4-1 Chapter 4 Overview of Security Types Classifying Securities Classifying Securities Interest-Bearing Assets Interest-Bearing Assets Equities Equities.

Slides:



Advertisements
Similar presentations
BY UCHE UWALEKE PhD. Understand key financial instruments Learn how derivatives could be used as Hedging instruments Be familiar with the main requirements.
Advertisements

 Derivatives are products whose values are derived from one or more, basic underlying variables.  Types of derivatives are many- 1. Forwards 2. Futures.
Unit 5 Microeconomics: Money and Finance Chapters 11.2 Economics Mr. Biggs.
Chapter # 4 Instruments traded on Financial Markets.
Stocks and bonds. Objectives Distinguish between stocks and bonds.
Introduction to Derivatives and Risk Management Corporate Finance Dr. A. DeMaskey.
Chapter McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. 3 Overview of Security Types.
3-1. Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3 Security Types.
3 3 C h a p t e r Security Types second edition Fundamentals of Investments Valuation & Management Charles J. Corrado Bradford D. Jordan McGraw Hill /
© 2008 Pearson Education Canada13.1 Chapter 13 Hedging with Financial Derivatives.
Risk Management in Financial Institutions (II) 1 Risk Management in Financial Institutions (II): Hedging with Financial Derivatives Forwards Futures Options.
3 3 C h a p t e r Security Types second edition Fundamentals of Investments Valuation & Management Charles J. Corrado Bradford D. Jordan McGraw Hill /
Chapter 9. Derivatives Futures Options Swaps Futures Options Swaps.
FrontPage: Turn in Savings Calculator worksheet from yesterday if you didn’t finish. The Last Word: Ch 11 Review/Unit 4 Test Tuesday.
Investing Bonds and Stocks. Setting Investment Goals  Investing presents opportunities for people and businesses to increase their income.  Investing.
4 th, 5 TH and 6 th SESSION 1. Financial Markets 2.
 2002, Prentice Hall, Inc. Ch. 21: Risk Management.
Back to Table of Contents pp Chapter 31 Investing in Stocks.
Financial Assets (Instruments)
Financial Instruments
Financial Markets: Saving and Investing
Overview of Security Types
Chapter Overview of Security Types McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 3.
© 2008 Pearson Education Canada13.1 Chapter 13 Hedging with Financial Derivatives.
Asset Classes: Security Types
1 Financial Options Ch 9. What is a financial option?  An option is a contract which gives its holder the right, but not the obligation, to buy (or sell)
Financial Options: Introduction. Option Basics A stock option is a derivative security, because the value of the option is “derived” from the value of.
© 2009 McGraw-Hill Ryerson Limited 4-1 Chapter 4 Security Types Classifying Securities Classifying Securities Interest-Bearing Assets Interest-Bearing.
Value Line Investment Survey VU Homepage [ Libraries –Bartley Virtual Library –Finance –Databases A-Z – V - Value Line.
1 Chapter 4 Overview of Security Types Ayşe Yüce – Ryerson University Copyright © 2012 McGraw-Hill Ryerson.
Chapter Eight Risk Management: Financial Futures, Options, and Other Hedging Tools Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Chapter 21 Derivative Securities Lawrence J. Gitman Jeff Madura Introduction to Finance.
Investment and portfolio management MGT 531.  Lecture #31.
Financial Derivatives Chapter 12. Chapter 12 Learning Objectives Define financial derivative Explain the function of financial derivatives Compare and.
Derivatives. What is Derivatives? Derivatives are financial instruments that derive their value from the underlying assets(assets it represents) Assets.
Financial Markets Investing: Chapter 11.
3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.
Financial Assets (Instruments) Chapter 2 Requests for permission to make copies of any part of the work should be mailed to: Thomson/South-Western 5191.
Chapter 11: Financial Markets Section 2
FIN 4140 Financial Markets & Institutions Lecture 1-2.
3 3 C h a p t e r Security Types second edition Fundamentals of Investments Valuation & Management Charles J. Corrado Bradford D. Jordan McGraw Hill /
Computational Finance Lecture 2 Markets and Products.
Chapter 3 Security Types
“A derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying asset)”
3-1 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
BONDS & FUTURES. WHY BUY BONDS? Corporate and Government bonds are other forms of investment. Return is usually lower than stock dividends but generally.
Overview of Security Types. 3-2 Basic TypesMajor Subtypes Interest-bearing Money market instruments Fixed-income securities Equities Common stock Preferred.
Chapter Overview of Security Types McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 3.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 3 Overview of Security Types.
Options Market Rashedul Hasan. Option In finance, an option is a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to.
Financial Literacy FINAL VOCABULARY By: Zack Clary.
INVESTMENT ALTERNATIVES. Assignment due on next lecture CHAPTER (1) : 1, 2, 5 and 13 CHAPTER (1) : 1, 2, 5 and 13 CHAPTER (2) : 1, 4, 12 and 26 (Questions)
Personal Finance Chapter 13
 Savings – income not used for consumption  Investment – the use of income today that allows for a future benefit  Financial System – all the institutions.
Financial Markets Chapter 11. Investment Act of redirecting resources from being consumed today so that they may create benefits.
2-1 Investment Alternatives. 2-2 Nonmarketable Financial Assets Commonly owned by individuals Commonly owned by individuals Represent direct exchange.
9.02 Summarize the investing in stocks and bonds. T H17.
Financial Markets How do your saving and investment choices affect your future?
Chapter 3 Overview of Security Types. 3.1 Classifying Securities The goal in this chapter is to introduce you to some of the different types of securities.
4-1 Introduction Credit is one of the critical mechanisms we have for allocating resources. Although interest has historically been unpopular, this comes.
Financial Markets Chapter 11 Section 2 Bonds and Other Financial Assets.
Money Investments  What is an investment?  Investment is something bought for future financial benefit.  Promotes economic growth  Contributes to wealth.
Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 10 Derivatives: Risk Management with Speculation, Hedging, and Risk Transfer.
Overview of Security Types
Investment Alternatives
Financial Markets and Financial Products
Risk Management with Financial Derivatives
Overview of Security Types
Investment Alternatives
Risk Management with Financial Derivatives
Presentation transcript:

