THE GLOBAL MARKET & INVESTMENT

CHOICES

Lame Bakwenabatsile Office 245/234

University of Botswana
Department of Accounting and Finance
 Growing Investment Opportunities
• Prior to the several developments that have
happened in terms of technology and markets
infrastructure, investors’ choices were limited
to investments within their country;
• However, now more investment instruments
are available in the financial markets as a
results of technological advances and new
regulations;
 Growing Investment Opportunities
• Investors now have the ability to invest from a
global perspective due to globalization or
integration of domestic and foreign financial
markets;
• A broker or investor in any part of the world
can now have constant contact with offices
and financial markets around the world;
 Growing Investment Opportunities
• Mergers of firms and security exchanges
internationally has also enabled investors and
investment firms to trade in securities in
markets around the world;
• Investment vehicles with a variety of
maturities, risk-return characteristics, and
cash flow patterns are being created due to
competition and deregulations in the financial
sector;
 Rationale for Investing Globally
• Ignoring foreign markets can
substantially reduce the investment
choices for investors from Botswana (or
any other country);
• The domestic financial market is very
small relative to other financial markets
in Africa without considering the
financial markets globally;
Rationale for Investing Globally
 Rationale for Investing Globally
• Rates of return available on non-Botswana
securities could exceed Botswana Securities
due to higher growth rates in foreign
countries.
 Rationale for Investing Globally
• Diversification with foreign securities can help
reduce portfolio risk because foreign markets have
low correlation with Botswana capital markets;
• The correlation of returns between a single pair of
countries changes over time because the factors
(such as international trade, economic growth,
monetary and fiscal policy) influencing the
correlation change over time;
• Diversified portfolios reduce variability of returns
over time. Correlation coefficients measure
diversification contribution.
Rationale for Investing Globally
Rationale for Investing Globally
 Rationale for Investing Globally
• Correlation coefficients can range from +1.00 to
−1.00. A correlation of +1.00 means that the
rates of return for these two investments move
exactly together.
• Combining investments with +1.00 correlation
coefficients in a portfolio would not help
diversify the portfolio.
 Rationale for Investing Globally
• In contrast, a correlation coefficient of −1.00
means that the rates of return for two
investments move exactly opposite to each
other.
• Combining two investments with large negative
correlation in a portfolio would be ideal for
diversification because it would stabilize the
rates of return over time, reducing the standard
deviation of the portfolio.
 Global Investment Choices
• Fixed-income investments
• Equity investments
• Special equity instruments
• Futures contracts
• Investment companies
• Real estate
• Low liquid investments
 Fixed-Income Investments
• Basic concepts of fixed-income investments
– Contractual payment schedule
– Recourse varies by instrument
• Savings accounts
– Fixed earnings
– Convenient
– Liquid and low risk
– Low rates
 Fixed-Income Investments
• Certificates of Deposit (CDs )
– Fixed durations of 3, 6 and 12 months
– Promised rates are higher than those of savings
accounts
– Heavy penalty for early withdrawal
• Government securities
– Treasury Bills with a maturity less than 1 year
– Treasury Notes with a maturity in 1 - 10 years
– Bonds with a maturity over 10 years
– Highly liquid and risk free
 Fixed-Income Investments
• Municipal bonds
– Issued by state and local governments usually
to finance infrastructural projects.
– Exempt from taxation by the government.
– Two types:
• General obligation bonds (backed by the
taxing power of the municipality)
• Revenue bonds (interest is paid from
revenue generated by specific projects)
 Fixed-Income Investments
• Corporate bonds
– Fixed income securities issued by industrial and
public utility corporations
– Classified by credit quality measured by ratings,
maturity and issuer (industrial or utility).
– Features
• Indenture (legal agreement between issuer
and bondholder)
• Call provision
• Sinking fund provision
 Fixed-Income Investments
Corporate Bonds categories
• Secured bonds
– Most senior bonds in capital structure of a
corporation and have the lowest risk of default
– Mortgage bonds
• Secured by liens on specific assets such as land &
buildings
– Collateral trust bonds
• Bonds secured by financial assets
– Equipment trust certificates
• Bonds secured by transportation equipment
 Fixed-Income Investments
• Debentures
