Chapter 1 - The Investment Environment

Chapter 1 - The Investment Environment - Chapter 1 The...

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Chapter 1: The Investment Environment 1. Real Assets versus Financial Assets Real assets- land, buildings, machines, and knowledge that can be used to produce goods and services Financial assets- stocks and bonds; do not contribute directly to the productive capacity of the economy; claims on real assets Financial assets define allocation of income or wealth among investors Household wealth includes financial assets such as bank accounts, corporate stocks or bonds National wealth- structures, equipments, inventories of goods, and land. 2. Financial Assets 3 types of financial assets: o Fixed Income o Equity o Derivatives Fixed Income (debt securities)- promises either a fixed stream of income or a stream of income determined by a specific formula. o Ex: Corporate bond, floating rate bonds o Money market- debt securities that are short term, highly marketable and generally low risk Ex: US Treasury bills, CDs o Capital market- include long term securities Ex: Treasury bonds, bonds issued by federal agencies, state and local municipalities and corporations Risk ranges from very safe to relatively risky Equity (common stock) – represents ownership share in the corporation
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o Not promised any payment, can receive dividends o Performance of equity investments tied directly to the success of the firmand its real assets Derivative securities – provide payoffs that are determined by the prices of other assets such as bond or stock prices o Ex: options or futures contracts o One use is to hedge risks or transfer them to other parties Indivduals can also invest directly in real assets 3.
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