1. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-1 Bodie Kane Marcus Perrakis Ryan

2. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-2 Chapter 1

3. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-3 Chapter Summary  Objective: To provide a general overview of the investment environment Short History of Investing The Investment Objective Real vs. Financial Assets Financial System Clients and their Needs The Agency Theory

4. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-4 Short History of Investing  The Crash of 1929 and the Great Depression  One-day panic in 1987  The ‘technology bubble’ in the nineties and  The ‘bear market’ of the new millennium

5. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-5 Investments & Financial Assets  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

6. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-6 Financial System Clients and Their Needs  Household Sector Primary Need: Invest Funds  Business Sector Primary Need: Raise Funds  Government Sector Primary Need: Raise Funds  Foreign Sector Primary Need in Canada: Invest Funds

7. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-7 Role of Financial Assets and Markets  Consumption Timing  Allocation of Risk  Separation of Ownership

8. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-8 The Financial System and Innovation  Financial Intermediation  Investment Banking and Brokerage Services  Financial Engineering - Pass-through securities - Derivative securities  Responding to Regulation & Taxes - Eurodollars, zeroes, split shares

9. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-9  Offers opportunities for investors and originators  Changes in financial institutions and regulation  Improvement in information capabilities Securitization

10. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-10 Repackaging 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 Financial Engineering

11. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-11  Accusations of inadequate disclosure: Investment dealers Accounting audits Managers Analysts, Auditors …

12. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-12 Agency Theory – the principal- agent relationship Investors Board of directors Management … and the Agency Problem

13. Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 1-13 The Right Approach  Diversification Across sectors Across asset classes Across countries (Globalization)  Information and patience