1、Chapter 3 Financial Instruments3.1What Is a Financial InstrumentTypes of financial instrumentsAsset classesInternational Accounting Standards (IAS) defines financial instruments as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of anoth
2、er entity.Financial instrumentsDerivativeInstruments（衍生工具）Cash instruments（现金工具）The values and characteristics of derivative instruments are based on the vehicles underlying components, such as assets, interest rates or indices. The values of cash instruments are influenced and determined by the mar
3、kets and they can be securities that are easily transferable into cash. Equity-basedinstrumentsDebt-based Instrumentsp Stocks, stock options, equity features, exotic derivatives Short term debt-based financial instruments last for one year or less: T-bills, commercial paper, deposits, certificates o
4、f deposit, short-term interest rate futures, forward rate agreements Long-term debt-based financial instruments last for more than a year: bonds, loans, bond futures, options on bond futures, interest rate swaps, interest rate caps and floors, interest rate options, exotic derivatives.3.2Commercial
5、Paper and Commercial BillWhat is a commercial paperAdvantages of commercial paperExample of commercial paperCommercial paper vs. commercial bill What is a commercial paperCommercial paper (CP) is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of account
6、s receivable and inventories, and meeting short-term liabilities. A discounted instrument Most matures in 1 to 6 months, some matures in up to 9 months Raise short term funds unsecured means buyers have no claim on a companys assets if the company fails to pay up at maturity sold in large denominati
7、ons of $100,000 or more to large institutions and wealthy individuals. Advantages of commercial paperDoes not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months, or 270 days, making it a very cost-effective means of financing.Example of c
8、ommercial paperA retail firm is looking for short-term funding to finance some new inventory for an upcoming holiday season. The firm needs $10 million and offers investors $10.1 million in face value of commercial paper in exchange for $10 million in cash, according to prevailing interest rates. In
9、 effect, there would be a $0.1 million interest payment upon maturity of the commercial paper in exchange for the $10 million in cash, equating to an interest rate of 1%. This interest rate can be adjusted for time, contingent on the number of days the commercial paper is outstanding. Commercial pap
10、er vs. commercial bill （商业票据与商业汇票） Commercial bills are instruments issued by banks that finance invoices raised by a company. Suppose a company selling goods or products to another company is apprehensive about the payment or at least wishes to enhance the safety of his money can get commercial bil
11、ls issued by banks. Banks issue advance payment in lieu of invoices that show sale of goods. This is an instrument that comes into effect only after a sale has taken place. This is an instrument used by banks to accept and/or discount the bills of a customer. Commercial bills are issued for financin
12、g needs of medium term.3.3Bankers Acceptance Bankers acceptance （银行承兑汇票）A bankers acceptance (BA) is a short-term credit investment created by a non-financial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market. 非金融企业开出，银行担保的短期信用
13、投资工具Bankers acceptances are considered very safe instruments and are used extensively in foreign trade. Banks typically charge a 2% fee.3.4Stock What is a StockPreferred StockCommon Stock What is a StockA stock (also known as shares and equity) is a type of security that signifies ownership in a cor
14、poration and represents a claim on part of the corporations assets and earnings.A shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. usually do not carry voting rightshas a higher claim on its assets and e
15、arnings than common stockcombines features of debt and equity, in that it pays fixed dividends and has the potential to appreciate in price Preferred Stock（优先股） carry voting rights have rights to a companys assets after bondholders, preferred shareholders and other debtholders riskier than debt or p
16、referred shares, usually outperform bonds and preferred shares in the long run growth stocks, value stocks, large-cap stocks, small-cap stocks Common Stock（普通股）3.5Fixed Income ProductsWhat is a Fixed Income Fixed Income as a ProductInterest PaymentsFixed Income as a Strategy What is a Fixed Income F
17、ixed income is a type of investment in which real return rates or periodic income is received at regular intervals and at reasonably predictable levels. can be used to diversify ones portfolio pose less risk than equities and derivative investments offer reliable returnsFixed Income as a ProductThe
