Investments MBA 536

1. InvestmentsMBA 536 Dr. David P Echevarria Cameron School of Business University of North Carolina Wilmington

2. Unit 1: Money And Capital Markets • Unit 1 presents an overview of what we frequently term the [stock] market. In addition to the standard material, we will also explore motives, means, and methods. • Each class session (165 minutes) will consist of two 75 minute lecture periods divided by a 15 minute break.

3. Chapter 1: Investment Environment • Learning Objectives • Why do people invest? • Importance of investment decisions • Steps to investing • Investment management • The Financial Crisis of 2008

4. Chapter 1: Investment Environment • Why do people invest? • Defer current consumption to increase future consumption or wealth • Accumulate funds for a purpose • Benefits to society and the economy • Capital formation • Job creation • Economic expansion

5. Chapter 1: Investment Environment • Importance of investment decisions • More choices now than ever • People live longer • Personal income growth is slower • Labor market is less stable

6. Chapter 1: Investment Environment • Steps to investing: Personal Financial Planning • Personal Inventory (assets, liabilities) • Investments: Goals and Time Frames • Personal Risk Profile • Portfolio Allocation (stocks, bonds, mutual funds) • Time Available (to investigate, select, monitor) • Exit strategy • Insurance (Hedges) • Life and Property • Emergency Funds (cash, credit)

7. Chapter 1: Investment Environment • Financial Crisis of 2008 • Whose story do we believe? • Wall Street Greed: The CDO and CDS games (Michael Lewis: The Big Short, esp. Ch. 7) • Government without Consequences: C.R.A. (1977), Fannie and Freddie, OCC General Council (1995). • Building the Real Estate Bubble • Changing the method of financing mortgages • Growth of non-conforming and sub-prime loans

8. Chapter 1: Investment Environment • Banks playing the spread / increasing leverage • Bursting the financial bubble • Broad-based decline in housing prices coupled with rising unemployment • Rising rates on variable rate mortgages (resets) • Exploding default rates • Credit Default Swap losses lead to banking meltdown • [Re] Discovery of systemic risk • International response to banking crisis – increase bank equity

9. Chapter 2Asset Classes & Financial Instruments The focus in Chapter 2 is on Financial Assets; stocks (equity), bonds (debt), and derivative securities (options and futures).

10. Chapter 2: Asset Classes & Financial Instruments • Learning Objectives • Direct Investment Classes • Marketable Securities • Derivative Securities

11. Chapter 2: Asset Classes & Financial Instruments • Direct Investment Classes • Nonmarketable Financial Claims • Marketable Financial Claims • Money market instruments • Capital market instruments • Derivative securities

12. Chapter 2: Asset Classes & Financial Instruments • Money Market Claims • T-Bills, Negotiable CD, Commercial Paper, Bankers’ Acceptances • Hybrid Claims: Eurodollar deposits, Repos • LIBOR: UK version of Fed Funds • Federal Agency paper

13. Chapter 2: Asset Classes & Financial Instruments • Capital Market Debt Claims • Notes and Bonds • Treasuries, Federal Agencies • Municipals (GO and Revenue) • Corporate Notes and Bonds • Collaterized (mortgage & Equip Trust Cert.) • Uncollateralized (debentures)

14. Chapter 2: Asset Classes & Financial Instruments • Capital Market Equity Claims • Preferred Stock (mostly from Utilities) • Common Stock (voting and non-voting) • Derivative Securities • Claims on Financial Claims • Options (Calls and Puts), Warrants • Futures (financial, commodities, currencies)

15. 15 MINUTE BREAK

16. Chapter 3Financial Markets Where does all this activity take place? What are the important characteristics of and requirements for efficient financial markets?

17. Chapter 3: Financial Markets • Learning Objectives • What are the principal features? • Who are the main players? • How are trades executed? • How are markets regulated?

18. Chapter 3: Financial Markets • General Characteristics of Financial Markets • Primary vs. Secondary Markets • Perfect and Complete Markets [Theory] • Financial Market Players • Investors (Active, Passive) • Investment Bankers • Advise • Underwrite • Distribute

19. Chapter 3: Financial Markets • Financial Market Players (cont’d) • Brokers (retail, online/discount) • Market Makers (OTC) • [Registered] Investment Advisors (RIA) • Registered Exchanges (NYSE, AMEX, etc.)

20. Chapter 3: Financial Markets • Secondary Market Functions (Execution) • Provide liquidity (cost = bid/ask spread) • Provide current price information • Price information via auction or electronic quote • Market makers, [stock exchange] specialists • Registered Exchanges (NYSE, etc. - centralized) • Over-The-Counter (OTC) – NASDAQ • Electronic Networks (e.g., Instinet)

21. Chapter 3: Financial Markets • Trade Order Execution • Market Order: immediate at bid (sell) or ask (buy) • Limit Order: at specified price • Stop Order: buy side, sell side • Trailing Stop: trigger price moves with market • Margin: borrowing portion of buy order (≤ 50%) • Short Sale: profiting from decline in price

22. Chapter 3: Financial Markets • Regulation of Financial Markets • Securities and Exchange Commission • SEC established by 1934 act. • Authority to regulate registered exchanges • Defines insiders and behavior that is illegal • FINRA (self-regulation, formerly NASD) • Rules of Conduct/Ethics • “Know your customer” • Specification of fines and penalties

23. Regulation of Financial Markets (cont’) • Sarbanes-Oxley (2002) • Securities Act of 1933 requires full disclosure • CEO/CFO certification of operating reports • Requirement for independent board of directors • Other Significant Regulations/Acts • Investment Company Act (1940) • Securities Investor Protection Corporation (1970) • Dodd-Frank (2009)

24. Chapter 4 Mutual Funds Mutual Funds are by far the most important means and method for individual investing and investment management.

25. Chapter 4: Mutual Funds • Learning Objectives • What are Mutual Funds? • What are the advantages of investing in mutual funds? • How mutual funds selected? • How are funds regulated?

26. Chapter 4: Mutual Funds • Mutual Funds • Mutual funds pool funds from many investors to buy securities • Open-end investment companies (mutual funds) continually issue and redeem shares @ NAV • Closed-End Funds: trade like stocks (listed / OTC) • Net Asset Value (NAV) • Value of the fund’s net assets, divided shares outstanding at close of market trading • Shares may trade at NAV or at bid/ask prices for load funds

27. Chapter 4: Mutual Funds • Advantages / Disadvantages of Mutual Funds • Diversification • Smaller minimum investments to access large diversified portfolio • Professional management • Ease of entry/exit • Minimum holding periods • Front/Back-end sales charges

28. Chapter 4: Mutual Funds • Selecting a Mutual Fund • Fund Objectives • Growth • Income • Growth and Income • Large Cap / Small Cap • International / Emerging Markets • Management performance • Fees and Charges

29. Chapter 4: Mutual Funds • Regulation and taxation of Mutual Funds • Mutual Fund Act of 1940 regulates U. S. fund operations through the SEC • State approval is also required for sales • Regulated Investment Companies • 90% of investment income must be distributed to shareholders each year • Tax liability [for gains] falls to individual shareholders

30. Homework Assignment • Given that there are several different editions in use, homework questions will largely be based on the material covered in class. These questions will be emailed as word documents. • Homework questions will form the basis for the midterm and final exams.