a bank's demand deposits, are called required reserves. Therefore, the required reserve ratio is the percentage of a bank's deposits that are required to be held as reserves. Banks create deposits when they make loans; the new deposits created are new money. Example Suppose the required reserve ratio in the U.S. is 20%, and then suppose that you deposit $1,000 cash with Citibank. Citibank keeps $200 of the $1,000 in reserves. The remaining $800 of excess reserves can be loaned out to, say, John. After the loan is made, the money supply increases by $800 (your $1,000 + John's $800). After getting the loan, John deposits the $800 with Bank of America (BOA). BOA keeps $160 of the $800 in reserves and can now loan out $640 to another person. Thus, BOA creates $640 of money supply. The process goes on and on. With each deposit and loan, more money is created. However, the money creation process does not create an infinite amount of money. The money multiplier is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5. Definitions of Money There are different definitions of money. The two most widely used measures of money in the U.S. are: The M1 Money Su
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Open itthe economic activity and behavior of individual economic units, such as a household, a company, or a market for a particular good or service, and macroeconomics is the study of the aggregate activities of households, companies, and markets. <span>Macroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates. <span><body><html>
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Reading 16 Aggregate Output, Prices, and Economic Growth IntroductionIn the field of economics, microeconomics is the study of the economic activity and behavior of individual economic units, such as a household, a company, or a market for a particular good or service, and macroeconomics is the study of the aggregate activities of households, companies, and markets. Macroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates. Macroeconomic analysis examines a nation’s aggregate output and income, its competitive and comparative advantages, the productivity of its labor force, its price level and inflation rate, and the actions of its national government and central bank. The objective of macroeconomic analysis is to address such fundamental questions as: What is an economy’s aggregate output, and how is aggregate income measured? What factors determine the level of aggregate output/income for an economy? What are the levels of aggregate demand and aggregate supply of goods and services within the country? Is the level of output increasing or decreasing, and at what rate? Is the general price level stable, rising, or falling? Is unemployment rising or falling? Are households spending or saving more? Are workers able to produce more output for a given level of inputs? Are businesses investing in and expanding their productive capacity? Are exports (imports) rising or falling? From an investment perspective, investors must be able to evaluate a country’s current economic environment and to forecast its future economic environment in order to identify asset classes and securities that will benefit from economic trends occurring within that country. Macroeconomic variables—such as the level of inflation, unemployment, consumption, government spending, and investment—affect the overall level of activity within a country. They also have different impacts on the growth and profitability of industries within a country, the companies within those industries, and the returns of the securities issued by those companies. This reading is organized as follows: Section 2 describes gross domestic product and related measures of domestic output and income. Section 3 discusses short-run and long-
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Harmonic analysis - Wikipedia
pport (these include functions of compact support), then its Fourier transform is never compactly supported. This is a very elementary form of an uncertainty principle in a harmonic analysis setting. See also: Convergence of Fourier series. <span>Fourier series can be conveniently studied in the context of Hilbert spaces, which provides a connection between harmonic analysis and functional analysis. Contents [hide] 1 Applied harmonic analysis 2 Abstract harmonic analysis 3 Other branches 4 See also 5 References 6 Bibliography 7 External links Applied harmonic analy
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Open itA Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured.
Original toplevel document
Hilbert space - Wikipediae state of a vibrating string can be modeled as a point in a Hilbert space. The decomposition of a vibrating string into its vibrations in distinct overtones is given by the projection of the point onto the coordinate axes in the space. <span>The mathematical concept of a Hilbert space, named after David Hilbert, generalizes the notion of Euclidean space. It extends the methods of vector algebra and calculus from the two-dimensional Euclidean plane and three-dimensional space to spaces with any finite or infinite number of dimensions. A Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured. Furthermore, Hilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used. Hilbert spaces arise naturally and frequently in mathematics and physics, typically as infinite-dimensional function spaces. The earliest Hilbert spaces were studied from this point o
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Open itA Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured.
Original toplevel document
Hilbert space - Wikipediae state of a vibrating string can be modeled as a point in a Hilbert space. The decomposition of a vibrating string into its vibrations in distinct overtones is given by the projection of the point onto the coordinate axes in the space. <span>The mathematical concept of a Hilbert space, named after David Hilbert, generalizes the notion of Euclidean space. It extends the methods of vector algebra and calculus from the two-dimensional Euclidean plane and three-dimensional space to spaces with any finite or infinite number of dimensions. A Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured. Furthermore, Hilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used. Hilbert spaces arise naturally and frequently in mathematics and physics, typically as infinite-dimensional function spaces. The earliest Hilbert spaces were studied from this point o
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Open itCorporate takeovers can happen in different ways: proxy contest or proxy fight, tender offer, hostile takeover, etc. The justification for the use of various anti-takeover defenses should rest on the support of the majority of shareholders and on the demonstration that preservation of the integrity of
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Subject 6. Factors Affecting Stakeholder Relationships and Corporate GovernanceStakeholder relationships and corporate governance are continually shaped and influenced by a variety of market and non-market factors. Market Factors Shareholder engagement involves a company's interactions with its shareholders. It can provide benefits that include building support against short-term activist investors, countering negative recommendations from proxy advisory firms, and receiving greater support for management's position. Shareholder activism encompasses a range of strategies that may be used by shareholders seeking to compel a company to act in a desired manner. It can take any of several forms: proxy battles, public campaigns, shareholder resolutions, litigation, and negotiations with management. Corporate takeovers can happen in different ways: proxy contest or proxy fight, tender offer, hostile takeover, etc. The justification for the use of various anti-takeover defenses should rest on the support of the majority of shareholders and on the demonstration that preservation of the integrity of the company is in the long-term interests of shareholders. Non-Market Factors These factors include the legal environment, the media, and the corporate governance industry itself.
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Open itCorporate takeovers can happen in different ways: proxy contest or proxy fight, tender offer, hostile takeover, etc. The justification for the use of various anti-takeover defenses should rest on the support of the majority of shareholders and on the demonstration that preservation of the integrity of the company is in the long-term interests of shareholders.
Original toplevel document
Subject 6. Factors Affecting Stakeholder Relationships and Corporate GovernanceStakeholder relationships and corporate governance are continually shaped and influenced by a variety of market and non-market factors. Market Factors Shareholder engagement involves a company's interactions with its shareholders. It can provide benefits that include building support against short-term activist investors, countering negative recommendations from proxy advisory firms, and receiving greater support for management's position. Shareholder activism encompasses a range of strategies that may be used by shareholders seeking to compel a company to act in a desired manner. It can take any of several forms: proxy battles, public campaigns, shareholder resolutions, litigation, and negotiations with management. Corporate takeovers can happen in different ways: proxy contest or proxy fight, tender offer, hostile takeover, etc. The justification for the use of various anti-takeover defenses should rest on the support of the majority of shareholders and on the demonstration that preservation of the integrity of the company is in the long-term interests of shareholders. Non-Market Factors These factors include the legal environment, the media, and the corporate governance industry itself.
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Open itHilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used.
Original toplevel document
Hilbert space - Wikipediae state of a vibrating string can be modeled as a point in a Hilbert space. The decomposition of a vibrating string into its vibrations in distinct overtones is given by the projection of the point onto the coordinate axes in the space. <span>The mathematical concept of a Hilbert space, named after David Hilbert, generalizes the notion of Euclidean space. It extends the methods of vector algebra and calculus from the two-dimensional Euclidean plane and three-dimensional space to spaces with any finite or infinite number of dimensions. A Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured. Furthermore, Hilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used. Hilbert spaces arise naturally and frequently in mathematics and physics, typically as infinite-dimensional function spaces. The earliest Hilbert spaces were studied from this point o
Flashcard 1749111147788
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Open itHilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used.
Original toplevel document
Hilbert space - Wikipediae state of a vibrating string can be modeled as a point in a Hilbert space. The decomposition of a vibrating string into its vibrations in distinct overtones is given by the projection of the point onto the coordinate axes in the space. <span>The mathematical concept of a Hilbert space, named after David Hilbert, generalizes the notion of Euclidean space. It extends the methods of vector algebra and calculus from the two-dimensional Euclidean plane and three-dimensional space to spaces with any finite or infinite number of dimensions. A Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured. Furthermore, Hilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used. Hilbert spaces arise naturally and frequently in mathematics and physics, typically as infinite-dimensional function spaces. The earliest Hilbert spaces were studied from this point o
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Open itHilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used.
Original toplevel document
Hilbert space - Wikipediae state of a vibrating string can be modeled as a point in a Hilbert space. The decomposition of a vibrating string into its vibrations in distinct overtones is given by the projection of the point onto the coordinate axes in the space. <span>The mathematical concept of a Hilbert space, named after David Hilbert, generalizes the notion of Euclidean space. It extends the methods of vector algebra and calculus from the two-dimensional Euclidean plane and three-dimensional space to spaces with any finite or infinite number of dimensions. A Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured. Furthermore, Hilbert spaces are complete: there are enough limits in the space to allow the techniques of calculus to be used. Hilbert spaces arise naturally and frequently in mathematics and physics, typically as infinite-dimensional function spaces. The earliest Hilbert spaces were studied from this point o
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Matrix (mathematics) - Wikipedia
x. In complex matrices, symmetry is often replaced by the concept of Hermitian matrices, which satisfy A ∗ = A, where the star or asterisk denotes the conjugate transpose of the matrix, that is, the transpose of the complex conjugate of A. <span>By the spectral theorem, real symmetric matrices and complex Hermitian matrices have an eigenbasis; that is, every vector is expressible as a linear combination of eigenvectors. In both cases, all eigenvalues are real. [29] This theorem can be generalized to infinite-dimensional situations related to matrices with infinitely many rows and columns, see below. Invertible matrix and its inverse[edit s
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Open itIn mathematics, particularly linear algebra and functional analysis, a spectral theorem is a result about when a linear operator or matrix can be diagonalized (that is, represented as a diagonal matrix in some basis).
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Spectral theorem - Wikipediafor more information. [imagelink] [Help with translations!] Spectral theorem From Wikipedia, the free encyclopedia Jump to: navigation, search <span>In mathematics, particularly linear algebra and functional analysis, a spectral theorem is a result about when a linear operator or matrix can be diagonalized (that is, represented as a diagonal matrix in some basis). This is extremely useful because computations involving a diagonalizable matrix can often be reduced to much simpler computations involving the corresponding diagonal matrix. The concep
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Open ita spectral theorem is a result about when a linear operator or matrix can be diagonalized
Original toplevel document
Spectral theorem - Wikipediafor more information. [imagelink] [Help with translations!] Spectral theorem From Wikipedia, the free encyclopedia Jump to: navigation, search <span>In mathematics, particularly linear algebra and functional analysis, a spectral theorem is a result about when a linear operator or matrix can be diagonalized (that is, represented as a diagonal matrix in some basis). This is extremely useful because computations involving a diagonalizable matrix can often be reduced to much simpler computations involving the corresponding diagonal matrix. The concep
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Open itBy the spectral theorem, real symmetric matrices and complex Hermitian matrices have an eigenbasis; that is, every vector is expressible as a linear combination of eigenvectors. In both cases, all eigenvalues are real.
Original toplevel document
Matrix (mathematics) - Wikipediax. In complex matrices, symmetry is often replaced by the concept of Hermitian matrices, which satisfy A ∗ = A, where the star or asterisk denotes the conjugate transpose of the matrix, that is, the transpose of the complex conjugate of A. <span>By the spectral theorem, real symmetric matrices and complex Hermitian matrices have an eigenbasis; that is, every vector is expressible as a linear combination of eigenvectors. In both cases, all eigenvalues are real. [29] This theorem can be generalized to infinite-dimensional situations related to matrices with infinitely many rows and columns, see below. Invertible matrix and its inverse[edit s
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Open itBy the spectral theorem, real symmetric matrices and complex Hermitian matrices have an eigenbasis
Original toplevel document
Matrix (mathematics) - Wikipediax. In complex matrices, symmetry is often replaced by the concept of Hermitian matrices, which satisfy A ∗ = A, where the star or asterisk denotes the conjugate transpose of the matrix, that is, the transpose of the complex conjugate of A. <span>By the spectral theorem, real symmetric matrices and complex Hermitian matrices have an eigenbasis; that is, every vector is expressible as a linear combination of eigenvectors. In both cases, all eigenvalues are real. [29] This theorem can be generalized to infinite-dimensional situations related to matrices with infinitely many rows and columns, see below. Invertible matrix and its inverse[edit s
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Inner product space - Wikipedia
tors. Inner products allow the rigorous introduction of intuitive geometrical notions such as the length of a vector or the angle between two vectors. They also provide the means of defining orthogonality between vectors (zero inner product). <span>Inner product spaces generalize Euclidean spaces (in which the inner product is the dot product, also known as the scalar product) to vector spaces of any (possibly infinite) dimension, and are studied in functional analysis. The first usage of the concept of a vector space with an inner product is due to Peano, in 1898. [1] An inner product naturally induces an associated norm, thus an inner product space
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Open itInner product spaces generalize Euclidean spaces (in which the inner product is the dot product, also known as the scalar product) to vector spaces of any (possibly infinite) dimension, and are studied in functional analysis.
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Inner product space - Wikipediators. Inner products allow the rigorous introduction of intuitive geometrical notions such as the length of a vector or the angle between two vectors. They also provide the means of defining orthogonality between vectors (zero inner product). <span>Inner product spaces generalize Euclidean spaces (in which the inner product is the dot product, also known as the scalar product) to vector spaces of any (possibly infinite) dimension, and are studied in functional analysis. The first usage of the concept of a vector space with an inner product is due to Peano, in 1898. [1] An inner product naturally induces an associated norm, thus an inner product space
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Open itInner product spaces generalize Euclidean spaces to vector spaces of any (possibly infinite) dimension, and are studied in functional analysis.
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Inner product space - Wikipediators. Inner products allow the rigorous introduction of intuitive geometrical notions such as the length of a vector or the angle between two vectors. They also provide the means of defining orthogonality between vectors (zero inner product). <span>Inner product spaces generalize Euclidean spaces (in which the inner product is the dot product, also known as the scalar product) to vector spaces of any (possibly infinite) dimension, and are studied in functional analysis. The first usage of the concept of a vector space with an inner product is due to Peano, in 1898. [1] An inner product naturally induces an associated norm, thus an inner product space
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Cauchy sequence - Wikipedia
"ultimate destination" of this sequence (that is, the limit) exists. [imagelink] (b) A sequence that is not Cauchy. The elements of the sequence fail to get arbitrarily close to each other as the sequence progresses. <span>In mathematics, a Cauchy sequence ( French pronunciation: [koʃi]; English: /ˈkoʊʃiː/ KOH-shee), named after Augustin-Louis Cauchy, is a sequence whose elements become arbitrarily close to each other as the sequence progresses. [1] More precisely, given any small positive distance, all but a finite number of elements of the sequence are less than that given distance from each other. It is not sufficient for
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Open itIn mathematics, a Cauchy sequence a sequence whose elements become arbitrarily close to each other as the sequence progresses.
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Cauchy sequence - Wikipedia"ultimate destination" of this sequence (that is, the limit) exists. [imagelink] (b) A sequence that is not Cauchy. The elements of the sequence fail to get arbitrarily close to each other as the sequence progresses. <span>In mathematics, a Cauchy sequence ( French pronunciation: [koʃi]; English: /ˈkoʊʃiː/ KOH-shee), named after Augustin-Louis Cauchy, is a sequence whose elements become arbitrarily close to each other as the sequence progresses. [1] More precisely, given any small positive distance, all but a finite number of elements of the sequence are less than that given distance from each other. It is not sufficient for
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Hilbert vs Inner Product Space - Mathematics Stack Exchange
add a comment | up vote 1 down vote <span>A Hilbert space is an inner product space that is complete with respect to the norm. Completeness is what differentiates the two. Not every metric space can be defined by an inner product, for instance the space of continuous functions on [0,1][0,1] with the supremu
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Subject 6. Ethical Decision-Making Frameworks
The CFA Institute Ethical Decision-Making Framework is a tool for analyzing and evaluating ethical scenarios in the investment profession. The Identify-Consider-Act- Reflect framework advances a decision-making structure for situations that often fall outside the clear confines of "right" and "wrong." Neither a linear model nor a checklist, the framework provides a summary of the key elements of making ethical decisions. The framework is offered with the understanding th
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Subject 6. Ethical Decision-Making Frameworks
hical scenarios in the investment profession. The Identify-Consider-Act- Reflect framework advances a decision-making structure for situations that often fall outside the clear confines of "right" and "wrong." <span>Neither a linear model nor a checklist, the framework provides a summary of the key elements of making ethical decisions. The framework is offered with the understanding that there likely will be additional influences, conflicts, and actions unique to each ethical scenario and beyond those detailed in the framework. Identify: ethical principles, duties to others (to whom do you owe a duty?), important facts, conflicts of interest. Consider: situational Influen
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Subject 6. Ethical Decision-Making Frameworks
g ethical decisions. The framework is offered with the understanding that there likely will be additional influences, conflicts, and actions unique to each ethical scenario and beyond those detailed in the framework. <span>Identify: ethical principles, duties to others (to whom do you owe a duty?), important facts, conflicts of interest. Consider: situational Influences, alternative actions, additional guidance. Act: make a decision or elevate the issue to a higher authority. Reflect: What did you
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Subject 6. Ethical Decision-Making Frameworks
nd actions unique to each ethical scenario and beyond those detailed in the framework. Identify: ethical principles, duties to others (to whom do you owe a duty?), important facts, conflicts of interest. <span>Consider: situational Influences, alternative actions, additional guidance. Act: make a decision or elevate the issue to a higher authority. Reflect: What did you learn? The lessons you learn will help you reach ethical decisions more quickly in the f
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Subject 6. Ethical Decision-Making Frameworks
work. Identify: ethical principles, duties to others (to whom do you owe a duty?), important facts, conflicts of interest. Consider: situational Influences, alternative actions, additional guidance. <span>Act: make a decision or elevate the issue to a higher authority. Reflect: What did you learn? The lessons you learn will help you reach ethical decisions more quickly in the future <span><body><html>
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Subject 6. Ethical Decision-Making Frameworks
o others (to whom do you owe a duty?), important facts, conflicts of interest. Consider: situational Influences, alternative actions, additional guidance. Act: make a decision or elevate the issue to a higher authority. <span>Reflect: What did you learn? The lessons you learn will help you reach ethical decisions more quickly in the future <span><body><html>
Flashcard 1750241250572
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Parent (intermediate) annotation
Open itMonetary policy refers to government or central bank activities that are directed toward influencing the quantity of money and credit in an economy.
