Introduction to Finance

19
Applying Finance To...
• Institutions and Markets 
Financial institutions and fi nancial 
markets are necessary components of an effi
cient fi nancial system. 
Institutions perform an important fi nancial intermediation role by 
gathering the savings of individuals and then lending the pooled 
savings to businesses that want to make investments.
• Investments 
Securities markets are also important components 
of an effi
cient fi nancial system. The primary securities market facil-
itates raising funds by issuing new debt and equity securities. The 
secondary market for securities facilitates the transfer of ownership 
of existing securities among investors. 
• Financial Management
Business fi rms continually interact with 
fi nancial institutions as they carry out their day-to-day operations. Busi-
nesses also often seek to raise additional funds to fi nance investment in 
inventories, equipment, and buildings needed to support growth in sales. 
Bank loans and mortgage loans are important fi nancing sources, along 
with the proceeds from the issuance of new debt and equity securities.
Summary
LO 1.1 
Finance is the study of how businesses and others acquire, 
spend, and manage money and other fi nancial resources. More spe-
cifi cally, fi nance is composed of three areas—fi nancial institutions 
and markets, investments, and fi nancial management. However, these 
three areas are not independent of one another but rather intersect or 
overlap. This book’s survey approach to the study of fi nance covers 
all three areas. 
LO 1.2 
You should study fi nance so that you can make informed 
economic, personal and business investment, and career decisions.
LO 1.3 
There are six principles of fi nance: (1) money has a time value, 
(2) higher returns are expected for taking on more risk, (3) diversifi ca-
tion of investments can reduce risk, (4) fi nancial markets are effi
cient 
in pricing securities, (5) manager and stockholder objectives may 
diff er, and (6) reputation matters. 
LO 1.4 
An eff ective fi nancial system has four major components—
policy makers, a monetary system, fi nancial institutions, and fi nan-
cial markets—to facilitate the fl ow of fi nancial capital from savings 
into investments. Policy makers pass laws and set fi scal and monetary 
policies designed to manage the economy. A monetary system cre-
ates and transfers money. Financial institutions accumulate and lend/
invest individual savings. Financial markets are needed to market and 
transfer securities and other fi nancial assets. 
LO 1.5 
Financial markets can be classifi ed as either money or capital 
markets, or as primary or secondary markets. There are four major 
types of fi nancial markets—debt securities markets, equity securities 
markets, derivative securities markets, and foreign exchange markets.
LO 1.6 
Career opportunities in fi nance are available in fi nancial man-
agement, depository fi nancial institutions, contractual savings and real 
property organizations, and securities markets and investment fi rms.
LO 1.7 
The plan of study in this book consists of three parts. Part 1 
focuses on the fi nancial institutions, markets, and other participants 
that make the U.S. fi nancial system operate eff ectively. Part 2 covers 
the investments area of fi nance. Part 3 focuses on the fi nancial manage-
ment of businesses. 
Key Terms
bond markets
capital markets
debt securities
debt securities markets
derivative securities markets 
entrepreneurial fi nance
equity securities
equity securities markets
ethical behavior
fi nance
fi nancial environment
fi nancial institutions
fi nancial management
fi nancial markets
fi nancial system
foreign exchange markets
investments
money markets
mortgage markets
personal fi nance
primary market
secondary market
Review Questions