Chapter 2 Financial Securities

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Classes of Financial Assets Financial assets can be classified as ◦______________________ market securities ◦_____________________ securities

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Classes of Financial Assets Money market securities are sometimes referred to as ____________ equivalents. Examples of money market securities:

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Classes of Financial Assets Capital market securities include: ◦Debt (bonds) ◦Equity  Common stock  Preferred stock Bonds and preferred stock are referred to as fixed income securities

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Classes of Financial Assets Derivative securities ◦Options ◦Futures

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Classes of Financial Assets Bond Market ◦US Treasury Bonds and Notes ◦Agency Issues (Fed Gov) ◦Municipal Bonds ◦Corporate Bonds ◦Mortgage-Backed Securities

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Classes of Financial Assets Treasury Notes and Bonds ◦Notes: maturities up to ________ years ◦Bonds: maturities in excess of ________ years ◦30-yr T-bond  2001, Treasury suspended sales  Sales resumed in 2006 ◦Par value: $1,000 ◦Quotes: % of par

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Agency Debt Major issuers ◦Federal Home Loan Bank ◦Federal National Mortgage Association ◦Government National Mortgage Association ◦Federal Home Loan Mortgage Corporation

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Municipal Bonds Issued by state and local governments Types ◦General obligation bonds ◦Revenue bonds Maturities – range up to 30 years

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Municipal Bond Yields The interest rate on munis is lower than the interest rate on comparable taxable bonds. Why?

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Corporate Bonds Issued by private firms Semi-annual interest payments Subject to higher _________________ risk than Treasury securities Options in corporate bonds ◦callable (most) ◦Convertible (some)

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Developed in the 1970s to help liquidity of financial institutions Proportional ownership of a pool or obligation secured by a pool Market has experienced very high rates of growth Recent problems in the ______________ market Mortgages and Mortgage-backed Securities

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Figure 2.9 Mortgage-backed Securities Outstanding

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Capital Market - Equity Common stock ◦Residual claim ◦Limited liability Preferred stock ◦Fixed dividends ◦Priority over common stock ◦Tax treatment

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Uses of Stock Indexes Measure of ______________ performance ________________________ to evaluate investment performance Base of derivatives

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Factors for Construction of Stock Indexes Representative? Broad or narrow? How is it weighted?

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Examples of U.S. Stock Indexes Dow Jones Industrial Average (30 Stocks) Standard & Poor’s 500 Composite NASDAQ Composite NYSE Composite Wilshire 5000

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Construction of Indexes How are stocks weighted? ◦Price weighted (DJIA) ◦Market-value weighted (S&P500, NASDAQ) ◦Equally weighted (Value Line Index)

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Relative performance of Stock market indexes