Investment Alternatives

Slides:



Advertisements
Similar presentations
INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 2 Asset Classes and.
Advertisements

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Asset Classes and Financial Instruments CHAPTER 2.
Bonds and Mutual Funds Carl Johnson Financial Literacy Jenks High School.
Asset Classes and Financial Instruments
Chapter # 4 Instruments traded on Financial Markets.
Chapter 1 Introduction to Bond Markets. Intro to Fixed Income Markets What is a bond? A bond is simply a loan, but in the form of a security. The issuer.
FIN352 Vicentiu Covrig 1 Investment Alternatives (chapter 2)
Investment in Fixed Income Securities. Learning Goals Determine what is bond and the type of bond How bond is being rating Bond valuation model.
Common Stock Valuation
Common Stock Valuation
INVESTMENTS: Analysis and Management Second Canadian Edition INVESTMENTS: Analysis and Management Second Canadian Edition W. Sean Cleary Charles P. Jones.
Chapter 13 Investing in Bonds Copyright © 2012 Pearson Canada Inc
1 Chapter 14 - Bonds A promise to repay a sum of money on a fixed date, together with interest, usually over the life of the loan Why buy bonds? –Steady.
McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Securities CHAPTER 2.
BONDS Savings and Investing. Characteristics of Bonds Bonds are debt instruments offered by the federal, state or local government and corporations Bonds.
Investment Alternatives
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.
Chapter 15: Stockholders’ Equity
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Asset Classes and Financial Instruments CHAPTER 2.
Investment Alternatives (Assets)
Investment Alternatives
John Wiley & Sons, Inc. © 2005 Chapter 18 The Statement of Cash Flows Prepared by Naomi Karolinski Monroe Community College and and Marianne Bradford.
+ Investments. + Learning Objectives Students will know investment options. Students will be able to identify relative risk, return and liquidity of the.
Chapter 13 Investing in Bonds
Financial Assets (Instruments)
Financial Instruments
INVESTMENTS | BODIE, KANE, MARCUS Chapter Fourteen Bond Prices and Yields Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction.
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 Financial Instruments.
The Returns and Risks From Investing
Business in Action 7e Bovée/Thill. Financial Markets and Investment Strategies Chapter 19.
Learning Objectives Distinguish between different kinds of bonds.
19-1 Financial Markets and Investment Strategies Chapter 19.
Bonds: Analysis and Strategy
McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Securities CHAPTER 2.
Using Puts and Calls Chapter 19
Indirect Investing.
Options Chapter 19 Charles P. Jones, Investments: Analysis and Management, Eleventh Edition, John Wiley & Sons 17-1.
INVESTMENTS: Analysis and Management Second Canadian Edition INVESTMENTS: Analysis and Management Second Canadian Edition W. Sean Cleary Charles P. Jones.
Stock (Equity) Preferred stock has preference over common stock in distribution of dividends and assets; dividend payments are fixed Preferred stock may.
ACCOUNTING PRINCIPLES SIXTH CANADIAN EDITION Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 13 Introduction to Corporations.
C H A P T E R 15 STOCKHOLDERS’ EQUITY
Financial Markets Investing: Chapter 11.
Indirect Investing Chapter 3
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.
Principles of Finance 5e, Ch. 2 Financial Assets © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a.
McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Securities CHAPTER 2.
Chapter 6 Charles P. Jones, Investments: Analysis and Management, Eleventh Edition, John Wiley & Sons 6- 1.
FINANCIAL ACCOUNTING Tools for Business Decision-Making KIMMEL  WEYGANDT  KIESO  TRENHOLM  IRVINE CHAPTER 12: REPORTING AND ANALYZING INVESTMENTS.
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)
CHAPTER 2 Investments Asset Classes and Financial Instruments Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights.
INVESTMENTS: Analysis and Management Third Canadian Edition INVESTMENTS: Analysis and Management Third Canadian Edition W. Sean Cleary Charles P. Jones.
2-1 Investment Alternatives. 2-2 Nonmarketable Financial Assets Commonly owned by individuals Commonly owned by individuals Represent direct exchange.
Chapter 2 Investment Alternatives. 3 Options for Household Savings with regard to financial assets 1.Hold with the financial intermediaries such as bank,
Chapter 6 Bonds (Debt) - Characteristics and Valuation 1.
2-1 Chapter 2 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University.
Money Investments  What is an investment?  Investment is something bought for future financial benefit.  Promotes economic growth  Contributes to wealth.
Chapter 20 Charles P. Jones, Investments: Analysis and Management, Twelfth Edition, John Wiley & Sons
W!se Unit 5 Investing. What is Investing?  Putting money to work earning more money for the future.
INVESTMENTS: Analysis and Management Second Canadian Edition
Chapter Fourteen Bond Prices and Yields
Investment Alternatives
The Returns and Risks From Investing
Bond Yields and Prices Chapter 17
Chapter 15 Long-Term Liabilities
Investment Alternatives
Asset Classes and Financial Instruments
Chapter 18: Investments Intermediate Accounting, 10th Edition
Investment Alternatives
Indirect Investing Chapter 3
Chapter 15: Stockholders’ Equity
Presentation transcript:

Investment Alternatives Chapter 2 Charles P. Jones, Investments: Analysis and Management, Eleventh Edition, John Wiley & Sons

Learning Objectives To be able to distinguish between marketable and non-marketable assets. To learn the basics of government bonds. To learn the basics of corporate bonds. To learn the basics of preferred stock and common stock. To learn the basics of exchange traded options.

