1. McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 1 The Investment Environment

2. 1-2 Essential nature of investment Reduced current consumption Planned later consumption Real Assets Assets used to produce goods and services Financial Assets Claims on real assets Investments & Financial Assets

3. 1-3 Role of Financial Assets and Markets Consumption Timing Allocation of Risk Separation of Ownership

4. 1-4 Crisis in Corporate Governance Accounting Scandals Enron Global Crossing Analyst Scandals Merrill Lynch Initial Public Offerings CSFB

5. 1-5 Financial System Clients and Their Needs Household Sector Primary Need: Invest Funds Business Sector Primary Need: Raise Funds Government Sector Primary Need: Raise Funds

6. 1-6 Meeting the Needs of Participants Financial Intermediation Investment Banking Financial Innovation & Derivatives Responding to Regulation & Taxes

7. 1-7 Technology and Delivery of Service Computer advancements On-line trading More complete and timely information Globalization Domestic firms compete in global markets. Performance in regions depends on other regions. Causes additional elements of risk Investments and Innovation

8. 1-8 Developments in Global Markets Managing foreign exchange Diversification to improve performance Instruments and vehicles continue to develop. Information and analysis improves. Key Trends - Globalization

9. 1-9 Securitization & Credit Enhancement Offers opportunities for investors and originators Changes in financial institutions and regulation Improvement in information capabilities Credit enhancement and its role Key Trends - Securitization

10. 1-10 Services of Financial Intermediaries Bundling and unbundling of cash flows Slicing and dicing of cash flows Examples: strips, CMOs, dual purpose funds, principal/interest splits Collateralized Loans Key Trends - Financial Engineering

11. 1-11 Globalization continues and offers more opportunities. Securitization continues to develop. Continued development of derivatives and exotics. Strong fundamental foundation is critical. Integration of investments & corporate finance. The Future