十二 Asset Valuation Market and Instruments

十二 Asset Valuation Market and Instruments

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十十 Asset Valuation: Market and Instruments 1: Preliminary Reading Selecting Investments in Global Market a: Discuss the characteristics of fixed-income securities available to investors, including US Treasury securities, corporate bonds, and Eurobonds. Fixed income investments have a contractual repayment schedule. By purchasing a fixed- income security, you are lending money to the issuer. The money lent out is called the principal. In return, the borrower promises to make periodic interest payments and, at maturity, pay back the principal. U.S. Treasury securities are bills, notes, and bonds. Government obligations are considered riskless because there is little chance of default, and they are very liquid. Corporate bonds are fixed-income securities issued by businesses. The bond’s indenture lists the terms of the loan, which includes the payment schedule and any call or refunding provisions that allow the bond to be redeemed prior to maturity. The indenture also specifies sinking fund provisions. These require the issuer to redeem a given percentage of the outstanding issue prior to maturity to protect the bondholders. Bonds are generally categorized by the type of security they offer their holders. A Eurobond is an international bond denominated in a currency other than that of the country where the bond is issued. Eurobonds include Eurodollar bonds and Euroyen bonds. A Eurodollar bond is denominated in U.S. dollars and sold outside the U.S. to non-U.S. investors. b: Discuss the characteristics of equity securities available to investors, including classes of stock and American Depository Receipts. Common stock represents ownership of the firm. Owners of the common stock of a firm share in the company’s successes and failures. Investing in common stock is a relatively risky investment compared with fixed-income securities. Common stock classifications: 1. By industry: Industrial, utilities, transportations, and financial institutions. 2. By domestic versus foreign. Buying foreign equities: 1. Purchase of American Depository Receipts (ADRs). ADRs are shares issued by U.S. banks representing an ownership interest in the actual shares, which are held in deposit in a bank in the issuing firm’s country. 2. Purchase of American shares. American shares are securities issued in the U.S. by a transfer agent acting on behalf of a foreign firm. 3. Direct purchase of foreign shares. Here you buy the shares in the country where the firm is listed. This requires payment in the foreign currency and transferring the certificates to your own country.
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4. Purchase of international mutual funds. Numerous investment companies invest in stocks outside the U.S. The alternatives range from global funds , which invest in both U.S. stocks and foreign stocks, to international funds , which invest almost wholly outside the U.S. Mutual funds are a convenient method of global investing, particularly for small investors. c: Discuss the characteristics of derivative investments (e.g. options, futures).
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This note was uploaded on 12/06/2011 for the course SMO Chartered taught by Professor Peterpellat during the Fall '08 term at University of Alberta.

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十二 Asset Valuation Market and Instruments

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