Bodie Kane INVESTMENTS Marcus Fourth Edition Chapter 1

Bodie Kane INVESTMENTS Marcus Fourth Edition Chapter 1 The Investment Environment Shakil Al Mamun 1 -1 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Investments & Financial Assets n Essential nature of investment - Reduced current consumption - Planned later consumption n Real Assets - Assets used to produce goods and services and it determine wealth of economy. n Financial Assets - Claims on real assets 1 -2 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Role of Financial Assets and Markets in the Economy Consumption Timing n Allocation of Risk n Separation of Ownership n - Agency Issues 1 -3 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Financial System Clients and Their Needs n Household Sector - Primary Need: Invest Funds n Business/Corporate Sector - Primary Need: Raise Funds n Government Sector - Primary Need: Raise Funds 1 -4 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition How the Financial System Meets the Needs of Participants n Financial Intermediation Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers. n Investment Banking Firms specializing in the sale of new securities to the public, typically by underwriting the issue Financial Innovation & Derivatives n Responding to Regulation & Taxes n 1 -5 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Financial Markets Direct Search Market n Brokered Market (primary mkt) n Dealer market (secondary mkt) n Auction market n 1 -5 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Investments and Innovation Technology and Delivery of Service n Computer advancements n More complete and timely information Globalization n Domestic firms compete in global markets n Performance in regions depends on other regions n Causes additional elements of risk 1 -6 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Key Trends - Globalization International and Global Markets Continue Developing n Managing foreign exchange n Diversification to improve performance n Instruments and vehicles continue to develop n Information and analysis improves 1 -7 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Key Trends - Securitization & Credit Enhancement n Offers opportunities for investors and originators n Changes in financial institutions and regulation n Improvement in information capabilities n Credit enhancement and its role 1 -8 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition Key Trends Financial Engineering Repackaging Services of Financial Intermediaries n. Bundling and unbundling of cash flows n. Slicing and dicing of cash flows n. Examples: strips, CMOs, dual purpose funds, principal/interest splits 1 -9 The Mc. Graw-Hill Companies, Inc. , 1999

Bodie Kane INVESTMENTS Marcus Fourth Edition The Future Globalization continues and offers more opportunities n Securitization continues to develop n Continued development of derivatives and exotics n Strong fundamental foundation is critical n Integration of investments & corporate finance n 1 -10 The Mc. Graw-Hill Companies, Inc. , 1999