FIN401-ch2 - Chapter 2 Chapter Financial Securities...

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Unformatted text preview: Chapter 2 Chapter Financial Securities Organization Organization Direct Investing Debt securities Indirect Investing Investment Companies Mutual funds Closed-end funds Unit Investment Trusts Equity securities Other securities Exchange Traded Funds Nonmarketable Financial Assets Nonmarketable Commonly owned by individuals Represent claims between issuer and Represent investor investor Usually “safe” investments; easy to convert Usually to cash without loss of value to Examples: Savings accounts and bonds, Examples: certificates of deposit, money market deposit accounts deposit Money Market Securities Money Marketable: claims are negotiable or salable in the marketplace salable Short-term, liquid, relatively low-risk debt Short-term, liquid relatively low-risk instruments instruments Issued by governments and private firms Issued governments Examples: Money market mutual funds, TExamples: Money Bills, Commercial paper MMMF and the Credit Crisis of 2008 MMMF Between 2005 and 2008, money market Between mutual funds (MMMFs) grew by 88%. mutual MMMFs had their own crisis in 2008 when MMMFs Lehman Brothers declared bankruptcy. Lehman Some funds had invested heavily in LB Some commercial paper. commercial A run on money market funds ensued. The U.S. Treasury intervened to stop the The run (insuring funds up to $3.4T). run Capital Market Securities Capital Marketable debt with Marketable maturity greater than one year one Ownership shares (equity) More risky than money market securities Bond Market Bond Treasury notes and bonds → Maturities Maturities » Notes – up to 10 years Notes up » Bonds – in excess of 10 years Bonds in → Par value - $1,000 $1,000 → Quotes – percentage of par percentage Treasury Notes and Bonds Treasury Federal Agency Debt Federal • • Major issuers → Federal Home Loan Bank Federal → Federal National Mortgage Assoc Federal → Government National Mortgage Assoc Government → Federal Home Loan Mortgage Corp Federal In September 2008, the government took In over FNMA and FHLMC over Municipal Bonds Municipal Issued by Issued state and local governments state Types → General obligation bonds General → Revenue bonds Revenue Maturities → Up to 30 years Up Municipal Bonds Municipal Interest income :not subject to federal tax, and (sometimes) state and local tax and To compare yields on taxable securities a To Taxable Equivalent Yield (TEY) is Taxable constructed constructed →r(tax exempt)=r(taxable)x(1-tax rate) →r(TEY)= r(tax exempt)/(1-tax rate) Corporate Bonds Corporate Issued by firms Semi-annual interest payments Subject to larger default risk than Subject larger government securities government Options in corporate bonds → Callable Callable → Convertible Convertible Asset-Backed Securities Asset-Backed Securitization: transforming illiquid, risky individual loans into more liquid, less risky securities securities Mortgage-backed securities → Pass through Pass → Collateral Collateral Many types of loans have been transformed Equity Market Equity Represents an ownership interest Represents ownership Two types of equity securities 1) Common stock stock Ownership in corporation Ownership Residual claimants Residual voting rights voting Limited liability Limited Equity Market Equity 2) Preferred stock stock No ownership No Dividend known in advance known May be called, converted called, Depository receipts Stock Indexes (Domestic) Stock Dow Jones Industrial Average (DJIA) → 30 stocks 30 → Price weighted Price Standard & Poor’s 500 Composite → Large companies Large → Market-value weighted Market-value Nasdaq Composite NYSE Composite Wilshire 5000 Stock Indexes (International) Stock Nikkei 225 → Price weighted Price FTSE Dax Region and country indexes Examples of International Indices Examples 2-18 Derivative Securities Derivative Derive value from connected underlying Derive securities securities Futures and options contracts: Futures standardized, performance is guaranteed by a third party by Risk management tools Options Options Exchange-traded options: created by investors, Exchange-traded not corporations not Call: Right but not the obligation to purchase a Call: fixed quantity at a fixed price before a certain date fixed Put: Right but not the obligation to sell a fixed Put: quantity at a fixed price before a certain date quantity Right is sold in the market at a price Right in LEAPS: longer maturities LEAPS: longer Futures Futures Futures contract Futures Standardized agreement providing for future delivery of a fixed asset at a fixed price delivery Basic positions » Long (buy) » Short (sell) Used to hedge the risk of price changes Used hedge ...
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This note was uploaded on 12/10/2011 for the course FIN 401 taught by Professor Staff during the Spring '08 term at Miami University.

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