notes - INVESTMENTS Lecture Outline/Notes Oleg Bondarenko...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
INVESTMENTS Lecture Outline/Notes Oleg Bondarenko Chapter 1: The Investment Environment What is an Investment? An investment is the current commitment of money or other resources for a period of time in order to derive future payments that will compensate the investor for 1) the time the funds are committed, 2) the expected rate of inFation, and 3) the uncertainty of the future payments. Two types of assets: Real assets are used to produce goods and services. ±.e., land, build- ings, machines, knowledge (human capital). Financial assets are claims on real assets or on the income generated by real assets. ±.e., stocks, bonds, etc. ±inancial assets do not directly contribute to the productive capacity of the economy and to the aggregate wealth of a society. Role of ²nancial assets and markets in the economy: (1) Consumption timing; (2) Allocation of risk; (3) Separation of ownership; (4) Information revelation. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Sectors of the Financial System: The household sector – households are interested in a wide array of Fnancial assets in order to attain different investment goals, depending on the household’s tax status, level of risk tolerance, hedging needs, etc. The business sector – businesses need to raise capital to Fnance expansions and continuing operations. They raise capital by issuing 1) debt (bonds) or 2) equity (common or preferred stocks). The government sector – governments Fnance expenditures by is- suing debt. In addition, the government regulates Fnancial markets and instru- ments. ±.e., Regulation Q, reserve requirements, etc. Market responses to the demands of the three sectors: Financial intermediation – Fnancial intermediaries (such as banks, investmentcompanies, insurance companies, credit unions) allow house- holds to invest in the instruments issued by businesses and govern- ments. Advantages: pooling diversiFcation expertise Investment banking – investment bankers advise businesses regard- ing appropriate market prices for new issues, interest rates, other mar- ket conditions. They also market new issues for businesses. Financial innovation and derivatives: ±inancial innovation has provided a wide array of investment vehicles to households. Examples: Pass-through securities of the Government National Mort- gage Association (GNMA, Ginnie Mae), securitization of mortgages; collateralized mortgage obligation (CMO) . 2
Background image of page 2
Derivative securities (stock options, futures, etc.) have evolved to pro- vide households with additional investment alternatives. Trends in fnancial markets: Globalization – integration of national capital markets: 1) American Depositary Receipts (ADRs) – claims to shares of for- eign stocks; 2) foreign securities that are offered in dollars; 3) mutual funds that invest internationally; 4) derivatives with payoF depending on prices in foreign security mar- kets.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 67

notes - INVESTMENTS Lecture Outline/Notes Oleg Bondarenko...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online