The Investment Environment

Chapter 1
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
 Investments & Financial Assets
Essential nature of investment
Reduced current consumption
Planned later consumption
Real Assets
Assets used to produce goods and services
Financial Assets
Claims on real assets

1-2
Role of Financial Assets and Markets

Consumption Timing
Allocation of Risk
Separation of Ownership

1-3
 Crisis in Corporate Governance

Accounting Scandals
Enron
Global Crossing
Analyst Scandals
Merrill Lynch
Initial Public Offerings
CSFB

1-4
Financial System Clients and Their Needs

Household Sector
Primary Need: Invest Funds
Business Sector
Primary Need: Raise Funds
Government Sector
Primary Need: Raise Funds

1-5
Meeting the Needs of Participants

Financial Intermediation
Investment Banking
Financial Innovation & Derivatives
Responding to Regulation & Taxes

1-6
 Investments and Innovation

Technology and Delivery of Service

Computer advancements
On-line trading
More complete and timely information

Globalization
Domestic firms compete in global markets.
Performance in regions depends on other regions.
Causes additional elements of risk

1-7
 Key Trends - Globalization

Developments in Global Markets

Managing foreign exchange
Diversification to improve
performance
Instruments and vehicles continue to
develop.
Information and analysis improves.

1-8
 Key Trends - Securitization

Securitization & Credit Enhancement

Offers opportunities for investors and
originators
Changes in financial institutions and
regulation
Improvement in information capabilities
Credit enhancement and its role

1-9
Key Trends - Financial Engineering

Services of Financial Intermediaries

Bundling and unbundling of cash flows
Slicing and dicing of cash flows
Examples: strips, CMOs, dual purpose
funds, principal/interest splits
Collateralized Loans

1-10
 The Future

Globalization continues and offers more

opportunities.
Securitization continues to develop.
Continued development of derivatives
and exotics.
Strong fundamental foundation is critical.
Integration of investments & corporate
finance.

1-11