1 Bodie Kane Marcus Essentials of Investments Fourth
1 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Chapters 1 & 2 Investments - Background and Issues Financial Markets and Instruments Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
2 Essentials of Investments Bodie • Kane • Marcus Fourth Edition 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 Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
3 Bodie • Kane • Marcus Essentials of Investments Fourth Edition The Investment Process • • • Asset allocation Security selection Risk-return trade-off Market efficiency Active vs. passive management Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
4 Bodie • Kane • Marcus Essentials of Investments Fourth Edition 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 Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
5 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Investments and Innovation Technology and Delivery of Service • Computer advancements • More complete and timely information Globalization • Domestic firms compete in global markets • Performance in regions depends on other regions • Causes additional elements of risk Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
6 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Key Trends - Globalization International and Global Markets Continue Developing • Managing foreign exchange • Diversification to improve performance • Instruments and vehicles continue to develop • Information and analysis improves Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
7 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Key Trends - Securitization & Credit Enhancement • Offers opportunities for investors and originators • Changes in financial institutions and regulation • Improvement in information capabilities • Credit enhancement and its role Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
8 Bodie • Kane • Marcus Essentials of Investments Key Trends Financial Engineering Fourth Edition Repackaging Services of Financial Intermediaries • Bundling and unbundling of cash flows • Slicing and dicing of cash flows • Examples: CMOs, principal/interest splits Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
9 Bodie • Kane • Marcus Essentials of Investments Fourth Edition 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 Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
10 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Major Classes of Financial Assets or Securities • Debt – Money market instruments – Bonds • Common stock • Preferred stock • Derivative securities Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
11 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Markets and Instruments • Money Market – Debt Instruments – Derivatives • Capital Market – Bonds – Equity – Derivatives Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
12 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Money Market Instruments • • • Treasury bills Certificates of deposit Commercial Paper Bankers Acceptances Eurodollars Repurchase Agreements (RPs) and Reverse RPs • Federal Funds Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
13 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Money Market Instrument Yields • Yields on Money Market Instruments are not always directly comparable Factors influencing yields • Par value vs. investment value • 360 vs. 365 days assumed in a year (366 leap year) • Bond equivalent yield Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
14 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Bank Discount Rate (T-Bills) 10, 000 - P 360 r BD = x n 10, 000 r. BD = bank discount rate P = market price of the T-bill n = number of days to maturity Example 90 -day T-bill, P = $9, 875 10, 000 - 9, 875 r BD = x 10, 000 Irwin / Mc. Graw-Hill 360 90 = 5% © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
15 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Bond Equivalent Yield • Can’t compare T-bill directly to bond – 360 vs 365 days – Return is figured on par vs. price paid • Adjust the bank discounted rate to make it comparable Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
16 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Bond Equivalent Yield r BEY 10, 000 - P 365 = x n P P = price of the T-bill n = number of days to maturity Example Using Sample T-Bill 10, 000 - 9, 875 365 r BEY = x 9, 875 90 r. BEY =. 0127 x 4. 0556 =. 0513 = 5. 13% Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
17 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Effective Annual Rate of Return • Similar to the bond equivalent yield • However, the annualized rate is compounded. r = 10, 000 -9, 875 = 0. 0127 9, 875 EAR = (1. 0127)4 - 1 = 0. 0518 = 5. 18% Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
18 Essentials of Investments Bodie • Kane • Marcus Capital Market - Fixed Income Instruments Fourth Edition Publicly Issued Instruments • US Treasury Bonds and Notes • Agency Issues (Fed Gov) – Example FHLB, FNMA • Municipal Bonds – General obligation or revenue Privately Issued Instruments • Corporate Bonds • Mortgage-Backed Securities Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
19 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Capital Market - Equity • Common stock – Residual claim – Limited liability • Preferred stock – Fixed dividends - limited – Priority over common – Tax treatment Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
20 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Stock Indexes Uses • Track average returns • Comparing performance of managers • Base of derivatives Factors in constructing or using an Index • Representative? • Broad or narrow? • How is it constructed? Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
21 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Examples of Indexes - Domestic • Dow Jones Industrial Average (30 Stocks) • Standard & Poor’s 500 Composite • NASDAQ Composite • NYSE Composite • Wilshire 5000 Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
22 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Examples of Indexes - Int’l • • Nikkei 225 & Nikkei 300 FTSE (Financial Times of London) Dax Region and Country Indexes – EAFE – Far East – United Kingdom Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
23 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Construction of Indexes • How are stocks weighted? – Price weighted (DJIA) – Market-value weighted (S&P 500, NASDAQ) – Equally weighted (Value Line Index) Irwin / Mc. Graw-Hill © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
24 Essentials of Investments Bodie • Kane • Marcus Fourth Edition Derivatives Securities Options • Basic Positions – Call (Buy) – Put (Sell) • Terms – Exercise Price – Expiration Date – Assets Irwin / Mc. Graw-Hill Futures • Basic Positions – Long (Buy) – Short (Sell) • Terms – Delivery Date – Assets © 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.
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