Post on 29-Jan-2016
CHAPTER 2CHAPTER 2
InvestmentsInvestments
Asset Classes and Asset Classes and Financial Financial
InstrumentsInstruments
Slides bySlides by
Richard D. JohnsonRichard D. Johnson
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reservedCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/IrwinMcGraw-Hill/Irwin
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Major Classes of Financial Assets or Securities
Money marketBond marketEquity marketsIndexesDerivative markets
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Money Market Instruments
Treasury billsCertificates of deposits Commercial PaperBankers Acceptances
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Money Market Instruments cont.
EurodollarsRepurchase Agreements (RPs) and
Reverse RPsBrokers’ CallsFederal FundsLIBOR Market
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Figure 2.1 Rates on Money Market Securities
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Table 2.1 Major Components of the Money Market
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Figure 2.2 Treasury Bill Listing
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Figure 2.3 Spread between 3-month CDs and Treasury Bill Rates
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Bond Market
Treasury Notes and BondsInflation-Protected Treasury BondsFederal Agency DebtInternational BondsMunicipal BondsCorporate BondsMortgages and Mortgage-Backed
Securities
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Treasury Notes and Bonds
Maturities– Notes – maturities up to 10 years
– Bonds – maturities in excess of 10 years
– 30-year bond• 2001 Treasury suspended sales
• 2006 Treasury resume sales
Par Value - $1,000Quotes – percentage of par
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Figure 2.4 Treasury Bonds and Notes
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Federal Agency Debt
Major issuers– Federal Home Loan Bank
– Federal National Mortgage Association
– Government National Mortgage Association
– Federal Home Loan Mortgage Corporation
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Figure 2.5 Government Agency Issues
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Municipal Bonds
Issued by state and local governmentsTypes
– General obligation bonds
– Revenue bonds• Industrial revenue bonds
Maturities – range up to 30 years
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Figure 2.6 Tax-exempt Debt Outstanding
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Municipal Bond Yields
Interest income on municipal bonds is not subject to federal and sometimes state and local tax
To compare yields on taxable securities a Taxable Equivalent Yield is constructed
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Table 2.2 Equivalent Taxable Yields
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Figure 2.7 Ratio of Yields on Tax-exempts to Taxables
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Corporate Bonds
Issued by private firms Semi-annual interest paymentsSubject to larger default risk than
government securitiesOptions in corporate bonds
– Callable
– Convertible
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Developed in the 1970s to help liquidity of financial institutions
Proportional ownership of a pool or a specified obligation secured by a pool
Market has experienced very high rates of growth
Mortgages and Mortgage-backed Securities
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Figure 2.8 Mortgage-backed Securities Outstanding
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Equity Markets
Common stock– Residual claim
– Limited liability
Preferred stock– Fixed dividends - limited
– Priority over common
– Tax treatment
Depository receipts
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Figure 2.9 Stock Market Listings
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Track average returnsComparing performance of managersBase of derivatives
Uses of Stock Indexes
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Representative? Broad or narrow? How is it weighted?
Factors for Construction of Stock Indexes
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Examples of Indexes - Domestic
Dow Jones Industrial Average (30 Stocks)Standard & Poor’s 500 CompositeNASDAQ CompositeNYSE CompositeWilshire 5000
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Figure 2.10 Performance of Major Stock Indexes
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Examples of Indexes - Int’l
Nikkei 225 & Nikkei 300FTSE (Financial Times of London)DaxRegion and Country Indexes
– EAFE
– Far East
– United Kingdom
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Construction of Indexes
How are stocks weighted?– Price weighted (DJIA)
– Market-value weighted (S&P500, NASDAQ)
– Equally weighted (Value Line Index)
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Derivatives Securities
Options Basic Positions
– Call (Buy)
– Put (Sell)
Terms– Exercise Price
– Expiration Date
– Assets
Futures Basic Positions
– Long (Buy)
– Short (Sell)
Terms– Delivery Date
– Assets