1、What is an Investmento“An Investment is the current commitment of money or other resources in the expectation of reaping future benefits”Real Assets Versus Financial AssetsoReal AssetsnAssets used to produce goods and services(land,buildings,machine,knowledge or patents etc.)oFinancial AssetsnClaims
2、 on real assets(Stocks,Bonds etc.)The success and failure of financial assets we choose to purchase ultimately depend on the performance of the underlying real assetsTypes Financial Assets oFixed income or debto Money market instrumentsnBank certificates of deposito Capital market instrumentsnBondso
3、Common stock or equityoDerivative securitiesAllocation vs.SelectionoAsset allocationoChoice among broad asset classesoChoice of sector within a particular asset classoSecurity selectionoChoice of which securities to hold within asset classActive vs.Passive ManagementoActive ManagementoFinding mispri
4、ced securitiesoTiming the marketoPassive ManagementoNo attempt to find undervalued securitiesoNo attempt to time the marketoHolding a highly diversified portfolioRisk and Return Trade-off“No-Free Lunch Proposition”Primary vs.Secondary MarketoNew issues of securities are offered to the public in the
5、primary market.IPOs Initial Public OfferingsoPreviously issued securities are then traded in the secondary marketMarket TrendsoAmerican Depository Receipts(ADRs)oForeign securities offered in dollarsoMutual funds that invest internationallyoInstruments and vehicles continue to develop(WEBs)oExchange
6、 Traded Funds(ETFs)Recent TrendsSecuritization oMortgage pass-through securitiesoOther pass-through arrangementsoCar,student,home equity,credit card loansoOffers opportunities for investors and originatorsRecent TrendsFinancial EngineeringoUse of mathematical models and computer-based trading techno
7、logy to synthesize new financial productsoBundling and unbundling of cash flowsRecent TrendsComputer Networks oOnline information disseminationoInformation is made cheaply and widely available to the publicoAutomated trade crossingnDirect trading among investorsFed Funds bank deposits at the Federal
8、 Reserve bankEvidence that performance is consistent from one period to the next is suggestive but inconclusiveRegulation Securities Markets ContinuedShelf RegistrationsReduced transaction costsMutual funds that invest internationallyInvestment BankingMunicipal Bonds-I issued and local governmentsTr
9、easury Notes and Bonds -Issued by the U.Automated trade crossingSpread:cost of trading with dealerSecurities Act of 19342 Equivalent Taxable Yields Corresponding to Various Tax-Exempt YieldsT-Bills are the most marketable of all money market instruments.Passive ManagementUsing only a portion of the
10、proceeds for an investmentIssuing firm doesnt receive proceeds and is not directly involvedBankers acceptance are an order to a bank by a banks customer to pay in a future date typically 6 months.Insiders do exploit their knowledgePurpose:to profit from a decline in the price of a stock or securityT
11、ED SpreadThe spread between LIBOR rate(Bank borrowing Rate)and T-Bill(U.S.Govt borrowing Rate)is a measure of credit risk in the market place.The Financial CrisisoWorld financial markets have suffered very large,across-the board declines in value.oUnprecedented declines in residential property value
12、s have been experienced in many countriesoThe banking systems of most Western countries have been in complete disarray,requiring huge government interventionsoA global recession is ongoing,with large negative effects impacting employment,trade and government revenuesoPreviously active markets in sec
13、uritized debt,and related credit risk transfer instruments,have ground to a haltCHAPTER 2Asset Classes and Financial InvestmentsTwo Segments of Financial MarketsI.Money market Short-term,marketable,liquid,low-risk debt securities.(cash or cash equivalents)II.Capital market Longer-term riskier securi
14、tiesI)The Money Market InstrumentsoU.S.T-Bills are the most marketable of all money market instruments.Investors buy the bills at a discount from stated maturity rateoA Certificate of deposit CD is a time deposit at a bankoCommercial Paper are short-term unsecured debt note issues by large companies
15、.oBankers acceptance are an order to a bank by a banks customer to pay in a future date typically 6 months.oRepos repurchase agreements,usually overnight borrowingoFed Funds bank deposits at the Federal Reserve bankThe Money Market InstrumentsoEurodollar deposits are dollar-denominated deposits at f
16、oreign banks or foreign branches of American banks.oBrokers call are the rate paid on margin accountsoLIBOR Rate at which the banks lend among themselvesFigure 2.2 The Spread between 3-month CD and Treasury Bill RatesII Capital Market1)Long-term Bond is composed of longer term borrowing or debt inst
17、ruments than those that trade in the money market2)Equity Securities represent ownership shares in a corporation(Common Stocks)3)Market Indices various composites of bonds and stocks4)Derivatives instruments provide payoffs that depend on the values of other assets such as commodity prices,bond and
