class business homework – solution solution group debates/presentations stock-trak – clip clip
TRANSCRIPT
Class Business
Homework– Solution
Group debates/presentations Stock-Trak
– Clip
Group Presentations
10 minute presentations Each group presents then class discussion Presentations:
– Define topic for class – Argue your side– Use Business press, academic discussion, experts
Submit – hardcopy of slides (can be multiple slides per page) day of
presentation– Copy of references
Emphasis on logical arguments
Account A717?? Trading requirements
Purchase of at least five different company’s stocks Purchase at least one international stock Short at least one stock and then reverse your
position before the end of trading. Purchase at least one mutual fund. Purchase of at least one corporate bond. Purchase at least one government debt security (bill,
note, or bond). Take both a long and short position in a futures
contract Take both a long and short position in an option
Take a long position on a security by buying on margin
The Investment Process
Asset allocation Security selection Risk-return trade-off Market efficiency Active vs. passive management
– What is the appropriate benchmark?
Active vs. Passive Management
Active Management Finding undervalued securities Timing the market
Passive Management No attempt to find undervalued securities No attempt to time Holding an efficient portfolio Minimize costs
Major Classes of Financial Assets or Securities
Debt– Money market instruments– Bonds
Common stock Preferred stock Derivative securities
Investments and InnovationTechnology and Delivery of Service Computer advancements More complete and timely informationGlobalization Domestic firms compete in global markets Performance in regions depends on other regions Causes additional elements of risk
Key Trends - Globalization
International and Global Markets Continue Developing Diversification to improve performance Instruments and vehicles continue to develop Information and analysis improves
Key Trends - Securitization
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 - Financial Engineering
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
The Future
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
Chapter 2Money Market Instruments
Treasury bills Certificates of deposit
– Large – Small
Commercial Paper Bankers Acceptances
Money Market Instruments cont.
Eurodollars Repurchase Agreements (Repos) and
Reverse Repos Federal Funds Money Market Funds
Capital Market - Fixed Income Instruments
Publicly Issued Instruments US Treasury Bonds and Notes Agency Issues (Fed Gov) Municipal Bonds International Bonds
Privately Issued Instruments Corporate Bonds Mortgage-Backed Securities
Municipal Bond Yields
Interest income on municipal bonds is not subject to federal and sometimes state and local tax
To compare yields on taxable securities a Taxable Equivalent Yield is constructed
trr m
1
r = taxable equivalent yield
t = marginal tax rate
Capital Market - Equity Common stock
– Residual claim– Limited liability
Preferred stock– Fixed dividends - limited– Priority over common– Tax treatment
Uses– Track average returns– Comparing performance of managers
(benchmarking)– Base of derivatives
Factors for Construction of Stock Indexes– Representative?– Broad or narrow?– How is it weighted?
Stock Indexes
Examples of Indexes Domestic
– Dow Jones Industrial Average (30 Stocks)– Standard & Poor’s 500 Composite– NASDAQ Composite– NYSE Composite– Wilshire 5000
International– Nikkei 225 & Nikkei 300– FTSE (Financial Times of London)– Dax
Construction of Indexes How are stocks weighted?
– Price weighted (DJIA)– Market-value weighted (S&P500,
NASDAQ)– Equally weighted (Value Line Index)
Futures/Forwards Basic Positions
– Long (Buy)– Short (Sell)
Terms– Delivery Date– Underlying
Examples– Rental contract, lease agreement,
commodities
Options
Basic Positions– Call (Buy)– Put (Sell)
Terms– Exercise Price– Expiration Date– Underlying
Examples– Stock, index, and currency