Alternatives - Investment Alternatives Investment Course...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Investment Alternatives Investment Course objectives “Security analysis” and “portfolio Security management” management” The importance and pervasiveness of The uncertainty, or risk risk Broad classes of investments (Our Broad emphasis will be on marketable financial assets, especially common stock.) assets, Investment Alternatives Investment Nonmarketable financial assets Money market investments, especially Money U.S. Treasury bills U.S. Fixed income securities – Issuers and default risk – Tax-advantaged bonds – Asset-backed securities Equities: common and preferred stock Derivatives: options and futures Course objectives Course “Security analysis” and “portfolio Security management” management” The importance of risk risk Broad classes of investments Broad Nonmarketable financial assets Nonmarketable Money market investments Money Fixed income securities Fixed Equities: common and preferred stock Equities: Derivatives: options and futures Derivatives: Summary Summary A good understanding of investments is good important for managing your own standard of living and retirement. of It is crucial for most jobs in financial It services, such as security analyst, portfolio manager, registered representative, financial planner. representative, It is also important in corporate finance It positions, where the firm is typically the issuer of securities rather than the issuer investor. investor. Summary Summary Security analysis is the effort to determine Security the true economic value of a security. If the market price is lower (higher) than what your estimate of true value, you may want to buy (sell short). want Portfolio management involves analyzing, Portfolio structuring and managing the combination of securities held by the investor. of Summary Summary We cannot see the future! – We do not know in advance how much we will We gain (or lose) from an investment. gain – Because of this uncertainty, investors bear Because risk, and the most important decision you face risk and when choosing your investments is deciding how much risk you are willing to bear. how – Because people are risk averse, they will bear Because more risk only if they anticipate higher expected return. expected Summary Summary Investments can be categorized along Investments several dimensions: several – Real vs. financial assets – Marketable vs. nonmarketable investments – Money market vs. capital market vs. derivative Money market investments market – Types of capital market securities Fixed income securities (bonds) Equities Summary Summary Nonmarketable financial assets include Nonmarketable savings accounts, bank CDs, and U.S. savings bonds. savings Money market investments are short-term, Money very liquid debt securities. very – The most important: U.S. Treasury bills. – The return from T-bills is normally taken as The the short-term risk-free rate (RF in the notation of the text). notation – T-bills do not pay coupons; they simply sell at T-bills a discount to face value. discount Summary Summary Prices of Treasury bills – T-bills are conventionally quoted in terms of the price T-bills discount from face value. discount – By convention, the discount is then annualized by By multiplying, using a 360-day-year assumption: multiplying, Face value − Price 360 × Face value Maturity – The quoted discount is less than the actual rate of The return from buying the T-bill and holding it until maturity. maturity. Summary Summary Fixed-income securities have specific Fixed-income promised future payments. Corporate bonds and Treasury notes and bonds are the most common fixed income securities. the Returns come in the form of interest Returns income and (possibly) capital gains or losses if sold before maturity. losses Interest received from municipal bonds is Interest exempt from federal taxes. Some munis are also exempt from state taxes. are Summary Summary To find the equivalent taxable yield for a muni, To equate the after-tax yields: equate – If a muni yielding Rmuni is exempt from federal taxes If only, the equivalent taxable yield Rttax satisfies ax satisfies Rtax(1-tstate)(1-tfed) = Rmuni(1-tstate), or Rtax = Rmuni / (1-tfed). – For a muni that is also exempt from state taxes, the For equivalent taxable yield solves equivalent Rtax(1-tstate)(1-tfed) = Rmuni, or Rtax = Rmuni / {(1-tstate)(1-tfed)}. Summary Summary There has been an enormous increase in There asset securitization in recent years. By far the biggest category of asset-backed securities is home mortgages. securities Common stock is a residual claim, with no Common promised payments and no possibility of promised default. Common stockholders are the owners of the corporation. Returns come from dividends and capital gains or losses. from Summary Summary Preferred stock is often called a “hybrid” Preferred security. security. – Debt-like characteristics include specific Debt-like promised payments, a stated value in liquidation, and being ahead of common stockholders in case of bankruptcy. stockholders – Equity-like characteristics include no Equity-like possibility of legal default, dividend payments (not interest), and being behind lenders in case of bankruptcy. case Summary Summary Derivative securities like options and Derivative futures are securities where the payoff is determined by (“derived” from) the value of some other underlying asset. of There are huge and growing derivatives There markets in stock options and futures, and also options and futures on stock indexes, interest rates, commodities, precious metals, foreign currencies, etc. metals, ...
View Full Document

This note was uploaded on 11/29/2009 for the course BUSFIN 722 taught by Professor Smith during the Spring '09 term at Ohio State.

Ask a homework question - tutors are online