– Unsecured promises to pay interest and principal
– In case of default, debenture owner can force
bankruptcy and claim any unpledged assets to
pay off the bonds
• Subordinated bonds
– Unsecured like debentures, but holders of these
bonds may claim assets after senior secured and
debenture bondholders claims have been
satisfied, in case of a default.
 Fixed-Income Investments
• Income bonds
– Interest payment contingent upon earning sufficient
income
– If income subsequently earned, interest must be
paid off
– Riskier than debenture bonds, offer higher returns
• Convertible bonds
– Have similar attributes as other bonds with an added
feature to convert them into common stock
– Offer the upside potential of common stock and
usually have lower interest rates
 Fixed-Income Investments
• Debenture with warrants
– Allows bondholder to purchase the firm’s
common stock at a fixed price for a given time
period
– Interest rates usually lower on bonds with
warrants attached
• Zero coupon bond
– Offered at a deep discount from the face value
– No interest during the life of the bond, only the
principal payment at maturity
 Fixed-Income Investments
• Preferred Stock
– Hybrid security ( have features of fixed income
and equity investments)
– Fixed dividends (% of face value or Pula amount)
– Dividend obligations are not legally binding, but
must be voted on by the board of directors to be
paid
– Most preferred stock is cumulative
– Credit implications of missing dividends since
most preferred stock is cumulative
 Equity Investments
• Common Stock
– Represents ownership of a firm
– Investor’s return tied to the performance of the
company and may result in loss or gain
• Common Stock Classifications
– Industrial: manufacturers of automobiles,
machinery, chemicals, beverages
– Utilities: electrical power companies, gas
suppliers, water industry
– Transportation: airlines, truck lines, railroads
– Financial: banks, savings and loans, credit unions
 Special Equity Instruments: Options
• These are equity-derivative securities
which have a claim on the common
stock of a firm.
• Warrants
– Options issued by a company giving
the holders the right to buy its
common stock at a specified price
within a designated time period.
 Special Equity Instruments: Options
• Options are rights to buy or sell common stock
or other underlying assets at a specified price
called the striking price within a certain period.
– Puts are options to sell
– Calls are options to buy
• A call option is similar to a warrant because it is
an option to buy common stock.
• It differs from a warrant because its issued by an
investor not a company and is valid for less than
a year.
 Futures Contracts
• Exchange of a particular asset at a specified
delivery date for a stated price paid at the
time of delivery
• Deposit (10% margin) is made by buyer at
contract to protect the seller
• Commodities trading is largely in futures
contracts
• Current price of the futures contract depends
on expectations
 Futures Contracts
• Financial Futures
– Recent development of contracts on financial instruments
such as T-bills, Treasury bonds, and Eurobonds
– Traded mostly on Chicago Mercantile Exchange (CME) and
Chicago Board of Trade (CBOT)
– Allow investors and portfolio managers to protect against
volatile interest rates
– Currency futures allow protection against changes in
exchange rates
– Various stock futures on market indexes such as the S&P
500 and Value Line Index
 Investment Companies
• Rather than buy individual securities directly
from the issuer they can be acquired indirectly
through shares in an investment company
• Investment companies sell shares in itself and
uses proceeds to buy securities
• Investors own part of the portfolio of
investments.
 Real Estate
• Real Estate Investment Trusts (REITs)
– Investment fund that invests in a variety of real
estate properties
– Construction and development trusts provide
builders with construction financing
– Mortgage trusts provide long-term financing
for properties
– Equity trusts own various income-producing
properties
 Real Estate
• Direct Real Estate Investment
– Purchase of a home
– Purchase of raw land
• Intention of selling in future for a profit
• Ownership provides a negative cash flow due to
mortgage payments, taxes, and property maintenance
– Land Development
• Divide the land into individual lots
• Build houses or a shopping mall on it
• Requires capital, time, and expertise
 Real Estate
• Rental Property
– Acquire apartment buildings or houses with low
down payments
– Derive enough income from the rents to pay the
expenses of the structure, including the mortgage
payments, and generate a good return
– Rental property provides a cash flow and an
opportunity to profit from the sale of the property
 Low liquid investments
• Antiques
• Art
• Coins and Stamps
• Diamonds