Asset Classes and Financial Instruments.ppt

1、CHAPTER 2,Asset Classes and Financial Instruments,2-2,Asset Classes,Money market instruments Capital market instruments Bonds Equity Securities Derivative Securities,2-3,The Money Market,Subsector of the fixed-income market: Securities are short-term, liquid, low risk, and often have large denominat

2、ions Money market mutual funds allow individuals to access the money market.,2-4,Table 2.1 Major Components ofthe Money Market,2-5,Money Market Securities,Treasury bills: Short-term debt of U.S. government Bid and asked price Bank discount method Certificates of Deposit: Time deposit with a bank Com

3、mercial Paper: Short-term, unsecured debt of a company,2-6,Money Market Securities,Bankers Acceptances: An order to a bank by a banks customer to pay a sum of money on a future date Eurodollars: dollar-denominated time deposits in banks outside the U.S. Repos and Reverses: Short-term loan backed by

4、government securities. Fed Funds: Very short-term loans between banks,2-7,Yields on Money Market Instruments,Except for Treasury bills, money market securities are not free of default risk Both the premium on bank CDs and the TED spread have often become greater during periods of financial crisis Du

5、ring the credit crisis of 2008, the federal government offered insurance to money market mutual funds after some funds experienced losses,2-8,The Bond Market,Treasury Notes and Bonds Inflation-Protected Treasury Bonds Federal Agency Debt International Bonds,2-9,The Bond Market,Municipal Bonds Corpor

6、ate Bonds Mortgages and Mortgage-Backed Securities,2-10,Treasury Notes and Bonds,Maturities Notes maturities up to 10 years Bonds maturities from 10 to 30 years Par Value - $1,000 Interest paid semiannually Quotes percentage of par,2-11,The Bond Market,Inflation-Protected Treasury Bonds TIPS: Provid

7、e inflation protection Federal Agency Debt Debt of mortgage-related agencies such as Fannie Mae and Freddie Mac International Bonds Eurobonds and Yankee bonds,2-12,Municipal Bonds,Issued by state and local governments Interest is exempt from federal income tax and sometimes from state and local tax,

8、2-13,Municipal Bonds,Types General obligation bonds: Backed by taxing power of issuer Revenue bonds: backed by projects revenues or by the municipal agency operating the project.,2-14,Figure 2.4 Tax-exempt Debt Outstanding,2-15,Municipal Bond Yields,To choose between taxable and tax-exempt bonds, co

9、mpare after-tax returns on each bond. Let t equal the investors marginal tax bracket Let r equal the before-tax return on the taxable bond and r m denote the municipal bond rate. If r (1 - t ) r m then the taxable bond gives a higher return; otherwise, the municipal bond is preferred.,2-16,Table 2.2

10、 Tax-Exempt Yield Table,The equivalent taxable yield is simply the tax-free rate, rm , divided by (1-t).,2-17,Corporate Bonds,Issued by private firms Semi-annual interest payments Subject to larger default risk than government securities Options in corporate bonds Callable Convertible,2-18,Proportio

11、nal ownership of a mortgage pool or a specified obligation secured by a pool Produced by securitizing mortgages Mortgage-backed securities are called pass-throughs because the cash flows produced by homeowners paying off their mortgages are passed through to investors.,Mortgage-Backed Securities,2-1

12、9,Mortgage-Backed Securities,Most mortgage-backed securities were issued by Fannie Mae and Freddie Mac. Traditionally, pass-throughs were comprised of conforming mortgages, which met standards of credit worthiness.,2-20,Mortgage-Backed Securities,Eventually, “Private-label” issuers securitized large

13、 amounts of subprime mortgages, made to financially weak borrowers. Finally, Fannie and Freddie were allowed and even encouraged to buy subprime mortgage pools. September, 2008: Fannie and Freddie got taken over by the federal government.,2-21,Figure 2.6 Mortgage-backed securities outstanding,2-22,E

