Finance: Financial Markets, Business Finance, and Asset Management / Edition 1

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Financial managers and investment professionals need a solidfoundation in finance principles and applications in order to makethe best decisions in today's ever-changing financial world.Written by the experienced author team of Frank Fabozzi and PamelaPeterson Drake, Finance examines the essential elements ofthis discipline and makes them understandable to a wide array ofindividuals, from seasoned professionals looking to fine-tune theirfinancial skills to newcomers seeking genuine guidance through thedynamic world of finance.

Divided into four comprehensive parts, this reliable resourceopens with an informative introduction to the basic tools ofinvesting and financing decision-making—financial mathematicsand financial analysis (Part I). From here, you'll become familiarwith the fundamentals of capital market theory, including financialmarkets, financial intermediaries, and regulators of financialactivities (Part II). You'll also gain a better understanding ofinterest rates, bond and stock valuation, asset pricing theory, andderivative instruments in this section.

Part III moves on to detail decision-making within a businessenterprise. Topics touched upon here include capitalbudgeting—that is, whether or not to invest in specificlong-lived projects—and capital structure. Management ofcurrent assets and risk management are also addressed.

By covering the basics of investment decision-making, Part IVskillfully wraps up this accessible overview of finance. Beginningwith the determination of an investment objective, this partproceeds to demonstrate portfolio theory and performanceevaluation, and also takes the time to outline techniques formanaging equity and bond portfolios as well as discuss the bestways to use derivatives in the portfolio management process.

Filled with in-depth insights and practical advice,Finance puts this field in perspective. And while a lot ofground is covered in this book, this information will help youappreciate and understand the complex financial issues that today'scompanies and investors constantly face.

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Product Details

  • ISBN-13: 9780470407356
  • Publisher: Wiley
  • Publication date: 6/9/2009
  • Series: Frank J. Fabozzi Series, #178
  • Edition number: 1
  • Pages: 832
  • Sales rank: 1,089,073
  • Product dimensions: 6.40 (w) x 9.10 (h) x 1.60 (d)

Meet the Author

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in thePractice of Finance and Becton Fellow at Yale University's Schoolof Management, Editor of the Journal of PortfolioManagement, and Associate Editor of the Journal ofStructured Finance and the Journal of Fixed Income.

Pamela Peterson Drake, PhD, CFA, is the J. Gray FergusonProfessor of Finance and Department Head of Finance and BusinessLaw at James Madison University.

