TERM 1
deficit
DEFINITION 1
taking much less in than spending ex: goverment- less taxes
in, more spending
TERM 2
saving surplus
DEFINITION 2
Individuals and companies that take in more than speding.
TERM 3
3 ways Savings are transferred through
Financial Markets
DEFINITION 3
1. Direct Transfer of Funds - firm seeking cash s ells securities
directly to savers (inverstors) willing to purchase them in hopes
for a large return. ex: startup compa ny- goes directly to a wealthy
private investor called an ANGEL INVE STOR or a VENTURE
CAPITALIST. (Koofers.com) startup com pany does well, received
2mil from venture capitalist to expan d and in return became part
owners of company. 2. Indirect transf er using an investment
banking firm- 3. Indirect transfer u sing the financial
intermediary
TERM 4
5 PRINCIPLES OF FINANCE
DEFINITION 4
1. CASH FLOW IS WHAT MATTERS- ca sh flow not profit determines
the value of a business 2. MONEY HA S A TIME VALUE- a dollar
received today is more valuable than a dollar receive one year
from now b/c of interest earned 3. R ISK REQUIRES A REWARD-
investors want a return that satisfies two requirements: return for
delaying consumption & additional ret urn for taking on risk. 4.
MARKET PRICES ARE GENERALLY RIG HT- 5. CONFLICTS OF
INTEREST CAUSE AGENCY PROBLEMS - results from the seperation
of ownership and management of th e firm.
TERM 5
AVOIDING FINANCIAL CRISIS- BACK TO 5
PRINCIPLES
DEFINITION 5
1. FORGETTING CASH FLOW IS WHAT MATTERS- focusign on
earnings instead of cash flow. 2. FORG ETTING MONEY HAS A TIME
VALUE- Focusing on the short run 3. F ORGETTING RISK REQUIRES
REWARD- Excessive risk taking due to under-estimation of risk. 4.
FORGETTING MARKET PRICES ARE GE NERALLY RIGHT- Ignoring
efficiency of financial markets. 5. FOR GETTING CONFLICTS OF
INTEREST CAUSES AGENCY PROBLEM S- Executive compensation is
out of control.
