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Chapter 1 An Overview of Finance 12
1.0 Introduction 12
1.1 Capital Market 16
1.1.1 The Definition of Capital Market 16
1.1.2 The Role of Capital Market 16
1.1.3 Primary Market vs Secondary Market 17
1.2 Participants in a Capital Market 18
1.2.1 Financial Intermediaries 18
1.2.2 Financial Institutions 20
1.2.3 Broker-Dealer 21
1.3 Business Organisations and Physical Assets Market 22
1.4 Chinese Capital Market: An Introduction 24
1.4.1 Shanghai Stock Exchange (SSE) 25
1.4.2 The STAR Market 26
1.4.3 The Shen Zhen Stock Exchange (SZSE) 27
1.4.4 Beijing Stock Exchange (BJSE) 29
1.5 Share Classes and Securities in China 29
1.6 Capital Market Analyst Approach 35
Conclusion 36
Exercises 38
Chapter 2 Money and Money Market 45
2.0 Introduction 45
2.0.1 Checks/Cheques 46
2.0.2 Legal Tender 47
2.0.3 Barter 49
2.1 Historical Development of Money 49
2.1.1 Origins of Money 49
2.1.2 Token Money 51
2.1.3 Money Development in China 52
2.2 The Essential Qualities of Money 53
2.3 The Functions of Money 54
2.4 Defining Money in a Broader Sense 55
2.4.1 Money Convertibility 55
2.4.2 Money Defined in Theory 56
2.4.3 Money Defined in Macroeconomics 57
2.4.4 Money Defined by Money Supply 58
2.5 Money Market 59
2.5.1 The Bill Market 60
2.5.2 Inter-bank (Lending) Market 61
2.5.3 Certificates of Deposit Market 62
Conclusion 63
Exercise 63
Chapter 3 Basic Concepts and Theories in Finance 69
3.0 Introduction 69
3.1 Theory of Managerial Self-Interest 71
3.2 The Concept of Agency 74
3.3 The Concept of ‘Time Value of Money’ 78
3.3.1 Single Interest Rate 79
3.3.2 Compound Interest Rate 81
3.4 The Concept of Maximising Shareholders’ Wealth 83
3.5 Risk Diversification and Risk Aversion 84
3.5.1 Systemic Risk or Market Risk 85
3.5.2 Risk-Aversion Theory 88
3.6 Information Asymmetry and Financial Signalling 89
3.6.1 Information Asymmetry 89
3.6.2 The Financial Signalling Theory 90
3.7 The Capital Market Efficiency Theory 91
Conclusion 92
Exercises 92
Chapter 4 Business Source of Finance 97
4.0 Introduction 97
4.1 Business Structure 98
4.1.1 Sole Proprietor 99
4.1.2 Partnership 100
4.1.3 Unincorporated vs. Incorporated Business 101
4.2 Equity Finance 102
4.2.1 Ordinary Share 102
4.2.2 Preference Shares 104
4.3 Debt Finance 105
4.3.1 Types of Corporate Debt 105
4.3.2 Interest Coupon Rate 107
4.4 Convertible Securities and Warrants 108
4.5 International Sources of Finance 109
4.6 Alternative Sources of Finance 110
Conclusion 110
Exercises 112
Chapter 5 Time Value of Money 117
5.0 Introduction 117
5.1 Future Value 118
5.2.1 The concept of future value
5.2.2 Future Value Table 119
5.2.3 The Use of Future Value 120
5.3 Present Value 123
5.4 Annuities 125
5.5 Perpetuity 129
5.6 Real and Nominal Rates of Interest 132
Conclusion 134
Exercises 135
Chapter 6 Fixed-Interest Securities and Valuations 145
6.0 Introduction 145
6.1 What is Value? 146
6.1.1 Book Value 147
6.1.2 Market Value 149
6.1.3 Forced-Sale Value 150
6.2 Government Bond Valuation 151
6.2.1 Risks Associated with Government Bonds 152
6.2.3 Calculating Market Value After an Unexpected Change in Interest Rates 154
6.3 Bond Yields 156
6.3.1 Interest (Current) Yield 156
6.3.2. Yield to Maturity (YTM) 156
6.3.3 The Valuation of Undated Government Bonds 158
6.4 Corporate Bond 160
6.4.1 Risks Associated with Debentures and Loan Stock 161
6.4.2 Further Explanation of Default Risk Premium 166
6.4.3 China Government Bond Index 168
6.5 An Introduction to Yield Curves 169
6.5.1 Introduction to Yield Curves 169
6.5.2 Positive Yield Curve 171
6.5.3 Inverted Yield Curve 172
6.5.4 Flat Yield Curve 172
Conclusion 173
Exercises 174
Chapter 7 Ordinary Share Valuation 179
7.0 Introduction 179
7.1 Information and Equity Value 181
7.2 Valuing Ordinary Shares 182
7.2.1 Absolute valuation 183
7.2.2 Relative valuation 183
7.2.3 Factors that affect the value of ordinary shares 184
7.3 Equity Valuation Models 185
7.3.1 Asset-based valuation 186
7.3.2 Income-based valuation model 188
7.3.4 Discounted cash flow-based valuation (DCFV) 195
7.4 Conclusion 199
Exercises 200
Chapter 8 Stock Market Investment Indicators 201
8.0 Introduction 201
8.1 Measuring Risks and Returns 202
8.1.1 Expected Return 203
8.1.2 Variance and standard deviation 204
8.1.3 Introduction to some technical indicators 208
8.2 Financial Ratio Analysis 214
8.2.1 Price/Earnings (P/E) Ratio 215
8.2.2 Earning Yield 216
8.2.3 Earning Yield Vs. P/E ratio 217
8.2.4 Dividend yield 218
8.2.4 Dividend Coverage Ratio (DCR) 219
8.2.5 Solvency ratio (Gearing) 220
8.2.6 Profitability ratios 221
8.2.7 Working capital management ratios 222
8.2.8 Liquidity ratio 223
8.3 Comprehensive Examples 223
8.3.1 Stock Market Performance Analysis 223
8.3.2 Financial Ratios Analysis and a Comparison of Two Companies in the Same Industry 224
8.3.4 FRA in action 228
Conclusion 233
Exercises 235
Chapter 9 Strategic Financial Management 240
9.0 Introduction 240
9.1 Business Finance 241
9.2 Finance in Non-profit Organisations (NPOs) 243
9.3 The Concept of Value, Revisited 245
9.4 Strategic Financial Management 247
9.5 Investment Decisions 249
9.6 Financing Decisions 250
Keys to Exercises
References 254