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The Basics of Finance: An Introduction to Financial Markets, Business Finance, and Portfolio Management

ISBN: 978-0-470-87772-2
512 pages
July 2010
The Basics of Finance: An Introduction to Financial Markets, Business Finance, and Portfolio Management (0470877723) cover image

An introductory guide to the world of finance

The Basics of Finance is an accessible book for those who want to gain a better understanding of this field, but lack a strong business background. It covers essential concepts, tools, methods, and strategies in finance without delving too far into theory.

Written by the experienced author team of Frank Fabozzi and Pamela Peterson Drake, this reliable resource discusses everything from financial instruments and markets to portfolio management techniques, understanding and analyzing financial statements, and different types of corporate financial strategy, planning, and policy.

  • Explores, in a basic way, topics such as cash flow analysis, asset valuation, capital budgeting, and derivatives
  • Provides a solid foundation in the field of finance, which you can quickly build upon
  • Explains concepts in various areas of finance without getting too complicated

The Basics of Finance offers essential guidance on financial markets and institutions, corporate finance, portfolio management, risk management, and much more. If you're looking to learn more about finance, this is the best place to start.

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Preface.

Acknowledgments.

Chapter 1 What is Finance?

Capital Markets & Capital Market Theory.

Financial Management.

Investment management.

Organization of this book.

The Bottom Line.

Questions.

Part One: The Financial System.

Chapter 2 Financial Instruments, Markets, and Intermediaries.

The financial system.

The Role of Financial Markets.

The role of financial intermediaries.

Types of financial markets.

The Bottom Line.

Questions.

Chapter 3 The Financial System’s Cast of Characters.

Domestic nonfinancial sectors.

Nonfinancial businesses.

Domestic financial sectors.

The foreign sector.

The Bottom Line.

Questions.

Part Two: Financial Management.

Chapter 4 Financial Statements.

Accounting principles: What are they?

The basic financial statements.

How are the statements related?

Why bother about the footnotes?

Accounting flexibility.

U.S. accounting v. outside of the U.S.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 5 Business Finance.

Forms of business enterprise.

The objective of financial management.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 6 Financial Strategy and Financial Planning.

Strategy and value.

The budgeting process.

Budgeting.

Performance evaluation.

Strategy and value creation.

The Bottom Line.

Questions.

Chapter 7 Dividend and Dividend Policies.

Dividends.

Stock distributions.

Dividend policy.

Stock repurchases.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 8 The Corporate Financing Decision.

Debt v. equity.

Financial leverage and risk.

Financial distress.

The cost of capital.

Optimal capital structure: Theory and practice.

The Bottom Line.

Solutions to Try It! Problems.

Questions.

Chapter 9 Investment Management.

Setting investment objectives.

Establishing an investment policy.

Constructing and monitoring a portfolio.

Measuring and evaluating performance.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Part Three: Valuation and Analysis Tools.

Chapter 10 Time Value of Money.

Why the time value of money?

Calculating the future value.

Calculating a present value.

Determining the unknown interest rate.

The time value of a series of cash flows.

Annuities.

Loan amortization.

Interest rates and yields.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 11 Financial Ratio Analysis.

Classifying financial ratios.

Liquidity.

Profitability ratios.

Activity ratios.

Financial leverage.

Return on investment.

The Du Pont system.

Common-size analysis.

Using financial ratio analysis.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 12 Cash Flow Analysis.

Difficulties with measuring Cash Flow.

Free cash flow.

Usefulness of cash flows analysis.

Ratio analysis.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 13 Capital Budgeting.

Investment decisions and owners' wealth.

The capital budgeting process.

Determining cash flows from investments.

Capital budgeting techniques.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Part Four: Investments.

Chapter 14 The World of Derivatives.

Futures and forward contracts.

Options.

Swaps.

The Bottom Line.

Appendix: Black-Scholes option pricing model.

Solutions to Try it! Problems.

Questions.

Chapter 15 Financial Risk Management.

The definition of risk.

Enterprise risk management.

Managing risks.

The Bottom Line.

Questions.

Chapter 16 The Theory of Portfolio Selection.

Some basic concepts.

Estimating a portfolio's expected return.

Measuring portfolio risk.

Portfolio diversification.

Choosing a portfolio of risky assets.

Behavioral finance and portfolio theory.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 17 Asset Pricing Theory: The Capital Asset Pricing Model.

Characteristics of an asset pricing model.

Overview of the capital asset pricing model.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 18 The Structure of Interest Rates.

The base interest rate.

The term structure of interest rates.

Term structure of interest rates theories.

Swap rate yield curve.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 19 Valuing Common Stock.

Discounted cash flow models.

Relative valuation methods.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Chapter 20 Valuing Bonds.

Valuing a bond.

Conventional yield measures.

Valuing bonds that have embedded options.

The Bottom Line.

Solutions to Try it! Problems.

Questions.

Appendix: Solutions to End of Chapter Questions and Problems.

Glossary.

About the Authors.

Index.

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PAMELA PETERSON DRAKE, PhD, CFA, is the J. Gray Ferguson Professor of Finance and Department Head of Finance and Business Law at James Madison University. She received her PhD in finance from the University of North Carolina at Chapel Hill and her BS in accountancy from Miami University. Professor Drake previously taught at Florida State University and Florida Atlantic University.

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance and Becton Fellow at the Yale School of Management and Editor of the Journal of Portfolio Management. Fabozzi earned a doctorate in economics from the City University of New York. He is an Affiliated Professor at the University of Karlsruhe's Institute of Statistics, Econometrics, and Mathematical Finance and is on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton University.

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