Preface xi Features of this book xii Key learning tools xiii PART 1: FINANCIAL SYSTEMS Chapter 1: An overview of finance Introduction 3 Definition of finance 4 The financial system Finance as a discipline for study 5 The interdisciplinary nature of finance Finance and business 7 The business environment and stakeholder protection * The four levels of financial decision-making * Personal level * Sole proprietorship level * Partnership level * Corporation level The ethics dilemma 13 Agency problems * Conflict of interest Financial markets 13 The existence of private wealth * Freedom of choice * Incentives * Efficient markets * The role of government Conclusion 17 Self-test question and answer 18 Questions and problems 18 Chapter 2: Financial and property markets Introduction 19 Financial assets 19 Debt versus equity claims * Prices of financial assets * The roles of financial assets Financial markets 21 The roles of financial markets * Market participants * Types of financial market Money markets 24 Market operation and participants * Types of instruments traded Capital markets 25 The debt markets * The equities market Foreign exchange (FX) market 28 Market operations and participants * Types of instruments traded Derivative markets 29 Types of derivative instruments * The operation of the market * Participants in the futures market * Forward contracts * Options contracts * Participants in the options market Cryptocurrency markets 35 Property markets 36 Characteristics of property * Indirect vs direct investment * Valuation and pricing * The role of the housing market in the economic cycle Conclusion 41 Self-test questions and answers 42 Questions and problems 42 Chapter 3: Financial institutions Introduction 43 The development of the modern financial system 43 The modern role of government in the financial intermediation process * Regulations to control the soundness of the financial system Credit creation 48 Credit multiplier Monetary policy - three control mechanisms 49 The official cash rate * The inflation problem Modern financial intermediaries 52 Depository institutions * Non-depository institutions * The benefits of financial intermediation Ethics and financial institutions 56 Classifying types of financial transfers 56 Conclusion 57 Self-test questions and answers 58 Questions and problems 58 PART 2: FINANCE TOOLS Chapter 4: Time value of money - Single payments Introduction 60 Simple interest and future value 61 Simple interest and calculating the present value 63 Compound interest and future value 63 Other methods of calculation The present value of a single payment 67 Compounding frequency 70 Continuous compounding/discounting 74 Nominal and effective interest rates 75 Solving for an unknown interest rate 77 Solving for an unknown time period 78 Conclusion 80 Self-test questions and answers 80 Questions and problems 82 Chapter 5: Time value of money - Multiple payments Introduction 84 Multiple cash flows 84 Future value of multiple cash flows * Present value of multiple cash flows Level cash flows: Annuities and perpetuities 87 Future value of an annuity * Present value and annuities Finding the amount of a regular payment 93 Annuity due 95 Perpetuities 97 Asset valuation: Capitalisation method of property valuation 98 Asset valuation: Calculating the price of a bond 100 Loan types 104 Multiple payments per annum and compounding frequency 106 Conclusion 107 Self-test questions and answers 108 Questions and problems 108 PART 3: PERSONAL FINANCE Chapter 6: Risk and return Introduction 112 Risk-free assets 113 The two components of a return * Nominal interest rate Term structure of interest rates 115 Shape of yield curves Risky assets 117 Risk and return - the trade-off 119 Measuring historical risk and return 121 Returns from investment * Holding period yields or return * Standard deviation as a measure of risk Measuring future risk and return 127 The benefit of diversification 129 The capital asset pricing model and the security market line relationship 133 Conclusion 135 Self-test questions and answers 136 Questions and problems 141 Chapter 7: Personal financial management Introduction 142 The personal financial planning activity 142 Money management 144 Gathering financial information * Preparing an income statement * Budget preparation * Developing a personal balance sheet Financial planning for life 147 Financial goal attainment 149 Funding a retirement plan 150 Retirement income gap * KiwiSaver * Choosing a KiwiSaver fund Residential property and mortgages 155 Property investment: Rights and ownership 156 Property concepts * Definition of land and land ownership * Forms of ownership Land registration and record of title 160 Resource Management Act 1991 Financing the purchase of residential property 164 Starting or buying a business 166 Personality traits * Preliminary evaluation * Business plan Conclusion 171 Self-test question and answer 172 Questions and problems 175 PART 4: FINANCIAL MANAGEMENT Chapter 8: Financial management Introduction 177 Role of financial management 178 Financial management * Organisational context Objective of financial management 180 What about profit maximisation? * Time value of money * Cash flows * Risk * Managers as agents * Economic implications of wealth maximisation Corporate governance and business ethics 187 Reconceiving products and markets * Redefining productivity in the value chain * Enabling local cluster development * Ethical considerations in property The external environment 189 Financial markets * Regulatory environment Risk and return 190 Conclusion 193 Self-test questions and answers 194 Questions and problems 195 Chapter 9: Investment in net working capital Introduction 199 Net working capital 199 Risk-profitability trade-off 200 Management of net working capital 200 Managing cash 201 Cash and near-cash * Motives for holding cash * Forecast cash flow statement Management of accounts receivable 204 Setting credit policy Management of inventory 205 Economic order quantity model * Computerised inventory control system * Just-in-time system Management of current liabilities 206 Cash conversion cycle 211 Conclusion 213 Self-test questions and answers 214 Questions and problems 216 Chapter 10: Financing the firm Introduction 222 Features of debt and equity 222 Funding a firm''s life cycle 223 Start-up stage * Growth stage * Maturity stage Choosing the financing mix 237 Short-term or long-term sources? * Internal or external funding? * Debt or equity finance? Cost of capital 240 Cost of debt capital * Cost of equity capital * Weighted average cost of capital Conclusion 245 Self-test questions and answers 246 Questions and problems 248 Chapter 11: Investment in long-term assets - Concepts Introduction 255 Capital budgeting process 255 Measuring the costs and benefits 256 Investment outlay * Operating cash flows * Terminal value Conclusion 266 Self-test question and answer 267 Questions and problems 269 Chapter 12: Investment in long-term assets - Evaluation techniques Introduction 271 Techniques of investment evaluation 271 Accounting return on investment * Payback period * Net present value * Assumptions of the weighted average cost of capital * NPV(ER) * Internal rate of return * Comparing NPV and IRR Other capital budgeting considerations 284 Capital budgeting and inflation * Capital budgeting and risk Conclusion 287 Self-test question and answer 287 Questions and problems 288 Chapter 13: Investment in long-term assets - Property Introduction 295 Why invest in property? 296 Analysis of a property investment 298 Investment purpose * Property investment risk * Property investment return * Single-period methods * Investor-specific considerations * Multi-period methods * Feasibility analysis * Capitalisation of property income * Financing property investments Conclusion 311 Self-test question and answer 312 Questions and problems 316 Glossary 318 Appendix 1 - Some useful formulae 329 Appendix 2 - Suggested solutions for selected end-of-chapter questions and problems 333 Acknowledgements 335 About the original authors 335 Index 336.