18、most common example of a security that yields a fixed income is a bond. Treasury bonds (T-bonds), Treasury notes (T-notes), Treasury bills (T-bills) investment-grade bonds, junk bonds 投资分级债券，垃圾债券The primary risk the issuer or borrower defaulting on his payment. Fixed Income as a Strategy（固定收益策略）an i
19、nvestment style generates stable and predictable returnsThe laddering strategy （梯形投资策略）With the laddering strategy, a portfolio manager can reinvest the principal of matured bonds into those with higher rates. For example, a $60,000 investment could be divided into a one-year, two-year, and three-ye
20、ar bond. When the one-year bond matures a year from now, the principal will be rolled into a three-year. When the two-year bond matures, the principal will be rolled into a three-year, and so on. By so doing, the investor is able to take advantage of the higher interest rates as the years go by.3.6B
21、ond What is a BondHow Bonds Work What is a BondA bond is a fixed income investment（固定收益投资） in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. used by companies, municipalities,
22、 states and sovereign governments to raise money and finance a variety of projects and activities. owners of bonds are debtholders, or creditors, of the issuerHow Bonds Work（债券原理）When companies or other entities need to raise money to finance new projects, to maintain ongoing operations, or to refin
23、ance existing debts, they may issue bonds directly to investors instead of obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states the interest rate that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date). T
24、he interest rate, called the coupon rate or payment, is the return that bondholders earn for loaning their funds to the issuer.The issuance price of a bond is typically set at par, usually $100 or $1,000 face value per individual bond. The actual market price of a bond depends on a number of factors
25、 including the credit quality of the issuer, the length of time until expiration, and the coupon rate compared to the general interest rate environment at the time.Bond prices move inversely with interest rates.（债券价格与利率成反比） What is a Corporate BondA corporate bond is a debt security issued by a corp
26、oration and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the companys physical assets may be used as collateral for bonds.Corporate bonds are considered to have a higher risk th
27、an government bonds. As a result, interest rates are almost always higher on corporate bonds, even for companies with top-flight credit quality.（公司债券由公司发行，被认为比政府债券风险更高）Corporate Bond （公司债券） How Corporate Bonds Work（公司债原理）Why Do Corporations Sell Bonds（公司如何销售债券）Corporate Bonds vs. Stocks（公司债与股票）Asset
28、-Backed Securities（资产支持证券）Corporate Bond What is a Zero-Coupon BondA zero-coupon bond is also known as an accrual bond.A zero-coupon bond is a debt security that doesnt pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full-face
29、value.The maturity dates on zero coupon bonds are usually long term, with many having initial maturities of at least 10 years.Zero coupon bonds are issued from a variety of sources, including the U.S. Treasury, state/local government entities, and corporations. 零息债券是一种不支付利息，但以较低折价进行交易的债券Zero-coupon
30、bond（零息债券） Calculating Price （计算价格）The price of a zero-coupon bond can be calculated as:Price = M / (1 + r)nwhere M = maturity dater = required rate of interestn = number of years until maturityIf an investor wishes to make a 6% return on a bond with $25,000 par value due to mature in 3 years, he wi
31、ll be willing to pay:$25,000 / (1 + 0.06)3 = $20,991.If the debtor accepts this offer, the bond will be sold to the investor at $20,991 / $25,000 = 84% of the face value. Upon maturity, the investor gains $25,000 - $20,991 = $4,009, which translates to 6% interest per year.Zero-coupon bond（零息债券） Wha
32、t is a Coupon BondA coupon bond, also referred to as a bearer bond（不记名债券）, is a debt obligation with coupons attached that represent semi-annual interest payments. 息票债券是一种附息票代表半年度支付利息的债务。How Coupon Bonds Work（息票债券原理）If an investor purchases a $1,000 ABC Company coupon bond and the coupon rate is 5%,
33、 the issuer provides the investor 5% interest every year. This means the investor gets $50, the face value of the bond derived from multiplying $1,000 by 0.05, every year. For the investor to claim his interest on the bond, he simply takes the corresponding coupon from the provided bond certificate
34、and gives it to an agent of the issuing institution.Coupon bond（息票债券） Coupon bonds are usually bearer bonds. Anyone who provides the necessary coupons to the issuer can receive the interest payment regardless of whether that person is the actual owner of the bond. Modern bonds are typically register
