1. 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. 2-2 Major Classes of Financial Assets or Securities Money market Bond market Equity Securities Indexes Derivative markets

3. 2-3 The Money Market Treasury bills –Bid and asked price –Bank discount method Certificates of Deposits Commercial Paper Bankers Acceptances

4. 2-4 The Money Market Continued Eurodollars Repurchase Agreements (RPs) and Reverse RPs Brokers’ Calls Federal Funds LIBOR Market

5. 2-5 Figure 2.1 Rates on Money Market Securities

6. 2-6 Table 2.1 Major Components of the Money Market

7. 2-7 Figure 2.2 Treasury Bill Yields

8. 2-8 Figure 2.3 The Spread between 3-month CD and Treasury Bill Rates

9. 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

10. 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

11. 2-11 Figure 2.4 Lisiting of Treasury Issues

12. 2-12 Federal Agency Debt Major issuers –Federal Home Loan Bank –Federal National Mortgage Association –Government National Mortgage Association –Federal Home Loan Mortgage Corporation

13. 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

14. 2-14 Figure 2.5 Tax-exempt Debt Outstanding

15. 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

16. 2-16 Table 2.2 Equivalent Taxable Yields Corresponding to Various Tax-Exempt Yields

17. 2-17 Figure 2.6 Ratio of Yields on Tax-Exempt to Taxable Bonds

18. 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

19. 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

20. 2-20 Figure 2.7 Mortgage-backed Securities Outstanding, 1979-2007

21. 2-21 Equity Securities Common stock –Residual claim –Limited liability Preferred stock –Fixed dividends -limited –Priority over common –Tax treatment Depository receipts

22. 2-22 Figure 2.8 Listing of Stocks Traded on the NYSE

23. 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

24. 2-24 Dow Jones Industrial Average Includes 30 large blue-chip corporations Computed since 1896 Price-weighted average

25. 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 (30 + 90)/2 = 60 Percentage change in index -2.5/62.5 = -.04 = -4%

26. 2-26 Broadly based index of 500 firms Market-value-weighted index Index funds Exchange Traded Funds (ETFs) Standard & Poor’s Indexes

27. 2-27 Other U.S. Market-Value Indexes NASDAQ Composite NYSE Composite Wilshire 5000

28. 2-28 Figure 2.9 Comparative Performance of Several Stock Stock Indexes, 2001-2006

29. 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)

30. 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

31. 2-31 Figure 2.10 Trading Data on GE Options

32. 2-32 Figure 2.11 Listing of Selected Futures Contracts