Original toplevel document
2. Monetary PolicyAs stated above, monetary policy refers to government or central bank activities that are directed toward influencing the quantity of money and credit in an economy. Before we can begin to understand how monetary policy is implemented, we must examine the functions and role of money . We can then explore the special role that central banks play i
Flashcard 1750242823436
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Parent (intermediate) annotation
Open itBefore we can begin to understand how monetary policy is implemented, we must examine the functions and role of money . We can then explore the special role that central banks play in today’s economies.
Original toplevel document
2. Monetary PolicyAs stated above, monetary policy refers to government or central bank activities that are directed toward influencing the quantity of money and credit in an economy. Before we can begin to understand how monetary policy is implemented, we must examine the functions and role of money . We can then explore the special role that central banks play in today’s economies.
Flashcard 1750248066316
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Parent (intermediate) annotation
Open itThe most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open itThe most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open itpted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. <span>When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. <span><body><html>
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
Flashcard 1750256192780
| status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
|---|---|---|---|---|---|---|---|
| repetition number in this series | 0 | memorised on | scheduled repetition | ||||
| scheduled repetition interval | last repetition or drill |
Parent (intermediate) annotation
Open itthe medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease.
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
Flashcard 1750259338508
| status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
|---|---|---|---|---|---|---|---|
| repetition number in this series | 0 | memorised on | scheduled repetition | ||||
| scheduled repetition interval | last repetition or drill |
Parent (intermediate) annotation
Open itThe process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its cust
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
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Parent (intermediate) annotation
Open itThe process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking 
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itThe process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. <span>This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking <span><body><html>
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
Flashcard 1750274280716
| status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
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| repetition number in this series | 0 | memorised on | scheduled repetition | ||||
| scheduled repetition interval | last repetition or drill |
Parent (intermediate) annotation
Open itThe practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itThe amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier. In the case just examined, the money multiplier is 1/0.10 = 10. This equation implies that the smaller the reserve requirement, the greater the money multiplier effect. </
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open ithat the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier. In the case just examined, the money multiplier is 1/0.10 = 10. <span>This equation implies that the smaller the reserve requirement, the greater the money multiplier effect. <span><body><html>
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itThe equation (1/Reserve Requirement) implies that the smaller the reserve requirement, the greater the money multiplier effect.
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
Flashcard 1750440742156
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Open itA board of directors , which serves as a link between shareholders and managers, acts as the shareholders' monitoring tool within the company.
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Subject 4. Stakeholder Managementgroups and on that basis managing the company's relationships with stakeholders. The framework of corporate governance and stakeholder management reflects a legal, contractual, organizational, and governmental infrastructure. <span>Mechanisms of Stakeholder Management Mechanisms of stakeholder management may include: • General meetings. o The right to participate in general shareholder meetings is a fundamental shareholder right. Shareholders, especially minority shareholders, should have the opportunity to ask questions of the board, to place items on the agenda and to propose resolutions, to vote on major corporate matters and transactions, and to participate in key corporate governance decisions, such as the nomination and election of board members. o Shareholders should be able to vote in person or in absentia, and equal consideration should be given to votes cast in person or in absentia. A board of directors, which serves as a link between shareholders and managers, acts as the shareholders' monitoring tool within the company. The audit function. It plays a critical role in ensuring the corporation's financial integrity and consideration of legal and compliance issues. The primary objective is to ensure that the financial information reported by the company to shareholders is complete, accurate, reliable, relevant, and timely. Company reporting and transparency. It helps reduce of information asymmetry and agency costs. Related-party transactions. Related-party transactions involve buying, selling, and other transactions with board members, managers, employees, family members, and so on. They can create an inherent conflict of interest. Policies should be established to disclose, mitigate, and manage such transactions. Remuneration policies. Does the company's remuneration strategy reward long-term or short-term growth? Are equity-based compensation plans linked to the long-term performance of the company? o Say on pay is the ability of shareholders in a company to actively vote on how much executives employed by the company should be compensated. Contractual agreements with creditors; indentures, covenants, collaterals and credit committees are tools used by creditors to protect their interests. Employee laws, contracts, codes of ethics and business conduct, and compliance offer(s) are all means a company can use to manage its relationship with its employees. Contractual agreements with customers and suppliers. Laws and regulations a company must follow to protect the rights of specific groups. <span><body><html>
Flashcard 1750783888652
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Open itEthical actions are those actions that are perceived as beneficial and conform to the ethical expectations of society.
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Subject 1. Ethicsrding what is good, acceptable, or responsible behavior, and what is bad, unacceptable, or forbidden behavior. They provide guidance for our behavior. Ethical conduct is behavior that follows moral principles. <span>Ethical actions are those actions that are perceived as beneficial and conform to the ethical expectations of society. Ethics encompass a set of moral principles ( code of ethics ) and standards of conduct that provide guidance for our behavior. Violations can ha
Flashcard 1750831336716
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Open itA profession may adopt standards of conduct to enhance and clarify the code of ethics.
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Subject 2. Ethics and Professionalismected behaviors of its members. generates confidence not only among members of the organization but also among non-members (clients, prospective clients, and/or the general public). <span>A profession may adopt standards of conduct to enhance and clarify the code of ethics. <span><body><html>
Flashcard 1750867512588
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Open itLaws and regulations are not always the best mechanism to reduce unethical behavior. They often lag behind current circumstances; legal standards are often created to address past ethical failings and do not provide guidance for an evolving and increasingly complex worl
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Subject 5. Ethical vs. Legal Standardsbut they are not always the same. Some legal behaviors are not considered ethical. Some ethical behaviors may not be legal in certain countries. <span>Laws and regulations are not always the best mechanism to reduce unethical behavior. They often lag behind current circumstances; legal standards are often created to address past ethical failings and do not provide guidance for an evolving and increasingly complex world. In addition, new laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different but similarly problematic conduct. Investment professionals should act beyond legal standards, making good judgments and responsible choices even in the absence of clear laws or rules.
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Open itLaws and regulations are not always the best mechanism to reduce unethical behavior. They often lag behind current circumstances; legal standards are often created to address past ethical failings and do not provide guidance for an evolving and increasingly complex world. In addition, new laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different but similarly problematic conduct.
Original toplevel document
Subject 5. Ethical vs. Legal Standardsbut they are not always the same. Some legal behaviors are not considered ethical. Some ethical behaviors may not be legal in certain countries. <span>Laws and regulations are not always the best mechanism to reduce unethical behavior. They often lag behind current circumstances; legal standards are often created to address past ethical failings and do not provide guidance for an evolving and increasingly complex world. In addition, new laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different but similarly problematic conduct. Investment professionals should act beyond legal standards, making good judgments and responsible choices even in the absence of clear laws or rules.
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Parent (intermediate) annotation
Open itt mechanism to reduce unethical behavior. They often lag behind current circumstances; legal standards are often created to address past ethical failings and do not provide guidance for an evolving and increasingly complex world. In addition, <span>new laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different but similarly problematic conduct. <span><body><html>
Original toplevel document
Subject 5. Ethical vs. Legal Standardsbut they are not always the same. Some legal behaviors are not considered ethical. Some ethical behaviors may not be legal in certain countries. <span>Laws and regulations are not always the best mechanism to reduce unethical behavior. They often lag behind current circumstances; legal standards are often created to address past ethical failings and do not provide guidance for an evolving and increasingly complex world. In addition, new laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different but similarly problematic conduct. Investment professionals should act beyond legal standards, making good judgments and responsible choices even in the absence of clear laws or rules.
Flashcard 1750906047756
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Open itCompany size and growth rates Organizational structure Sophistication of working capital management Borrowing and investing positions/activities/capacities
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Reading 38 Working Capital Management Introand collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. <span>Both internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capital Needs Internal Factors External Factors Company size and growth rates Organizational structure Sophistication of working capital management Borrowing and investing positions/activities/capacities Banking services Interest rates New technologies and new products The economy Competitors The scope of working capital management includes transactions, relations, analyses, and focus: Transactions include payments for trade, financing, and investment. Relations with financial institutions and trading partners must be maintained to ensure that the transactions work effectively. Analyses of working capital management activities are required so that appropriate strategies can be formulated and implemented. Focus requires that organizations of all sizes today must have a global viewpoint with strong emphasis on liquidity. In this reading, we examine the different types of working capital and the management issues associated with each. We also look at methods of evaluating the effectiveness of working capital management. <span><body><html>
Flashcard 1750912077068
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Open itBanking services Interest rates New technologies and products Competitors Economy
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Reading 38 Working Capital Management Introand collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. <span>Both internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capital Needs Internal Factors External Factors Company size and growth rates Organizational structure Sophistication of working capital management Borrowing and investing positions/activities/capacities Banking services Interest rates New technologies and new products The economy Competitors The scope of working capital management includes transactions, relations, analyses, and focus: Transactions include payments for trade, financing, and investment. Relations with financial institutions and trading partners must be maintained to ensure that the transactions work effectively. Analyses of working capital management activities are required so that appropriate strategies can be formulated and implemented. Focus requires that organizations of all sizes today must have a global viewpoint with strong emphasis on liquidity. In this reading, we examine the different types of working capital and the management issues associated with each. We also look at methods of evaluating the effectiveness of working capital management. <span><body><html>
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Open itThis reading provides an overview of equity securities and their different features and establishes the background required to analyze and value equity securities in a global context. It addresses the following questions: What distinguishes common shares from preference shares, and what purposes do these securities serve in financing a company’s o
Original toplevel document
Reading 47 Overview of Equity Securities (Intro)Equity securities represent ownership claims on a company’s net assets. As an asset class, equity plays a fundamental role in investment analysis and portfolio management because it represents a significant portion of many individual and institutional investment portfolios. The study of equity securities is important for many reasons. First, the decision on how much of a client’s portfolio to allocate to equities affects the risk and return characteristics of the entire portfolio. Second, different types of equity securities have different ownership claims on a company’s net assets, which affect their risk and return characteristics in different ways. Finally, variations in the features of equity securities are reflected in their market prices, so it is important to understand the valuation implications of these features. This reading provides an overview of equity securities and their different features and establishes the background required to analyze and value equity securities in a global context. It addresses the following questions: What distinguishes common shares from preference shares, and what purposes do these securities serve in financing a company’s operations? What are convertible preference shares, and why are they often used to raise equity for unseasoned or highly risky companies? What are private equity securities, and how do they differ from public equity securities? What are depository receipts and their various types, and what is the rationale for investing in them? What are the risk factors involved in investing in equity securities? How do equity securities create company value? What is the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return? The remainder of this reading is organized as follows. Section 2 provides an overview of global equity markets and their historical performance. Section 3 examines
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Parent (intermediate) annotation
Open itThis reading provides an overview of equity securities and their different features and establishes the background required to analyze and value equity securities in a global context. It addresses the following questions: What distinguishes common shares from preference shares, and what purposes do these securities serve in financing a company’s operations? What are convertible preference shares, and why are they often used to raise equity for unseasoned or highly risky companies? What are private equity securities, and how do they differ from public equity securities? What are depository receipts and their various types, and what is the rationale for investing in them? What are the risk factors involved in investing in equity securities? How do equity securities create company value? What is the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return?
Original toplevel document
Reading 47 Overview of Equity Securities (Intro)Equity securities represent ownership claims on a company’s net assets. As an asset class, equity plays a fundamental role in investment analysis and portfolio management because it represents a significant portion of many individual and institutional investment portfolios. The study of equity securities is important for many reasons. First, the decision on how much of a client’s portfolio to allocate to equities affects the risk and return characteristics of the entire portfolio. Second, different types of equity securities have different ownership claims on a company’s net assets, which affect their risk and return characteristics in different ways. Finally, variations in the features of equity securities are reflected in their market prices, so it is important to understand the valuation implications of these features. This reading provides an overview of equity securities and their different features and establishes the background required to analyze and value equity securities in a global context. It addresses the following questions: What distinguishes common shares from preference shares, and what purposes do these securities serve in financing a company’s operations? What are convertible preference shares, and why are they often used to raise equity for unseasoned or highly risky companies? What are private equity securities, and how do they differ from public equity securities? What are depository receipts and their various types, and what is the rationale for investing in them? What are the risk factors involved in investing in equity securities? How do equity securities create company value? What is the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return? The remainder of this reading is organized as follows. Section 2 provides an overview of global equity markets and their historical performance. Section 3 examines
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Open itnal to violate this “law of demand”? What are appropriate measures of how sensitive the quantity demanded or supplied is to changes in price, income, and prices of other goods? What affects those sensitivities? <span>If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why? What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might gove
Original toplevel document
Prerequisite Reading Demand and Supply Analysis: Introductionel of markets, he or she cannot hope to forecast how external events—such as a shift in consumer tastes or changes in taxes and subsidies or other intervention in markets—will influence a firm’s revenue, earnings, and cash flows. <span>Having grasped the tools and concepts presented in this reading, the reader should also be able to understand many important economic relations and facts and be able to answer questions, such as: Why do consumers usually buy more when the price falls? Is it irrational to violate this “law of demand”? What are appropriate measures of how sensitive the quantity demanded or supplied is to changes in price, income, and prices of other goods? What affects those sensitivities? If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why? What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might government intervention reduce that value, and what is an appropriate measure of that loss? What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another? Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks? How do different types of auctions affect price discovery? This reading is organized as follows. Section 2 explains how economists classify markets. Section 3 covers the basic principles and concepts o
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Open itprices of other goods? What affects those sensitivities? If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why? <span>What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might government intervention reduce that value, and what is an appropriate measure of that loss? What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another? Is i
Original toplevel document
Prerequisite Reading Demand and Supply Analysis: Introductionel of markets, he or she cannot hope to forecast how external events—such as a shift in consumer tastes or changes in taxes and subsidies or other intervention in markets—will influence a firm’s revenue, earnings, and cash flows. <span>Having grasped the tools and concepts presented in this reading, the reader should also be able to understand many important economic relations and facts and be able to answer questions, such as: Why do consumers usually buy more when the price falls? Is it irrational to violate this “law of demand”? What are appropriate measures of how sensitive the quantity demanded or supplied is to changes in price, income, and prices of other goods? What affects those sensitivities? If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why? What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might government intervention reduce that value, and what is an appropriate measure of that loss? What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another? Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks? How do different types of auctions affect price discovery? This reading is organized as follows. Section 2 explains how economists classify markets. Section 3 covers the basic principles and concepts o
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Open itthat value, and what is an appropriate measure of that loss? What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another? <span>Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks? How do different types of auctions affect price discovery? <span><body><html>
Original toplevel document
Prerequisite Reading Demand and Supply Analysis: Introductionel of markets, he or she cannot hope to forecast how external events—such as a shift in consumer tastes or changes in taxes and subsidies or other intervention in markets—will influence a firm’s revenue, earnings, and cash flows. <span>Having grasped the tools and concepts presented in this reading, the reader should also be able to understand many important economic relations and facts and be able to answer questions, such as: Why do consumers usually buy more when the price falls? Is it irrational to violate this “law of demand”? What are appropriate measures of how sensitive the quantity demanded or supplied is to changes in price, income, and prices of other goods? What affects those sensitivities? If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why? What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might government intervention reduce that value, and what is an appropriate measure of that loss? What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another? Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks? How do different types of auctions affect price discovery? This reading is organized as follows. Section 2 explains how economists classify markets. Section 3 covers the basic principles and concepts o
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Open itopportunity to pursue another? Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks? <span>How do different types of auctions affect price discovery? <span><body><html>
Original toplevel document
Prerequisite Reading Demand and Supply Analysis: Introductionel of markets, he or she cannot hope to forecast how external events—such as a shift in consumer tastes or changes in taxes and subsidies or other intervention in markets—will influence a firm’s revenue, earnings, and cash flows. <span>Having grasped the tools and concepts presented in this reading, the reader should also be able to understand many important economic relations and facts and be able to answer questions, such as: Why do consumers usually buy more when the price falls? Is it irrational to violate this “law of demand”? What are appropriate measures of how sensitive the quantity demanded or supplied is to changes in price, income, and prices of other goods? What affects those sensitivities? If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why? What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might government intervention reduce that value, and what is an appropriate measure of that loss? What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another? Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks? How do different types of auctions affect price discovery? This reading is organized as follows. Section 2 explains how economists classify markets. Section 3 covers the basic principles and concepts o
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Open itThe theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the
Original toplevel document
Prerequisite Demand and Supply Analysis: The firmicroeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. <span>The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore,
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Parent (intermediate) annotation
Open itThe theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services.
Original toplevel document
Prerequisite Demand and Supply Analysis: The firmicroeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. <span>The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore,
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Parent (intermediate) annotation
Open it<head> The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the
Original toplevel document
Prerequisite Demand and Supply Analysis: The firmicroeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. <span>The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore,
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Parent (intermediate) annotation
Open itlly, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. <span>Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the diffe
Original toplevel document
Prerequisite Demand and Supply Analysis: The firmicroeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. <span>The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore,
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Parent (intermediate) annotation
Open itined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. <span>The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. <span><body><html>
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Prerequisite Demand and Supply Analysis: The firmicroeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. <span>The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore,
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Open itWorking capital management is a broad-based function. Effective execution requires managing and coordinating several tasks within the company, including managing short-term investments, granting credit to customers and collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances.
