Information Systems

BMGT343

Exam 1 Review

Chapter 1- Investments: Background and Issues

1.1 Real Versus Financial Assets

Nature of the Investment:

-Reduce current consumption in hopes of greater future consumption

Real Assets:

-Used to produce goods and services: Property, plant, equipment, human capital

Financial Assets:

-Claims on real assets or claims on asset income

-Claims to the income generated by the real asset

*Real assets generate net income to the economy, financial assets simply define the allocation of income or wealth among investors

-Household wealth includes financial assets such as bank accounts, corporate stock, or bonds. These securities, which are financial, are liabilities of the issuers of the securities…on balance sheet claims cancel out; leaving only real assets as the net wealth of the economy

All financial assets (owner of claim) are offset by a financial liability (issuer of claim)

When we aggregate over all balance sheets, only real assets remain. Hence, net worth of an economy is the sum of its real assets.

1.2 Major Classes of Financial Assets or Securities

Debt Securities (promise either a fixed stream of income or a stream of income)

-Money market instruments (Bank certificate of deposit, Tbills) short term, highly marketable & low risk

-Bonds

-Preferred Stock

Common Stock/Equity: represents an ownership share in the corp…not promised any particular payment, receive dividends and have prorated ownership in the real assets *tied directly to the success of the firm and its real assets…risky

-Ownership stake in the entity, residual cash flow

Derivative securities –provide payoffs that are determined by the prices of other assets such as bond or stock prices

-A contract whose value is derived from some underlying market conditions

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1.3 Financial Markets and the Economy

Allocation of Risk

-Bond v Stock of given company: Bonds promise to provide a fixed payment…stockholders bear more of...