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 2 Asset Classes and Financial Instruments
2-2 Major Classes of Financial Assets or Securities Money market Bond market Equity Securities Indexes Derivative markets
2-3 The Money Market Treasury bills –Bid and asked price –Bank discount method Certificates of Deposits Commercial Paper Bankers Acceptances
2-4 The Money Market Continued Eurodollars Repurchase Agreements (RPs) and Reverse RPs Brokers’ Calls Federal Funds LIBOR Market
2-5 Figure 2.1 Rates on Money Market Securities
2-6 Table 2.1 Major Components of the Money Market
2-7 Figure 2.2 Treasury Bill Yields
2-8 Figure 2.3 The Spread between 3-month CD and Treasury Bill Rates
2-9 The Bond Market Treasury Notes and Bonds Inflation-Protected Treasury Bonds Federal Agency Debt International Bonds Municipal Bonds Corporate Bonds Mortgages and Mortgage-Backed Securities
2-10 Treasury Notes and Bonds Maturities –Notes – maturities up to 10 years –Bonds – maturities in excess of 10 years –30-year bond Par Value - $1,000 Quotes – percentage of par
2-11 Figure 2.4 Lisiting of Treasury Issues
2-12 Federal Agency Debt Major issuers –Federal Home Loan Bank –Federal National Mortgage Association –Government National Mortgage Association –Federal Home Loan Mortgage Corporation
2-13 Municipal Bonds Issued by state and local governments Types –General obligation bonds –Revenue bonds Industrial revenue bonds Maturities – range up to 30 years
2-14 Figure 2.5 Tax-exempt Debt Outstanding
2-15 Municipal Bond Yields Interest income on municipal bonds is not subject to federal and sometimes not to state and local tax To compare yields on taxable securities a Taxable Equivalent Yield is constructed
2-16 Table 2.2 Equivalent Taxable Yields Corresponding to Various Tax-Exempt Yields
2-17 Figure 2.6 Ratio of Yields on Tax-Exempt to Taxable Bonds
2-18 Corporate Bonds Issued by private firms Semi-annual interest payments Subject to larger default risk than government securities Options in corporate bonds –Callable –Convertible
2-19 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 Mortgages and Mortgage-Backed Securities
2-20 Figure 2.7 Mortgage-backed Securities Outstanding,
2-21 Equity Securities Common stock –Residual claim –Limited liability Preferred stock –Fixed dividends -limited –Priority over common –Tax treatment Depository receipts
2-22 Figure 2.8 Listing of Stocks Traded on the NYSE
2-23 There are several broadly based indexes computed and published daily There are several indexes of bond market performance Others include: –Nikkei Average –Financial Times Index Stock Market Indexes
2-24 Dow Jones Industrial Average Includes 30 large blue-chip corporations Computed since 1896 Price-weighted average
2-25 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 ( )/2 = 60 Percentage change in index -2.5/62.5 = -.04 = -4%
2-26 Broadly based index of 500 firms Market-value-weighted index Index funds Exchange Traded Funds (ETFs) Standard & Poor’s Indexes
2-27 Other U.S. Market-Value Indexes NASDAQ Composite NYSE Composite Wilshire 5000
2-28 Figure 2.9 Comparative Performance of Several Stock Stock Indexes,
2-29 Foreign and International Stock Market Indexes Nikkei (Japan) FTSE (Financial Times of London) Dax (Germany) MSCI (Morgan Stanley Capital International) Hang Seng (Hong Kong) TSX (Canada)
2-30 Derivatives Markets Options Basic Positions –Call (Buy) –Put (Sell) Terms –Exercise Price –Expiration Date –Assets Futures Basic Positions –Long (Buy) –Short (Sell) Terms –Delivery Date –Assets
2-31 Figure 2.10 Trading Data on GE Options
2-32 Figure 2.11 Listing of Selected Futures Contracts