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CHAPTER 2

Financial Securities. CHAPTER 2. Major Classes of Financial Assets or Securities. Money market Bond market Equity markets Indexes Derivative markets. Money Market Instruments. Treasury bills Certificates of deposits Commercial Paper Bankers Acceptances Eurodollars

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CHAPTER 2

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  1. Financial Securities CHAPTER 2

  2. Major Classes of Financial Assets or Securities • Money market • Bond market • Equity markets • Indexes • Derivative markets

  3. Money Market Instruments • Treasury bills • Certificates of deposits • Commercial Paper • Bankers Acceptances • Eurodollars • Repurchase Agreements (RPs) and Reverse RPs • Brokers’ Calls • Federal Funds • Between Money and Capital • LIBOR Market

  4. Figure 2.1 Money Rates

  5. Figure 2.2 Treasury Bills Zero Coupon Treasuries

  6. Bond Market • Treasury Notes and Bonds • Federal Agency Debt • International Bonds • Municipal Bonds • Corporate Bonds • Mortgages and Mortgage-Backed Securities

  7. Treasury Notes and Bonds • Maturities • Notes – maturities up to 10 years • Bonds – maturities in excess of 10 years • 30-year bond • 2001 Treasury suspended sales • 2005 discussion to possibly resume sales • Par Value - $1,000 • Quotes – percentage of par

  8. Figure 2.4 Treasury Notes, Bonds and BillsUS Treasuries

  9. Federal Agency Debt • Major issuers • Federal Home Loan Bank • Federal National Mortgage Association • Government National Mortgage Association • Federal Home Loan Mortgage Corporation

  10. Figure 2.5 Government Agency & Similar Issues Fannie MaeFHLBFreddie Mac

  11. Municipal Bonds • Issued by state and local governments • Types • General obligation bonds • Revenue bonds • Industrial revenue bonds • Maturities – range up to 30 years • Rates and Prices

  12. Municipal Bond Yields • Interest income on municipal bonds is not subject to federal and sometimes state and local tax • To compare yields on taxable securities a Taxable Equivalent Yield is constructed

  13. Table 2.3 Equivalent Taxable Yields

  14. Corporate Bonds • Issued by private firms • Semi-annual interest payments • Subject to larger default risk than government securities • Options in corporate bonds • Callable • Convertible • Rates and Price

  15. Figure 2.8 Corporate Bond Prices Corporate Bond Listing

  16. 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

  17. Equity Markets • Common stock • Residual claim • Limited liability • Preferred stock • Fixed dividends - limited • Priority over common • Tax treatment • Depository receipts • Prices

  18. Figure 2.10 Listing of Stocks Traded on the NYSE

  19. Stock Indexes • Uses of Stock Indexes • Track average returns • Comparing performance of managers • Base of derivatives • Factors for Construction of Stock Indexes • Representative? • Broad or narrow? • How is it weighted?

  20. Examples of Indexes - Domestic • Dow Jones Industrial Average (30 Stocks) • Standard & Poor’s 500 Composite • NASDAQ Composite • NYSE Composite • Wilshire 5000

  21. Figure 2-11 Comparative Performance of Several Stock Market Indexes

  22. Examples of Indexes - Int’l • Nikkei 225 & Nikkei 300 • FTSE (Financial Times of London) • Dax • Region and Country Indexes • EAFE • Far East • United Kingdom

  23. Construction of Indexes • How are stocks weighted? • Price weighted (DJIA) DJI • Buy and hold strategy • Page 43 example 2.2 • Divisor problem • Page 44 example 2.3 • Market-value weighted (S&P500, NASDAQ) • Buy and hold strategy • Page 46 example 2.4 • Equally weighted (Value Line Index) • Requires rebalancing of portfolio

  24. Options Basic Positions Call (Buy) Put (Sell) Terms Exercise Price Expiration Date Assets Futures Basic Positions Long (Buy) Short (Sell) Terms Delivery Date Assets Derivatives Securities Investment Derivatives 101: Payoff Diagrams

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