1、Lecture 1 Introduction to Financial market investmentslAn investment is the current commitment of money or other resources in the expectation of receiving future benefits.lReal assetsassets used to produce goods and serviceslFinancial assetsclaims on real assets or the income generated by themFinanc
2、ial AssetslRisk free assets-deposit,T-Bills,T-bondslRisky assets-corporate bonds,stocks,mutual funds,futures,optionsCourse outlinelIntroduction to financial instruments lHow securities are tradedlPortfolio theoryMV efficient frontierCAPMFactor modelsEmpirical tests on asset pricing modelsMarket effi
3、ciency Course outlinelBond ValuationBond price and yieldActive bond managementlStock ValuationMacro and industry analysisFinancial statement analysisStock valuation modelsCourse assessmentlAttendance 10%lCase and presentation 30%lFinal-exam 60%The importance of financial assets$Billion%totalReal ass
4、etsReal estate2287429.7%Total real assets1738735.9%Financial Assetsdeposit489510.1%debt24025%institution holdings2203845%Total financial assets 3100964.1%Function of financial marketslChannel funds from savers who have excess of funds to lenders who have a shortage of fundsfund surplus units(savings
5、)fund deficit units(capital investment)financial intermediariesindirectfinancingindirectfinancingdirect financing through financial marketsParticipants in the financial marketslHouseholdlBusiness sectorlGovernmentlFinancial intermediariesBanksinsuranceMutual fundInvestment banksFunction of financial
6、 marketslAllocation of riskslShift consumption over the period of lifelSeparation of ownership and managementlImprove informational efficiencyTwo fundamental principleslRisk-return trade-off:higher-risk asset provide higher expected rate of return than lower-risk assetlMarket Efficiency:all assets a
7、re correctly priced with respected to available informationDow Jones Industrial Average(1900-2010)Dow Jones Industrial Average19006819108119207319302451940150195019819606761970797198082219902732200011180201011577Historical performance of Fidelity FundPeter Lynchs investment ruleslStayed fully invest
8、ed(minimal cash)lPick stocks based on their fundamentalslEmphasize on growth lTrade frequentlylIn 1965,one share of Berkshire Hathaway was worth$19,today a single share is worth$11691,because of Warren Buffett.lWarren Buffett believes in making money.He believes in fairness.He believes in the abilit
9、y of government to make peoples lives better.But most of all,he believes in luck.Time,January 23,2012Types of Financial MarketslMoney market is market for trading short-term(usually less than one year)securities;Capital market is market for trading long-term securities.Capital market includes long-t
10、erm bond market and equity marketlA primary market is market in which new issues of a security,such as bond or stock,are sold to initial buyers;the secondary market is market in which securities that have been previously issued can be resoldFeatures of the Money MarketlLack of Default RiskslHigh Liq
11、uiditylUsually large denominationThe money market is sometimes called“cash equivalents”marketMoney Market InstrumentlU.S.Treasury bill(T-bill)Minimum denominations of$1000sell at the discount of the par valueEasily converted to cashLow transaction costUnderstanding Wall-Street quoteslTreasury Bills
12、What is T-bill discount rate,what is T-bill equivalent yield,what is the T-bill price.Bid price is 998.82,ask price is 998.84.MaturityDays to MaturityBidAskChgAsk YieldSep 30104.244.160.03?Dec 16874.584.57?T-bill Price and equivalent yieldlT-bill are quoted using the bank discount rate.In this appro
13、ach,the bills discount from par value,is annualized based on a 360-day yearlThe discount rate is lR=(1000-P)/1000*(360/n)lTo determine the bills true market price,solve following equation P=1000*1-r*(n/360)lTo calculate the true yield of a Treasury bill,the discount must be divided by the price and
14、a 365-day year used.bid(ask)yield=(1000-P)/P*(365/n)Money Market InstrumentslCD:A certificate of deposit is a time deposit with a bank.The certificate states the amount of the deposit,the date on which it matures,the interest rate and the method under which the interest is calculated.Large negotiabl
15、e CDs are generally issued in denominations of$100,000 or more.lCDs cant be withdraw before maturity but can be sold in money market before its maturity dateFixed-Income Capital MarketlTreasury Bond(Notes)T-notes maturities range up to 10 years,T-bonds usually maturities from 0 to 30 yearsDenominati
