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Investments

Investment
Commitment of current resources in the expectation of deriving greater resources in the future.
Derivatives
Securities providing payoffs that depend on the values of other assets.
Primary Market
A market in which new issues of securities are offered to the public.
Financial Assets
Claims on real assets or the income generated by them.
Asset Allocation
Allocation of an investment portfolio across broad asset classes.
Risk-Return Trade off
Assets with higher expected returns entail greater risk.
Active Management
Attempting to identify mispriced securities or to forecast broad market trends.
Financial Intermediaries
Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers
Investment Bankers
Firms specializing in the sale of new securities to the public, typically by underwriting the issue.
CHAPTER ONE
Nature of Investment
Reduce current consumption for greater future consumption.
Real Assets
Used to produce goods are services: Property, plants and equipment, human capital.
Financial Assets
Claim on real assets or claims on real-asset income.
A Financial Liability
All Financial assets are offset by what?
Real Assets
What remains when all balance sheets are aggregated?
Sum of real assets
What is the Net Wealth of economy?
Fixed-income (debt) securities, Common stock (equity), Derivative securities.
What are the major classes of Financial Assets or Securities.
Active Management
(Inefficient Markets) Finding undervalued securities, Market timing.
Passive Management
(Efficient Markets) No attempt to find undervalued securities, no attempt to time, holding a diversified portfolio.
Return on a Stock
(P1-P0+D)/P0
Return on a Bond
(P1-P0+Int.)/P0
Efficient Market
Securities should be neither under priced nor overpriced on average, Security prices should reflect all information available to investors.
Primary Market
Newly issued securities offered to public (IPO), Investment banker typically ‘underwrites’ issues.
Secondary Market
Preexisting securities traded among investors.
Venture Capital
A high risk firm (Shark Tank), and investment to finance new firm.
Private Equity
Investments in companies not traded on stock exchange.
CHAPTER TWO
How to earn interest in a T-bill
Buy the bill at discount from the face value to be received at maturity.
Municipal Bond
A debt obligation issued by state or local gov., Interest Income is exempt from Federal Income Tax, and is exempt from state and local taxation in the issuing state.
Common Dividends
Cannot be paid if preferred dividends are in arrears on cumulative preferred stock.
When will you earn higher returns on TIPS
When inflation is higher than anticipated over the investment period.
Commercial Papers
Larger well-known companies often issue their own short-term unsecured debt notes directly to the public called?
Purchase a Call Option
If you thought prices of stock would be rising over the next few months, you might want to purchase what on the stock?
Hedging
What are business firms most likely to use derivative securities for?
Equal Weighted Index
Index computed from a single average of returns.
Writers of a put option
who profits from a bullish market?
Treasury Bills
Most marketable security, short term, very liquid, no risk, Interest type: Discount, Return is difference of Purchase price and Face Value.
(Yield goes up….Price goes down)
Certificates of Deposite (CDs)
over $100,000 it becomes trade able, 14 day minimum, money penalty if taken out early, liquid if 3 months or less, Interest Type: Add on (Interest + Principle)
Commercial Paper (CP)
Issued by big Financial Institutions, Interest Type: Discount.
Bankers Acceptances
When a purchaser authorizes a bank to pay a seller for goods at later date (credit card)
Eurodollars
Mutual funds, Dollar-denomination deposits held outside U.S., Transfer of info is difficult, pay higher interest rates than U.S. deposits, not affected by exchange rate
Federal Funds
Exchanged for 24 hours only,
London Interbank Offer Rate (LIBOR)
Rate at which large banks in London lend to each other. Base rate for many loans and derivatives.
Treasury Bills
Investors pay at the asked price, At maturity t-bill sold at par value
Factors influencing “quoted” yields
360 vs. 365 days assumed in a year
Municipal Bonds (Government Issue)
Most unpredictable bonds but provide the highest return, they are exempt from federal taxes
Mortgage-Backed Securities (Private issues)
Collateral (guarantees such as buildings, equipment, future rev.)
Common Stock
Limited liability, can only lose what you invest.
Preferred Stock
Fixed dividends, nonvoting, get dividends before common share holders,
Factors in constructing/using index
Dow Jones includes 30 blu chip stock and it is constantly changing, is very narrow, it affects the way you invest.
Price-weighted average
Computed by adding prices of stocks and dividing by divisor
Market value-weighted index
Return equals weighted average of returns of each component security, with weights proportional to outstanding market value.
Equally weighted index
Computed from simple average of returns
Listed Call option
Right to buy a asset at a specified price on or before a specified expiration date (Holders right)
Listed Put option
Right to sell an asset at a specified exercise price on or before a specified expiration date (Holders right)
Future Contracts (Purchaser long)
Buys specified quantity at contract expiration for set price
Future Contracts (Contract seller short)
Delivers underlying commodity at contract expiration for agreed-upon price
Future Contracts
The holder has future right to buy/sell. Contracts are always settled.

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