Financial Management Environment PDF

GROUP 1 FINANCIAL MANAGEMENT ENVIRONMENT Topic B  Today's Topic Highlights Outline (1) The Economic Environment for Business (2) The Nature and Role of Financial Markets and Institutions (3) The Nature and Role...

GROUP 1 FINANCIAL MANAGEMENT ENVIRONMENT Topic B  Today's Topic Highlights Outline (1) The Economic Environment for Business (2) The Nature and Role of Financial Markets and Institutions (3) The Nature and Role of Money Markets  THE ECONOMIC ENVIRONMENT FOR BUSINESS  Economics is a social study that studies the production, distribution and consumption of goods and services. (1) Microeconomics (2) Macroeconomics Economics (1) Macroeconomics looks at the economy as a whole, addressing broad aggregates like national income and output, unemployment, inflation, and the effects of monetary and fiscal policy. Objectives Economic growth Low level of inflation Low level of unemployment Sustainable Balance of Payments Proper distribution of income and wealth Macroeconomic Policy Setting POLICY OBJECTIVES POLICY TARGETS POLICY INSTRUMENTS the broad goals that economic specific and quantifiable tools used by policymakers to policies aim to achieve outcomes that policymakers achieve the targets and aim to achieve to meet the objectives. broader objectives. These targets provide clear (1) Monetary Policy benchmarks for assessing the (2) Fiscal Policy success of economic policies. (3) Exchange Rate Policy  Main Macroeconomics Policy Targets Economic Sustainable Balance Proper distribution of Growth of Payments income and wealth Low levels of Low level of unemployment inflation  Economic Policy Tools Monetary Policy Fiscal Policy Exchange Rate Policy Influence monetary variables like money government’s use of taxation and spending Involves managing the country's currency supply and interest rates. to meet macroeconomic targets. value relative to other currencies to influence trade and investment. Contractionary Policy: Contractionary Policy: Decreases money supply. Increase tax Increase interest rates. Decrease government Expansionary Policy: (Aims to combat inflation.) expenditure. Expansionary Policy: Increases money supply. Decrease Tax Decrease interest rates. Increase government (Aims to accelerate economic expenditures growth or combat unemployment during a recession.) GOVERNMENT ECONOMIC POLICY AND IMPLICATIONS ON BUSINESSES Contractionary Monetary Increased Government Spending Policy (Raising Interest and Tax Incentives Rates) When the economy is growing too fast or inflation When the government increases its spending on development is too high, the government may try to slow things projects and offers tax incentives to certain sectors, the down by reducing the money supply and raising combined effects can significantly stimulate the economy and interest rates. create numerous opportunities for businesses. Higher borrowing cost Higher overall demand Costs more to pay existing debt Cost savings and increased investment Drop in company shares Job creation Reduced investment in new projects GOVERNMENT ECONOMIC POLICY AND IMPLICATIONS ON BUSINESSES Free Float of Currency – Domestic Currency Weakens without Intervention When a government allows its currency to float freely, the value of the currency is determined by the market forces of supply and demand without any intervention. This can lead to a weakening of the domestic currency, which has several implications for businesses Imported Raw Materials Become More Expensive Foreign Goods Become More Expensive Exported Domestic Goods Become More Competitive Nature and Role of Financial Markets and Institutions  A financial market is a market where financial securities are traded. They enable the exchange of stocks, bonds, commercial papers, short-term bills, etc. a. Capital Market b. Money Market WHAT IS A FINANCIAL MARKET?  