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Reading 38 Working Capital Management IntroThe focus of this reading is on the short-term aspects of corporate finance activities collectively referred to as working capital management . The goal of effective working capital management is to ensure that a company has adequate ready access to the funds necessary for day-to-day operating expenses, while at the same time making sure that the company’s assets are invested in the most productive way. Achieving this goal requires a balancing of concerns. Insufficient access to cash could ultimately lead to severe restructuring of a company by selling off assets, reorganization via bankruptcy proceedings, or final liquidation of the company. On the other hand, excessive investment in cash and liquid assets may not be the best use of company resources. Effective working capital management encompasses several aspects of short-term finance: maintaining adequate levels of cash, converting short-term assets (i.e., accounts receivable and inventory) into cash, and controlling outgoing payments to vendors, employees, and others. To do this successfully, companies invest short-term funds in working capital portfolios of short-dated, highly liquid securities, or they maintain credit reserves in the form of bank lines of credit or access to financing by issuing commercial paper or other money market instruments. Working capital management is a broad-based function. Effective execution requires managing and coordinating several tasks within the company, including managing short-term investments, granting credit to customers and collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. Both internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capit
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Open itnction. Effective execution requires managing and coordinating several tasks within the company, including managing short-term investments, granting credit to customers and collecting on this credit, managing inventory, and managing payables. <span>Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. <span><body><html>
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Reading 38 Working Capital Management IntroThe focus of this reading is on the short-term aspects of corporate finance activities collectively referred to as working capital management . The goal of effective working capital management is to ensure that a company has adequate ready access to the funds necessary for day-to-day operating expenses, while at the same time making sure that the company’s assets are invested in the most productive way. Achieving this goal requires a balancing of concerns. Insufficient access to cash could ultimately lead to severe restructuring of a company by selling off assets, reorganization via bankruptcy proceedings, or final liquidation of the company. On the other hand, excessive investment in cash and liquid assets may not be the best use of company resources. Effective working capital management encompasses several aspects of short-term finance: maintaining adequate levels of cash, converting short-term assets (i.e., accounts receivable and inventory) into cash, and controlling outgoing payments to vendors, employees, and others. To do this successfully, companies invest short-term funds in working capital portfolios of short-dated, highly liquid securities, or they maintain credit reserves in the form of bank lines of credit or access to financing by issuing commercial paper or other money market instruments. Working capital management is a broad-based function. Effective execution requires managing and coordinating several tasks within the company, including managing short-term investments, granting credit to customers and collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. Both internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capit
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Open itead> 3.1.6 Suppliers A company’s suppliers have a primary interest in being paid as contracted or agreed on, and in a timely manner, for products or services delivered to the company. Suppliers, like creditors, are concerned with a company’s ability to generate sufficient cash flows to meet its financial obligations. <html>
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Open itits given the price paid, as well as to meet applicable standards of safety. Compared with other stakeholder groups, customers tend to be less concerned with, and affected by, a company’s financial performance. <span>3.1.6 Suppliers A company’s suppliers have a primary interest in being paid as contracted or agreed on, and in a timely manner, for products or services delivered to the company. Suppliers, like creditors, are concerned with a company’s ability to generate sufficient cash flows to meet its financial obligations. 3.1.7 Governments/Regulators Governments and regulators seek to protect the interests of the general public and ensure the well being of their nations’ econom
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Open itBoard of Directors Representation Analysts should assess whether the experience and skill sets of board members match the needs of the company. Are they truly independent? Are there inherent conflicts of interest?
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Subject 8. Analyst Considerations in Corporate Governance and Stakeholder Management3; Does the practice really insulate managers from Wall Street's short-term mindset? Dual-class structures create an inferior class of shareholders, and may allow management to make bad decisions with few consequences. <span>Board of Directors Representation Analysts should assess whether the experience and skill sets of board members match the needs of the company. Are they truly independent? Are there inherent conflicts of interest? Remuneration and Company Performance What are the main drivers of the management team's remuneration and incentive structure? Does the remuneration plan reward lo
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Open itBoard of Directors Representation Analysts should assess whether the experience and skill sets of board members match the needs of the company. Are they truly independent? Are there inherent conflicts of interest?
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Subject 8. Analyst Considerations in Corporate Governance and Stakeholder Management3; Does the practice really insulate managers from Wall Street's short-term mindset? Dual-class structures create an inferior class of shareholders, and may allow management to make bad decisions with few consequences. <span>Board of Directors Representation Analysts should assess whether the experience and skill sets of board members match the needs of the company. Are they truly independent? Are there inherent conflicts of interest? Remuneration and Company Performance What are the main drivers of the management team's remuneration and incentive structure? Does the remuneration plan reward lo
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Open itl> Board of Directors Representation Analysts should assess whether the experience and skill sets of board members match the needs of the company. Are they truly independent? Are there inherent conflicts of interest? <html>
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Subject 8. Analyst Considerations in Corporate Governance and Stakeholder Management3; Does the practice really insulate managers from Wall Street's short-term mindset? Dual-class structures create an inferior class of shareholders, and may allow management to make bad decisions with few consequences. <span>Board of Directors Representation Analysts should assess whether the experience and skill sets of board members match the needs of the company. Are they truly independent? Are there inherent conflicts of interest? Remuneration and Company Performance What are the main drivers of the management team's remuneration and incentive structure? Does the remuneration plan reward lo
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Open itESG Implementation Methods Asset managers and asset owners can incorporate ESG issues into the investment process in a variety of ways. Negative screening is a type of investment strategy that excludes certain companies or sectors from investment consideration because of their underlying business activities or other environmental or social concerns. Positive screening and best-in-class strategies focus on investments with favorable ESG aspects. Thematic investing focuses on a single factor, such as energy efficiency or climate change. Impact investing strategies are targeted investments, typically
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Subject 9. ESG Considerations for Investorsd adherence to environmental safety and regulatory standards. Social factors generally pertain to human rights and welfare concerns in the workplace, product development, and, in some cases, community impact. <span>ESG Implementation Methods Asset managers and asset owners can incorporate ESG issues into the investment process in a variety of ways. Negative screening is a type of investment strategy that excludes certain companies or sectors from investment consideration because of their underlying business activities or other environmental or social concerns. Positive screening and best-in-class strategies focus on investments with favorable ESG aspects. Thematic investing focuses on a single factor, such as energy efficiency or climate change. Impact investing strategies are targeted investments, typically made in private markets, aimed at solving social or environmental problems. <span><body><html>
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Open itinvestment consideration because of their underlying business activities or other environmental or social concerns. Positive screening and best-in-class strategies focus on investments with favorable ESG aspects. <span>Thematic investing focuses on a single factor, such as energy efficiency or climate change. Impact investing strategies are targeted investments, typically made in private markets, aimed at solving social or environmental problems. <span><body><html>
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Subject 9. ESG Considerations for Investorsd adherence to environmental safety and regulatory standards. Social factors generally pertain to human rights and welfare concerns in the workplace, product development, and, in some cases, community impact. <span>ESG Implementation Methods Asset managers and asset owners can incorporate ESG issues into the investment process in a variety of ways. Negative screening is a type of investment strategy that excludes certain companies or sectors from investment consideration because of their underlying business activities or other environmental or social concerns. Positive screening and best-in-class strategies focus on investments with favorable ESG aspects. Thematic investing focuses on a single factor, such as energy efficiency or climate change. Impact investing strategies are targeted investments, typically made in private markets, aimed at solving social or environmental problems. <span><body><html>
Flashcard 1750963719436
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Open itESG Implementation Methods Asset managers and asset owners can incorporate ESG issues into the investment process in a variety of ways. Negative screening is a type of investment strategy that excludes certain companies or sectors from investment consideration because of their underlying business activities or other environmental or social concerns. Positive screening and best-in-class strategies focus on investments with favorable ESG aspects. Thematic investing focuses on a single factor, such as energy efficiency or climate change. Impact investing strategies are targeted investments, typically made in private markets, aimed at solving social or environmental problems.
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Subject 9. ESG Considerations for Investorsd adherence to environmental safety and regulatory standards. Social factors generally pertain to human rights and welfare concerns in the workplace, product development, and, in some cases, community impact. <span>ESG Implementation Methods Asset managers and asset owners can incorporate ESG issues into the investment process in a variety of ways. Negative screening is a type of investment strategy that excludes certain companies or sectors from investment consideration because of their underlying business activities or other environmental or social concerns. Positive screening and best-in-class strategies focus on investments with favorable ESG aspects. Thematic investing focuses on a single factor, such as energy efficiency or climate change. Impact investing strategies are targeted investments, typically made in private markets, aimed at solving social or environmental problems. <span><body><html>
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Open itThis reading introduces equity valuation models used to estimate the intrinsic value (synonym: fundamental value ) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics.
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Reading 49 Equity Valuation: Concepts and Basic Tools (Intro)Analysts gather and process information to make investment decisions, including buy and sell recommendations. What information is gathered and how it is processed depend on the analyst and the purpose of the analysis. Technical analysis uses such information as stock price and trading volume as the basis for investment decisions. Fundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings. Whereas technical analysts use information to predict price movements and base investment decisions on the direction of predicted change in prices, fundamental analysts use information to estimate the value of a security and to compare the estimated value to the market price and then base investment decisions on that comparison. This reading introduces equity valuation models used to estimate the intrinsic value (synonym: fundamental value ) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics. The fundamentals to be considered depend on the analyst’s approach to valuation. In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securities. This reading is organized as follows. Section 2 discusses the implications of differences between estimated value and market price. Section 3 introduces three major categor
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Open itWhatever the approach(Top-Down or Bottom-up), an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value.
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Reading 49 Equity Valuation: Concepts and Basic Tools (Intro)Analysts gather and process information to make investment decisions, including buy and sell recommendations. What information is gathered and how it is processed depend on the analyst and the purpose of the analysis. Technical analysis uses such information as stock price and trading volume as the basis for investment decisions. Fundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings. Whereas technical analysts use information to predict price movements and base investment decisions on the direction of predicted change in prices, fundamental analysts use information to estimate the value of a security and to compare the estimated value to the market price and then base investment decisions on that comparison. This reading introduces equity valuation models used to estimate the intrinsic value (synonym: fundamental value ) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics. The fundamentals to be considered depend on the analyst’s approach to valuation. In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securities. This reading is organized as follows. Section 2 discusses the implications of differences between estimated value and market price. Section 3 introduces three major categor
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Open itGiven the globalization of the world economy, most large companies depend heavily on their foreign operations (for example, by some estimates about 40 percent of S&P 500 Index earnings are from outside the United States).
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Reading 20 Currency Exchange Rates IntroductionMeasured by daily turnover, the foreign exchange (FX) market—the market in which currencies are traded against each other—is by far the world’s largest market. Current estimates put daily turnover at approximately USD4 trillion for 2010. This is about 10 to 15 times larger than daily turnover in global fixed-income markets and about 50 times larger than global turnover in equities. Moreover, volumes in FX turnover continue to grow: Some predict that daily FX turnover will reach USD10 trillion by 2020 as market participation spreads and deepens. The FX market is also a truly global market that operates 24 hours a day, each business day. It involves market participants from every time zone connected through electronic communications networks that link players as large as multibillion-dollar investment funds and as small as individuals trading for their own account—all brought together in real time. International trade would be impossible without the trade in currencies that facilitates it, and so too would cross-border capital flows that connect all financial markets globally through the FX market. These factors make foreign exchange a key market for investors and market participants to understand. The world economy is increasingly transnational in nature, with both production processes and trade flows often determined more by global factors than by domestic considerations. Likewise, investment portfolio performance increasingly reflects global determinants because pricing in financial markets responds to the array of investment opportunities available worldwide, not just locally. All of these factors funnel through, and are reflected in, the foreign exchange market. As investors shed their “home bias” and invest in foreign markets, the exchange rate—the price at which foreign-currency-denominated investments are valued in terms of the domestic currency—becomes an increasingly important determinant of portfolio performance. Even investors adhering to a purely “domestic” portfolio mandate are increasingly affected by what happens in the foreign exchange market. Given the globalization of the world economy, most large companies depend heavily on their foreign operations (for example, by some estimates about 40 percent of S&P 500 Index earnings are from outside the United States). Almost all companies are exposed to some degree of foreign competition, and the pricing for domestic assets—equities, bonds, real estate, and others—will also depend on demand from foreign investors. All of these various influences on investment performance reflect developments in the foreign exchange market. This reading introduces the foreign exchange market, providing the basic concepts and terminology necessary to understand exchange rates as well as some of the basics of ex
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Open itIf a company invests in projects that produce a return in excess of the cost of capital, the company has created value; in contrast, if the company invests in projects whose returns are less than the cost of capital, the company has actually destroyed value.
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Reading 36 Cost of Capital IntroductionA company grows by making investments that are expected to increase revenues and profits. The company acquires the capital or funds necessary to make such investments by borrowing or using funds from owners. By applying this capital to investments with long-term benefits, the company is producing value today. But, how much value? The answer depends not only on the investments’ expected future cash flows but also on the cost of the funds. Borrowing is not costless. Neither is using owners’ funds. The cost of this capital is an important ingredient in both investment decision making by the company’s management and the valuation of the company by investors. If a company invests in projects that produce a return in excess of the cost of capital, the company has created value; in contrast, if the company invests in projects whose returns are less than the cost of capital, the company has actually destroyed value. Therefore, the estimation of the cost of capital is a central issue in corporate financial management. For the analyst seeking to evaluate a company’s investment program and its competitive position, an accurate estimate of a company’s cost of capital is important as well. Cost of capital estimation is a challenging task. As we have already implied, the cost of capital is not observable but, rather, must be estimated. Arriving at a cost of capital estimate requires a host of assumptions and estimates. Another challenge is that the cost of capital that is appropriately applied to a specific investment depends on the characteristics of that investment: The riskier the investment’s cash flows, the greater its cost of capital. In reality, a company must estimate project-specific costs of capital. What is often done, however, is to estimate the cost of capital for the company as a whole and then adjust this overall corporate cost of capital upward or downward to reflect the risk of the contemplated project relative to the company’s average project. This reading is organized as follows: In the next section, we introduce the cost of capital and its basic computation. Section 3 presents a selection of methods for estimat
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Open itStaggered terms of Boards make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board and could result in a permanent impairment of long-term shareholder value.
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Subject 5. Board of Directors and CommitteesComposition of the Board of Directors A board of directors is the central pillar of the governance structure, serves as the link between shareholders and managers, and acts as the shareholders' internal monitoring tool within the company. The structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions. Executive (internal) directors are employed by the company and are typically members of senior management. Non-executive (external) directors have limited involvement in daily operations but serve an important oversight role. In a classified or staggered board, directors are typically elected in two or more classes, serving terms greater than one year. Proponents argue that by staggering the election of directors, a certain level of continuity and skill is maintained. However, staggered terms make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board and could result in a permanent impairment of long-term shareholder value. Functions and Responsibilities of the Board Two primary duties of a board of directors are duty of care and duty of loyalty. Among other responsibilities, the
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Open itThe choice of which risks to undertake through the allocation of its scarce resources is the key tool available to management. An organization with a comprehensive risk management culture in place, in which risk is integral to every key strategy and decision, should perform better in the long-term, in good time
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Reading 40 Risk Management: An Introduction IntroRisk—and risk management—is an inescapable part of economic activity. People generally manage their affairs in order to be as happy and secure as their environment and resources will allow. But regardless of how carefully these affairs are managed, there is risk because the outcome, whether good or bad, is seldom predictable with complete certainty. There is risk inherent in nearly everything we do, but this reading will focus on economic and financial risk, particularly as it relates to investment management. All businesses and investors manage risk, whether consciously or not, in the choices they make. At its core, business and investing are about allocating resources and capital to chosen risks. In their decision process, within an environment of uncertainty, these entities may take steps to avoid some risks, pursue the risks that provide the highest rewards, and measure and mitigate their exposure to these risks as necessary. Risk management processes and tools make difficult business and financial problems easier to address in an uncertain world. Risk is not just a matter of fate; it is something that organizations can actively control with their decisions, within a risk management framework. Risk is an integral part of the business or investment process. Even in the earliest models of modern portfolio theory, such as mean–variance portfolio optimization and the capital asset pricing model, investment return is linked directly to risk but requires that risk be managed optimally. Proper identification and measurement of risk, and keeping risks aligned with the goals of the enterprise, are key factors in managing businesses and investments. Good risk management results in a higher chance of a preferred outcome—more value for the company or portfolio or more utility for the individual. Portfolio managers need to be familiar with risk management not only to improve the portfolio’s risk–return outcome, but also because of two other ways in which they use risk management at an enterprise level. First, they help to manage their own companies that have their own enterprise risk issues. Second, many portfolio assets are claims on companies that have risks. Portfolio managers need to evaluate the companies’ risks and how those companies are addressing them. This reading takes a broad approach that addresses both the risk management of enterprises in general and portfolio risk management. The principles underlying portfolio risk management are generally applicable to the risk management of financial and non-financial institutions as well. The concept of risk management is also relevant to individuals. Although many large entities formally practice risk management, most individuals practice it more informally and some practice it haphazardly, oftentimes responding to risk events after they occur. Although many individuals do take reasonable precautions against unwanted risks, these precautions are often against obvious risks, such as sticking a wet hand into an electrical socket or swallowing poison. The more subtle risks are often ignored. Many individuals simply do not view risk management as a formal, systematic process that would help them achieve not only their financial goals but also the ultimate end result of happiness, or maximum utility as economists like to call it, but they should. Although the primary focus of this reading is on institutions, we will also cover risk management as it applies to individuals. We will show that many common themes underlie risk management—themes that are applicable to both organizations and individuals. Although often viewed as defensive, risk management is a valuable offensive weapon in the manager’s arsenal. In the quest for preferred outcomes, such as higher profit, returns, or share price, management does not usually get to choose the outcomes but does choose the risks it takes in pursuit of those outcomes. The choice of which risks to undertake through the allocation of its scarce resources is the key tool available to management. An organization with a comprehensive risk management culture in place, in which risk is integral to every key strategy and decision, should perform better in the long-term, in good times and bad, as a result of better decision making. The fact that all businesses and investors engage in risky activities (i.e., activities with uncertain outcomes) raises a number of important questions. The questions that this reading will address include the following: What is risk management, and why is it important? What risks does an organization (or individual) face in pursuing its objectives? How are an entity’s goals affected by risk, and how does it make risk management decisions to produce better results? How does risk governance guide the risk management process and risk budgeting to integrate an organization’s goals with its activities? How does an organization measure and evaluate the risks it faces, and what tools does it have to address these risks? The answers to these questions collectively help to define the process of risk management. This reading is organized along the lines of these questions. Section 2 describes the risk management process, and Section 3 discusses risk governance and risk tolerance. Section 4 cove
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Open itFiscal policy refers to the use of government expenditure, tax, and borrowing activities to achieve economic goals. Monetary policy refers to central bank activities to control the supply of money. Their goals are maximum employment, stable prices, and moderate long-term interest rates. </spa
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Subject 1. What is Money?Fiscal policy refers to the use of government expenditure, tax, and borrowing activities to achieve economic goals. Monetary policy refers to central bank activities to control the supply of money. Their goals are maximum employment, stable prices, and moderate long-term interest rates. The Functions of Money Money performs three basic functions. • It serves as a medium of exchange to buy and sell goods and services. Money simplif
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Open itFiscal policy refers to the use of government expenditure, tax, and borrowing activities to achieve economic goals. Monetary policy refers to central bank activities to control the supply of money. Their goals are maximum employment, stable prices, and moderate long-term interest rates.