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Table of Contents

Preface xiii

About the Authors xv


Background 1


What Is Finance? 3

Capital Markets and Capital Market Theory 4

Financial Management 5

Investment Management 7

Summary 8


Mathematics of Finance 11

The Importance of the Time Value of Money 11

Determining the Future Value 13

Determining the Present Value 20

Determining the Unknown Interest Rate 22

Determining the Number of Compounding Periods 23

The Time Value of a Series of Cash Flows 24

Valuing Cash Flows with Different Time Patterns 34

Loan Amortization 40

The Calculation of Interest Rates and Yields 46

Principles of Valuation 51

Summary 55


Basics of Financial Analysis 57

Financial Ratio Analysis 58

Cash Flow Analysis 87

Usefulness of Cash Flows in Financial Analysis 99

Summary 105


Capital Markets and Capital Market Theory 109


The Financial System 111

Financial Assets/Financial Instruments 111

Financial Markets 113

Financial Intermediaries 114

Regulators of Financial Actitivies 118

Classification of Financial Markets 122

Market Participants 131

Summary 150

References 154


Interest Rate Determination and the Structure of InterestRates 155

Theories About Interest Rate Determination 155

The Federal Reserve System and the

Determination of Interest Rates 157

The Structure of Interest Rates 163

Term Structure of Interest Rates 168

Summary 178

References 179


Basics of Derivatives 181

Futures and Forward Contracts 181

Options 194

Swaps 206

Cap and Floor Agreements 209

Summary 211

Appendix: Black-Scholes Option Pricing Model 212

References 219


Asset Valuation: Basic Bond and Stock Valuation Models221

Valuing Bonds 221

Valuation of Common Stock Using Dividend Discount Models 235

Summary 246

Appendix: Valuing Convertible Bonds 247

References 252


Asset Valuation:The Theory of Asset Pricing 255

Characteristics of an Asset Pricing Model 255

Capital Asset Pricing Model 256

Arbitrage Pricing Theory Model 270

Summary 279

References 281


Financial Management 283


Financial Management 285

Forms of Business Enterprise 286

The Objective of Financial Management 291

The Agency Relationship 296

Dividend and Dividend Policies 302

Special Considerations in International Financial Management314

Summary 322

References 325


Financial Strategy and Financial Planning 327

Strategy and Value 328

Financial Planning and Budgeting 331

Importance of Financial Planning 332

Budgeting Process 332

Sales Forecasting 334

Seasonal Considerations 337

Budgeting 338

Pro Forma Financial Statements 346

Long-Term Financial Planning 352

Financial Modeling 355

Performance Evaluation 362

Strategy and Value Creation 369

Summary 372

References 373


The Corporate Financing Decision 375

Debt vs. Equity 375

The concept of leverage 378

Capital Structure and Financial Leverage 381

Financial Leverage and Risk 384

Capital Structure and Taxes 388

Capital Structure and Financial Distress 393

The Cost of Capital 397

The Agency Relationship and Capital Structure 399

Optimal Capital Structure: Theory and Practice 400

A Capital Structure Prescription 403

Summary 404

Appendix: Capital structure: Lessons from

Modigliani and Miller 405

References 415


Financial Engineering, Asset Securitization, and ProjectFinancing 417

Creation of Structured Notes 419

Asset Securitization 427

Project Financing 438

Summary 446

References 448


Capital Budgeting: Process and Cash Flow Estimation449

Investment Decisions and Owners’ Wealth Maximization450

Capital Budgeting Process 452

Classifying Investment Projects 454

Estimating Cash Flows of Capital Budgeting Projects 458

Summary 477

References 477


Capital Budgeting Techniques 479

Evaluation Techniques 479

Net Present Value 481

Profitability Index 485

Internal Rate of Return 487

Modified Internal Rate of Return 491

Payback Period 495

Discounted Payback Period 496

Issues in Capital Budgeting 497

Comparing Techniques 500

Capital Budgeting Techniques in Practice 503

Capital Budgeting and the Justification of New Technology504

Incorporating Risk into Capital Budgeting Analysis 506

Summary 523

References 524


Managing Current Assets 525

Management of Cash and Marketable Securities 526

Cash Management 527

Marketable Securities 533

Management of Accounts Receivable 534

Inventory Management 545

Summary 553

References 554


Financial Risk Management 555

Risk Defined 555

Enterprise Risk Management 558

Managing Risks 563

Risk Transfer 565

Summary 572

References 574


Investment Management 575


The Basic Principles of Investment Management 577

The Investment Management Process 577

The Theory of Portfolio Selection 582

Tracking Error 604

Measuring and Evaluating Performance 607

Summary 622

References 624


Equity Portfolio Management 625

Stock Market Indicators 625

Top-Down vs. Bottom-up Approaches 629

Fundamental vs. Technical Analysis 629

Popular Stock Market Strategies 631

Passive Strategies 643

Equity-Style Management 643

Types of Stock Market Structures 646

The U.S. Stock Markets: Exchanges and OTC Markets 649

Trading Mechanics 656

Summary 664

References 665


Bond Portfolio Management 669

Sectors of the Bond Market 669

Features of Bonds 679

Yield Measures 686

Risks Associated with Investing in Bonds 693

Measuring Interest Rate Risk 702

Bond Indexes 710

Active Bond Portfolio Strategies 711

Passive Bond Portfolio Strategies 716

Summary 719

References 720


Use of Stock Index Futures and Treasury Futures Contracts inPortfolio Management 721

Using Stock Index Futures in Equity Portfolio Management 722

Using Treasury Bond and Note Futures Contracts in

Bond Portfolio Management 736

Using Stock Index Futures and Treasury Bond Futures to Implementan Asset Allocation Decision 744

Summary 746

References 746


Use of Options in Portfolio Management 747

Using Stock Options and Index Options in

Equity Portfolio Management 747

Using Interest Rate Options in Bond Portfolio Management 761

Summary 771

Appendix: Pricing Models on Options on Physicals and FuturesOptions 771

References 773

Index 775

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