Capital markets are places to make medium- to long-term investments or raise money using financial CAPITAL securities, such as securities for debt and stocks. MARKET It is divided into categorias mainly: Equity Securities Debt Securities  THE CAPITAL MARKETS SERVE TWO MAIN FUNCTIONS: Primary markets. This is when organizations raise new finance via the issuance of new equities or debt securities to financial institutions or private investors Secondary markets. Investors are allowed to trade in existing listed securities, to sell their existing securities or buy new ones to manage their portfolios. The low transaction costs and enhanced liquidity facilitates the proper pricing of securities at fair value. The secondary markets in turn serve as a source of pricing information for the primary market, and assist the efficient allocation of new funds at the right price.  Money Markets is where companies and government meet their short- term borrowing needs. Money markets have much shorter period MONEY of time between its issuance and maturity compared to bonds. MARKET Usually, it only lasts three or months or less but not exceeding a year. Examples of Money Market Instrument are: Time deposits Treasury bills Money market funds  An organization that serves as a middle- man for two parties to enable a financial transaction is referred to as a financial intermediary. Financial intermediaries encompass a range of entities, including mutual funds, commercial banks, investment banks, and pension funds. Financial Intermediaries  Convenience Professional Risk- WHAT ARE THE Profiling BENIFITS OF Pooling of risk GOING THROUGH Maturity of A FINANCIAL transformation INTERMEDIARY? Regulatory protection Aggregation  Functions of a Stock Market and Corporate Bond Market A stock market is a marketplace for the issuance and trading of company shares and derivatives. In the same way, a corporate bond market is a marketplace for the issuance and trading of corporate debt securities and derivatives. Both the stock market and corporate bond market have certain identical functions: Source of Finance for companies Source of Investment for investors Reduced risk to buyers and sellers  Risk and Return Trade-off TYPE OF RISK: 1. DEFAULT RISK - The risk that a borrower will not meet its obligations in a timely manner. 2. LIQUIDITY RISK - The risk of receiving less than fair value for an investment if liquidated in a quick manner. 3. MATURITY RISK - The risk that prices of securities may change owing to uncertainty in the duration of the investment, such as interest rate movements, which are more evident in longerdated securities. 4. INFLATION RISK - The risk that upon receiving back the invested amount, the purchasing power of the invested amount has already been eroded.  Nature and Features of Different Securities in Relation to the Risk/Return Trade-off MONEY MARKET SECURITIES 1. TREASURY BILLS - Treasury bills are discount securities issued at below face value by the Treasury department. 2. Certificate of Deposit (CD) - CDs are time/fixed deposits with a bank or financial institution bearing a predetermined interest rate and maturity date. CAPITAL MARKET SECURITIES 1. Government Bonds - These are interest-bearing securities with coupon paid on a periodical basis, for example, semi-annually. 2. Debentures - Debentures are loan agreements. It is common for debentures to be unsecured since in the event of a default the debenture holders become general creditors with rights over the unencumbered assets THE NATURE AND ROLE OF MONEY MARKET  A SECTION OF THE FINANCIAL MARKET WHERE NEGOTIABLE INSTRUMENTS WITH HIGH LIQUIDITY AND SHORT-TERM MATURITIES ARE TRADED. MONEY MARKET  MONEY MARKET IS A SYSTEM it facilitates the trade of negotiable instruments it is unregulated and informal MONEY MARKET IS USED BY VARIOUS PARTICIPANTS for short-term financing needs for safe investment opportunities MONEY MARKET  WHAT ARE THE EXAMPLES OF COMMON MONEY CHARACTERISTICS OF MARKET MONEY MARKET INSTRUMENTS INSTRUMENTS? TREASURY BILLS SHORT TERM COMMERCIAL HIGHLY LIQUID PAPER LOW-RISK CERTIFICATE OF DEPOSITS  PRIMARY MONEY SECONDARY MONEY MARKETS MARKETS Issuance of new money market Trading of existing money instruments market instruments For the purpose of raising funds to To provide liquidity for investors meet short term financial needs who want to trade before maturity HOW MONEY MARKETS SERVE THE ECONOMY  ROLE OF MONEY MARKET A SYSTEM FACILITATES THAT GIVES LIQUIDITY A PLATFORM WAY FOR THE MANAGEMENT EFFICIENT FOR SAFE AND TRADE OF AND SHORT ALLOCATION PROFITABLE FINANCIAL TERM OF FUNDS INVESTMENTS INSTRUMENTS FUNDING  End Reported by Group 1