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Subject 1. What is Money?Fiscal policy refers to the use of government expenditure, tax, and borrowing activities to achieve economic goals. Monetary policy refers to central bank activities to control the supply of money. Their goals are maximum employment, stable prices, and moderate long-term interest rates. The Functions of Money Money performs three basic functions. • It serves as a medium of exchange to buy and sell goods and services. Money simplif
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Open it/head> Fiscal policy refers to the use of government expenditure, tax, and borrowing activities to achieve economic goals. Monetary policy refers to central bank activities to control the supply of money. Their goals are maximum employment, stable prices, and moderate long-term interest rates. <html>
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Subject 1. What is Money?Fiscal policy refers to the use of government expenditure, tax, and borrowing activities to achieve economic goals. Monetary policy refers to central bank activities to control the supply of money. Their goals are maximum employment, stable prices, and moderate long-term interest rates. The Functions of Money Money performs three basic functions. • It serves as a medium of exchange to buy and sell goods and services. Money simplif
Flashcard 1750998060300
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Open itThe money multiplier is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In
Original toplevel document
Subject 1. What is Money?liquid of all assets, due to its function as the medium of exchange. However, many methods of holding money do not yield an interest return and the purchase power of money will decline during a time of inflation. <span>The Money Creation Process Reserves are the cash in a bank's vault and deposits at Federal Reserve Banks. Under the fractional reserve banking system, a bank is obligated to hold a minimum amount of reserves to back up its deposits. Reserves held for that purpose, which are expressed as a percentage of a bank's demand deposits, are called required reserves. Therefore, the required reserve ratio is the percentage of a bank's deposits that are required to be held as reserves. Banks create deposits when they make loans; the new deposits created are new money. Example Suppose the required reserve ratio in the U.S. is 20%, and then suppose that you deposit $1,000 cash with Citibank. Citibank keeps $200 of the $1,000 in reserves. The remaining $800 of excess reserves can be loaned out to, say, John. After the loan is made, the money supply increases by $800 (your $1,000 + John's $800). After getting the loan, John deposits the $800 with Bank of America (BOA). BOA keeps $160 of the $800 in reserves and can now loan out $640 to another person. Thus, BOA creates $640 of money supply. The process goes on and on. With each deposit and loan, more money is created. However, the money creation process does not create an infinite amount of money. The money multiplier is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5. Definitions of Money There are different definitions of money. The two most widely used measures of money in the U.S. are: The M1 Money Su
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Parent (intermediate) annotation
Open itThe money multiplier is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5.
Original toplevel document
Subject 1. What is Money?liquid of all assets, due to its function as the medium of exchange. However, many methods of holding money do not yield an interest return and the purchase power of money will decline during a time of inflation. <span>The Money Creation Process Reserves are the cash in a bank's vault and deposits at Federal Reserve Banks. Under the fractional reserve banking system, a bank is obligated to hold a minimum amount of reserves to back up its deposits. Reserves held for that purpose, which are expressed as a percentage of a bank's demand deposits, are called required reserves. Therefore, the required reserve ratio is the percentage of a bank's deposits that are required to be held as reserves. Banks create deposits when they make loans; the new deposits created are new money. Example Suppose the required reserve ratio in the U.S. is 20%, and then suppose that you deposit $1,000 cash with Citibank. Citibank keeps $200 of the $1,000 in reserves. The remaining $800 of excess reserves can be loaned out to, say, John. After the loan is made, the money supply increases by $800 (your $1,000 + John's $800). After getting the loan, John deposits the $800 with Bank of America (BOA). BOA keeps $160 of the $800 in reserves and can now loan out $640 to another person. Thus, BOA creates $640 of money supply. The process goes on and on. With each deposit and loan, more money is created. However, the money creation process does not create an infinite amount of money. The money multiplier is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5. Definitions of Money There are different definitions of money. The two most widely used measures of money in the U.S. are: The M1 Money Su
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Parent (intermediate) annotation
Open itDefinitions of Money There are different definitions of money. The two most widely used measures of money in the U.S. are: The M1 Money Supply: cash, checking accounts and traveler's checks. This is the narrowest definition of the money supply. This definition focuses on money's function as a medium of exchange. The M2 Money Supply: M1 + savings + small time deposits + retail money funds. This definition focuses on money's function as a medium of exchange and store of value. Credit cards are not purchasing power, but instead are a convenient means of arranging a loan. Credit is a liability acquired when one borrows funds, while money is
Original toplevel document
Subject 1. What is Money?unt by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5. <span>Definitions of Money There are different definitions of money. The two most widely used measures of money in the U.S. are: The M1 Money Supply: cash, checking accounts and traveler's checks. This is the narrowest definition of the money supply. This definition focuses on money's function as a medium of exchange. The M2 Money Supply: M1 + savings + small time deposits + retail money funds. This definition focuses on money's function as a medium of exchange and store of value. Credit cards are not purchasing power, but instead are a convenient means of arranging a loan. Credit is a liability acquired when one borrows funds, while money is a financial asset that provides the holder with future purchasing power. However, the widespread use of credit cards will tend to reduce the average quantity of money people hold. Deposits are money, but checks are not - a check is an instruction to a bank to transfer money. The Quantity Theory of Money Money Supply (M) x Velocity of Money (V) = Price (P) x Real Output (Y) The velocity of money is the average n
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Parent (intermediate) annotation
Open itmoney's function as a medium of exchange. The M2 Money Supply: M1 + savings + small time deposits + retail money funds. This definition focuses on money's function as a medium of exchange and store of value. <span>Credit cards are not purchasing power, but instead are a convenient means of arranging a loan. Credit is a liability acquired when one borrows funds, while money is a financial asset that provides the holder with future purchasing power. However, the widespread use of credit cards will tend to reduce the average quantity of money people hold. Deposits are money, but checks are not - a check is an instruction to a bank to transfer money. <span><body><html>
Original toplevel document
Subject 1. What is Money?unt by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5. <span>Definitions of Money There are different definitions of money. The two most widely used measures of money in the U.S. are: The M1 Money Supply: cash, checking accounts and traveler's checks. This is the narrowest definition of the money supply. This definition focuses on money's function as a medium of exchange. The M2 Money Supply: M1 + savings + small time deposits + retail money funds. This definition focuses on money's function as a medium of exchange and store of value. Credit cards are not purchasing power, but instead are a convenient means of arranging a loan. Credit is a liability acquired when one borrows funds, while money is a financial asset that provides the holder with future purchasing power. However, the widespread use of credit cards will tend to reduce the average quantity of money people hold. Deposits are money, but checks are not - a check is an instruction to a bank to transfer money. The Quantity Theory of Money Money Supply (M) x Velocity of Money (V) = Price (P) x Real Output (Y) The velocity of money is the average n
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Parent (intermediate) annotation
Open ity acquired when one borrows funds, while money is a financial asset that provides the holder with future purchasing power. However, the widespread use of credit cards will tend to reduce the average quantity of money people hold. <span>Deposits are money, but checks are not - a check is an instruction to a bank to transfer money. <span><body><html>
Original toplevel document
Subject 1. What is Money?unt by which a change in the monetary base is multiplied to calculate the final change in the money supply. Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5. <span>Definitions of Money There are different definitions of money. The two most widely used measures of money in the U.S. are: The M1 Money Supply: cash, checking accounts and traveler's checks. This is the narrowest definition of the money supply. This definition focuses on money's function as a medium of exchange. The M2 Money Supply: M1 + savings + small time deposits + retail money funds. This definition focuses on money's function as a medium of exchange and store of value. Credit cards are not purchasing power, but instead are a convenient means of arranging a loan. Credit is a liability acquired when one borrows funds, while money is a financial asset that provides the holder with future purchasing power. However, the widespread use of credit cards will tend to reduce the average quantity of money people hold. Deposits are money, but checks are not - a check is an instruction to a bank to transfer money. The Quantity Theory of Money Money Supply (M) x Velocity of Money (V) = Price (P) x Real Output (Y) The velocity of money is the average n
Flashcard 1751007497484
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| repetition number in this series | 0 | memorised on | scheduled repetition | ||||
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Parent (intermediate) annotation
Open itViolations of moral principles can harm the community in a variety of ways.
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Subject 1. EthicsEthical conduct is behavior that follows moral principles. Ethical actions are those actions that are perceived as beneficial and conform to the ethical expectations of society. <span>Ethics encompass a set of moral principles ( code of ethics ) and standards of conduct that provide guidance for our behavior. Violations can harm the community in a variety of ways. <span><body><html>
Flashcard 1751009332492
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Parent (intermediate) annotation
Open itDemand and supply analysis is the study of how buyers and sellers interact to determine transaction prices and quantities.
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Prerequisite Reading Demand and Supply Analysis: Introductioncroeconomics has its roots in microeconomics , which deals with markets and decision making of individual economic units, including consumers and businesses. Microeconomics is a logical starting point for the study of economics. <span>This reading focuses on a fundamental subject in microeconomics: demand and supply analysis. Demand and supply analysis is the study of how buyers and sellers interact to determine transaction prices and quantities. As we will see, prices simultaneously reflect both the value to the buyer of the next (or marginal) unit and the cost to the seller of that unit. In private enterprise market economies, which are the chief concern of investment analysts, demand and supply analysis encompasses the most basic set of microeconomic tools. Traditionally, microeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theor
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Parent (intermediate) annotation
Open itFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making.
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open itA primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under IFRS and US GAAP . However, financial reports do not contain all the information needed to perform effectiv
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open itthe financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under IFRS and US GAAP . However, <span>financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and ow
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open itagement’s discussion and analysis). This reading focuses on data presented in financial reports prepared under IFRS and US GAAP . However, financial reports do not contain all the information needed to perform effective financial analysis. <span>Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typica
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open itcompany (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. <span>The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comp
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open itl the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, <span>an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. <span><body><html>
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open itThis reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. <
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open itEquity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
| status | not read | reprioritisations | ||
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Parent (intermediate) annotation
Open it(such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. <span>Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundam
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open ithip or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. <span>Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
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Parent (intermediate) annotation
Open italyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. <span>The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit. <span><body><html>
Original toplevel document
Reading 27 Financial Analysis Techniques IntroductionFinancial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues? A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself. This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis. Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1 The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the frame
Flashcard 1751029255436
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Parent (intermediate) annotation
Open itExamples of long-lived financial assets include investments in equity or debt securities issued by other companies.
Original toplevel document
Reading 29 Long-Lived Assets IntroductionLong-lived assets , also referred to as non-current assets or long-term assets, are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.1 Long-lived assets may be tangible, intangible, or financial assets. Examples of long-lived tangible assets, typically referred to as property, plant, and equipment and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and equipment, and vehicles; examples of long-lived intangible assets (assets lacking physical substance) include patents and trademarks; and examples of long-lived financial assets include investments in equity or debt securities issued by other companies. The scope of this reading is limited to long-lived tangible and intangible assets (hereafter, referred to for simplicity as long-lived assets). The first issue in accounting for a long-lived asset is determining its cost at acquisition. The second issue is how to allocate the cost to expense over time. The costs of most long-lived assets are capitalised and then allocated as expenses in the profit or loss (income) statement over the period of time during which they are expected to provide economic benefits. The two main types of long-lived assets with costs that are typically not allocated over time are land, which is not depreciated, and those intangible assets with indefinite useful lives. Additional issues that arise are the treatment of subsequent costs incurred related to the asset, the use of the cost model versus the revaluation model, unexpected declines in the value of the asset, classification of the asset with respect to intent (for example, held for use or held for sale), and the derecognition of the asset. This reading is organised as follows. Section 2 describes and illustrates accounting for the acquisition of long-lived assets, with particular attention to the impact of ca
Flashcard 1751030828300
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Parent (intermediate) annotation
Open itThe first issue in accounting for a long-lived asset is determining its cost at acquisition. The second issue is how to allocate the cost to expense over time.
Original toplevel document
Reading 29 Long-Lived Assets IntroductionLong-lived assets , also referred to as non-current assets or long-term assets, are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.1 Long-lived assets may be tangible, intangible, or financial assets. Examples of long-lived tangible assets, typically referred to as property, plant, and equipment and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and equipment, and vehicles; examples of long-lived intangible assets (assets lacking physical substance) include patents and trademarks; and examples of long-lived financial assets include investments in equity or debt securities issued by other companies. The scope of this reading is limited to long-lived tangible and intangible assets (hereafter, referred to for simplicity as long-lived assets). The first issue in accounting for a long-lived asset is determining its cost at acquisition. The second issue is how to allocate the cost to expense over time. The costs of most long-lived assets are capitalised and then allocated as expenses in the profit or loss (income) statement over the period of time during which they are expected to provide economic benefits. The two main types of long-lived assets with costs that are typically not allocated over time are land, which is not depreciated, and those intangible assets with indefinite useful lives. Additional issues that arise are the treatment of subsequent costs incurred related to the asset, the use of the cost model versus the revaluation model, unexpected declines in the value of the asset, classification of the asset with respect to intent (for example, held for use or held for sale), and the derecognition of the asset. This reading is organised as follows. Section 2 describes and illustrates accounting for the acquisition of long-lived assets, with particular attention to the impact of ca
Flashcard 1751033187596
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Parent (intermediate) annotation
Open itThe first issue in accounting for a long-lived asset is determining its cost at acquisition. The second issue is how to allocate the cost to expense over time.
Original toplevel document
Reading 29 Long-Lived Assets IntroductionLong-lived assets , also referred to as non-current assets or long-term assets, are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.1 Long-lived assets may be tangible, intangible, or financial assets. Examples of long-lived tangible assets, typically referred to as property, plant, and equipment and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and equipment, and vehicles; examples of long-lived intangible assets (assets lacking physical substance) include patents and trademarks; and examples of long-lived financial assets include investments in equity or debt securities issued by other companies. The scope of this reading is limited to long-lived tangible and intangible assets (hereafter, referred to for simplicity as long-lived assets). The first issue in accounting for a long-lived asset is determining its cost at acquisition. The second issue is how to allocate the cost to expense over time. The costs of most long-lived assets are capitalised and then allocated as expenses in the profit or loss (income) statement over the period of time during which they are expected to provide economic benefits. The two main types of long-lived assets with costs that are typically not allocated over time are land, which is not depreciated, and those intangible assets with indefinite useful lives. Additional issues that arise are the treatment of subsequent costs incurred related to the asset, the use of the cost model versus the revaluation model, unexpected declines in the value of the asset, classification of the asset with respect to intent (for example, held for use or held for sale), and the derecognition of the asset. This reading is organised as follows. Section 2 describes and illustrates accounting for the acquisition of long-lived assets, with particular attention to the impact of ca
Flashcard 1751034760460
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| repetition number in this series | 0 | memorised on | scheduled repetition | ||||
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Parent (intermediate) annotation
Open itThe two main types of long-lived assets with costs that are typically not allocated over time are land, which is not depreciated, and those intangible assets with indefinite useful lives.
Original toplevel document
Reading 29 Long-Lived Assets IntroductionLong-lived assets , also referred to as non-current assets or long-term assets, are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.1 Long-lived assets may be tangible, intangible, or financial assets. Examples of long-lived tangible assets, typically referred to as property, plant, and equipment and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and equipment, and vehicles; examples of long-lived intangible assets (assets lacking physical substance) include patents and trademarks; and examples of long-lived financial assets include investments in equity or debt securities issued by other companies. The scope of this reading is limited to long-lived tangible and intangible assets (hereafter, referred to for simplicity as long-lived assets). The first issue in accounting for a long-lived asset is determining its cost at acquisition. The second issue is how to allocate the cost to expense over time. The costs of most long-lived assets are capitalised and then allocated as expenses in the profit or loss (income) statement over the period of time during which they are expected to provide economic benefits. The two main types of long-lived assets with costs that are typically not allocated over time are land, which is not depreciated, and those intangible assets with indefinite useful lives. Additional issues that arise are the treatment of subsequent costs incurred related to the asset, the use of the cost model versus the revaluation model, unexpected declines in the value of the asset, classification of the asset with respect to intent (for example, held for use or held for sale), and the derecognition of the asset. This reading is organised as follows. Section 2 describes and illustrates accounting for the acquisition of long-lived assets, with particular attention to the impact of ca
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Parent (intermediate) annotation
Open itMacroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates.
Original toplevel document
Reading 16 Aggregate Output, Prices, and Economic Growth IntroductionIn the field of economics, microeconomics is the study of the economic activity and behavior of individual economic units, such as a household, a company, or a market for a particular good or service, and macroeconomics is the study of the aggregate activities of households, companies, and markets. Macroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates. Macroeconomic analysis examines a nation’s aggregate output and income, its competitive and comparative advantages, the productivity of its labor force, its price level and inflation rate, and the actions of its national government and central bank. The objective of macroeconomic analysis is to address such fundamental questions as: What is an economy’s aggregate output, and how is aggregate income measured? What factors determine the level of aggregate output/income for an economy? What are the levels of aggregate demand and aggregate supply of goods and services within the country? Is the level of output increasing or decreasing, and at what rate? Is the general price level stable, rising, or falling? Is unemployment rising or falling? Are households spending or saving more? Are workers able to produce more output for a given level of inputs? Are businesses investing in and expanding their productive capacity? Are exports (imports) rising or falling? From an investment perspective, investors must be able to evaluate a country’s current economic environment and to forecast its future economic environment in order to identify asset classes and securities that will benefit from economic trends occurring within that country. Macroeconomic variables—such as the level of inflation, unemployment, consumption, government spending, and investment—affect the overall level of activity within a country. They also have different impacts on the growth and profitability of industries within a country, the companies within those industries, and the returns of the securities issued by those companies. This reading is organized as follows: Section 2 describes gross domestic product and related measures of domestic output and income. Section 3 discusses short-run and long-
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Parent (intermediate) annotation
Open itMacroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates.
