CHAPTER # 2

ORGANIZING FINANCIAL ASSETS

 Financial Assets
 Financial assets are financial claims on the
issuer of the securities like govt or
corporations.
 An investor can invest in three different ways
1. Investing in non marketable assets
2. Investing directly
3. Investing indirectly
 EXHIBIT2-1
 Major types of financial assets
 DIRECT INVESTING
 Nonmarketable Savings deposits
 Certificates of deposit
 Money market deposit accounts
 U.S. savings bonds
 Money market Treasury bills
 Negotiable certificates of deposit
 Commercial paper
 Eurodollars
 Repurchase agreements
 Banker’s acceptances
 Capital market Fixed income
 Treasuries
 Agencies
 Municipals
 Corporates
 Equities
 Preferred stock
 Common stock
 Derivatives market Options
 Future contracts
 INDIRECT INVESTING
 Investment companies Unit investment trust
 Open end
 Money market mutual fund
 Stock, bond, and income funds
 Closed end
 Exchange-traded funds
 Non Marketable Financial
Assets
 Personal transaction between the owner and
the issuer
 Safe and very liquid investments
 Types of non marketable financial assets
1. Savings accounts
 Opened in commercial banks and other
financial institutions
 Very safe and provide regular return
 Interest rate is determined by govt
2.Non negotiable certifcates of
deposits
 Offered by commercial banks and other
financial institutions.
 They are infact saving certificates known as
CoD
 Have different maturities
 Return depends on maturity
 Often issued at their own terms
 Penalty charged for early withdrawals
 3.Money market deposit
accounts
 Offered by financial insttutions
 Terms on these instruments are very relaxed
 Can be opened with minimum deposit
 Offer competitive rates and are insured
 There is no limit on no. of deposits and
withdrawals
4. US Govt bonds/ Govt bonds
 These are non marketable instruments issued
by govt
 Non transferable, non negotiable and cannot be
used for collateral
 Purchased from treasury through fin.
Institutions
 Issued in different denominations
 Money market securities
 Market for short term, highly liquid and low
risk assets
 They are debt instruments issued by govt,
financial institutions, and banks
 Maturity is of one day to one year and mostly
less then 90 days
 Some are negotiable while others are non
negotiable
 Investors can invest in them directly or
indirectly
 Types of Money market
securities
1. Treasury Bills
 Short term, risk free money market instrument

 They are fully gauranteed

 Issued at discount

 The actual yield on a bond can be calculated as:

Investment yield=FV-PP/PP*3/Maturity in days

 Outstanding bonds can be further bought and

sold in secondary market

 Negotiable certificates of
deposit
 These certificates are issued by financial
institutions when an investor makes deposit
 Represent marketable deposit liability of issuer
 They are considered negotiable because they
can be traded in market before maturity
 The deposit is maintained in banks until
maturity, at which the depositor receives
deposited amount +interest
 3. Commercial Paper
 A short term unsecured promissory note issued by large
financially strong corporations
 Issued at discount directly or indirectly
 Secondary market for commercial papers is weak
4. Eurodollars:
 Deposits in dollars held in foreign banks
 This type of market originated in Europe
 Eurodollar deposits consist of both time deposit and
CDs
 Maturities are short term most often less than six
months
5. Repurchase agreement
 An agreement between borrower and lender to sell
and repurchase govt securities
 The borrower is a financial institution and lender
an investor
 Borrower sells repurchase agreement to investor
and agrees to repurchase it back in short time, often
overnight
 The difference between sale price and purchase
price is interest of investor
 A tool used by central banks to control money
suuply
 6. Banker’s acceptance
 A time draft drawn on a bank by a customer,in
which bank agrees to pay a particular amount
at some future date.
 They are negotiable and can be sold at discount
 Used in international trade
 Maturity ranges from 30 to 180 days