18、stock prices,or market index value.Their values derive from the value of other assets1)The Long-term Bond MarketoTreasury Notes and Bonds -Issued by the U.S.GovernmentoInflation-Protected Treasury Bonds TIPS provide a constant stream of income in real(inflation adjusted)dollarsoFederal Agency Debt I
19、ssued by government agenciesoInternational Bonds-bonds denominated in currency other than that of the country which it is issuedoMunicipal Bonds-I issued and local governmentsoCorporate Bonds Issued by corporationoMortgages and Mortgage-Backed Securities-ownership claim in a pool of mortgages or obl
20、igations.Treasury Notes and BondsoMaturitiesnNotes maturities up to 10 yearsnBonds maturities in excess of 10 yearsn30-year bondoPar Value-$1,000oQuotes percentage of parU.S.Treasury SnapshotDirect-marketed fundsNot active for stock offeringsPotential advantages2 Equivalent Taxable Yields Correspond
21、ing to Various Tax-Exempt YieldsTrading Scandal with Mutual FundsBundling and unbundling of cash flowsShelf RegistrationsNasdaq Small Cap MarketHedge FundsFTSE(Financial Times of London)Revenue sharing on sales force distributedUsed as a basis for valuation of investment company shares=-.Level 2 rec
22、eives all quotes but they cant enter quotes6 Market Capitalization of Major World Stock Exchanges,2008Automated trade crossingProportional ownership of a pool or a specified obligation secured by a poolPrivate computer networks that directly link buyers with sellersPrice-contingentBundling and unbun
23、dling of cash flowsFederal Agency DebtoMajor issuersnFederal Home Loan BanknFederal National Mortgage AssociationnGovernment National Mortgage AssociationnFederal Home Loan Mortgage CorporationMunicipal BondsoIssued by state and local governmentsoTypesnGeneral obligation bondsnRevenue bondsoIndustri
24、al revenue bondsoMaturities range up to 30 yearsMunicipal Bond YieldsoInterest income on municipal bonds is not subject to federal and sometimes not to state and local taxoTo compare yields on taxable securities a Taxable Equivalent Yield is constructedTable 2.2 Equivalent Taxable Yields Correspondi
25、ng to Various Tax-Exempt YieldsTax Exempt Yield=Taxable Yield*(1 Tax Rate)International BondsoA Eurobond is a bond denominated in a currency other than that of the country in which it is issue.A dollar denominated bond sold in UK would be call a Eurodollar bond.(No relation to Euro currency).oA Yank
26、ee bond is dollar denominated bond sold in the U.S.by a non U.S.issuer.oA Samurai bond are yen denominated bond sold in Japan by non Japanese issuers.Corporate BondsoIssued by private firms oSemi-annual interest paymentsoSubject to larger default risk than government securitiesoOptions in corporate
27、bondsnCallablenConvertibleoDeveloped in the 1970s to help liquidity of financial institutionsoProportional ownership of a pool or a specified obligation secured by a pool oMarket has experienced very high rates of growthMortgages and Mortgage-Backed SecuritiesoCommon stocknResidual claimnLimited lia
28、bilityoPreferred stocknFixed dividends -limitednPriority over commonnTax treatmentoDepository receipts2)Equity SecuritiesoThere are several broadly based indexes computed and published dailyoThere are several indexes of bond market performance3)Market IndexesDow Jones Industrial AverageoIncludes 30
29、large blue-chip corporationsoComputed since 1896oPrice-weighted averageExample 2.2 Price-Weighted AveragePortfolio:Initial value$25+$100=$125 Final value$30+$90=$120 Percentage change in portfolio value =5/125=-.04=-4%Index:Initial index value (25+100)/2=62.5 Final index value (30+90)/2=60 Percentag
30、e change in index-2.5/62.5 =-.04=-4%oBroadly based index of 500 firmsoMarket-value-weighted indexoIndex fundsoExchange Traded Funds(ETFs)Standard&Poors IndexesOther U.S.Market-Value IndexesoNASDAQ CompositeoNYSE CompositeoWilshire 5000Foreign and Intl Stock Market IndexesoNikkei(Japan)oFTSE(Financia
31、l Times of London)oDax(Germany)oMSCI(Morgan Stanley Capital International)oHang Seng(Hong Kong)oTSX(Canada)TSX(Canada)Timing the marketRevenue sharing on sales force distributedETF or Index FundOpen Interest is the total number of options contracts that are not closed or delivered on a particular da
32、y.Interest income on municipal bonds is not subject to federal and sometimes not to state and local taxNot active for stock offeringsMajor issuersHow Securities are TradedBond TradingTypes of Investment CompaniesRevenue sharing on sales force distributedMunicipal Bond YieldsBonds maturities in exces
33、s of 10 yearsLower costsShelf RegistrationsForeign securities offered in dollarsBuying on MarginTrade continuouslyA dollar denominated bond sold in UK would be call a Eurodollar bond.Foreign and Intl Stock Market IndexesGlobal Equity Market Snapshot4)Derivatives MarketsOptionsoBasic PositionsnCall(B