Original toplevel document
Reading 16 Aggregate Output, Prices, and Economic Growth IntroductionIn the field of economics, microeconomics is the study of the economic activity and behavior of individual economic units, such as a household, a company, or a market for a particular good or service, and macroeconomics is the study of the aggregate activities of households, companies, and markets. Macroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates. Macroeconomic analysis examines a nation’s aggregate output and income, its competitive and comparative advantages, the productivity of its labor force, its price level and inflation rate, and the actions of its national government and central bank. The objective of macroeconomic analysis is to address such fundamental questions as: What is an economy’s aggregate output, and how is aggregate income measured? What factors determine the level of aggregate output/income for an economy? What are the levels of aggregate demand and aggregate supply of goods and services within the country? Is the level of output increasing or decreasing, and at what rate? Is the general price level stable, rising, or falling? Is unemployment rising or falling? Are households spending or saving more? Are workers able to produce more output for a given level of inputs? Are businesses investing in and expanding their productive capacity? Are exports (imports) rising or falling? From an investment perspective, investors must be able to evaluate a country’s current economic environment and to forecast its future economic environment in order to identify asset classes and securities that will benefit from economic trends occurring within that country. Macroeconomic variables—such as the level of inflation, unemployment, consumption, government spending, and investment—affect the overall level of activity within a country. They also have different impacts on the growth and profitability of industries within a country, the companies within those industries, and the returns of the securities issued by those companies. This reading is organized as follows: Section 2 describes gross domestic product and related measures of domestic output and income. Section 3 discusses short-run and long-
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Parent (intermediate) annotation
Open itMacroeconomic variables—such as the level of inflation, unemployment, consumption, government spending, and investment—affect the overall level of activity within a country. They also have different impacts on the growth and profitability of industries within a country, the companies within those industries, and the returns of the securities issued by those
Original toplevel document
Reading 16 Aggregate Output, Prices, and Economic Growth IntroductionIn the field of economics, microeconomics is the study of the economic activity and behavior of individual economic units, such as a household, a company, or a market for a particular good or service, and macroeconomics is the study of the aggregate activities of households, companies, and markets. Macroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates. Macroeconomic analysis examines a nation’s aggregate output and income, its competitive and comparative advantages, the productivity of its labor force, its price level and inflation rate, and the actions of its national government and central bank. The objective of macroeconomic analysis is to address such fundamental questions as: What is an economy’s aggregate output, and how is aggregate income measured? What factors determine the level of aggregate output/income for an economy? What are the levels of aggregate demand and aggregate supply of goods and services within the country? Is the level of output increasing or decreasing, and at what rate? Is the general price level stable, rising, or falling? Is unemployment rising or falling? Are households spending or saving more? Are workers able to produce more output for a given level of inputs? Are businesses investing in and expanding their productive capacity? Are exports (imports) rising or falling? From an investment perspective, investors must be able to evaluate a country’s current economic environment and to forecast its future economic environment in order to identify asset classes and securities that will benefit from economic trends occurring within that country. Macroeconomic variables—such as the level of inflation, unemployment, consumption, government spending, and investment—affect the overall level of activity within a country. They also have different impacts on the growth and profitability of industries within a country, the companies within those industries, and the returns of the securities issued by those companies. This reading is organized as follows: Section 2 describes gross domestic product and related measures of domestic output and income. Section 3 discusses short-run and long-
Flashcard 1751044721932
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Parent (intermediate) annotation
Open itEndowment funds are typically funded entirely by donations that are deductible for the donors.
Original toplevel document
Endowment Fund<span>What is an 'Endowment Fund' An endowment fund is an investment fund established by a foundation that makes consistent withdrawals from invested capital. The capital in endowment funds, often used by universities, nonprofit organizations, churches and hospitals, is generally utilized for specific needs or to further a company’s operating process. Endowment funds are typically funded entirely by donations that are deductible for the donors. BREAKING DOWN 'Endowment Fund' Financial endowments are typically structured so the principal amount invested remains intact, while investment income
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Parent (intermediate) annotation
Open itThe CIO’s description underscores the importance of not assuming that past active returns that might be found in a historical dataset will repeat themselves in the future. Active returns refer to returns earned by strategies that do not assume that all information is fully reflected in market prices.
Original toplevel document
Reading 46 Market Efficiency (Intro)Market efficiency concerns the extent to which market prices incorporate available information. If market prices do not fully incorporate information, then opportunities may exist to make a profit from the gathering and processing of information. The subject of market efficiency is, therefore, of great interest to investment managers, as illustrated in Example 1. EXAMPLE 1 Market Efficiency and Active Manager Selection The chief investment officer (CIO) of a major university endowment fund has listed eight steps in the active manager selection process that can be applied both to traditional investments (e.g., common equity and fixed-income securities) and to alternative investments (e.g., private equity, hedge funds, and real assets). The first step specified is the evaluation of market opportunity: What is the opportunity and why is it there? To answer this question we start by studying capital markets and the types of managers operating within those markets. We identify market inefficiencies and try to understand their causes, such as regulatory structures or behavioral biases. We can rule out many broad groups of managers and strategies by simply determining that the degree of market inefficiency necessary to support a strategy is implausible. Importantly, we consider the past history of active returns meaningless unless we understand why markets will allow those active returns to continue into the future.1 The CIO’s description underscores the importance of not assuming that past active returns that might be found in a historical dataset will repeat themselves in the future. Active returns refer to returns earned by strategies that do not assume that all information is fully reflected in market prices. Governments and market regulators also care about the extent to which market prices incorporate information. Efficient markets imply informative prices—prices that accurately reflect available information about fundamental values. In market-based economies, market prices help determine which companies (and which projects) obtain capital. If these prices do not efficiently incorporate information about a company’s prospects, then it is possible that funds will be misdirected. By contrast, prices that are informative help direct scarce resources and funds available for investment to their highest-valued uses.2 Informative prices thus promote economic growth. The efficiency of a country’s capital markets (in which businesses raise financing) is an important characteristic of a well-functioning financial system. The remainder of this reading is organized as follows. Section 2 provides specifics on how the efficiency of an asset market is described and discusses the factors affectin
Flashcard 1751048654092
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Parent (intermediate) annotation
Open itIf market prices do not fully incorporate information, then opportunities may exist to make a profit from the gathering and processing of information.
Original toplevel document
Reading 46 Market Efficiency (Intro)Market efficiency concerns the extent to which market prices incorporate available information. If market prices do not fully incorporate information, then opportunities may exist to make a profit from the gathering and processing of information. The subject of market efficiency is, therefore, of great interest to investment managers, as illustrated in Example 1. EXAMPLE 1 Market Efficiency and Active Manager Selection The chief investment officer (CIO) of a major university endowment fund has listed eight steps in the active manager selection process that can be applied both to traditional investments (e.g., common equity and fixed-income securities) and to alternative investments (e.g., private equity, hedge funds, and real assets). The first step specified is the evaluation of market opportunity: What is the opportunity and why is it there? To answer this question we start by studying capital markets and the types of managers operating within those markets. We identify market inefficiencies and try to understand their causes, such as regulatory structures or behavioral biases. We can rule out many broad groups of managers and strategies by simply determining that the degree of market inefficiency necessary to support a strategy is implausible. Importantly, we consider the past history of active returns meaningless unless we understand why markets will allow those active returns to continue into the future.1 The CIO’s description underscores the importance of not assuming that past active returns that might be found in a historical dataset will repeat themselves in the future. Active returns refer to returns earned by strategies that do not assume that all information is fully reflected in market prices. Governments and market regulators also care about the extent to which market prices incorporate information. Efficient markets imply informative prices—prices that accurately reflect available information about fundamental values. In market-based economies, market prices help determine which companies (and which projects) obtain capital. If these prices do not efficiently incorporate information about a company’s prospects, then it is possible that funds will be misdirected. By contrast, prices that are informative help direct scarce resources and funds available for investment to their highest-valued uses.2 Informative prices thus promote economic growth. The efficiency of a country’s capital markets (in which businesses raise financing) is an important characteristic of a well-functioning financial system. The remainder of this reading is organized as follows. Section 2 provides specifics on how the efficiency of an asset market is described and discusses the factors affectin
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Parent (intermediate) annotation
Open itOur objective in this reading is to identify the optimal risky portfolio for all investors by using the capital asset pricing model (CAPM). The foundation of this reading is the computation of risk and return of a portfolio and the role that correlation plays in diversifying portfolio risk and arriving at the efficient frontier. The efficient frontier and the capital allocation line consist of portfolios that are generally acceptable to all investors. By combining an investor’s individual indifference curves with the market-determined capital allocation line, we are able to illustrate that the only optimal risky portfolio for an investor is the portfolio of all risky assets (i.e., the market). Additionally, we discuss the capital market line, a special case of the capital allocation line that is used for passive investor portfolios. We also differentiate between
Original toplevel document
Reading 42 Portfolio Risk and Return: Part II (Intro)Our objective in this reading is to identify the optimal risky portfolio for all investors by using the capital asset pricing model (CAPM). The foundation of this reading is the computation of risk and return of a portfolio and the role that correlation plays in diversifying portfolio risk and arriving at the efficient frontier. The efficient frontier and the capital allocation line consist of portfolios that are generally acceptable to all investors. By combining an investor’s individual indifference curves with the market-determined capital allocation line, we are able to illustrate that the only optimal risky portfolio for an investor is the portfolio of all risky assets (i.e., the market). Additionally, we discuss the capital market line, a special case of the capital allocation line that is used for passive investor portfolios. We also differentiate between systematic and nonsystematic risk, and explain why investors are compensated for bearing systematic risk but receive no compensation for bearing nonsystematic risk. We discuss in detail the CAPM, which is a simple model for estimating asset returns based only on the asset’s systematic risk. Finally, we illustrate how the CAPM allows security selection to build an optimal portfolio for an investor by changing the asset mix beyond a passive market portfolio. The reading is organized as follows. In Section 2, we discuss the consequences of combining a risk-free asset with the market portfolio and provide an interpretation of the
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Parent (intermediate) annotation
Open itnvestor’s individual indifference curves with the market-determined capital allocation line, we are able to illustrate that the only optimal risky portfolio for an investor is the portfolio of all risky assets (i.e., the market). <span>Additionally, we discuss the capital market line, a special case of the capital allocation line that is used for passive investor portfolios. We also differentiate between systematic and nonsystematic risk, and explain why investors are compensated for bearing systematic risk but receive no compensation for bearing nonsystematic risk. We discuss in detail the CAPM, which is a simple model for estimating asset returns based only on the asset’s systematic risk. Finally, we illustrate how the CAPM allows security selection to build an optimal portfolio for an investor by changing the asset mix beyond a passive market portfolio. <span><body><html>
Original toplevel document
Reading 42 Portfolio Risk and Return: Part II (Intro)Our objective in this reading is to identify the optimal risky portfolio for all investors by using the capital asset pricing model (CAPM). The foundation of this reading is the computation of risk and return of a portfolio and the role that correlation plays in diversifying portfolio risk and arriving at the efficient frontier. The efficient frontier and the capital allocation line consist of portfolios that are generally acceptable to all investors. By combining an investor’s individual indifference curves with the market-determined capital allocation line, we are able to illustrate that the only optimal risky portfolio for an investor is the portfolio of all risky assets (i.e., the market). Additionally, we discuss the capital market line, a special case of the capital allocation line that is used for passive investor portfolios. We also differentiate between systematic and nonsystematic risk, and explain why investors are compensated for bearing systematic risk but receive no compensation for bearing nonsystematic risk. We discuss in detail the CAPM, which is a simple model for estimating asset returns based only on the asset’s systematic risk. Finally, we illustrate how the CAPM allows security selection to build an optimal portfolio for an investor by changing the asset mix beyond a passive market portfolio. The reading is organized as follows. In Section 2, we discuss the consequences of combining a risk-free asset with the market portfolio and provide an interpretation of the
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Parent (intermediate) annotation
Open itA non-current liability (long-term liability) broadly represents a probable sacrifice of economic benefits in periods generally greater than one year in the future. Common types of non-current liabilities reported in a company’s financial statements include long-term debt (e.g., bonds payable, long-term notes payable), finance leases, pension liabi
Original toplevel document
Reading 31 Non-Current (Long-Term) Liabilities IntroductionA non-current liability (long-term liability) broadly represents a probable sacrifice of economic benefits in periods generally greater than one year in the future. Common types of non-current liabilities reported in a company’s financial statements include long-term debt (e.g., bonds payable, long-term notes payable), finance leases, pension liabilities, and deferred tax liabilities. This reading focuses on bonds payable and leases. Pension liabilities are also introduced. This reading is organised as follows. Section 2 describes and illustrates the accounting for long-term bonds, including the issuance of bonds, the recording of interest exp
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Parent (intermediate) annotation
Open itA non-current liability (long-term liability) broadly represents a probable sacrifice of economic benefits in periods generally greater than one year in the future. Common types of non-current liabilities reported in a company’s financial statements include long-term debt (e.g., bonds payable, long-term notes payable), finance leases, pension liabilities, and deferred tax liabilities. This reading focuses on bonds payable and leases. Pension liabilities are also introduced.
Original toplevel document
Reading 31 Non-Current (Long-Term) Liabilities IntroductionA non-current liability (long-term liability) broadly represents a probable sacrifice of economic benefits in periods generally greater than one year in the future. Common types of non-current liabilities reported in a company’s financial statements include long-term debt (e.g., bonds payable, long-term notes payable), finance leases, pension liabilities, and deferred tax liabilities. This reading focuses on bonds payable and leases. Pension liabilities are also introduced. This reading is organised as follows. Section 2 describes and illustrates the accounting for long-term bonds, including the issuance of bonds, the recording of interest exp
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Parent (intermediate) annotation
Open ityear in the future. Common types of non-current liabilities reported in a company’s financial statements include long-term debt (e.g., bonds payable, long-term notes payable), finance leases, pension liabilities, and deferred tax liabilities. <span>This reading focuses on bonds payable and leases. Pension liabilities are also introduced. <span><body><html>
Original toplevel document
Reading 31 Non-Current (Long-Term) Liabilities IntroductionA non-current liability (long-term liability) broadly represents a probable sacrifice of economic benefits in periods generally greater than one year in the future. Common types of non-current liabilities reported in a company’s financial statements include long-term debt (e.g., bonds payable, long-term notes payable), finance leases, pension liabilities, and deferred tax liabilities. This reading focuses on bonds payable and leases. Pension liabilities are also introduced. This reading is organised as follows. Section 2 describes and illustrates the accounting for long-term bonds, including the issuance of bonds, the recording of interest exp
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Parent (intermediate) annotation
Open itcision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons. First, capital budgeting is very important for corporations. <span>Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations. Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitio
Original toplevel document
Reading 35 Capital Budgeting IntroductionCapital budgeting is the process that companies use for decision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons. First, capital budgeting is very important for corporations. Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations. Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding. Third, the valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management. Many of the methods used by security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeti
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Parent (intermediate) annotation
Open ito mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations. Second, <span>the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding. Third, the valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management. Many of the methods
Original toplevel document
Reading 35 Capital Budgeting IntroductionCapital budgeting is the process that companies use for decision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons. First, capital budgeting is very important for corporations. Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations. Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding. Third, the valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management. Many of the methods used by security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeti
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Parent (intermediate) annotation
Open itporations. Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding. Third, <span>the valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management. Many of the methods used by security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder val
Original toplevel document
Reading 35 Capital Budgeting IntroductionCapital budgeting is the process that companies use for decision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons. First, capital budgeting is very important for corporations. Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations. Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding. Third, the valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management. Many of the methods used by security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeti
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Parent (intermediate) annotation
Open itsecurity analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, <span>although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. <span><body><html>
Original toplevel document
Reading 35 Capital Budgeting IntroductionCapital budgeting is the process that companies use for decision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons. First, capital budgeting is very important for corporations. Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations. Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding. Third, the valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management. Many of the methods used by security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeti
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Parent (intermediate) annotation
Open itn characteristics of fixed-income investments. Beyond the vast worldwide market for publicly and privately issued fixed-rate bonds, many financial assets and liabilities with known future cash flows may be evaluated using the same principles. <span>The starting point for this analysis is the yield-to-maturity, or internal rate of return on future cash flows, which was introduced in the fixed-income valuation reading. The return on a fixed-rate bond is affected by many factors, the most important of which is the receipt of the interest and principal payments in the full amount and on the scheduled da
Original toplevel document
Reading 54 Understanding Fixed‑Income Risk and Return (Intro)It is important for analysts to have a well-developed understanding of the risk and return characteristics of fixed-income investments. Beyond the vast worldwide market for publicly and privately issued fixed-rate bonds, many financial assets and liabilities with known future cash flows may be evaluated using the same principles. The starting point for this analysis is the yield-to-maturity, or internal rate of return on future cash flows, which was introduced in the fixed-income valuation reading. The return on a fixed-rate bond is affected by many factors, the most important of which is the receipt of the interest and principal payments in the full amount and on the scheduled dates. Assuming no default, the return is also affected by changes in interest rates that affect coupon reinvestment and the price of the bond if it is sold before it matures. Measures of the price change can be derived from the mathematical relationship used to calculate the price of the bond. The first of these measures (duration) estimates the change in the price for a given change in interest rates. The second measure (convexity) improves on the duration estimate by taking into account the fact that the relationship between price and yield-to-maturity of a fixed-rate bond is not linear. Section 2 uses numerical examples to demonstrate the sources of return on an investment in a fixed-rate bond, which includes the receipt and reinvestment of coupon interest
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Parent (intermediate) annotation
Open itth known future cash flows may be evaluated using the same principles. The starting point for this analysis is the yield-to-maturity, or internal rate of return on future cash flows, which was introduced in the fixed-income valuation reading. <span>The return on a fixed-rate bond is affected by many factors, the most important of which is the receipt of the interest and principal payments in the full amount and on the scheduled dates. Assuming no default, the return is also affected by changes in interest rates that affect coupon reinvestment and the price of the bond if it is sold before it matures. Measures of the price change can be derived from the mathematical relationship used to calculate the price of the bond. The first of these measures (duration) estimates the change in th
Original toplevel document
Reading 54 Understanding Fixed‑Income Risk and Return (Intro)It is important for analysts to have a well-developed understanding of the risk and return characteristics of fixed-income investments. Beyond the vast worldwide market for publicly and privately issued fixed-rate bonds, many financial assets and liabilities with known future cash flows may be evaluated using the same principles. The starting point for this analysis is the yield-to-maturity, or internal rate of return on future cash flows, which was introduced in the fixed-income valuation reading. The return on a fixed-rate bond is affected by many factors, the most important of which is the receipt of the interest and principal payments in the full amount and on the scheduled dates. Assuming no default, the return is also affected by changes in interest rates that affect coupon reinvestment and the price of the bond if it is sold before it matures. Measures of the price change can be derived from the mathematical relationship used to calculate the price of the bond. The first of these measures (duration) estimates the change in the price for a given change in interest rates. The second measure (convexity) improves on the duration estimate by taking into account the fact that the relationship between price and yield-to-maturity of a fixed-rate bond is not linear. Section 2 uses numerical examples to demonstrate the sources of return on an investment in a fixed-rate bond, which includes the receipt and reinvestment of coupon interest
