Chapter 1: The Investment Environment

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Chapter 1: The Investment Environment

  1. 1. Chapter 1 The Investment Environment
  2. 2. <ul><li>Essential nature of investment </li></ul><ul><ul><li>Reduced current consumption </li></ul></ul><ul><ul><li>Planned later consumption </li></ul></ul><ul><li>Real Assets </li></ul><ul><ul><li>Assets used to produce goods and services </li></ul></ul><ul><li>Financial Assets </li></ul><ul><ul><li>Claims on real assets </li></ul></ul>Investments & Financial Assets
  3. 3. Role of Financial Assets and Markets <ul><li>Consumption Timing </li></ul><ul><li>Allocation of Risk </li></ul><ul><li>Separation of Ownership </li></ul>
  4. 4. Crisis in Corporate Governance <ul><li>Accounting Scandals </li></ul><ul><ul><li>Enron </li></ul></ul><ul><ul><li>Global Crossing </li></ul></ul><ul><li>Analyst Scandals </li></ul><ul><ul><li>Merrill Lynch </li></ul></ul><ul><li>Initial Public Offerings </li></ul><ul><ul><li>CSFB </li></ul></ul>
  5. 5. Financial System Clients and Their Needs <ul><li>Household Sector </li></ul><ul><ul><li>Primary Need: Invest Funds </li></ul></ul><ul><li>Business Sector </li></ul><ul><ul><li>Primary Need: Raise Funds </li></ul></ul><ul><li>Government Sector </li></ul><ul><ul><li>Primary Need: Raise Funds </li></ul></ul>
  6. 6. Meeting the Needs of Participants <ul><li>Financial Intermediation </li></ul><ul><li>Investment Banking </li></ul><ul><li>Financial Innovation & Derivatives </li></ul><ul><li>Responding to Regulation & Taxes </li></ul>
  7. 7. <ul><li>Technology and Delivery of Service </li></ul><ul><li>Computer advancements </li></ul><ul><li>On-line trading </li></ul><ul><li>More complete and timely information </li></ul><ul><li>Globalization </li></ul><ul><li>Domestic firms compete in global markets. </li></ul><ul><li>Performance in regions depends on other regions. </li></ul><ul><li>Causes additional elements of risk </li></ul>Investments and Innovation
  8. 8. <ul><li>Developments in Global Markets </li></ul><ul><li>Managing foreign exchange </li></ul><ul><li>Diversification to improve performance </li></ul><ul><li>Instruments and vehicles continue to develop. </li></ul><ul><li>Information and analysis improves. </li></ul>Key Trends - Globalization
  9. 9. <ul><li>Securitization & Credit Enhancement </li></ul><ul><li>Offers opportunities for investors and originators </li></ul><ul><li>Changes in financial institutions and regulation </li></ul><ul><li>Improvement in information capabilities </li></ul><ul><li>Credit enhancement and its role </li></ul>Key Trends - Securitization
  10. 10. <ul><li>Services of Financial Intermediaries </li></ul><ul><li>Bundling and unbundling of cash flows </li></ul><ul><li>Slicing and dicing of cash flows </li></ul><ul><li>Examples: strips, CMOs, dual purpose funds, principal/interest splits </li></ul><ul><li>Collateralized Loans </li></ul>Key Trends - Financial Engineering
  11. 11. <ul><li>Globalization continues and offers more opportunities. </li></ul><ul><li>Securitization continues to develop. </li></ul><ul><li>Continued development of derivatives and exotics. </li></ul><ul><li>Strong fundamental foundation is critical. </li></ul><ul><li>Integration of investments & corporate finance. </li></ul>The Future

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