Assig essay

Financial Assets: These are the legal documents or piece of papers. Their value comes from the fact that they give their owners claim to certain future cash flows. Here the corporate bond , inventory , corporate stock and note receivable are the financial assets. Financial assets are purchased by people or companies to earn income with funds they don’t currently need . Buying such an asset is similar to opening a saving account in the bank and receiving interest . Question 2: Companies are generally financed with a mix of debt and equity.

How does the rockiness of the company as perceived by the financial market hanged as the mix shifts from all the equity to mostly debt? Why? Would changes in perceived risk induced by changes in the debt equity mix affect the company’s stock price? Answer: Managing financial market risk goes to the heart of how governments operate. Governments wants to be able to oversee a growing economy, they want their citizen’s well being to improve overtime, and they need to be able to provide appropriate safety nets for the disadvantaged. To be able to this, government must have well-functioning financial market.And some time we had that. It seemed that we had thrown if the shackles of the lows of the traditional business cycle and that continued growth could be expected overtime. Risk and uncertainty in the run up to the global financial crisis, we greater development in financial markets which largely brought benefits to the community, but also brought with it significant risks. We know that as countries develop and become richer, companies and households increasingly acquire financial assets and liabilities,the stock of which rises faster than incomes.Second, as financial markets become developed, the stock of assets, both financial and physical, is increasingly acquired with debt.

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The third effect has been the significant amount of financial incantation that has occurred leading into the SGF. This innovation brought with it, in certain instances, greater complexity. This increase incompletely , notably in wholesale financial markets, was one of the contributing factors to the SGF.

Whether it is the complexity itself, or the inability of agents to adequately take account of these risks, we end up with the same result : a misprinting of financial assets.At the same time, financial markets bring with them some key challenges. Financial intermediation is both inherently risky and critical to economic stability. It is because the banking industry contains such risks that it can suffer severe contractions without careful macroeconomic management by government. And because banking is critical to a modern economy, if it does collapse, it can be disastrous for the rest of the economy.

Aligned to this is the structure of incentives in the financial sector and the relationship between risk and return.The central tenet in modern finance being that investors are naturally risk averse, so in exchange for taking on more risk they demand higher return. Therefore, riskier assets tend to have lower prices and these produce higher expected returns. Focuses, a well-managed financial firm takes calculated and limited risks, risks that will make money for the firm if they pay off, but will not destroy the firm if they do not. But why did major firms such as Alga and Lehman Brothers, take risks that were critically unbounded, albeit low in probability? In addition, we have the uncertainty of financial markets.

Investment decisions are often made in a setting of uncertainty because, by the time the investment can yield a return, the conditions determining its profitability may have changed. Some unanticipated changes be hedged, specially those that are uncertain to occur because it is difficult or impossible to insurer; whatever an insurance company or an issuer of a credit default swap; to calculate a premium. The low probability events, which can trigger system is problems, are very difficult to guard against, especially when such as event is transmitted through a fallopian system as a result of the interconnectedness of firms.In light of those risks, where does this place a government which wishes to act in the best interests of its citizens. How does it reach the balance between stability and competition and innovation while voiding systemic risks arising domestically or globally. Question 3: Discuss the difference, similarities and ties between finance and accounting.

Answer: Differences: If Nan CE Accounting Finance is the study and management of investments. Finance is concerned with: Stocks Bonds Financial products Individual Investor The focus in finance is on future cash flow Accounting is the preparation , evaluation and management of financial records.Accounting is concerned with : Budgets Audits Taxes Business financial operations Accounting statements portray physical activity in numbers i.

E descriptive, historical for egg. Depreciation Similarities: Reports Financial accounting is used to produce reports that include financial statements, including the balance sheet, income statement and statement of cash flows. This information is given to external parties, such as stockholders, investors and lending institutions. With cost accounting, the documents produced through financial accounting are used by people within the company to make internal decisions.The use of financial statements is vital to both types of accounting. The difference lies in the groups Of people that use the information. Historical Data Cost accountants and financial accountants both are interested in historical information about a company. This information is provided through financial statements.

A primary reason that this information is important is to make future decisions for the company. With both types of accounting, future plans are created based on historical information. This includes forecasting, creating budgets and planning future projects.Company Performance Both financial accounting and cost accounting focus on ways to improve company performance. Financial accounting, however, concentrates on an entire company, while cost accounting generally divides performance by division, location or region. Financial accounting focuses on company performance by closely monitoring accounts payable and accounts receivables.

Cost accounting also monitors performance issues by viewing these accounts and other data such as the cost of goods sold. Ties: Accounting is a language of finance.The practice of finance is closely tied to accounting because financial transactions are recorded within the structure of accounting systems. Because of this connection, all finance professionals need some knowledge of accounting. Question 4: How does the activity of investors in financial markets affects the decisions of executives within the firm? Answer: Executives whose compensation is related to the stock price through bonuses, Stock options or other ties will base decisions on their potential to affect the share price.Tying compensation to share price is a way to discourage “agency problems” where a executive puts his own interests ahead of shareholders. “Shareholders choose to solve agency problems with the firm’s executive by tying his compensation to the stock price, because they believe that the stock price contains information about firm value,” the authors write. “If prices were uninformative, shareholders would not tie managerial compensation to stock rises, and so executive would not care about them.

” Run on the financial markets. A run occurs when investors sell a stock solely because other investors are selling.A run can push a share price below the level called for by fundamentals such as earnings. This would not happen in a perfectly efficient market because investors would base their buy and sell decisions on the firm’s fundamentals. Once the price fell below the appropriate level, other investors would base their buy and sell decisions on the firm’s fundamentals. Once the price fell below the appropriate level, other investors would spot a arraign and buy, and that demand would cause the price to establish or rise, preventing a run.However, the feedback effect can give the run momentum by scourging lenders from providing the firm with capital, weakening the company and spurring more selling.

Question 5: Is limited liability a meaningful concept? Why or why not? And if so, for whom ? Answer: Yes, it is a useful concept a business owner has “limited liability”, it means that he or she is not personally responsible for business debts and obligations of the corporation. In other words, if the corporation is sued, only the assets of the business are at risk, not the wiener’s (shareholders) personal assets, such as their houses or cars.

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