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Parent (intermediate) annotation
Open itest and principal payments in the full amount and on the scheduled dates. Assuming no default, the return is also affected by changes in interest rates that affect coupon reinvestment and the price of the bond if it is sold before it matures. <span>Measures of the price change can be derived from the mathematical relationship used to calculate the price of the bond. The first of these measures (duration) estimates the change in the price for a given change in interest rates. The second measure (convexity) improves on the duration estimate by taking into account the fact that the relationship between price and yield-to-maturity of a fixed-rate bond is not linear. <span><body><html>
Original toplevel document
Reading 54 Understanding Fixed‑Income Risk and Return (Intro)It is important for analysts to have a well-developed understanding of the risk and return characteristics of fixed-income investments. Beyond the vast worldwide market for publicly and privately issued fixed-rate bonds, many financial assets and liabilities with known future cash flows may be evaluated using the same principles. The starting point for this analysis is the yield-to-maturity, or internal rate of return on future cash flows, which was introduced in the fixed-income valuation reading. The return on a fixed-rate bond is affected by many factors, the most important of which is the receipt of the interest and principal payments in the full amount and on the scheduled dates. Assuming no default, the return is also affected by changes in interest rates that affect coupon reinvestment and the price of the bond if it is sold before it matures. Measures of the price change can be derived from the mathematical relationship used to calculate the price of the bond. The first of these measures (duration) estimates the change in the price for a given change in interest rates. The second measure (convexity) improves on the duration estimate by taking into account the fact that the relationship between price and yield-to-maturity of a fixed-rate bond is not linear. Section 2 uses numerical examples to demonstrate the sources of return on an investment in a fixed-rate bond, which includes the receipt and reinvestment of coupon interest
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Parent (intermediate) annotation
Open itUnderstanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, der
Original toplevel document
Reading 57 Basics of Derivative Pricing and Valuation (Intro)It is important to understand how prices of derivatives are determined. Whether one is on the buy side or the sell side, a solid understanding of pricing financial products is critical to effective investment decision making. After all, one can hardly determine what to offer or bid for a financial product, or any product for that matter, if one has no idea how its characteristics combine to create value. Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying. The purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing? This reading is organized as follows. Section 2 explores two related topics, the pricing of the underlying assets on which derivatives are created and the principle
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Parent (intermediate) annotation
Open itn> Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. <span>The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to
Original toplevel document
Reading 57 Basics of Derivative Pricing and Valuation (Intro)It is important to understand how prices of derivatives are determined. Whether one is on the buy side or the sell side, a solid understanding of pricing financial products is critical to effective investment decision making. After all, one can hardly determine what to offer or bid for a financial product, or any product for that matter, if one has no idea how its characteristics combine to create value. Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying. The purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing? This reading is organized as follows. Section 2 explores two related topics, the pricing of the underlying assets on which derivatives are created and the principle
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Parent (intermediate) annotation
Open itpricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. <span>Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying. <span><body><html>
Original toplevel document
Reading 57 Basics of Derivative Pricing and Valuation (Intro)It is important to understand how prices of derivatives are determined. Whether one is on the buy side or the sell side, a solid understanding of pricing financial products is critical to effective investment decision making. After all, one can hardly determine what to offer or bid for a financial product, or any product for that matter, if one has no idea how its characteristics combine to create value. Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying. The purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing? This reading is organized as follows. Section 2 explores two related topics, the pricing of the underlying assets on which derivatives are created and the principle
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itThe purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the
Original toplevel document
Reading 57 Basics of Derivative Pricing and Valuation (Intro)It is important to understand how prices of derivatives are determined. Whether one is on the buy side or the sell side, a solid understanding of pricing financial products is critical to effective investment decision making. After all, one can hardly determine what to offer or bid for a financial product, or any product for that matter, if one has no idea how its characteristics combine to create value. Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying. The purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing? This reading is organized as follows. Section 2 explores two related topics, the pricing of the underlying assets on which derivatives are created and the principle
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itThe purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option prici
Original toplevel document
Reading 57 Basics of Derivative Pricing and Valuation (Intro)It is important to understand how prices of derivatives are determined. Whether one is on the buy side or the sell side, a solid understanding of pricing financial products is critical to effective investment decision making. After all, one can hardly determine what to offer or bid for a financial product, or any product for that matter, if one has no idea how its characteristics combine to create value. Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying. The purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing? This reading is organized as follows. Section 2 explores two related topics, the pricing of the underlying assets on which derivatives are created and the principle
| status | not read | reprioritisations | ||
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| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itHow are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? <span>How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing? <span><body><html>
Original toplevel document
Reading 57 Basics of Derivative Pricing and Valuation (Intro)It is important to understand how prices of derivatives are determined. Whether one is on the buy side or the sell side, a solid understanding of pricing financial products is critical to effective investment decision making. After all, one can hardly determine what to offer or bid for a financial product, or any product for that matter, if one has no idea how its characteristics combine to create value. Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying. The purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered: How does the pricing of the underlying asset affect the pricing of derivatives? How are derivatives priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing? This reading is organized as follows. Section 2 explores two related topics, the pricing of the underlying assets on which derivatives are created and the principle
| status | not read | reprioritisations | ||
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| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itMicroeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theory of the consumer and the theory of the firm as two branches of study. The theory of the consumer deals with consumption (the deman
Original toplevel document
Reading 14 Topics in Demand and Supply AnalysisIn a general sense, economics is the study of production, distribution, and consumption and can be divided into two broad areas of study: macroeconomics and microeconomics. Macroeconomics deals with aggregate economic quantities, such as national output and national income, and is rooted in microeconomics , which deals with markets and decision making of individual economic units, including consumers and businesses. Microeconomics is a logical starting point for the study of economics. Microeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theory of the consumer and the theory of the firm as two branches of study. The theory of the consumer deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption). The theory of the firm deals with the supply of goods and services by profit-maximizing firms. It is expected that candidates will be familiar with the basic concepts of demand and supply. This material is covered in detail in the recommended prerequisite readings. I
| status | not read | reprioritisations | ||
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| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itMicroeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theory of the consumer and the theory of the firm as two branches of study. <span>The theory of the consumer deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption). The theory of the firm deals with the supply of goods and services by
Original toplevel document
Reading 14 Topics in Demand and Supply AnalysisIn a general sense, economics is the study of production, distribution, and consumption and can be divided into two broad areas of study: macroeconomics and microeconomics. Macroeconomics deals with aggregate economic quantities, such as national output and national income, and is rooted in microeconomics , which deals with markets and decision making of individual economic units, including consumers and businesses. Microeconomics is a logical starting point for the study of economics. Microeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theory of the consumer and the theory of the firm as two branches of study. The theory of the consumer deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption). The theory of the firm deals with the supply of goods and services by profit-maximizing firms. It is expected that candidates will be familiar with the basic concepts of demand and supply. This material is covered in detail in the recommended prerequisite readings. I
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itstudy. The theory of the consumer deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption). <span>The theory of the firm deals with the supply of goods and services by profit-maximizing firms. <span><body><html>
Original toplevel document
Reading 14 Topics in Demand and Supply AnalysisIn a general sense, economics is the study of production, distribution, and consumption and can be divided into two broad areas of study: macroeconomics and microeconomics. Macroeconomics deals with aggregate economic quantities, such as national output and national income, and is rooted in microeconomics , which deals with markets and decision making of individual economic units, including consumers and businesses. Microeconomics is a logical starting point for the study of economics. Microeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theory of the consumer and the theory of the firm as two branches of study. The theory of the consumer deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption). The theory of the firm deals with the supply of goods and services by profit-maximizing firms. It is expected that candidates will be familiar with the basic concepts of demand and supply. This material is covered in detail in the recommended prerequisite readings. I
| status | not read | reprioritisations | ||
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| last reprioritisation on | suggested re-reading day | |||
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Parent (intermediate) annotation
Open itInventories and cost of sales (cost of goods sold) are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itInventories and cost of sales (cost of goods sold) are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inf
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open ite of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. <span>Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, invento
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itgnificantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. <span>If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. <span><body><html>
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itIFRS permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost. US GAAP allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO). The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inven
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itentification, first-in, first-out (FIFO), and weighted average cost. US GAAP allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO). <span>The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over ti
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |
Parent (intermediate) annotation
Open itost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO). The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. <span>Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financ
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
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Open itory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. <span>The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. <span><body><html>
Original toplevel document
Reading 28 Inventories IntroductionMerchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements. Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time. International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios. This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they
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Open itAmong the questions we address in this reading are the following: What are the similarities and differences among industry classification systems? How does an analyst go about choosing a peer group of companies? What are the key factors to consider when analyzing an industry? What advantages are enjoyed by companies in strategically well-positioned industries? </spa
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Reading 48 Introduction to Industry and Company Analysis (Intro)Industry analysis is the analysis of a specific branch of manufacturing, service, or trade. Understanding the industry in which a company operates provides an essential framework for the analysis of the individual company—that is, company analysis . Equity analysis and credit analysis are often conducted by analysts who concentrate on one or several industries, which results in synergies and efficiencies in gathering and interpreting information. Among the questions we address in this reading are the following: What are the similarities and differences among industry classification systems? How does an analyst go about choosing a peer group of companies? What are the key factors to consider when analyzing an industry? What advantages are enjoyed by companies in strategically well-positioned industries? After discussing the uses of industry analysis in the next section, Sections 3 and 4 discuss, respectively, approaches to identifying similar companies and industry
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Open itns we address in this reading are the following: What are the similarities and differences among industry classification systems? How does an analyst go about choosing a peer group of companies? <span>What are the key factors to consider when analyzing an industry? What advantages are enjoyed by companies in strategically well-positioned industries? <span><body><html>
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Reading 48 Introduction to Industry and Company Analysis (Intro)Industry analysis is the analysis of a specific branch of manufacturing, service, or trade. Understanding the industry in which a company operates provides an essential framework for the analysis of the individual company—that is, company analysis . Equity analysis and credit analysis are often conducted by analysts who concentrate on one or several industries, which results in synergies and efficiencies in gathering and interpreting information. Among the questions we address in this reading are the following: What are the similarities and differences among industry classification systems? How does an analyst go about choosing a peer group of companies? What are the key factors to consider when analyzing an industry? What advantages are enjoyed by companies in strategically well-positioned industries? After discussing the uses of industry analysis in the next section, Sections 3 and 4 discuss, respectively, approaches to identifying similar companies and industry
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Open itDeferred tax assets or liabilities usually arise when accounting standards and tax authorities recognize the timing of revenues and expenses at different times. Because timing differences such as these will eventually reverse over time, they are called “temporary differences.” Deferred tax assets represent taxes that have been recognized for tax reporting purposes (or often the carrying forward of losses from previous periods) but have not yet been recognized
Original toplevel document
Reading 30 Income Taxes IntroductionFor those companies reporting under International Financial Reporting Standards (IFRS), IAS 12 [Income Taxes] covers accounting for a company's income taxes and the reporting of deferred taxes. For those companies reporting under United States generally accepted accounting principles (US GAAP), FASB ASC Topic 740 [Income Taxes] is the primary source for information on accounting for income taxes. Although IFRS and US GAAP follow similar conventions on many income tax issues, there are some key differences that will be discussed in the reading. Differences between how and when transactions are recognized for financial reporting purposes relative to tax reporting can give rise to differences in tax expense and related tax assets and liabilities. To reconcile these differences, companies that report under either IFRS or US GAAP create a provision on the balance sheet called deferred tax assets or deferred tax liabilities, depending on the nature of the situation. Deferred tax assets or liabilities usually arise when accounting standards and tax authorities recognize the timing of revenues and expenses at different times. Because timing differences such as these will eventually reverse over time, they are called “temporary differences.” Deferred tax assets represent taxes that have been recognized for tax reporting purposes (or often the carrying forward of losses from previous periods) but have not yet been recognized on the income statement prepared for financial reporting purposes. Deferred tax liabilities represent tax expense that has appeared on the income statement for financial reporting purposes, but has not yet become payable under tax regulations. This reading provides a primer on the basics of income tax accounting and reporting. The reading is organized as follows. Section 2 describes the differences between taxabl
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Open itusually arise when accounting standards and tax authorities recognize the timing of revenues and expenses at different times. Because timing differences such as these will eventually reverse over time, they are called “temporary differences.” <span>Deferred tax assets represent taxes that have been recognized for tax reporting purposes (or often the carrying forward of losses from previous periods) but have not yet been recognized on the income statement prepared for financial reporting purposes. Deferred tax liabilities represent tax expense that has appeared on the income statement for financial reporting purposes, but has not yet become payable under tax regulations. <span><body><html>
Original toplevel document
Reading 30 Income Taxes IntroductionFor those companies reporting under International Financial Reporting Standards (IFRS), IAS 12 [Income Taxes] covers accounting for a company's income taxes and the reporting of deferred taxes. For those companies reporting under United States generally accepted accounting principles (US GAAP), FASB ASC Topic 740 [Income Taxes] is the primary source for information on accounting for income taxes. Although IFRS and US GAAP follow similar conventions on many income tax issues, there are some key differences that will be discussed in the reading. Differences between how and when transactions are recognized for financial reporting purposes relative to tax reporting can give rise to differences in tax expense and related tax assets and liabilities. To reconcile these differences, companies that report under either IFRS or US GAAP create a provision on the balance sheet called deferred tax assets or deferred tax liabilities, depending on the nature of the situation. Deferred tax assets or liabilities usually arise when accounting standards and tax authorities recognize the timing of revenues and expenses at different times. Because timing differences such as these will eventually reverse over time, they are called “temporary differences.” Deferred tax assets represent taxes that have been recognized for tax reporting purposes (or often the carrying forward of losses from previous periods) but have not yet been recognized on the income statement prepared for financial reporting purposes. Deferred tax liabilities represent tax expense that has appeared on the income statement for financial reporting purposes, but has not yet become payable under tax regulations. This reading provides a primer on the basics of income tax accounting and reporting. The reading is organized as follows. Section 2 describes the differences between taxabl
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Open itpidly since the mid-1990s. This growth has largely occurred because of interest in these investments by institutions, such as endowment and pension funds, as well as high-net-worth individuals seeking diversification and return opportunities. <span>Alternative investments are perceived to behave differently from traditional investments. Investors may seek either absolute return or relative return. <span><body><html>
Original toplevel document
Reading 58 Introduction to Alternative Investments (Intro)Assets under management in vehicles classified as alternative investments have grown rapidly since the mid-1990s. This growth has largely occurred because of interest in these investments by institutions, such as endowment and pension funds, as well as high-net-worth individuals seeking diversification and return opportunities. Alternative investments are perceived to behave differently from traditional investments. Investors may seek either absolute return or relative return. Some investors hope alternative investments will provide positive returns throughout the economic cycle; this goal is an absolute return objective. Alternative investments are not free of risk, however, and their returns may be negative and/or correlated with other investments, including traditional investments, especially in periods of financial crisis. Some investors in alternative investments have a relative return objective. A relative return objective, which is often the objective of portfolios of traditional investment, seeks to achieve a return relative to an equity or fixed-income benchmark. This reading is organized as follows. Section 2 describes alternative investments’ basic characteristics and categories; general strategies of alternative investment portfo
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Open it; What is the distinction between a forward commitment and a contingent claim? What are forward and futures contracts? In what ways are they alike and in what ways are they different? What are swaps? <span>What are call and put options and how do they differ from forwards, futures, and swaps? What are credit derivatives and what are the various types of credit derivatives? What are the benefits of derivatives? What are some criticisms of derivatives and to what extent are they well founded? What is arbitrage and what role does it play in a well-functioning financial market? <span><body><html>
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Reading 56 Derivative Markets and Instruments (Intro)Equity, fixed-income, currency, and commodity markets are facilities for trading the basic assets of an economy. Equity and fixed-income securities are claims on the assets of a company. Currencies are the monetary units issued by a government or central bank. Commodities are natural resources, such as oil or gold. These underlying assets are said to trade in cash markets or spot markets and their prices are sometimes referred to as cash prices or spot prices , though we usually just refer to them as stock prices, bond prices, exchange rates, and commodity prices. These markets exist around the world and receive much attention in the financial and mainstream media. Hence, they are relatively familiar not only to financial experts but also to the general population. Somewhat less familiar are the markets for derivatives , which are financial instruments that derive their values from the performance of these basic assets. This reading is an overview of derivatives. Subsequent readings will explore many aspects of derivatives and their uses in depth. Among the questions that this first reading will address are the following: What are the defining characteristics of derivatives? What purposes do derivatives serve for financial market participants? What is the distinction between a forward commitment and a contingent claim? What are forward and futures contracts? In what ways are they alike and in what ways are they different? What are swaps? What are call and put options and how do they differ from forwards, futures, and swaps? What are credit derivatives and what are the various types of credit derivatives? What are the benefits of derivatives? What are some criticisms of derivatives and to what extent are they well founded? What is arbitrage and what role does it play in a well-functioning financial market? This reading is organized as follows. Section 2 explores the definition and uses of derivatives and establishes some basic terminology. Section 3 describes derivati
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Open itAmong the questions that this first reading will address are the following: What are the defining characteristics of derivatives? What purposes do derivatives serve for financial market participants? What is the distinction between a forward commitment and a contingent claim? What are forward and futures contracts? In what ways are they alike and in what ways are they different? What are swaps? What are call and put options and how do they differ from forwards, futures, and swaps? What are credit derivatives and what are the various types of credit
Original toplevel document