4-1 Chapter 4 Overview of Security Types Classifying Securities Classifying Securities Interest-Bearing Assets Interest-Bearing Assets Equities Equities Derivatives Derivatives Option Contracts Option Contracts Ayşe Yüce Copyright © 2012 McGraw-Hill Ryerson

© 2009 McGraw-Hill Ryerson Limited 4- 2 Security Types Our goal in this chapter is to introduce the different types of securities that investors routinely buy and sell in financial markets around the world. Our goal in this chapter is to introduce the different types of securities that investors routinely buy and sell in financial markets around the world. For each security type, we will examine: For each security type, we will examine: Its distinguishing characteristics, Its distinguishing characteristics, Its potential gains and losses, and Its potential gains and losses, and How its prices are quoted in the financial press. How its prices are quoted in the financial press.

© 2009 McGraw-Hill Ryerson Limited 4- 3 Classifying Securities Basic TypesMajor Subtypes Interest-bearing Money market instruments Fixed-income securities Equities Common stock Preferred stock Derivatives Options Futures

4- 4 Interest-Bearing Assets Money market instruments are short-term debt obligations of large corporations and governments. These securities promise to make one future payment. When they are issued, their lives are less than one year. Examples: Treasury bills (T-bills), bank certificates of deposit (CDs), corporate and municipal money market instruments. Potential gains/losses: A known future payment/except when the borrower defaults (i.e., does not pay). Price quotations: Usually, the instruments are sold on a discount basis, and only the interest rates are quoted. Therefore, investors must be able to calculate prices from the quoted rates.

4- 5 Interest Bearing Securities Fixed-income securities are longer-term debt obligations of corporations or governments. These securities promise to make fixed payments according to a pre-set schedule. When they are issued, their lives exceed one year. Examples: Treasury notes, corporate bonds, car loans, student loans. Potential gains/losses: Fixed coupon payments and final payment at maturity, except when the borrower defaults. Possibility of gain (loss) from fall (rise) in interest rates Depending on the debt issue, illiquidity can be a problem. Illiquidity means that you might not be able to sell securities quickly for their current market value.

Price Quotations from online version of The Wall Street Journal (some columns are self-explanatory): Price Quotations from online version of The Wall Street Journal (some columns are self-explanatory): The price (per $100 face) of the bond when it last traded. The Yield to Maturity (YTM) of the bond. Quote Example: Fixed-Income Securities

© 2009 McGraw-Hill Ryerson Limited 4- 7 Equities Common stock: Represents ownership in a corporation. A part owner receives a pro rated share of whatever is left over after all obligations have been met in the event of a liquidation. Examples: RIM shares, Royal Bank shares, Magna shares, etc. Potential gains/losses: Many companies pay cash dividends to their shareholders. However, neither the timing nor the amount of any dividend is guaranteed. The stock value may rise or fall depending on the prospects for the company and market-wide circumstances.

