Investments Class Powerpoints

# Investments Class Powerpoints - Click to edit Master...

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Unformatted text preview: Click to edit Master subtitle style 7/26/11 Class Powerpoints Final Review Topics 7/26/11 I nvestments 2 22 Treasury Bills Quotation Market convention is to use rate rather than pr ice for T-bill quote Bank Discount Rate (BD) rBD: bank discount rate F: face value (par) P: pr ice n F P F r BD 360 ×- = 7/26/11 I nvestments 2 33 Treasury Bills Example A 90-day T-Bill of par \$10,000 trades at \$9,600. What’s the bank discount rate? n = 90, F = \$10,000, P = \$9,600 Annualized retur n on the investment? % 16 90 360 000 , 10 \$ 600 , 9 \$ 000 , 10 \$ = ×- = BD r % 90 . 16 90 365 600 , 9 600 , 9 000 , 10 365 = ×- = ×- = n P P F r BEY 7/26/11 I nvestments 2 44 Treasury Bills Bond Equivalent Yield (BEY) Measures (simple) annualized return on T-bill investment Facilitates comparison of yields between T-bill and T-bond Bank discount rate is NOT a true interest rate Bank discount rates are converted to yields Bonds quoted in yields BD BD BEY r n r r ×- × = 360 365 7/26/11 I nvestments 3 55 Equity Indexes: DJIA Some facts 30 industr ial stock pr ice-weighted average. Oldest and best-known in the U.S. Used to representing about a quar ter of the market value of the NYSE stocks. Quantitatively ∑ = = + + + = 30 1 30 2 1 1 ) ... ( 1 DJIA i i P divisor P P P divisor 7/26/11 I nvestments 3 66 Equity Indexes: S&P 500 Market value-weighted index - Calculation ∑ = × = 500 1 1 P500 & S i i i P N divisor Stocks Shares Name Outstanding Yesterday Today A 20 \$30 \$25 B 5 \$40 \$50 S&P 8 100 93.75 Price ) ( 40 5 30 20 8 1 × + × % 25 . 6 100 100 75 . 93 return day 1 P & S 1 , &- =- = = day P S r ) ( 8 1 P & S 2 2 1 1 P N P N + = ) 50 5 25 20 ( 8 1 × + × 7/26/11 I nvestments 3 77 Equity Indexes: S&P 500 When does the divisor change? NOT for stock split YES for stock replacement in the index E.g., C replaces B in the index Stocks Shares Name Outstanding Yesterday Today A 20 \$30 \$25 B 5 \$40 \$50 S&P 8 100 93.75 C 40 \$50 \$60 S&P 30.9333 93.75 Price Divisor 9333 . 30 93.75 60 40 25 20 divisor new divisor new 60 40 25 20 75 . 93 = × + × = × + × = 7/26/11 I nvestments 5 88 Margin Account Trading Definition Account Values: Asset : total holding of securities including cash Liability : the amount of money owed to others Either cash (margin borrowing) or stock (short sale) Equity : the investors net worth = Asset - Liability Stock Value : the market value of stock holding Margin: equity as a percent age of stock value 7/26/11 I nvestments 5 99 Margin Account Trading Holding Per iod Retur n E.g., you invest \$10,000 and receive \$1,000 of dividends at the end of the year. The market value of your stocks at the end of the year is \$11,000....
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## This note was uploaded on 07/26/2011 for the course FIN 4133 taught by Professor Hearth during the Spring '11 term at Arkansas.

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Investments Class Powerpoints - Click to edit Master...

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