34、uy)nPut(Sell)oTermsnExercise PricenExpiration DatenAssetsFutures oBasic PositionsnLong(Buy)nShort(Sell)oTermsnDelivery DatenAssetsFigure 2.10 Trading Data on Intel OptionsOpen Interest is the total number of options contracts that are not closed or delivered on a particular day.Figure 2.10 Listing o
35、f Corn Futures ContractsCHAPTER 3How Securities are TradedHow Firms Issue SecuritiesoPrimarynNew issuenKey factor:issuer receives the proceeds from the saleoSecondarynExisting owner sells to another partynIssuing firm doesnt receive proceeds and is not directly involvedHow Firms Issue Securities Con
36、tinuedoInvestment BankingoShelf RegistrationoPrivate PlacementsoInitial Public Offerings(IPOs)Investment BankingoUnderwritten:firm commitment on proceeds to the issuing firmoRed herringoProspectusFigure 3.1 Relationship Among a Firm Issuing Securities,the Underwriters and the PublicInternationalOthe
37、r investment organizationsMutual FundsInvestment Policies(No relation to Euro currency).No attempt to find undervalued securitiesMunicipal Bonds-I issued and local governmentsPotential advantagesRepos repurchase agreements,usually overnight borrowingThe spread between LIBOR rate(Bank borrowing Rate)
38、and T-Bill(U.Examples-SPDRs and WEBSBond TradingHow Securities are TradedShort SalesUnderpricingFixed dividends -limitedShelf RegistrationsFinancial experts to serve on audit committees of boards of directorsHedge FundsGovernmentBank certificates of depositCorporate BondsA dollar denominated bond so
39、ld in UK would be call a Eurodollar bond.Shelf RegistrationsoSEC Rule 415oIntroduced in 1982oReady to be issued on the shelfoSale to a limited number of sophisticated investors not requiring the protection of registrationoAllowed under Rule 144AoDominated by institutionsoVery active market for debt
40、securitiesoNot active for stock offeringsPrivate PlacementsInitial Public OfferingsoProcess nRoad showsnBookbuildingoUnderpricing nPost sale returnsnCost to the issuing firmFigure 3.2 Average Initial Return of IPOsFigure 3.3 Long-term Relative Performance of Initial Public OfferingsHow Securities ar
41、e TradedoTypes of MarketsnDirect searchoLeast organizednBrokeredoTrading in a good is activenDealer oTrading in a particular type of asset increasesnAuctionoMost integratedTypes of OrdersoMarketexecuted immediatelynBid PricenAsk PriceoPrice-contingentnInvestors specify pricesnStop ordersFigure 3.5 P
42、rice-Contingent OrdersTrading MechanismsoDealer marketsoElectronic communication networks(ECNs)oSpecialists marketsU.S.Security MarketsoNasdaq and NYSE have evolved in response to new information technologyoBoth have increased their commitment to automated electronic tradingNet Asset ValueMutual fun
43、ds that invest internationallyPotential disadvantagesMoney market instrumentsSelf-RegulationThe spread between LIBOR rate(Bank borrowing Rate)and T-Bill(U.Eurodollar deposits are dollar-denominated deposits at foreign banks or foreign branches of American banks.Financial experts to serve on audit co
44、mmittees of boards of directorsDirect searchIndex fundsBid:price dealer will buy from youFinal index value (30+90)/2=6010 Listing of Corn Futures ContractsInterest income on municipal bonds is not subject to federal and sometimes not to state and local taxTax treatmentBonds maturities in excess of 1
45、0 yearsTypes of OrdersTrading Scandal with Mutual FundsPass-through status under the U.Corporate Bonds Issued by corporationInformation on Mutual FundsAssets used to produce goods and services(land,buildings,machine,knowledge or patents etc.NasdaqoNational Market SystemoNasdaq Small Cap MarketoLevel
46、s of subscribersnLevel 1 inside quotesnLevel 2 receives all quotes but they cant enter quotesnLevel 3 dealers making marketsTable 3.1 Partial Requirements for Listing on NASDAQ MarketsNew York Stock ExchangeoMember functions nCommission brokersnFloor brokersnSpecialistsoBlock housesTable 3.2 Some In
47、itial Listing Requirements for the NYSETable 3.3 Block Transactions on the New York Stock ExchangeOther SystemsoElectronic Communication NetworksnPrivate computer networks that directly link buyers with sellersoNational Market SystemnSecurities Act of Amendments of 1975oBond TradingnAutomated Bond S
48、ystem(ABS)Market Structure in Other CountriesoLondon-predominately electronic tradingoEuronext market formed by combination of the Paris,Amsterdam and Brussels exchangesoTokyo Stock ExchangeoGlobalization and consolidation of stock markets Figure 3.6 Market Capitalization of Major World Stock Exchan
49、ges,2008Trading CostsoCommission:fee paid to broker for making the transactionoSpread:cost of trading with dealernBid:price dealer will buy from younAsk:price dealer will sell to younSpread:ask-bidoCombination:on some trades both are paidBuying on MarginoUsing only a portion of the proceeds for an i
50、nvestmentoBorrow remaining componentoMargin arrangements differ for stocks and futuresStock Margin TradingoMargin is currently 50%;you can borrow up to 50%of the stock valuenSet by the FedoMaintenance margin:minimum amount equity in trading can be before additional funds must be put into the account