35、ed bonds（记名债券） with physical certificates that provide the terms of the debt and the name of the registered holder who receives interest payments automatically from the issuing institution. Some bonds are in the form of book entry bonds, which are electronically registered and linked to the issuer a
36、nd its investors. In book entry bonds, the investor gets receipts instead of certificates. Investors also get accounts handled by financial institutions. They are able to receive their interest payments through these accounts.Unregistered Bonds（不记名债券）3.7Treasury Bills, Treasury Notes, and Treasury B
37、onds What is a Treasury BillA Treasury Bill (T-Bill) is a short-term debt obligation backed by the Treasury Department of the U.S. government with a maturity of less than one year, sold in denominations of $1,000 up to a maximum purchase of $5 million on noncompetitive bids. T-Bills can have maturit
38、ies of just a few days up to 52 weeks, but common maturities are one month, three months or six months. The longer the maturity date, the higher the interest rate that the T-Bill will pay to the investor.Purchase ProcessNew issues of T-Bills can be purchased at auctions held by the government. Previ
39、ously issued ones can be bought on the secondary market.Treasury Bills（短期国债） What is a Treasury NoteA treasury note is a marketable government debt security with a fixed interest rate and a maturity between 1 and 10 years. Treasury notes are available from the government with either a competitive or
40、 noncompetitive bid. with a competitive bid, investors specify the yield they want, at the risk that their bid may not be approved; with a noncompetitive bid, investors accept whatever yield is determined at auction.Treasury notes（中期国债） What is a Treasury BondA Treasury bond (T-bond) is a marketable
41、, fixed-interest U.S. government debt security with a maturity of more than 10 years make interest payments semiannually the income received is only taxed at the federal level primarily risk-free issued by the U.S. government with very little risk of defaultTreasury Bonds（长期国债）3.8Forward Contract Wh
42、at is a Forward ContractA forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. can be used for hedging or speculation（可用于对冲和投机） can be customized to any commodity, amount and delivery date （可以定制任何商品、金额、交割日期） do not trade on a ce
43、ntralized exchange （场外交易工具）Forward contract（远期合约） ExampleAssume that an agricultural producer has 2 million bushels of corn to sell six months from now, and is concerned about a potential decline in the price of corn. It therefore enters into a forward contract with its financial institution to sell
44、 2 million bushels of corn at a price of $4.30 per bushel in six months, with settlement on a cash basis.In six months, the spot price of corn has three possibilities.(1)It is exactly $4.30 per bushel: In this case, no monies are owed by the producer or financial institution to each other and the co
45、ntract is closed.(2)It is higher than the contract price, say $5 per bushel. The producer owes the institution $1.4 million, or the difference between the current spot price and the contracted rate of $4.30.(3)It is lower than the contract price, say $3.50 per bushel. The financial institution will
46、pay the producer $1.6 million, or the difference between the contracted rate of $4.30 and the current spot price.Forward contract（远期合约）3.9Futures ContractWhat is a Futures ContractExample of Futures ContractsWhat are Currency Futures What is a Futures ContractA futures contract is a legal agreement
47、to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future. standardized for quality and quantity （标准化） trading on a futures exchange（在交易所交易） The buyer is taking on the obligation to buy the underlying asset, the seller is taking on the obligation to pr
48、ovide the underlying asset at the expiration date（买卖方各自承担义务）Futures contract（期货合约） Example of Futures ContractsOil producers may use futures contracts when they need to sell their oil. In this way they can lock in a price（锁定价格） that they will sell at, and then deliver the oil to the buyer when the f
49、utures contract expires. Similarly, manufacturing companies may need oil for making widgets. Futures contracts may also be used since the companies like to plan ahead and always have oil coming in each month. By this means they know the price that they will pay for oil (the futures contract price) i
50、n advance, and they know that they will be taking delivery of the oil once the contract expires.Futures contract（期货合约） What are Currency FuturesCurrency futures are a transferable futures contract that specifies the price, in one currency, at which another currency can be bought or sold at a future
