chpt 4 - Three types of financial assets 1....

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1. interest-bearing: money market instruments; fixed-income securities 2. Equities: common stock; preferred stock 3. Derivatives: options; futures Money market instruments : debt obligations of large corporations and govts with an original maturity of <1y. e.g. T-bill, by BOC, sold on a discount basis Most liquid: treasury bills; other types include bank certificate of deposit (CDs), and provincial and municipal MMI Fixed income securities : Longer-term debt obligations, often of corporations and govts, that promise to make fixed payments according to a preset schedule. They are debt obligations. E.g. note, bond. Coupon rate: never changes and determines the amount for each interest payment Current yield : annual coupon divided by the current bond price Bond prices are quoted as percentages of bond face value. The potential gains from owning fixed income securities come in two forms. 1. Fixed payments and final payment. 2. Price of securities rise when interest rates fall. EQUITIES Common stock : represents ownership; dividend and voting right Potential benefits: 1. Usually dividends; 2. value of stock rises Preferred stock: dividend is usually fixed; when liquidized, preferred shares have face value and paid first. Potential gains: promised dividend + gains from price increases Convertible bond: can be exchanged for a fixed number of shares of stock anytime DERIVATIVES Primary asset: security originally sold by a business or govt to raise money. E.g. bonds and stocks Derivative asset: a financial asset that is derived from an existing trade asset rather than issued by a business or govt to raise capital. More generally, any financial asset that is not a primary asset. Usually, claims 1. on financial assets (i.e. stocks) 2. On future price of a real asset (i.e. gold) Futures contracts An agreement made today regarding the terms of a trade that will take place later. Essentially a bet on the future price of whatever being sold/bought. Note: no money exchanges today. Types: financial futures—intangible assets like stocks, bonds, currencies or money market instruments. Commodity futures: real asset, agricultural product or natural resources product
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This note was uploaded on 02/15/2012 for the course AFM 121 taught by Professor Mr.tom during the Winter '11 term at Waterloo.

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chpt 4 - Three types of financial assets 1....

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