SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT INTRODUCTION

Main Concepts Real assets Financial assets Role of financial markets Agency problem Corporate governance Financial intermediaries Investment company Investment banker Pass-through security Securitization Primitive security Derivative security Money market Money market instruments Bond market Bond market instruments

Types of stock and bond market indices Underwriting Seasoned issue Private placement Short sale Long position Short position Primary market Secondary market Third market Fourth market Insider trading Unit investment trust Managed investment companies Hedge funds Mutual funds International funds Index funds Exchange-traded funds

Real assetsFinancial assets Land, buildings, equipment Claims such as securities to the income generated by real assets

Role of financial marketsAgency problem Risk allocation Consumption timing Separation of ownership and management Managers, who are hired as agents of the shareholders, may pursue their own interest instead.

Corporate governanceFinancial intermediaries Banks Investment companies Insurance companies Credit unions

Investment companyInvestment banker Pool together and manage the money of many investors i.e. mutual funds Advise the issuing firm on the prices it can charge for the securities issued, market conditions, and appropriate interest rates. i.e. Goldman Sachs

Pass-through securitySecuritization Backed by homogenous asset pools (i.e. mortgages) The purchaser receives all interest and principal payments. i.e. Mortgages are treated like other securities in financial markets.

Primitive securityDerivative security Offers returns based only on the status of the issuer ◦ Bond-interest payments: depend on the solvency of the issuing body. ◦ Dividend payments: depend on firm’s financial position. Yields return that depend on additional factors pertaining to the prices of other assets (i.e. underlying asset).

Money marketMoney market instruments Maturity: less than one year Short-term fixed income market Treasury bill Certificate of deposit Commercial paper Bankers’ acceptances Eurodollars Repos and reverses

Bond marketBond market instruments Long-term fixed income market Treasury notes and bonds International bonds Municipal bonds Corporate bonds Mortgage-backed securities

Seasoned Issue: all issues after IPO Types of stock and bond market indices Underwriting Price-weighted index Value-weighted index Equally-weighted index The role of investment bankers in the IPO process.

Private placementShort sale Opposite of public offering Selling shares directly to to a small group of institutional or wealthy investors. Allows investors to profit from a decline in a security’s price. The investor borrows a share of stock from a broker and sells it. The short-seller must purchase a share of the same stock in the market to replace the share that was borrowed (covering the short position).

Long positionShort position Purchase Sell

Primary marketSecondary market Where the new issue takes place. Where trading of already- issued securities takes place.

OTC No membership requirements for trading No listing requirements for securities Third marketFourth market Trading of exchange-listed securities on the over-the- counter market Direct trading between investors in exchange-listed securities without benefit of a broker

Insider tradingUnit investment trust Private information held by officers, directors, or major stockholders that has not yet been given to the public. Pools of money invested in a portfolio that is fixed for the life of the fund.

Managed investment companiesHedge funds BoD of the fund (elected by shareholders) hires a management company to manage the portfolio Closed-end ◦ Do not issue shares ◦ Liquidation: shares are sold to other investors Opened-end ◦ Issue shares ◦ Liquidation: shares are sold back to the fund Are not registered as mutual funds and not subject to regulatory authority Open to only wealthy or institutional investors Like mutual funds allow private investors to pool assets to be invested by a fund manager

Mutual fundsInternational funds Open-end investment companies Invest in securities worldwide

Index fundsExchange-traded funds Tries to match the performance of a broad market index Buys shares in securities included in a particular index in proportion to each security’s representation in that index Allow investors to trade index portfolios just as they do shares of stock