Asset Classes and Financial Investments

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CHAPTER 2 Asset Classes

and Financial
Investments

Investments, 8th edition


Bodie, Kane and Marcus

Slides by Susan Hine

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Major Classes of Financial Assets or
Securities
• Money market
• Bond market
• Equity Securities
• Indexes
• Derivative markets

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The Money Market

• Treasury bills
– Bid and asked price
– Bank discount method
• Certificates of Deposits
• Commercial Paper
• Bankers Acceptances

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The Money Market Continued

• Eurodollars
• Repurchase Agreements (RPs) and Reverse
RPs
• Brokers’ Calls
• Federal Funds
• LIBOR Market

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Figure 2.1 Rates on Money Market Securities

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Table 2.1 Major Components of the
Money Market

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Figure 2.2 Treasury Bill Yields

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Figure 2.3 The Spread between 3-month
CD and Treasury Bill Rates

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The Bond Market

• Treasury Notes and Bonds


• Inflation-Protected Treasury Bonds
• Federal Agency Debt
• International Bonds
• Municipal Bonds
• Corporate Bonds
• Mortgages and Mortgage-Backed Securities

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Treasury Notes and Bonds

• Maturities
– Notes – maturities up to 10 years
– Bonds – maturities in excess of 10 years
– 30-year bond
• Par Value - $1,000
• Quotes – percentage of par

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Figure 2.4 Lisiting of Treasury Issues

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Federal Agency Debt

• Major issuers
– Federal Home Loan Bank
– Federal National Mortgage Association
– Government National Mortgage
Association
– Federal Home Loan Mortgage Corporation

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Municipal Bonds

• Issued by state and local governments


• Types
– General obligation bonds
– Revenue bonds
• Industrial revenue bonds
• Maturities – range up to 30 years

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Figure 2.5 Tax-exempt Debt Outstanding

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Municipal Bond Yields

• Interest income on municipal bonds is not


subject to federal and sometimes not to state
and local tax

• To compare yields on taxable securities a


Taxable Equivalent Yield is constructed

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Table 2.2 Equivalent Taxable Yields
Corresponding to Various Tax-Exempt
Yields

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Figure 2.6 Ratio of Yields on Tax-Exempt
to Taxable Bonds

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Corporate Bonds

• Issued by private firms


• Semi-annual interest payments
• Subject to larger default risk than government
securities
• Options in corporate bonds
– Callable
– Convertible

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Mortgages and Mortgage-Backed
Securities

• Developed in the 1970s to help liquidity of


financial institutions
• Proportional ownership of a pool or a
specified obligation secured by a pool
• Market has experienced very high rates of
growth

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Figure 2.7 Mortgage-backed Securities
Outstanding, 1979-2007

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Equity Securities
• Common stock
– Residual claim
– Limited liability
• Preferred stock
– Fixed dividends -limited
– Priority over common
– Tax treatment
• Depository receipts

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Figure 2.8 Listing of Stocks Traded on
the NYSE

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Stock Market Indexes

• There are several broadly based indexes


computed and published daily
• There are several indexes of bond market
performance
• Others include:
– Nikkei Average
– Financial Times Index

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Dow Jones Industrial Average

• Includes 30 large blue-chip corporations


• Computed since 1896
• Price-weighted average

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Example 2.2 Price-Weighted Average

Portfolio: Initial value $25 + $100 = $125


Final value $30 + $ 90 = $120
Percentage change in portfolio value
= 5/125 = -.04 = -4%
Index: Initial index value (25+100)/2 = 62.5
Final index value (30 + 90)/2 = 60
Percentage change in index -2.5/62.5
= -.04 = -4%

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Standard & Poor’s Indexes

• Broadly based index of 500 firms


• Market-value-weighted index
• Index funds
• Exchange Traded Funds (ETFs)

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Other U.S. Market-Value Indexes

• NASDAQ Composite
• NYSE Composite
• Wilshire 5000

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Figure 2.9 Comparative Performance of
Several Stock Stock Indexes, 2001-2006

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Foreign and International
Stock Market Indexes
• Nikkei (Japan)
• FTSE (Financial Times of London)
• Dax (Germany)
• MSCI (Morgan Stanley Capital International)
• Hang Seng (Hong Kong)
• TSX (Canada)

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Derivatives Markets
Options Futures
• Basic Positions • Basic Positions
– Call (Buy) – Long (Buy)
– Put (Sell) – Short (Sell)
• Terms • Terms
– Exercise Price – Delivery Date
– Expiration Date – Assets
– Assets

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Figure 2.10 Trading Data on GE Options

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Figure 2.11 Listing of Selected
Futures Contracts

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