Reading 56 Derivative Markets and Instruments (Intro)Equity, fixed-income, currency, and commodity markets are facilities for trading the basic assets of an economy. Equity and fixed-income securities are claims on the assets of a company. Currencies are the monetary units issued by a government or central bank. Commodities are natural resources, such as oil or gold. These underlying assets are said to trade in cash markets or spot markets and their prices are sometimes referred to as cash prices or spot prices , though we usually just refer to them as stock prices, bond prices, exchange rates, and commodity prices. These markets exist around the world and receive much attention in the financial and mainstream media. Hence, they are relatively familiar not only to financial experts but also to the general population. Somewhat less familiar are the markets for derivatives , which are financial instruments that derive their values from the performance of these basic assets. This reading is an overview of derivatives. Subsequent readings will explore many aspects of derivatives and their uses in depth. Among the questions that this first reading will address are the following: What are the defining characteristics of derivatives? What purposes do derivatives serve for financial market participants? What is the distinction between a forward commitment and a contingent claim? What are forward and futures contracts? In what ways are they alike and in what ways are they different? What are swaps? What are call and put options and how do they differ from forwards, futures, and swaps? What are credit derivatives and what are the various types of credit derivatives? What are the benefits of derivatives? What are some criticisms of derivatives and to what extent are they well founded? What is arbitrage and what role does it play in a well-functioning financial market? This reading is organized as follows. Section 2 explores the definition and uses of derivatives and establishes some basic terminology. Section 3 describes derivati
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Open itThe structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, ed
Original toplevel document
Subject 5. Board of Directors and CommitteesComposition of the Board of Directors A board of directors is the central pillar of the governance structure, serves as the link between shareholders and managers, and acts as the shareholders' internal monitoring tool within the company. The structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions. Executive (internal) directors are employed by the company and are typically members of senior management. Non-executive (external) directors have limited involvement in daily operations but serve an important oversight role. In a classified or staggered board, directors are typically elected in two or more classes, serving terms greater than one year. Proponents argue that by staggering the election of directors, a certain level of continuity and skill is maintained. However, staggered terms make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board and could result in a permanent impairment of long-term shareholder value. Functions and Responsibilities of the Board Two primary duties of a board of directors are duty of care and duty of loyalty. Among other responsibilities, the
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Open itThe structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors l
Original toplevel document
Subject 5. Board of Directors and CommitteesComposition of the Board of Directors A board of directors is the central pillar of the governance structure, serves as the link between shareholders and managers, and acts as the shareholders' internal monitoring tool within the company. The structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions. Executive (internal) directors are employed by the company and are typically members of senior management. Non-executive (external) directors have limited involvement in daily operations but serve an important oversight role. In a classified or staggered board, directors are typically elected in two or more classes, serving terms greater than one year. Proponents argue that by staggering the election of directors, a certain level of continuity and skill is maintained. However, staggered terms make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board and could result in a permanent impairment of long-term shareholder value. Functions and Responsibilities of the Board Two primary duties of a board of directors are duty of care and duty of loyalty. Among other responsibilities, the
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Open itThe structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting
Original toplevel document
Subject 5. Board of Directors and CommitteesComposition of the Board of Directors A board of directors is the central pillar of the governance structure, serves as the link between shareholders and managers, and acts as the shareholders' internal monitoring tool within the company. The structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions. Executive (internal) directors are employed by the company and are typically members of senior management. Non-executive (external) directors have limited involvement in daily operations but serve an important oversight role. In a classified or staggered board, directors are typically elected in two or more classes, serving terms greater than one year. Proponents argue that by staggering the election of directors, a certain level of continuity and skill is maintained. However, staggered terms make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board and could result in a permanent impairment of long-term shareholder value. Functions and Responsibilities of the Board Two primary duties of a board of directors are duty of care and duty of loyalty. Among other responsibilities, the
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Open itally includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. <span>If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions. <span><body><html>
Original toplevel document
Subject 5. Board of Directors and CommitteesComposition of the Board of Directors A board of directors is the central pillar of the governance structure, serves as the link between shareholders and managers, and acts as the shareholders' internal monitoring tool within the company. The structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions. Executive (internal) directors are employed by the company and are typically members of senior management. Non-executive (external) directors have limited involvement in daily operations but serve an important oversight role. In a classified or staggered board, directors are typically elected in two or more classes, serving terms greater than one year. Proponents argue that by staggering the election of directors, a certain level of continuity and skill is maintained. However, staggered terms make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board and could result in a permanent impairment of long-term shareholder value. Functions and Responsibilities of the Board Two primary duties of a board of directors are duty of care and duty of loyalty. Among other responsibilities, the
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Open itThe concepts and tools of hypothesis testing provide an objective means to measure whether the available evidence supports the hypothesis. After a statistical test of a hypothesis we should have a clearer idea of the probability that a hypothesis is true or not, although our conclusion always stops short of certainty. Hypo
Original toplevel document
Reading 12 Hypothesis Testing IntroAnalysts often confront competing ideas about how financial markets work. Some of these ideas develop through personal research or experience with markets; others come from interactions with colleagues; and many others appear in the professional literature on finance and investments. In general, how can an analyst decide whether statements about the financial world are probably true or probably false? When we can reduce an idea or assertion to a definite statement about the value of a quantity, such as an underlying or population mean, the idea becomes a statistically testable statement or hypothesis. The analyst may want to explore questions such as the following: Is the underlying mean return on this mutual fund different from the underlying mean return on its benchmark? Did the volatility of returns on this stock change after the stock was added to a stock market index? Are a security’s bid-ask spreads related to the number of dealers making a market in the security? Do data from a national bond market support a prediction of an economic theory about the term structure of interest rates (the relationship between yield and maturity)? To address these questions, we use the concepts and tools of hypothesis testing. Hypothesis testing is part of statistical inference, the process of making judgments about a larger group (a population) on the basis of a smaller group actually observed (a sample). The concepts and tools of hypothesis testing provide an objective means to gauge whether the available evidence supports the hypothesis. After a statistical test of a hypothesis we should have a clearer idea of the probability that a hypothesis is true or not, although our conclusion always stops short of certainty. Hypothesis testing has been a powerful tool in the advancement of investment knowledge and science. As Robert L. Kahn of the Institute for Social Research (Ann Arbor, Michigan) has written, “The mill of science grinds only when hypothesis and data are in continuous and abrasive contact.” The main emphases of this reading are the framework of hypothesis testing and tests concerning mean and variance, two quantities frequently used in investments. We give an
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Open itThe concepts and tools of hypothesis testing provide an objective means to measure whether the available evidence supports the hypothesis. After a statistical test of a hypothesis we should have a clearer idea of the probability that a hypothesis is true or not, although our conclusion always stops short of certainty. Hypothesis testing has been a powerful tool in the advancement of investment knowledge and science.
Original toplevel document
Reading 12 Hypothesis Testing IntroAnalysts often confront competing ideas about how financial markets work. Some of these ideas develop through personal research or experience with markets; others come from interactions with colleagues; and many others appear in the professional literature on finance and investments. In general, how can an analyst decide whether statements about the financial world are probably true or probably false? When we can reduce an idea or assertion to a definite statement about the value of a quantity, such as an underlying or population mean, the idea becomes a statistically testable statement or hypothesis. The analyst may want to explore questions such as the following: Is the underlying mean return on this mutual fund different from the underlying mean return on its benchmark? Did the volatility of returns on this stock change after the stock was added to a stock market index? Are a security’s bid-ask spreads related to the number of dealers making a market in the security? Do data from a national bond market support a prediction of an economic theory about the term structure of interest rates (the relationship between yield and maturity)? To address these questions, we use the concepts and tools of hypothesis testing. Hypothesis testing is part of statistical inference, the process of making judgments about a larger group (a population) on the basis of a smaller group actually observed (a sample). The concepts and tools of hypothesis testing provide an objective means to gauge whether the available evidence supports the hypothesis. After a statistical test of a hypothesis we should have a clearer idea of the probability that a hypothesis is true or not, although our conclusion always stops short of certainty. Hypothesis testing has been a powerful tool in the advancement of investment knowledge and science. As Robert L. Kahn of the Institute for Social Research (Ann Arbor, Michigan) has written, “The mill of science grinds only when hypothesis and data are in continuous and abrasive contact.” The main emphases of this reading are the framework of hypothesis testing and tests concerning mean and variance, two quantities frequently used in investments. We give an
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Open itasure whether the available evidence supports the hypothesis. After a statistical test of a hypothesis we should have a clearer idea of the probability that a hypothesis is true or not, although our conclusion always stops short of certainty. <span>Hypothesis testing has been a powerful tool in the advancement of investment knowledge and science. <span><body><html>
Original toplevel document
Reading 12 Hypothesis Testing IntroAnalysts often confront competing ideas about how financial markets work. Some of these ideas develop through personal research or experience with markets; others come from interactions with colleagues; and many others appear in the professional literature on finance and investments. In general, how can an analyst decide whether statements about the financial world are probably true or probably false? When we can reduce an idea or assertion to a definite statement about the value of a quantity, such as an underlying or population mean, the idea becomes a statistically testable statement or hypothesis. The analyst may want to explore questions such as the following: Is the underlying mean return on this mutual fund different from the underlying mean return on its benchmark? Did the volatility of returns on this stock change after the stock was added to a stock market index? Are a security’s bid-ask spreads related to the number of dealers making a market in the security? Do data from a national bond market support a prediction of an economic theory about the term structure of interest rates (the relationship between yield and maturity)? To address these questions, we use the concepts and tools of hypothesis testing. Hypothesis testing is part of statistical inference, the process of making judgments about a larger group (a population) on the basis of a smaller group actually observed (a sample). The concepts and tools of hypothesis testing provide an objective means to gauge whether the available evidence supports the hypothesis. After a statistical test of a hypothesis we should have a clearer idea of the probability that a hypothesis is true or not, although our conclusion always stops short of certainty. Hypothesis testing has been a powerful tool in the advancement of investment knowledge and science. As Robert L. Kahn of the Institute for Social Research (Ann Arbor, Michigan) has written, “The mill of science grinds only when hypothesis and data are in continuous and abrasive contact.” The main emphases of this reading are the framework of hypothesis testing and tests concerning mean and variance, two quantities frequently used in investments. We give an
Flashcard 1751128608012
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Parent (intermediate) annotation
Open itMeasured by daily turnover, the foreign exchange (FX) market—the market in which currencies are traded against each other—is by far the world’s largest market.
Original toplevel document
Reading 20 Currency Exchange Rates IntroductionMeasured by daily turnover, the foreign exchange (FX) market—the market in which currencies are traded against each other—is by far the world’s largest market. Current estimates put daily turnover at approximately USD4 trillion for 2010. This is about 10 to 15 times larger than daily turnover in global fixed-income markets and about 50 times larger than global turnover in equities. Moreover, volumes in FX turnover continue to grow: Some predict that daily FX turnover will reach USD10 trillion by 2020 as market participation spreads and deepens. The FX market is also a truly global market that operates 24 hours a day, each business day. It involves market participants from every time zone connected through electronic communications networks that link players as large as multibillion-dollar investment funds and as small as individuals trading for their own account—all brought together in real time. International trade would be impossible without the trade in currencies that facilitates it, and so too would cross-border capital flows that connect all financial markets globally through the FX market. These factors make foreign exchange a key market for investors and market participants to understand. The world economy is increasingly transnational in nature, with both production processes and trade flows often determined more by global factors than by domestic considerations. Likewise, investment portfolio performance increasingly reflects global determinants because pricing in financial markets responds to the array of investment opportunities available worldwide, not just locally. All of these factors funnel through, and are reflected in, the foreign exchange market. As investors shed their “home bias” and invest in foreign markets, the exchange rate—the price at which foreign-currency-denominated investments are valued in terms of the domestic currency—becomes an increasingly important determinant of portfolio performance. Even investors adhering to a purely “domestic” portfolio mandate are increasingly affected by what happens in the foreign exchange market. Given the globalization of the world economy, most large companies depend heavily on their foreign operations (for example, by some estimates about 40 percent of S&P 500 Index earnings are from outside the United States). Almost all companies are exposed to some degree of foreign competition, and the pricing for domestic assets—equities, bonds, real estate, and others—will also depend on demand from foreign investors. All of these various influences on investment performance reflect developments in the foreign exchange market. This reading introduces the foreign exchange market, providing the basic concepts and terminology necessary to understand exchange rates as well as some of the basics of ex
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Parent (intermediate) annotation
Open itA staggered board consists of a board of directors whose members are grouped into classes; for example, Class 1, Class 2, Class 3, etc. Each class represents a certain percentage of the total number of board positions. For example, a class is commonly comprised on one-third of the total board members. During each election term only one class is open to elections, thereby staggering the board directors
Original toplevel document
Staggered Board[imagelink] DEFINITION of '<span>Staggered Board' A staggered board consists of a board of directors whose members are grouped into classes; for example, Class 1, Class 2, Class 3, etc. Each class represents a certain percentage of the total number of board positions. For example, a class is commonly comprised on one-third of the total board members. During each election term only one class is open to elections, thereby staggering the board directorship. BREAKING DOWN 'Staggered Board' A staggered board is also known as a classified board because of the different "classes" involved. A
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Parent (intermediate) annotation
Open itbers are grouped into classes; for example, Class 1, Class 2, Class 3, etc. Each class represents a certain percentage of the total number of board positions. For example, a class is commonly comprised on one-third of the total board members. <span>During each election term only one class is open to elections, thereby staggering the board directorship. <span><body><html>
Original toplevel document
Staggered Board[imagelink] DEFINITION of '<span>Staggered Board' A staggered board consists of a board of directors whose members are grouped into classes; for example, Class 1, Class 2, Class 3, etc. Each class represents a certain percentage of the total number of board positions. For example, a class is commonly comprised on one-third of the total board members. During each election term only one class is open to elections, thereby staggering the board directorship. BREAKING DOWN 'Staggered Board' A staggered board is also known as a classified board because of the different "classes" involved. A
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Parent (intermediate) annotation
Open itShareholder engagement involves a company's interactions with its shareholders. It can provide benefits that include building support against short-term activist investors, countering negative recommendations from proxy advisory firms, and receiving greater support
Original toplevel document
Subject 6. Factors Affecting Stakeholder Relationships and Corporate GovernanceStakeholder relationships and corporate governance are continually shaped and influenced by a variety of market and non-market factors. Market Factors Shareholder engagement involves a company's interactions with its shareholders. It can provide benefits that include building support against short-term activist investors, countering negative recommendations from proxy advisory firms, and receiving greater support for management's position. Shareholder activism encompasses a range of strategies that may be used by shareholders seeking to compel a company to act in a desired manner. It can take any of several forms: proxy battles, public campaigns, shareholder resolutions, litigation, and negotiations with management. Corporate takeovers can happen in different ways: proxy contest or proxy fight, tender offer, hostile takeover, etc. The justification for the use of various anti-takeover defenses should rest on the support of the majority of shareholders and on the demonstration that preservation of the integrity of the company is in the long-term interests of shareholders. Non-Market Factors These factors include the legal environment, the media, and the corporate governance industry itself.
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Parent (intermediate) annotation
Open itShareholder engagement involves a company's interactions with its shareholders. It can provide benefits that include building support against short-term activist investors, countering negative recommendations from proxy advisory firms, and receiving greater support for management's position.
Original toplevel document
Subject 6. Factors Affecting Stakeholder Relationships and Corporate GovernanceStakeholder relationships and corporate governance are continually shaped and influenced by a variety of market and non-market factors. Market Factors Shareholder engagement involves a company's interactions with its shareholders. It can provide benefits that include building support against short-term activist investors, countering negative recommendations from proxy advisory firms, and receiving greater support for management's position. Shareholder activism encompasses a range of strategies that may be used by shareholders seeking to compel a company to act in a desired manner. It can take any of several forms: proxy battles, public campaigns, shareholder resolutions, litigation, and negotiations with management. Corporate takeovers can happen in different ways: proxy contest or proxy fight, tender offer, hostile takeover, etc. The justification for the use of various anti-takeover defenses should rest on the support of the majority of shareholders and on the demonstration that preservation of the integrity of the company is in the long-term interests of shareholders. Non-Market Factors These factors include the legal environment, the media, and the corporate governance industry itself.
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Parent (intermediate) annotation
Open itGiven the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. <span>Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited <span><body><html>
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open itAnother important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in it
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open itAnother important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open itcreate a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. <span>Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. <span><body><html>
Original toplevel document
Money: the price of oranges in terms of pears; of pears in terms of bread; of bread in terms of milk; or of milk in terms of oranges. A barter economy has no common measure of value that would make multiple transactions simple. <span>2.1.1. The Functions of Money The most generic definition of money is that it is any generally accepted medium of exchange. A medium of exchange is any asset that can be used to purchase goods and services or to repay debts. Money can thus eliminate the debilitating double coincidence of the “wants” problem that exists in a barter economy. When this medium of exchange exists, a farmer wishing to sell wheat for wine does not need to identify a wine producer in search of wheat. Instead, he can sell wheat to those who want wheat in exchange for money. The farmer can then exchange this money for wine with a wine producer, who in turn can exchange that money for the goods or services that she wants. However, for money to act as this liberating medium of exchange, it must possess certain qualities. It must: be readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit. Qualities (i) and (ii) are closely related; the medium of exchange will only be acceptable if it has a known value. If the medium of exchange has quality (iii), then it can be used to purchase items of relatively little value and of relatively large value with equal ease. Having a high value relative to its weight is a practical convenience, meaning that people can carry around sufficient wealth for their transaction needs. Finally, if the medium of exchange can be counterfeited easily, then it would soon cease to have a value and would not be readily acceptable as a means of effecting transactions; in other words, it would not satisfy qualities (i) and (ii). Given the qualities that money needs to have, it is clear why precious metals (particularly gold and silver) often fulfilled the role of medium of exchange in early societies, and as recently as the early part of the twentieth century. Precious metals were acceptable as a medium of exchange because they had a known value, were easily divisible, had a high value relative to their weight, and could not be easily counterfeited. Thus, precious metals were capable of acting as a medium of exchange. But they also fulfilled two other useful functions that are essential for the characteristics of money. In a barter economy, it is difficult to store wealth from one year to the next when one’s produce is perishable, or indeed, if it requires large warehouses in which to store it. Because precious metals like gold had a high value relative to their bulk and were not perishable, they could act as a store of wealth . However, their ability to act as a store of wealth not only depended on the fact that they did not perish physically over time, but also on the belief that others would always value precious metals. The value from year to year of precious metals depended on people’s continued demand for them in ornaments, jewellery, and so on. For example, people were willing to use gold as a store of wealth because they believed that it would remain highly valued. However, if gold became less valuable to people relative to other goods and services year after year it would not be able to fulfill its role as a store of value , and as such might also lose its status as a medium of exchange. Another important characteristic of money is that it can be used as a universal unit of account. As such, it can create a single unitary measure of value for all goods and services. In an economy where gold and silver are the accepted medium of exchange, all prices, debts, and wealth can be recorded in terms of their gold or silver coin exchange value. Money, in its role as a unit of account, drastically reduces the number of prices in an economy compared to barter, which requires that prices be established for a good in terms of all other goods for which it might be exchanged. In summary, money fulfills three important functions, it: acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. 2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money
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Parent (intermediate) annotation
Open itIn taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership w
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
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Parent (intermediate) annotation
Open itne time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. <span>A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. <span><body><html>
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
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Parent (intermediate) annotation
Open itIn our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions.