16、ons of$1,000 or moreCoupon payment made semiannuallyUnderstanding Wall-Street quoteslTreasury Bonds and NotesCompute the bond price based on bid or ask quoteRateMaturityMo/YrBidAskChgAsk yield6Aug 09n100:21100:22-95.9110May 05-10117:17117:21-66.24Understanding Wall-Street quotelColons in bid and ask
17、 quotes represent 32 nds,thus 100:21 means 100 21/32lPrice is quoted as a percentage of par value,thus 100 21/32 refers 100.65625%of par valuelPar value usually is$1,000,so bond price is$1006.5625Corporate bondslCorporate Bonds:an interest-bearing certificate of debt,issued by corporationlMajor diff
18、erence from T-bond is risk,lSometimes come with options attachedCallable bondsConvertible bondsUnderstanding Wall Street quotelCorporate bond is quoted in explicit fractionsRateMaturityMo/YrCurrent yieldVolCloseNet ChgATT6 1/2297.2%3790 1/2+1/4The bond has a coupon rate of 6.5%and mature in 2029,the
19、 bondIs sold at 90.5%of par value,which is 905Current yield=(annual coupon income/price)=65/905=7.2%Mortgages and Mortgage-Backed SecuritieslA mortgage-backed security is either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool.lMortgage-backed pass-through se
20、curities were introduced by the GNMA(Government National Mortgage Association),which bear the obligation to pay even if the borrower defaults.lMortgage-backed securities market is the second largest fixed income security market,larger than corporate bond market,but smaller than Treasury market.Equit
21、y MarketlCommon stocksOwnership interest in companyClasses of stocksShareholders rightslVoting rights lRight to residual claimlPreemptive right to corporate distributionslRight to dividendUnderstanding Wall-Street quoteslNew York Stock Exchange Composite Transactions52 weeksYidVolNetHiLoStockSymDiv%
22、PE100sHiLoCloseChange$51 15/16181/16GatewayGTW404151250 3/1649 1/8491/2+25/8Equity MarketlPreferred stocksOwnership interest in companyRight to fixed dividends Limited voting rightsCumulative vs.non-cumulativeStock Market IndexlMajor Stock Market IndexDow Jones Industrial AverageS&P 500 IndexNasdaqN
23、ikkei Average of TokyoHeng Seng IndexPrice-Weighted IndexlE.g Dow Jones Industrial AverageI(T)=the index value on day TD(T)=the Divisor on day T(adjust for split,etc)P(I,T)the price of stock I on day T NiTDTiPTI1)(/),()(An example for stock splitlSupposeDay 1Day 2A5055B2017C3215Index at day1 is(50+2
24、0+32)/3=34On day 2,stock C has 1:2 split,the divisor is(50+20+16/34)=2.53Index on day 2 is(55+17+15/2.53)=34.39If written in percentage,the index is(34.39/34)*100=101.15Value-weighted IndexlE.g S&P 500 IndexN(I,T)is number of shares of stock I on day TP(I,1)and N(I,1)is the price and volume of stock
25、 I on the base dayThe base level for S&P500 index is 10BaselevelINIPTINTIPTINiNi*)1,(*)1,(),(*),()(11 Forward and Futures MarketlForwards and futuresArrangement to buy or sell asset at certain time in future for certain priceNegotiation of forwards between investors and banksExchange-traded futuresl
26、Types of forward/futures contractCurrencystockIndexInterest rateCommodityUnderstanding Wall Street quoteslS&P500 index(CME)$250*indexopenHigh Low settleOpeninterestMar907.50910.70901.70909.90572994pre911.25903.07908.59Option MarketlTraded optionsCall options vs.put optionsCall option gives holder ri
27、ght to buy asset by certain date for certain pricePut option gives holder right to sell asset by certain date for certain priceUnderstanding Wall-Street quoteslListed Options QuotationsCallPutoptionstrikeExpVolLastVolLastDell487/840Oct50091/42235/16Dell487/850Oct926617/88763Option-like SecuritieslWa
28、rrantsOption to buy specified number of common stocks at set price and/or before set dateCall warrants vs.put warrantsWarrants vs.derivatives warrantsAttached to new issue of bonds or common stocksExchange-tradedCommodity MarketlCommoditiesFarm products,precious metals and financial productsCash mar
29、kets vs.future marketsFinancial markets and instrumentsThe Money MarketThe fixed income capital marketTreasury billTreasury bonds and notesCertificates of deposit(CD)Municipal bondsCommercial paperCorporate bondsBankers acceptanceMortgage-backed securitiesEurodollarsRepurchase agreementsDerivative marketsFutures and forwardsEquity marketsoptionsPreferred stocksswapsCommon stocks
