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session2 - Session 2 Financial Assets Asset Variety Money...

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Session 2 Financial Assets
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2 Asset Variety Money Bonds Equities Currencies Derivatives
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3 Asset Choice Basics Demand and supply Returns and risk Stocks and flows Prices and yields Required rate of return Fundamentals and fair value Speculative bubbles and animal spirits
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4 US Assets Compared 50 100 150 200 99 00 01 02 03 04 05 06 07 08 09 Returns Indices 3mth money US 10yr Treasury S&P500
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5 Market Arbitrage Links between asset prices Supply and demand Substitutes and relative prices Prices and total returns “Required” rate of return = risk -free rate + risk premium
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0 1 2 3 4 5 6 7 00 01 02 03 04 05 06 07 08 09 10 % 6 Risk Free Rate 3mth US Treasury Bill yield How would unexpected bouts of inflation/deflation affect your view about the risk-free nature of Treasury bills?
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7 Introducing Bonds Fixed interest Risk Maturities Coupons, yields & prices Numerical examples
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8 Present Value Basics “Going” yield on safe assets is 5% HMT offers £105 in one year’s time What is this IOU worth today?
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