Common Stock Price Quotes

Common Stock Price Quotes Online at First, enter symbol. Resulting Screen

© 2009 McGraw-Hill Ryerson Limited Equities Preferred stock: The dividend is usually fixed and must be paid before any dividends for the common shareholders. In the event of a liquidation, preferred shares have a particular face value. Example: Citigroup preferred stock. Potential gains/losses: Dividends are “promised.” However, there is no legal requirement that the dividends be paid, as long as no common dividends are distributed. The stock value may rise or fall depending on the prospects for the company and market-wide circumstances.

© 2009 McGraw-Hill Ryerson Limited Derivatives Primary asset: Security originally sold by a business or government to raise money. Derivative asset: A financial asset that is derived from an existing traded asset, rather than issued by a business or government to raise capital. More generally, any financial asset that is not a primary asset. Futures contract: An agreement made today regarding the terms of a trade that will take place later. Option contract: An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specified price for a set period of time.

© 2009 McGraw-Hill Ryerson Limited Futures Contracts Examples: financial futures (i.e., S&P/TSX 60, S&P 500, T-bonds, foreign currencies, and others), commodity futures (i.e., wheat, crude oil, cattle, and others). Potential gains/losses: At maturity, you gain if your contracted price is better than the market price of the underlying asset, and vice versa. If you sell your contract before its maturity, you may gain or lose depending on the market price for the contract. Note that enormous gains and losses are possible.

Source: Ayşe Yüce Copyright © 2012 McGraw-Hill Ryerson Futures Contracts: Price Quotes

© 2009 McGraw-Hill Ryerson Limited Option Contracts A call option gives the owner the right, but not the obligation, to buy an asset, while a put option gives the owner the right, but not the obligation, to sell an asset. The price you pay today to buy an option is called the option premium. The specified price at which the underlying asset can be bought or sold is called the strike price, or exercise price. An American option can be exercised anytime up to and including the expiration date, while a European option can be exercised only on the expiration date.

© 2009 McGraw-Hill Ryerson Limited Option Contracts Options differ from futures in two main ways: Holders of call options have no obligation to buy the underlying asset. Holders of put options have no obligation to sell the underlying asset. To avoid this obligation, buyers of calls and puts must pay a price today. Holders of futures contracts do not pay for the contract today. Potential gains and losses: Buyers of options profit if the strike price is better than the market price, and if the difference is greater than the option premium. In the worst case, buyers lose the entire premium. Sellers of options gain the premium if the market price is better than strike price. Here, the gain is limited but the loss is not.

Online Price Quotes for Nike (NKE) options Source:

4- 17 Investing in Stocks versus Options, I. Stocks: Suppose you have $10,000 for investments. Macron Technology is selling at $50 per share. Number of shares bought = $10,000 / $50 = 200 If Macron is selling for $55 per share 3 months later, gain = ($55  200) - $10,000 = $1,000 If Macron is selling for $45 per share 3 months later, gain = ($45  200) - $10,000 = -$1,000

4- 18 Investing in Stocks versus Options, II. Options: A call option with a $50 strike price and 3 months to maturity is also available at a premium of $4. Traded option contracts are on a bundle of 100 shares. A call contract costs $4  100 = $400, so number of contracts bought = $10,000 / $400 = 25 (for 25  100 = 2500 shares) If Macron is selling for $55 per share 3 months later, gain = {($55 – $50)  2500} - $10,000 = $2,500 If Macron is selling for $45 per share 3 months later, gain = ($0  2500) – $10,000 = -$10,000

(Montreal Exchange) (Montreal Exchange) (current corporate bond prices) (current corporate bond prices) (bond basics) (bond basics) (learn more about TRACE) (learn more about TRACE) (Are you a “Foolish investor”?) (Are you a “Foolish investor”?) (reproduction stock tickers) (reproduction stock tickers) (CME Group) (CME Group) (Chicago Board Options Exchange) (Chicago Board Options Exchange) finance.yahoo.com (prices for option chains) finance.yahoo.com (prices for option chains) finance.yahoo.com (online version of The Wall Street Journal) (online version of The Wall Street Journal) Ayşe Yüce Copyright © 2012 McGraw-Hill Ryerson Useful Internet Sites