Chapter Two Asset Classes and Financial Instruments INVESTMENTS

Chapter Two Asset Classes and Financial Instruments INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of Mc. Graw-Hill Education.

Chapter Overview Fixed Income Asset Classes Equity Derivatives INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -2

Fixed Income Money Markets Fixed Income Capital Markets Asset Classes Equity Derivatives INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -3

The Money Market • Subsector of the fixed-income market • • Short-term Liquid Low risk Often have large denominations (alto valore per singolo titolo) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -4

Major Components of the Money Market INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -5

Money Market Securities (1 of 2) • Treasury bills: • Il prezzo lettera (in inglese ask price o semplicemente ask), chiamato anche prezzo di offerta, è il prezzo minimo che un venditore è disposto ad accettare per vendere uno strumento finanziario. Questo significa che il prezzo ask è il prezzo minimo che l'investitore intenzionato a comprare il suddetto strumento finanziario dovrà pagare per acquistarlo. • Prezzo denaro (bid) è il massimo prezzo che un compratore è disposto a pagare per acquistare uno strumento finanziario. • Questo significa che il prezzo bid è il miglior prezzo a cui un investitore in possesso del suddetto strumento finanziario potrà venderlo nel mercato. • Certificates of deposit (https: //www. investopedia. com/terms/c/certificateofdeposit. asp) • Commercial paper (https: //www. investopedia. com/terms/c/commercialpaper. asp) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -6

Money Market Securities (2 of 2) • Bankers’ Acceptances (https: //www. investopedia. com/terms/b/bankersacceptance. asp) • Eurodollars (https: //www. investopedia. com/terms/e/eurodollar. asp) • Repos and reverses (https: //www. investopedia. com/terms/r/reverserepurchaseagreement. asp) • Federal funds (https: //www. investopedia. com/terms/f/federalfunds. asp) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -7

Yields on Money Market Instruments • Money market securities are not free of default risk • A certificate of deposit (CD) is a time deposit, a financial product commonly sold in the United States and elsewhere by banks, thrift institutions, and credit unions. • The premium on bank CDs and the TED spread have often become greater during periods of financial crisis INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -8

Spread between 3 -month CD and Treasury Bills INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -9

The Capital Market (1 of 2) Treasury Notes Treasury Bonds Corporate Bonds Municipal Bonds Capital Markets International Bonds Inflation. Protected Securities Federal Agency Debt INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -10

The Capital Market (2 of 2) • Subsector of the fixed-income market • Long-Term • Liquid • Low risk (but not as low as the Money Market) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -11

Capital Market: Treasury Notes and Bonds • Treasury Notes and Bonds • The U. S. government borrows funds in large part by selling Treasury notes and Treasury bonds. T-notes are issued with maturities ranging up to 10 years, while bonds are issued with maturities ranging from 10 to 30 years. • Maturities (What is Maturity? Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot and forward transactions, interest rate and commodity swaps, options, loans and fixed income instruments such as bonds) • Par Value (valore nominale) • Interest paid semiannually. Both notes and bonds make semiannual interest payments called coupon payments, a name derived from precomputer days, when investors would literally clip coupons attached to the bond and present a coupon to receive the interest payment. INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -12

Capital Market Securities • Inflation-Protected Treasury Bonds • (TIPS) Treasury Inflation-Protected Security (TIPS) is a Treasury bond that is indexed to inflation to protect investors from the negative effects of rising prices. The principal value of TIPS rises as inflation rises. Inflation is the pace at which prices increase throughout the U. S. economy as measured by the Consumer Price Index or CPI. • Federal Agency Debt • Some government agencies issue their own securities to finance their activities. These agencies usually are formed to channel credit to a particular sector of the economy that Congress believes might not receive adequate credit through normal private sources (Fannie Mae; Freddie Mac; Others) • International Bonds when firms borrow abroad and many investors buy bonds from foreign issuers • Eurobonds and Yankee bonds INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -13

Capital Market Securities • A Eurodollar bond is a bond denominated in a currency other than that of the country in which it is issued. For example, a dollar-denominated bond sold in Britain would be called a Eurodollar bond. Similarly, investors might speak of Euroyen bonds, yen-denominated bonds sold outside Japan. (Better call them simply as international bonds. • In contrast to bonds that are issued in foreign currencies, many firms issue bonds in foreign countries but in the currency of the investor. For example, a Yankee bond is a dollar denominated bond sold in the United States by a non -U. S. issuer. Similarly, Samurai bonds are yen-denominated bonds sold in Japan by non-Japanese issuers. INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -14

Capital Market: Municipal Bonds • Issued by state and local governments • Interest is exempt from federal income tax and sometimes from state and local tax • Types • General obligation bonds (https: //www. investopedia. com/terms/g/generalobliga tionbond. asp) • Revenue bonds (https: //www. investopedia. com/terms/r/revenuebond. asp) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -15

Tax-Exempt Debt Outstanding Municipal bond funds are exempt from federal tax and may also be exempt from state taxes. INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -16