Investment Objectives Safety of Principal Growth of Principal Current Income Tax Protection Inflation Protection

Forms of Risk Business Risk Financial Risk or Bankruptcy Risk Liquidity Risk Political Risk Economic Risk Systemic Risk

Nonmarketable Financial Assets Commonly owned by individuals Represent direct exchange of claims between issuer and investor Usually very liquid or easy to convert to cash without loss of value Examples: Savings accounts and bonds, certificates of deposit, money market deposit accounts

Money Market Securities Marketable: claims are negotiable or salable in the marketplace Short-term, liquid, relatively low risk debt instruments Issued by governments and private firms Examples: Money market mutual funds, T-Bills, Commercial paper

Capital Market Securities Marketable debt with maturity greater than one year and ownership shares More risky than money market securities Fixed-income securities have a specified payment schedule Dates and amount of interest and principal payments known in advance

Bond Characteristics Buyer of a newly issued coupon bond is lending money to the issuer who agrees to repay principal and interest Bonds are fixed-income securities Buyer knows future cash flows Known interest and principal payments If sold before maturity price will depend on interest rates at that time

Bond Characteristics Prices quoted as a % of par value Bond buyer must pay the price of the bond plus accrued interest since last semiannual interest payment Prices quoted without accrued interest Premium: amount above par value Discount: amount below par value

Innovation in Bond Features Zero-coupon bond Sold at a discount and redeemed for face value at maturity Locks in a fixed rate of return, eliminating reinvestment rate risk Responds sharply to interest rate changes Not popular with taxable investors May have call feature

Major Bond Types Federal government securities (eg., T-bonds) Federal agency securities (eg., GNMAs) Federally sponsored credit agency securities (eg., FNMAs, SLMAs) Municipal securities: General obligation bonds, Revenue bonds Tax implications for investors

Corporate Bonds Usually unsecured debt maturing in 20-40 years, paying semi-annual interest, callable, with par value of $1,000 Callable bonds gives the issuer the right to repay the debt prior to maturity Convertible bonds may be exchanged for another asset at the owner’s discretion Risk that issuer may default on payments

Bond Ratings Rate relative probability of default Rating organizations Standard and Poors Corporation (S&P) Moody’s Investors Service Inc Rating firms perform the credit analysis for the investor Emphasis on the issuer’s relative probability of default

Bond Ratings Investment grade securities Speculative securities Rated AAA, AA, A, BBB Typically, institutional investors are confined to bonds in these four categories Speculative securities Rated BB, B, CCC, C Significant uncertainties C rated bonds are not paying interest

Securitization Transformation of illiquid, risky individual loans into asset-backed securities GNMAs Marketable securities backed by auto loans, credit-card receivables, small-business loans, leases High yields, short maturities, investment-grade ratings

Equity Securities Denote an ownership interest in a corporation Denote control over management, at least in principle Voting rights important Denote limited liability Investor cannot lose more than their investment should the corporation fail

Preferred Stocks Hybrid security because features of both debt and equity Preferred stockholders paid after debt but before common stockholders Dividend known, fixed in advance May be cumulative if dividend omitted Often convertible into common stock May carry variable dividend rate

Common Stocks Common stockholders are residual claimants on income and assets Par value is face value of a share Usually economically insignificant Book value is accounting value of a share Market value is current market price of a share

Common Stocks Dividends are cash payments to shareholders Dividend yield is income component of return =D/P Payout Ratio is ratio of dividends to earnings

Common Stocks Stock dividend is payment to owners in stock Stock split is the issuance of additional shares in proportion to the shares outstanding The book and par values are changed P/E ratio is the ratio of current market price of equity to the firm’s earnings

Investing Internationally Direct investing US stockbrokers can buy and sell securities on foreign stock exchanges Foreign firms may list their securities on a US exchange or on Nasdaq Purchase ADR’s Issued by depositories having physical possession of foreign securities Investors isolated from currency fluctuations

Derivative Securities Securities whose value is derived from another security Futures and options contracts are standardized and performance is guaranteed by a third party Risk management tools Warrants are options issued by firms

Options Exchange-traded options are created by investors, not corporations Call (Put): Buyer has the right but not the obligation to purchase (sell) a fixed quantity from (to) the seller at a fixed price before a certain date Right is sold in the market at a price Increases return possibilities

Futures Futures contract: A standardized agreement between a buyer and seller to make future delivery of a fixed asset at a fixed price A “good faith deposit,” called margin, is required of both the buyer and seller to reduce default risk Used to hedge the risk of price changes

Copyright 2006 John Wiley & Sons, Inc. All rights reserved Copyright 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United states Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.