14、quity Securities,Common stock: Ownership Residual claim Limited liability Preferred stock: Perpetuity Fixed dividends Priority over common Tax treatment American Depository Receipts,2-23,Stock Market Indexes,Dow Jones Industrial Average Includes 30 large blue-chip corporations Computed since 1896 Pr

15、ice-weighted average,2-24,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 -

16、2.5/62.5 = -.04 = -4%,2-25,S pronounced “footsie”) DAX (Germany), Hang Seng (Hong Kong) TSX (Canada),2-27,Derivatives Markets,Options and futures provide payoffs that depend on the values of other assets such as commodity prices, bond and stock prices, or market index values. A derivative is a secur

17、ity that gets its value from the values of another asset.,2-28,Options,Call: Right to buy underlying asset at the strike or exercise price. Value of calls decrease as strike price increases Put: Right to sell underlying asset at the strike or exercise price. Value of puts increase with strike price

18、Value of both calls and puts increase with time until expiration.,2-29,Futures Contracts,A futures contract calls for delivery of an asset (or in some cases, its cash value) at a specified delivery or maturity date for an agreed-upon price, called the futures price, to be paid at contract maturity.

19、Long position: Take delivery at maturity Short position: Make delivery at maturity,2-30,Comparison,Option,Right, but not obligation, to buy or sell; option is exercised only when it is profitable Options must be purchased The premium is the price of the option itself.,Futures Contract,Obliged to mak

20、e or take delivery. Long position must buy at the futures price, short position must sell at futures price Futures contracts are entered into without cost,CHAPTER 3,How Securities are Traded,2-32,How Firms Issue Securities,Primary Market Firms issue new securities through underwriter to public Inves

21、tors get new securities; firm gets funding Secondary Market Investors trade previously issued securities among themselves,2-33,How Firms Issue Securities (Ctd.),Stocks IPO Seasoned offering Bonds Public offering Private placement,2-34,Investment Banking,Underwriting: Investment bank helps the firm t

22、o issue and market new securities Prospectus: Describes the issue and the prospects of the company. Red herring,2-35,Figure 3.1 Relationship Among a Firm Issuing Securities, the Underwriters, and the Public,2-36,Investment Banking,Firm commitment investment bank purchases securities from the issuing

23、 company and then resells them to the public. Shelf Registration SEC Rule 415: Allows firms to register securities and gradually sell them to the public for two years,2-37,Investment Banking (Ctd.),Private placements Firm uses underwriter to sell securities to a small group of institutional or wealt

24、hy investors. Cheaper than public offerings Private placements not traded in secondary markets,2-38,Initial Public Offerings,Process Road shows to publicize new offering Bookbuilding to determine demand for the new issue Degree of investor interest in the new offering provides valuable pricing infor

25、mation,2-39,Figure 3.3 Long-term Relative Performance of Initial Public Offerings,2-40,How Securities are Traded,Types of Markets: Direct search Buyers and sellers seek each other Brokered markets Brokers search out buyers and sellers,2-41,How Securities are Traded,Types of Markets: Dealer markets D

26、ealers have inventories of assets from which they buy and sell Auction markets traders converge at one place to trade,2-42,Bid and Asked Prices,Bid Price,Bids are offers to buy. In dealer markets, the bid price is the price at which the dealer is willing to buy. Investors “sell to the bid”. Bid-Aske

27、d spread is the profit for making a market in a security.,Ask Price,Asked prices represent offers to sell. In dealer markets, the asked price is the price at which the dealer is willing to sell. Investors must pay the asked price to buy the security.,2-43,Types of Orders,Market Order: Executed immed

28、iately Trader receives current market price Price-contingent Order: Traders specify buying or selling price A large order may be filled at multiple prices,2-44,Figure 3.5 Price-Contingent Orders,2-45,Trading Mechanisms,Dealer markets Electronic communication networks (ECNs) True trading systems that

