Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 1 The Investment Environment

1-2 Real Assets Versus Financial Assets Essential nature of investment –Reduced current consumption –Planned later consumption Real Assets –Assets used to produce goods and services Financial Assets –Claims on real assets

1-3 Table 1.1 Balance Sheet of U.S. Households, 2007

1-4 Table 1.2 Domestic Net Worth

1-5 A Taxonomy of Financial Assets Fixed income or debt – Money market instruments Bank certificates of deposit – Capital market instruments Bonds Common stock or equity Derivative securities

1-6 Financial Markets and the Economy Information Role –The Google effect Consumption Timing Allocation of Risk Separation of Ownership and Management –Agency Issues

1-7 Financial Markets and the Economy Continued Corporate Governance and Corporate Ethics –Accounting Scandals Examples – Enron, Rite Aid, HealthSouth –Auditors—watchdogs of the firms –Analyst Scandals Arthur Andersen –Sarbanes-Oxley Act Tighten the rules of corporate governance

1-8 The Investment Process Asset allocation –Choice among broad asset classes like stocks, bonds, real estate, commodities Security selection –Choice of which securities to hold within asset class Security analysis

1-9 Markets are Competitive Risk-Return Trade-Off (no free lunch) Efficient Markets: price reflects all info. –Active Management Finding mispriced securities Timing the market –Passive Management No attempt to find undervalued securities No attempt to time the market Holding a highly diversified portfolio

1-10 The Players Business Firms– net borrowers Households – net savers Governments – can be both borrowers and savers Financial Intermediaries –Investment Companies; invests mainly in securities –Banks –Insurance companies –Credit unions

1-11 The Players Continued Investment Bankers:Goldman Sachs, Citigroup, J.P.Morgan –Perform specialized services for businesses such as issuing securities for firms –Markets in the primary market

1-12 Table 1.3 Balance Sheet of Commercial Banks, 2007

1-13 Table 1.4 Balance Sheet of Nonfinancial U.S. Business, 2007

1-14 Recent Trends—Globalization American Depository Receipts (ADRs) claim in shares of a foreign company Foreign securities offered in dollars Mutual funds that invest internationally Variant of ADR: Exchange Traded Funds (ETFs),diversified investment in foreign shares, e.g. iSHAREs, WEBS

1-15 Figure 1.1 Globalization: A Debt Issue Denominated in Euros

1-16 Recent Trends—Securitization Mortgage pass-through securities Other pass-through arrangements –Car, student, home equity, credit card loans Offers opportunities for investors and originators

1-17 Figure 1.2 Asset-backed Securities Outstanding

1-18 Recent Trends—Financial Engineering Use of mathematical models and computer- based trading technology to synthesize new financial products Bundling and unbundling of cash flows

1-19 Figure 1.3 Building Creates a Complex Security

1-20 Figure 1.4 Unbundling of Mortgages into Principal- and Interest-Only Securities

1-21 Recent Trends—Computer Networks Online information dissemination customer's direct access to an on-line broker Information is made cheaply and widely available to the public Automated trade crossing –Direct trading among investors