Ch01_05 - 1-1 FIN 6275 Lecture I(Chapters 1 5 The investment environment Financial markets and instruments Interest rates and risk premiums 1-2

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Unformatted text preview: 1-1 FIN 6275 Lecture I (Chapters 1- 5) The investment environment Financial markets and instruments Interest rates and risk premiums 1-2 Chapter 1 1-3 FIN 6275 (Part I) Lecture I – p. 3 Essential nature of investment Reduced current consumption Planned later consumption Real Assets Determine the productive capacity and net income of the economy Assets (land, buildings, machines, knowledge) used to produce goods and services Financial Assets Claims on real assets – stocks, bonds, derivatives Investments & Financial Assets 1-4 FIN 6275 (Part I) Lecture I – p. 4 Balance Sheet of U.S. Households 1-5 FIN 6275 (Part I) Lecture I – p. 5 Financial Markets and the Economy Consumption Timing – use securities to store wealthInformation Role – capital flows to best companiesAllocation of Risk – select securities according to risk tasteSeparation of Ownership and Management Agency Issues Between managers and shareholders Between bondholders and shareholders Corporate Governance and Corporate Ethics Accounting Scandals (Example – Enron) Auditors—watchdogs of the firms Analyst Scandals (e.g. Arthur Andersen) Sarbanes-Oxley Act - tightens the rules of corporate governance 1-6 FIN 6275 (Part I) Lecture I – p. 6 The Investment Process Asset allocation Choice among broad asset classes Security selection Choice of which securities to hold within asset class Security analysis to value securities and determine their attractiveness Top-down vs. bottom-up 1-7 FIN 6275 (Part I) Lecture I – p. 7 Markets are Competitive Risk-Return Trade-Off Efficient Markets Active Management Finding mispriced securities Timing the market Passive ManagementNo attempt to find undervalued securities No attempt to time the market Holding a highly diversified portfolio 1-8 FIN 6275 (Part I) Lecture I – p. 8 The Players Business Firms– net borrowers Households– net savers Governments– can be both 1-9 FIN 6275 (Part I) Lecture I – p. 9 How the Financial System Meets the Needs of Participants Financial Intermediation Investment Banking Responding to Regulation & Taxes Financial Innovation & Derivatives 1-10 FIN 6275 (Part I) Lecture I – p. 10 Financial Intermediaries Financial Intermediaries– pool and invest fundsInvestment Companies Banks Insurance companies Credit unions Investment Banking Underwrite newstock and bond issues Perform specialized services for businesses Sell new issues in the primarymarket Commercial Banking Take deposits and make loans Universal Banking1-11 FIN 6275 (Part I) Lecture I – p. 11 Financial Engineering Use of mathematical models and computer-based trading technology to synthesize new financial products Bundling and unbundling of cash flows Slicing and dicing of cash flows and risk 1-12 FIN 6275 (Part I) Lecture I – p. 12 The pieces have different risks … Source: CNN Money, March 31, 2011, “Beef Prices Soar” 1-13...
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This note was uploaded on 02/29/2012 for the course FINA 6275 taught by Professor Gerganajostova during the Spring '12 term at GWU.

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Ch01_05 - 1-1 FIN 6275 Lecture I(Chapters 1 5 The investment environment Financial markets and instruments Interest rates and risk premiums 1-2

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