Download - Investments MBA 536 Dr. David P Echevarria Cameron School of Business University of North Carolina Wilmington.

InvestmentsMBA 536

Dr. David P Echevarria

Cameron School of Business

University of North Carolina Wilmington

Unit 1: Money And Capital Markets

Unit 1 presents an overview of what we frequently term the [stock] market. In addition to the standard material, we will also explore motives, means, and methods.

Each class session (165 minutes) will consist of two 75 minute lecture periods divided by a 15 minute break.

Chapter 1: Investment Environment

I. Learning ObjectivesA. Why do people invest?

B. Importance of investment decisions

C. Steps to investing

D. Investment management

E. The Financial Crisis of 2008


II.Why do people invest?A. Defer current consumption to increase future

consumption or wealth

B. Accumulate funds for a purpose

C. Benefits to society and the economy

1. Capital formation

2. Job creation

3. Economic expansion


III. Importance of investment decisionsA. More choices now than ever

B. People live longer

C. Personal income growth is slower

D. Labor market is less stable


IV.Steps to investing: Personal Financial PlanningA. Personal Inventory (assets, liabilities)

B. Investments: Goals and Time Frames1. Personal Risk Profile

2. Portfolio Allocation (stocks, bonds, mutual funds)

3. Time Available (to investigate, select, monitor)

4. Exit strategy

C. Insurance (Hedges)1. Life and Property

2. Emergency Funds (cash, credit)


V. Financial Crisis of 2008A.Whose story do we believe?

1. Wall Street Greed: The CDO and CDS games (Michael Lewis: The Big Short, esp. Ch. 7)

2. Government without Consequences: C.R.A. (1977), Fannie and Freddie, OCC General Council (1995).

B. Building the Real Estate Bubble1. Changing the method of financing mortgages

2. Growth of non-conforming and sub-prime loans


C. Banks playing the spread / increasing leverageD. Bursting the financial bubble

1. Broad-based decline in housing prices coupled with rising unemployment

2. Rising rates on variable rate mortgages (resets)3. Exploding default rates4. Credit Default Swap losses lead to banking

meltdown

E. [Re] Discovery of systemic risk1. International response to banking crisis – increase

bank equity

Chapter 2Asset Classes & Financial Instruments

The focus in Chapter 2 is on Financial Assets; stocks (equity), bonds (debt), and derivative securities (options and futures).

Chapter 2: Asset Classes & Financial Instruments I. Learning Objectives

A. Direct Investment Classes

B. Marketable Securities

C. Derivative Securities

Chapter 2: Asset Classes & Financial InstrumentsII. Direct Investment Classes

A. Nonmarketable Financial Claims

B. Marketable Financial Claims1. Money market instruments

2. Capital market instruments

3. Derivative securities

Chapter 2: Asset Classes & Financial InstrumentsIII. Money Market Claims

A. T-Bills, Negotiable CD, Commercial Paper, Bankers’ Acceptances

B. Hybrid Claims: Eurodollar deposits, Repos

C. LIBOR: UK version of Fed Funds

D. Federal Agency paper

Chapter 2: Asset Classes & Financial InstrumentsIV.Capital Market Debt Claims

A. Notes and Bonds1. Treasuries, Federal Agencies

2. Municipals (GO and Revenue)

B. Corporate Notes and Bonds1. Collaterized (mortgage & Equip Trust Cert.)

2. Uncollateralized (debentures)

Chapter 2: Asset Classes & Financial InstrumentsV.Capital Market Equity Claims

A. Preferred Stock (mostly from Utilities)

B. Common Stock (voting and non-voting)

VI.Derivative SecuritiesA. Claims on Financial Claims

B. Options (Calls and Puts), Warrants

C. Futures (financial, commodities, currencies)

15 MINUTE BREAK

Chapter 3Financial Markets

Where does all this activity take place? What are the important characteristics of and requirements for efficient financial markets?

Chapter 3: Financial Markets

I. Learning ObjectivesA. What are the principal features?

B. Who are the main players?

C. How are trades executed?

D. How are markets regulated?


I. General Characteristics of Financial MarketsA. Primary vs. Secondary MarketsB. Perfect and Complete Markets [Theory]

II. Financial Market PlayersA. Investors (Active, Passive)B. Investment Bankers

1. Advise2. Underwrite3. Distribute


II. Financial Market Players (cont’d)C. Brokers (retail, online/discount)

D. Market Makers (OTC)

E. [Registered] Investment Advisors (RIA)

F. Registered Exchanges (NYSE, AMEX, etc.)


III.Secondary Market Functions (Execution)A. Provide liquidity (cost = bid/ask spread)

B. Provide current price information1. Price information via auction or electronic quote

2. Market makers, [stock exchange] specialists

C. Registered Exchanges (NYSE, etc. - centralized)

D. Over-The-Counter (OTC) – NASDAQ

E. Electronic Networks (e.g., Instinet)


IV.Trade Order ExecutionA. Market Order: immediate at bid (sell) or ask

(buy)

B. Limit Order: at specified price

C. Stop Order: buy side, sell side

D. Trailing Stop: trigger price moves with market

E. Margin: borrowing portion of buy order (≤ 50%)

F. Short Sale: profiting from decline in price


V. Regulation of Financial MarketsA. Securities and Exchange Commission

1. SEC established by 1934 act.

2. Authority to regulate registered exchanges

3. Defines insiders and behavior that is illegal

B. FINRA (self-regulation, formerly NASD)1. Rules of Conduct/Ethics

2. “Know your customer”

3. Specification of fines and penalties

V. Regulation of Financial Markets (cont’)C. Sarbanes-Oxley (2002)

1. Securities Act of 1933 requires full disclosure

2. CEO/CFO certification of operating reports

3. Requirement for independent board of directors

D. Other Significant Regulations/Acts1. Investment Company Act (1940)

2. Securities Investor Protection Corporation (1970)

3. Dodd-Frank (2009)

Chapter 4 Mutual Funds

Mutual Funds are by far the most important means and method for individual investing and investment management.

Chapter 4: Mutual Funds

I. Learning ObjectivesA. What are Mutual Funds?

B. What are the advantages of investing in mutual funds?

C. How mutual funds selected?

D. How are funds regulated?


II.Mutual FundsA. Mutual funds pool funds from many investors to buy

securities

B. Open-end investment companies (mutual funds) continually issue and redeem shares @ NAV

C. Closed-End Funds: trade like stocks (listed / OTC)

D. Net Asset Value (NAV)1. Value of the fund’s net assets, divided shares outstanding at

close of market trading

2. Shares may trade at NAV or at bid/ask prices for load funds


III.Advantages / Disadvantages of Mutual FundsA. Diversification

B. Smaller minimum investments to access large diversified portfolio

C. Professional management

D. Ease of entry/exit

E. Minimum holding periods

F. Front/Back-end sales charges


IV. Selecting a Mutual FundA. Fund Objectives

1. Growth2. Income3. Growth and Income4. Large Cap / Small Cap5. International / Emerging Markets

B. Management performanceC. Fees and Charges


I. Regulation and taxation of Mutual FundsA. Mutual Fund Act of 1940 regulates U. S. fund

operations through the SEC

B. State approval is also required for sales

C. Regulated Investment Companies1. 90% of investment income must be distributed to

shareholders each year

2. Tax liability [for gains] falls to individual shareholders

Homework Assignment

Given that there are several different editions in use, homework questions will largely be based on the material covered in class. These questions will be emailed as word documents.

Homework questions will form the basis for the midterm and final exams.