chap02 - Chapter 2 Asset classes and Financial Instruments...

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Ch2: Financial Instruments 1 Chapter 2 Asset classes and Financial Instruments The money market The bond market Equity market Stock Market Indexes Derivative market
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Ch2: Financial Instruments 2 After studying this chapter you should be able to: Distinguish among the major assets that trade in money markets and in capital markets Describe the construction of stock market indexes
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Ch2: Financial Instruments 3 2.1 Money Markets Money market (cash equivalents) p24 Consist of very short-term securities Most in large denominations Out of reach of individual investors Mutual funds(ch4) Easy to access Marketable Short-term Highly liquid Relatively low-risk
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Ch2: Financial Instruments 4 Money Market Instruments Treasury bills p24 Certificates of deposit p26 Commercial Paper p26 Bankers Acceptances p27 Eurodollars p27 Repurchase Agreements (RPs) and Reverse RPs p27 Federal Funds p28 Brokers’ Calls p28 The LIBOR Market p28
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Ch2: Financial Instruments 5 Money Market Instruments (cont`) Treasury bills p24 Government securities issued at a discount from face value and returning the face amount at maturity Most marketable of all instruments Can be bought at the auction or on the secondary market Minimum denominations of $1,000 Highly liquid Income is taxed at the federal level, but exempted from all state and local taxes
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Ch2: Financial Instruments 6 Money Market Instruments (cont`) Certificates of deposit (CD) p26 a time deposit with a bank that may not be withdrawn on demand However, large CDs can be sold to another investor if the owner needs to cash in the CD before its maturity
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Ch2: Financial Instruments 7 Money Market Instruments (cont`) Commercial paper (CP) p26 Short-term unsecured h debt issued by large corporations Backed by a bank line of credit. Maturity is up to 270 days with denominations of multiples of 100,000.
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Ch2: Financial Instruments 8 Money Market Instruments (cont`) Bankers’ acceptance p27 An order to a bank by a customer to pay a sum of money at a future date. Widely used in foreign trade Accepted: bank endorsees the order Credit changed from customer to bank Eurodollars p27 Dollar-denominated deposits at foreign banks or foreign branches of American Banks. (FRB) Repurchase/reverses agreement (Repos) p27 Dealers in government securities use it as overnight borrowings. Overnight inerest
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Ch2: Financial Instruments 9 Money Market Instruments (cont`) Brokers’ call p28 Individuals who buy stocks on margin borrow part of the funds for the stocks from their broker. The broker in turn may borrow the funds from a bank. Federal funds p28
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This note was uploaded on 11/07/2010 for the course BBA 6789 taught by Professor Songyu during the Spring '10 term at University of Macau.

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chap02 - Chapter 2 Asset classes and Financial Instruments...

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