Original toplevel document
Money3; acts as a medium of exchange; provides individuals with a way of storing wealth; and provides society with a convenient measure of value and unit of account. <span>2.1.2. Paper Money and the Money Creation Process Although precious metals like gold and silver fulfilled the required functions of money relatively well for many years, and although carrying gold coins around was easier than carrying around one’s physical produce, it was not necessarily a safe way to conduct business. A crucial development in the history of money was the promissory note . The process began when individuals began leaving their excess gold with goldsmiths, who would look after it for them. In turn the goldsmiths would give the depositors a receipt, stating how much gold they had deposited. Eventually these receipts were traded directly for goods and services, rather than there being a physical transfer of gold from the goods buyer to the goods seller. Of course, both the buyer and seller had to trust the goldsmith because the goldsmith had all the gold and the goldsmith’s customers had only pieces of paper. These depository receipts represented a promise to pay a certain amount of gold on demand. This paper money therefore became a proxy for the precious metals on which they were based, that is, they were directly related to a physical commodity. Many of these early goldsmiths evolved into banks, taking in excess wealth and in turn issuing promissory notes that could be used in commerce. In taking in other people’s gold and issuing depository receipts and later promissory notes, it became clear to the goldsmiths and early banks that not all the gold that they held in their vaults would be withdrawn at any one time. Individuals were willing to buy and sell goods and services with the promissory notes, but the majority of the gold that backed the notes just sat in the vaults—although its ownership would change with the flow of commerce over time. A certain proportion of the gold that was not being withdrawn and used directly for commerce could therefore be lent to others at a rate of interest. By doing this, the early banks created money. The process of money creation is a crucial concept for understanding the role that money plays in an economy. Its potency depends on the amount of money that banks keep in reserve to meet the withdrawals of its customers. This practice of lending customers’ money to others on the assumption that not all customers will want all of their money back at any one time is known as fractional reserve banking . We can illustrate how it works through a simple example. Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement .2 Now consider what happens when a customer deposits €100 in the First Bank of Nations. This deposit changes the balance sheet of First Bank of Nations, as shown in Exhibit 2, and it represents a liability to the bank because it is effectively loaned to the bank by the customer. By lending 90 percent of this deposit to another customer the bank has two types of assets: (1) the bank’s reserves of €10, and (2) the loan equivalent to €90. Notice that the balance sheet still balances; €100 worth of assets and €100 worth of liabilities are on the balance sheet. Now suppose that the recipient of the loan of €90 uses this money to purchase some goods of this value and the seller of the goods deposits this €90 in another bank, the Second Bank of Nations. The Second Bank of Nations goes through the same process; it retains €9 in reserve and loans 90 percent of the deposit (€81) to another customer. This customer in turn spends €81 on some goods or services. The recipient of this money deposits it at the Third Bank of Nations, and so on. This example shows how money is created when a bank makes a loan. Exhibit 2. Money Creation via Fractional Reserve Banking First Bank of Nations Assets Liabilities Reserves €10 Deposits €100 Loans €90 Second Bank of Nations Assets Liabilities Reserves €9 Deposits €90 Loans €81 Third Bank of Nations Assets Liabilities Reserves €8.1 Deposits €81 Loans €72.9 This process continues until there is no more money left to be deposited and loaned out. The total amount of money ‘created’ from this one deposit of €100 can be calculated as: Equation (1) New deposit/Reserve requirement = €100/0.10 = €1,000 It is the sum of all the deposits now in the banking system. You should also note that the original deposit of €100, via the practice of reserve banking, was the catalyst for €1,000 worth of economic transactions. That is not to say that economic growth would be zero without this process, but instead that it can be an important component in economic activity. The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier .3 In the case just examined, the money multiplier is 1/0.10 = 10. Equation 1 implies that the smaller the reserve requirement, the greater the money multiplier effect. In our simplistic example, we assumed that the banks themselves set their own reserve requirements. However, in some economies, the central bank sets the reserve requirement, which is a potential means of affecting money growth. In any case, a prudent bank would be wise to have sufficient reserves such that the withdrawal demands of their depositors can be met in stressful economic and credit market conditions. Later, when we discuss central banks and central bank policy, we will see how central banks can use the mechanism just described to affect the money supply. Specifically, the central bank could, by purchasing €100 in government securities credited to the bank account of the seller, seek to initiate an increase in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. 2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promisso
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Parent (intermediate) annotation
Open itThe process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulati
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open itThe process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. </sp
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open itundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. <span>The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. <span><body><html>
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open itThe monetary authorities in most modern economies produce a range of measures of money. But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy,
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open it. But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, <span>economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open iton, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . <span>By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. <span><body><html>
Original toplevel document
Moneye in the money supply. The central bank may also lend reserves directly to banks, creating excess reserves (relative to any imposed or self-imposed reserve requirement) that can support new loans and money expansion. <span>2.1.3. Definitions of Money The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits. More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money. The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases. Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies. <span><body><html>
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Parent (intermediate) annotation
Open itThe study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. Among the questions this reading will address
Original toplevel document
Prerequisite Demand and Supply Analysis: The firmf this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. <span>The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. Among the questions this reading will address are the following: How should profit be defined from the perspective of suppliers of capital to the firm? What is meant by factors of production? How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices and costs) play in optimization? This reading is organized as follows: Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their us
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Parent (intermediate) annotation
Open itperiod is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. <span>Among the questions this reading will address are the following: How should profit be defined from the perspective of suppliers of capital to the firm? What is meant by factors of production? How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices
Original toplevel document
Prerequisite Demand and Supply Analysis: The firmf this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. <span>The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. Among the questions this reading will address are the following: How should profit be defined from the perspective of suppliers of capital to the firm? What is meant by factors of production? How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices and costs) play in optimization? This reading is organized as follows: Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their us
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Parent (intermediate) annotation
Open itong the questions this reading will address are the following: How should profit be defined from the perspective of suppliers of capital to the firm? What is meant by factors of production? <span>How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices and costs) play in optimization? <span><body><html>
Original toplevel document
Prerequisite Demand and Supply Analysis: The firmf this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. <span>The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. Among the questions this reading will address are the following: How should profit be defined from the perspective of suppliers of capital to the firm? What is meant by factors of production? How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices and costs) play in optimization? This reading is organized as follows: Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their us
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Parent (intermediate) annotation
Open itThe focus of this reading is on the short-term aspects of corporate finance activities collectively referred to as working capital management . The goal of effective working capital management is to ensure that a company has adequate ready access to the funds necessary for day-to-day operating expenses, while at the same time making sure that the company’s assets are invested in the most productive way. Achieving this goal requires a balancing of concerns. Insufficient access to cash could ultimately lead to severe restructuring of a company by selling off assets, reorganization via ba
Original toplevel document
Reading 38 Working Capital Management IntroThe focus of this reading is on the short-term aspects of corporate finance activities collectively referred to as working capital management . The goal of effective working capital management is to ensure that a company has adequate ready access to the funds necessary for day-to-day operating expenses, while at the same time making sure that the company’s assets are invested in the most productive way. Achieving this goal requires a balancing of concerns. Insufficient access to cash could ultimately lead to severe restructuring of a company by selling off assets, reorganization via bankruptcy proceedings, or final liquidation of the company. On the other hand, excessive investment in cash and liquid assets may not be the best use of company resources. Effective working capital management encompasses several aspects of short-term finance: maintaining adequate levels of cash, converting short-term assets (i.e., accounts receivable and inventory) into cash, and controlling outgoing payments to vendors, employees, and others. To do this successfully, companies invest short-term funds in working capital portfolios of short-dated, highly liquid securities, or they maintain credit reserves in the form of bank lines of credit or access to financing by issuing commercial paper or other money market instruments. Working capital management is a broad-based function. Effective execution requires managing and coordinating several tasks within the company, including managing short-term investments, granting credit to customers and collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. Both internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capit
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Parent (intermediate) annotation
Open itny has adequate ready access to the funds necessary for day-to-day operating expenses, while at the same time making sure that the company’s assets are invested in the most productive way. Achieving this goal requires a balancing of concerns. <span>Insufficient access to cash could ultimately lead to severe restructuring of a company by selling off assets, reorganization via bankruptcy proceedings, or final liquidation of the company. On the other hand, excessive investment in cash and liquid assets may not be the best use of company resources. <span><body><html>
Original toplevel document
Reading 38 Working Capital Management IntroThe focus of this reading is on the short-term aspects of corporate finance activities collectively referred to as working capital management . The goal of effective working capital management is to ensure that a company has adequate ready access to the funds necessary for day-to-day operating expenses, while at the same time making sure that the company’s assets are invested in the most productive way. Achieving this goal requires a balancing of concerns. Insufficient access to cash could ultimately lead to severe restructuring of a company by selling off assets, reorganization via bankruptcy proceedings, or final liquidation of the company. On the other hand, excessive investment in cash and liquid assets may not be the best use of company resources. Effective working capital management encompasses several aspects of short-term finance: maintaining adequate levels of cash, converting short-term assets (i.e., accounts receivable and inventory) into cash, and controlling outgoing payments to vendors, employees, and others. To do this successfully, companies invest short-term funds in working capital portfolios of short-dated, highly liquid securities, or they maintain credit reserves in the form of bank lines of credit or access to financing by issuing commercial paper or other money market instruments. Working capital management is a broad-based function. Effective execution requires managing and coordinating several tasks within the company, including managing short-term investments, granting credit to customers and collecting on this credit, managing inventory, and managing payables. Effective working capital management also requires reliable cash forecasts, as well as current and accurate information on transactions and bank balances. Both internal and external factors influence working capital needs; we summarize them in Exhibit 1. Exhibit 1. Internal and External Factors That Affect Working Capit
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Parent (intermediate) annotation
Open itFundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings.
Original toplevel document
Reading 49 Equity Valuation: Concepts and Basic Tools (Intro)Analysts gather and process information to make investment decisions, including buy and sell recommendations. What information is gathered and how it is processed depend on the analyst and the purpose of the analysis. Technical analysis uses such information as stock price and trading volume as the basis for investment decisions. Fundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings. Whereas technical analysts use information to predict price movements and base investment decisions on the direction of predicted change in prices, fundamental analysts use information to estimate the value of a security and to compare the estimated value to the market price and then base investment decisions on that comparison. This reading introduces equity valuation models used to estimate the intrinsic value (synonym: fundamental value ) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics. The fundamentals to be considered depend on the analyst’s approach to valuation. In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securities. This reading is organized as follows. Section 2 discusses the implications of differences between estimated value and market price. Section 3 introduces three major categor
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Parent (intermediate) annotation
Open itFundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings.
Original toplevel document
Reading 49 Equity Valuation: Concepts and Basic Tools (Intro)Analysts gather and process information to make investment decisions, including buy and sell recommendations. What information is gathered and how it is processed depend on the analyst and the purpose of the analysis. Technical analysis uses such information as stock price and trading volume as the basis for investment decisions. Fundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings. Whereas technical analysts use information to predict price movements and base investment decisions on the direction of predicted change in prices, fundamental analysts use information to estimate the value of a security and to compare the estimated value to the market price and then base investment decisions on that comparison. This reading introduces equity valuation models used to estimate the intrinsic value (synonym: fundamental value ) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics. The fundamentals to be considered depend on the analyst’s approach to valuation. In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securities. This reading is organized as follows. Section 2 discusses the implications of differences between estimated value and market price. Section 3 introduces three major categor
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Parent (intermediate) annotation
Open itThe cash-based information provided by the cash flow statement contrasts with the accrual-based information from the income statement. For example, the income statement reflects revenues when earned rather than when cash is collected; in contrast, the cash flow statement reflects cash receipts when collected as opposed to when the revenue was earned.
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Reading 26 Understanding Cash Flow Statements IntroductionThe cash flow statement provides information about a company’s cash receipts and cash payments during an accounting period. The cash-based information provided by the cash flow statement contrasts with the accrual-based information from the income statement. For example, the income statement reflects revenues when earned rather than when cash is collected; in contrast, the cash flow statement reflects cash receipts when collected as opposed to when the revenue was earned. A reconciliation between reported income and cash flows from operating activities provides useful information about when, whether, and how a company is able to generate cash from its operating activities. Although income is an important measure of the results of a company’s activities, cash flow is also essential. As an extreme illustration, a hypothetical company that makes all sales on account, without regard to whether it will ever collect its accounts receivable, would report healthy sales on its income statement and might well report significant income; however, with zero cash inflow, the company would not survive. The cash flow statement also provides a reconciliation of the beginning and ending cash on the balance sheet. In addition to information about cash generated (or, alternatively, cash used) in operating activities, the cash flow statement provides information about cash provided (or used) in a company’s investing and financing activities. This information allows the analyst to answer such questions as: Does the company generate enough cash from its operations to pay for its new investments, or is the company relying on new debt issuance to finance them? Does the company pay its dividends to common stockholders using cash generated from operations, from selling assets, or from issuing debt? Answers to these questions are important because, in theory, generating cash from operations can continue indefinitely, but generating cash from selling assets, for example, is possible only as long as there are assets to sell. Similarly, generating cash from debt financing is possible only as long as lenders are willing to lend, and the lending decision depends on expectations that the company will ultimately have adequate cash to repay its obligations. In summary, information about the sources and uses of cash helps creditors, investors, and other statement users evaluate the company’s liquidity, solvency, and financial flexibility. This reading explains how cash flow activities are reflected in a company’s cash flow statement. The reading is organized as follows. Section 2 describes the components an
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Parent (intermediate) annotation
Open itSome investors in alternative investments have a relative return objective. A relative return objective, which is often the objective of portfolios of traditional investment, seeks to achieve a return relative to an equity or fixed-income benchmark. </s
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Reading 58 Introduction to Alternative Investments (Intro)Assets under management in vehicles classified as alternative investments have grown rapidly since the mid-1990s. This growth has largely occurred because of interest in these investments by institutions, such as endowment and pension funds, as well as high-net-worth individuals seeking diversification and return opportunities. Alternative investments are perceived to behave differently from traditional investments. Investors may seek either absolute return or relative return. Some investors hope alternative investments will provide positive returns throughout the economic cycle; this goal is an absolute return objective. Alternative investments are not free of risk, however, and their returns may be negative and/or correlated with other investments, including traditional investments, especially in periods of financial crisis. Some investors in alternative investments have a relative return objective. A relative return objective, which is often the objective of portfolios of traditional investment, seeks to achieve a return relative to an equity or fixed-income benchmark. This reading is organized as follows. Section 2 describes alternative investments’ basic characteristics and categories; general strategies of alternative investment portfo
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Parent (intermediate) annotation
Open itSome investors in alternative investments have a relative return objective. A relative return objective, which is often the objective of portfolios of traditional investment, seeks to achieve a return relative to an equity or fixed-income benchmark.
Original toplevel document
Reading 58 Introduction to Alternative Investments (Intro)Assets under management in vehicles classified as alternative investments have grown rapidly since the mid-1990s. This growth has largely occurred because of interest in these investments by institutions, such as endowment and pension funds, as well as high-net-worth individuals seeking diversification and return opportunities. Alternative investments are perceived to behave differently from traditional investments. Investors may seek either absolute return or relative return. Some investors hope alternative investments will provide positive returns throughout the economic cycle; this goal is an absolute return objective. Alternative investments are not free of risk, however, and their returns may be negative and/or correlated with other investments, including traditional investments, especially in periods of financial crisis. Some investors in alternative investments have a relative return objective. A relative return objective, which is often the objective of portfolios of traditional investment, seeks to achieve a return relative to an equity or fixed-income benchmark. This reading is organized as follows. Section 2 describes alternative investments’ basic characteristics and categories; general strategies of alternative investment portfo
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Parent (intermediate) annotation
Open itEquity, fixed-income, currency, and commodity are said to trade in cash markets or spot markets and their prices are sometimes referred to as cash prices or spot prices , though we usually just refer to them as stock prices, bond prices, exchange rates, and commodity prices. These markets exist around the world and receive much attention in the financial and mainstream media. Hence, they are relatively familiar not only to financial experts but also to the
Original toplevel document
Reading 56 Derivative Markets and Instruments (Intro)Equity, fixed-income, currency, and commodity markets are facilities for trading the basic assets of an economy. Equity and fixed-income securities are claims on the assets of a company. Currencies are the monetary units issued by a government or central bank. Commodities are natural resources, such as oil or gold. These underlying assets are said to trade in cash markets or spot markets and their prices are sometimes referred to as cash prices or spot prices , though we usually just refer to them as stock prices, bond prices, exchange rates, and commodity prices. These markets exist around the world and receive much attention in the financial and mainstream media. Hence, they are relatively familiar not only to financial experts but also to the general population. Somewhat less familiar are the markets for derivatives , which are financial instruments that derive their values from the performance of these basic assets. This reading is an overview of derivatives. Subsequent readings will explore many aspects of derivatives and their uses in depth. Among the questions that this first reading will address are the following: What are the defining characteristics of derivatives? What purposes do derivatives serve for financial market participants? What is the distinction between a forward commitment and a contingent claim? What are forward and futures contracts? In what ways are they alike and in what ways are they different? What are swaps? What are call and put options and how do they differ from forwards, futures, and swaps? What are credit derivatives and what are the various types of credit derivatives? What are the benefits of derivatives? What are some criticisms of derivatives and to what extent are they well founded? What is arbitrage and what role does it play in a well-functioning financial market? This reading is organized as follows. Section 2 explores the definition and uses of derivatives and establishes some basic terminology. Section 3 describes derivati