Commitment of current resources in the expectation of deriving greater resources in the future.
Securities providing payoffs that depend on the values of other assets.
A market in which new issues of securities are offered to the public.
Claims on real assets or the income generated by them.
Allocation of an investment portfolio across broad asset classes.
Risk-Return Trade off
Assets with higher expected returns entail greater risk.
Attempting to identify mispriced securities or to forecast broad market trends.
Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers
Firms specializing in the sale of new securities to the public, typically by underwriting the issue.
Nature of Investment
Reduce current consumption for greater future consumption.
Used to produce goods are services: Property, plants and equipment, human capital.
Claim on real assets or claims on real-asset income.
A Financial Liability
All Financial assets are offset by what?
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.
(Inefficient Markets) Finding undervalued securities, Market timing.
(Efficient Markets) No attempt to find undervalued securities, no attempt to time, holding a diversified portfolio.
Return on a Stock
Return on a Bond
Securities should be neither under priced nor overpriced on average, Security prices should reflect all information available to investors.
Newly issued securities offered to public (IPO), Investment banker typically ‘underwrites’ issues.
Preexisting securities traded among investors.
A high risk firm (Shark Tank), and investment to finance new firm.
Investments in companies not traded on stock exchange.
How to earn interest in a T-bill
Buy the bill at discount from the face value to be received at maturity.
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.
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.
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?
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?
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.
When a purchaser authorizes a bank to pay a seller for goods at later date (credit card)
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
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.
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.)
Limited liability, can only lose what you invest.
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.
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
The holder has future right to buy/sell. Contracts are always settled.
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