29、 can automatically execute orders Specialists markets maintain a “fair and orderly market”,2-46,NASDAQ,Lists about 3,200 firms Originally, NASDAQ was primarily a dealer market with a price quotation system Today, NASDAQs Market Center offers a sophisticated electronic trading platform with automatic

30、 trade execution. Large orders may still be negotiated through brokers and dealers,2-47,Table 3.1 Partial Requirements for Listing on NASDAQ Markets,2-48,New York Stock Exchange,Lists about 2,800 firms Automatic electronic trading runs side-by-side with traditional broker/specialist system SuperDot

31、: electronic order-routing system DirectPlus: fully automated execution for small orders Specialists: Handle large orders and maintain orderly trading,2-49,Table 3.2 Some Initial Listing Requirements for the NYSE,2-50,Electronic Communication Networks,ECNs: Private computer networks that directly li

32、nk buyers with sellers for automated order execution Major ECNs include NASDAQs Market Center, ArcaEx, Direct Edge, BATS, and LavaFlow. “Flash Trading”: Computer programs look for even the smallest mispricing opportunity and execute trades in tiny fractions of a second.,2-51,Bond Trading,Most bond t

33、rading takes place in the OTC market among bond dealers. Market for many bond issues is “thin”. NYSE is expanding its bond-trading system. NYSE Bonds is the largest centralized bond market of any U.S. exchange,2-52,Market Structure in Other Countries,London - predominately electronic trading Euronex

34、t market formed by combination of the Paris, Amsterdam and Brussels exchanges, then merged with NYSE Tokyo Stock Exchange,2-53,Globalization and Consolidation of Stock Markets,NYSE mergers and acquisitions: Archipelago (ECN) American Stock Exchange Euronext NASDAQ mergers and acquisitions: Instinet/

35、INET (ECN) Boston Stock Exchange,2-54,Globalization and Consolidation of Stock Markets,Chicago Mercantile Exchange acquired: Chicago Board of Trade New York Mercantile Exchange,2-55,Figure 3.6 Market Capitalization of Major World Stock Exchanges, 2007,2-56,Trading Costs,Brokerage Commission: fee pai

36、d to broker for making the transaction Explicit cost of trading Full Service vs. Discount brokerage Spread: Difference between the bid and asked prices Implicit cost of trading,2-57,Buying on Margin,Borrowing part of the total purchase price of a position using a loan from a broker. Investor contrib

37、utes the remaining portion. Margin refers to the percentage or amount contributed by the investor. You profit when the stock appreciates.,2-58,Buying on Margin (Ctd.),Initial margin is set by the Fed Currently 50% Maintenance margin Minimum equity that must be kept in the margin account Margin call

38、if value of securities falls too much,2-59,Margin Trading: Initial Conditions Example 3.1,Share price$100 60% Initial Margin 40% Maintenance Margin 100 Shares Purchased Initial Position Stock $10,000 Borrowed $4,000 Equity $6,000,2-60,Maintenance Margin Example 3.1,Stock price falls to $70 per share

39、 New Position Stock $7,000 Borrowed $4,000 Equity $3,000 Margin% = $3,000/$7,000 = 43%,2-61,Margin Call Example 3.2,How far can the stock price fall before amargin call? Let maintenance margin = 30% Equity = 100P - $4000 Percentage margin = (100P - $4,000) / 100P (100P - $4,000) / 100P = 0.30 Solve

40、to find: P = $57.14,2-62,Table 3.4 Illustration of Buying Stock on Margin,2-63,Short Sales,Purpose: to profit from a decline in the price of a stock or security Mechanics Borrow stock through a dealer Sell it and deposit proceeds and margin in an account Closing out the position: buy the stock and return to the party from which it was borrowed,2-64,Short Sale:Initial Conditions Example 3.3,Dot Bomb1000 Shares 50%Initial Margin