burlaréis

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burlaréis

  1. 1. Chapter 2 Financial Instruments
  2. 2. Major Types of Securities <ul><li>Debt </li></ul><ul><ul><li>Money market instruments </li></ul></ul><ul><ul><li>Bonds </li></ul></ul><ul><li>Common stock </li></ul><ul><li>Preferred stock </li></ul><ul><li>Derivative securities </li></ul>
  3. 3. Markets and Instruments <ul><li>Money Market </li></ul><ul><ul><li>Debt Instruments </li></ul></ul><ul><ul><li>Derivatives </li></ul></ul><ul><li>Capital Market </li></ul><ul><ul><li>Bonds </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Derivatives </li></ul></ul>
  4. 4. Money Market Instruments <ul><li>Treasury bills </li></ul><ul><li>Certificates of deposit </li></ul><ul><li>Commercial Paper </li></ul><ul><li>Bankers Acceptances </li></ul><ul><li>Eurodollars </li></ul>
  5. 5. Money Market Instruments (Cont.) <ul><li>Repurchase Agreements (RPs) and Reverse RPs </li></ul><ul><li>Federal Funds </li></ul><ul><li>Brokers’ Calls </li></ul><ul><li>LIBOR Market </li></ul>
  6. 6. T- Bill Pricing From dealer point of view Ask – Selling price Bid -- Purchase price
  7. 7. Certificate of Deposit Fixed term
  8. 8. Commercial paper Unsecured debt Backed by line of credit
  9. 9. Bankers’ acceptance “Post dated check ” Bank accepts responsibility for payment
  10. 10. Eurodollars Dollar denominated deposits at foreign banks No Fed regulations
  11. 11. Repos Short term overnight borrowing Investor buys securities and then sells back at higher price – price difference is interest
  12. 12. Reverse Repo Dealer buys securities and then sells back at a higher price
  13. 13. Fed Funds Overnight loans of reserves between banks
  14. 14. Bond Markets <ul><ul><li>US Treasury Bonds and Notes </li></ul></ul><ul><ul><li>Agency Issues (Fed Gov) </li></ul></ul><ul><ul><li>International Bonds </li></ul></ul><ul><ul><li>Municipal Bonds </li></ul></ul><ul><ul><li>Corporate Bonds </li></ul></ul><ul><ul><li>Mortgage-Backed Securities </li></ul></ul>
  15. 15. Treasury Notes / Bonds Notes – 10 years Bonds – 10 – 30 years
  16. 16. Treasury Notes / Bonds $1,000 denominations Semi-annual coupon payments Coupon payment is interest Based value * coupon rate *.5
  17. 17. Federal Agency Debt Fannie Mae Federal National Mortgage Association Ginnie Mae Government national mortgage association
  18. 18. Federal Agency Debt Freddie Mac Federal Home Loan Mortgage Corporation Implicit government guarantee Lower risk => Lower interest
  19. 19. Municipal Bond Yields <ul><li>Interest income on most municipals is not subject to tax </li></ul><ul><li>To compare the yields on municipals to other bonds use equivalent taxable yield </li></ul><ul><li>(municipal return) / (1 – tax rate) </li></ul><ul><li>Or solve for the tax rate that equates the two yields </li></ul><ul><li>Tax rate = 1 – (municipal rate/taxable rate) </li></ul>
  20. 20. Capital Market - Equity <ul><li>Common stock </li></ul><ul><ul><li>Residual claim </li></ul></ul><ul><ul><li>Limited liability </li></ul></ul><ul><li>Preferred stock </li></ul><ul><ul><li>Fixed dividends - limited </li></ul></ul><ul><ul><li>Priority over common </li></ul></ul><ul><ul><li>Tax treatment </li></ul></ul>
  21. 21. Stock Market Indexes <ul><li>Uses </li></ul><ul><ul><li>Track average returns </li></ul></ul><ul><ul><li>Comparing performance of managers </li></ul></ul><ul><ul><li>Base of derivatives </li></ul></ul><ul><li>Factors in constructing or using an Index </li></ul><ul><ul><li>Representative? </li></ul></ul><ul><ul><li>Broad or narrow? </li></ul></ul><ul><ul><li>How is it constructed? </li></ul></ul>
  22. 22. Examples of Indexes - Domestic <ul><li>Dow Jones Industrial Average (30 Stocks) </li></ul><ul><li>Standard & Poor’s 500 Composite </li></ul><ul><li>NASDAQ Composite </li></ul><ul><li>NYSE Composite </li></ul><ul><li>Wilshire 5000 </li></ul>
  23. 23. Bond Indexes <ul><li>Lehman Brothers </li></ul><ul><li>Merrill Lynch </li></ul><ul><li>Salomon Brothers </li></ul><ul><li>Specialized Indexes </li></ul><ul><ul><li>Merrill Lynch Mortgage </li></ul></ul>
  24. 24. Construction of Indexes <ul><li>How are stocks weighted? </li></ul><ul><ul><li>Price weighted (DJIA) </li></ul></ul><ul><ul><li>Market-value weighted (S&P500, NASDAQ) </li></ul></ul><ul><ul><li>Equally weighted (Value Line Index) </li></ul></ul><ul><li>How returns are averaged? </li></ul><ul><ul><li>Arithmetic (DJIA and S&P500) </li></ul></ul><ul><ul><li>Geometric (Value Line Index) </li></ul></ul>
  25. 25. Stock Indices
  26. 26. Stock Indices
  27. 27. Stock Indices
  28. 28. Stock Indices
  29. 29. Stock Indices
  30. 30. Stock Indices
  31. 31. Value Index
  32. 32. Value Index
  33. 33. Equally Weighted Index
  34. 34. Averaging Methods <ul><li>Component Return </li></ul><ul><li>A=10% B= (-5%) C = 20% </li></ul><ul><li>Arithmetic Average </li></ul><ul><li>[.10 + (-.05) + .2] / 3 = 8.33% </li></ul><ul><li>Geometric Average </li></ul><ul><li>[(1.1) (.95) (1.2)] 1/3 - 1 = 7.84% </li></ul>
  35. 35. Construction of Indexes <ul><li>How returns are averaged? </li></ul><ul><ul><li>Arithmetic (DJIA and S&P500) </li></ul></ul><ul><ul><li>Geometric (Value Line Index) </li></ul></ul>
  36. 36. Derivatives Securities <ul><li>Options </li></ul><ul><li>Basic Positions </li></ul><ul><ul><li>Call (Buy) </li></ul></ul><ul><ul><li>Put (Sell) </li></ul></ul><ul><li>Terms </li></ul><ul><ul><li>Exercise Price </li></ul></ul><ul><ul><li>Expiration Date </li></ul></ul><ul><ul><li>Assets </li></ul></ul><ul><li>Futures </li></ul><ul><li>Basic Positions </li></ul><ul><ul><li>Long (Buy) </li></ul></ul><ul><ul><li>Short (Sell) </li></ul></ul><ul><li>Terms </li></ul><ul><ul><li>Delivery Date </li></ul></ul><ul><ul><li>Assets </li></ul></ul>

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