Municipal Bond Yields Taxable vs. Tax-Exempt Bonds • Compare after-tax returns on each bond • • Let t = investor’s marginal tax bracket (scaglione) Let r = the before-tax return on the taxable bond Let rm = the municipal bond rate If then the taxable bond gives a higher return; otherwise, the municipal bond is preferred INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -17

Tax-Exempt Yield Table INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -18

Capital Market: Corporate Bonds • • Issued by private firms Semi-annual interest payments Larger default risk than government securities Options in corporate bonds • Callable (Un “Callable Bond” è un titolo obbligazionario che conferisce all'emittente il diritto di richiamare, rimborsare, il titolo stesso prima della scadenza finale ad un prezzo prefissato (solitamente 100)) • Convertible (Un'obbligazione convertibile è un'obbligazione il cui rimborso può avvenire, a discrezione del sottoscrittore, attraverso la consegna di titoli di altra specie e di uguale valore. (https: //www. ilsole 24 ore. com/art/finanza-e-mercati/2017 -1211/borsa-e-l-ora-convertible-bond-che-cosa-sono-e-comeguadagnano-165459_PRV. shtml? uuid=AEe. Yh. ZQD) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -19

Capital Markets: Mortgage Backed Securities • Mortgage-Backed Securities • Proportional ownership of a mortgage pool or a specified obligation secured by a pool • Produced by securitizing mortgages (La cartolarizzazione dei crediti o securitization è una particolare tecnica di finanza strutturata negli Usa mediante cui è possibile smobilizzare alcuni cespiti per acquisire liquidità immediata) • Most were issued by Fannie Mae and Freddie Mac INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -20

Capital Markets: Mortgage Backed Securities • Cartolarizzazioni • Le operazioni di cartolarizzazione costituiscono una modalità di finanziamento che permette di smobilizzare attività illiquide. • La cessione avviene a una società (cosiddetta società veicolo o società per la cartolarizzazione) • La società veicolo finanzia l’acquisto delle attività cedute dal settore pubblico mediante l’emissione di titoli sul mercato (da cui il termine cartolarizzazione). INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -21

Mortgage-Backed Securities Outstanding= in circolazione (flottante) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -22

U. S. Fixed-Income Market INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -23

Equity Asset Classes Fixed Income Common Stock Equity Preferred Stock Derivatives ADR = American Depository Receips INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -24

Equity Securities: Common Stock • Common stocks, also known as equity securities or equities, represent ownership shares in a corporation. Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to a vote at the corporation’s annual meeting and to a share in the financial benefits of ownership. The corporation is controlled by a board of directors elected by the shareholders. The board, which meets only a few times each year, selects managers who actually run the corporation on a day-to-day basis. Managers have the authority to make most business decisions without the board’s specific approval. The board’s mandate is to oversee the management to ensure that it acts in the best interests of shareholders. • Ownership (quota di proprietà) • Residual claim (ultime pretese a essere soddisfatte) • Limited liability (nessuna responsabilità ulteriore) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -25

Equity Securities: Preferred Stock • Preferred stock: • Perpetuity (infinite-maturity bond) • Fixed dividends (Like a bond) • The firm retains discretion to make the dividend payments to the preferred stockholders • Priority over common • Tax treatment • American Depository Receipts (ADR) • Certificates traded in U. S. markets that represent ownership in shares of a foreign company • created to make it easier foreign firms to satisfy U. S. security registration requirements INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -26

Stock Basics • Dividend Yield; Capital Gains; P/E Ratio • …. Anche yahoo finance INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -27

Stock Market Indices • Dow Jones Industrial Average Includes 30 large blue-chip corporations Computed since 1896 Price-Weighted Index https: //www. ft. com/content/76 ecd 406 -b 08 e-4 c 2 c 8643 -cd 23 acb 7 cf 2 c • https: //www. globalfinancialdata. com/goodbye-to-alegacy-exxon-mobil/ • • • S&P 500 • Broad based index of 500 firms • (Market-)Value-Weighted Index INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -28

Stock Market Indexes • Investors can base their portfolios on an index • Buy an index mutual fund https: //www. investopedia. com/ask/answers/033 015/whats-difference-between-index-fund-andetf. asp • Buy exchange-traded funds (ETFs) (replicante) https: //it. wikipedia. org/wiki/Exchangetraded_fund INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -29

Other Indices U. S. Indexes Foreign Indexes • NYSE Composite • NASDAQ Composite • Wilshire 5000 • Nikkei (Japan) • FTSE (U. K. ; pronounced “footsie”) • DAX (Germany), • Hang Seng (Hong Kong) • TSX (Canada) INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -30

Derivatives Fixed Income Asset Classes Equity Derivatives Options Futures • A derivative is a security that gets its value from the value of another asset, such as commodity prices, bond and stock prices, or market index values INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -31

Derivatives Markets: Options • Call Option: • Right to buy underlying asset at the strike price • Es: a July call option on IBM stock with an exercise price of $180 entitles its owner to purchase IBM stock for a price of $180 at any time up to and including the expiration date in July. • Put Option: • Right to sell underlying asset at the strike price https: //www. ilsole 24 ore. com/art/2 -miliardi-dollarigeneral-motors--2005 --AEr. Tc. XQF https: //www. investopedia. com/articles/activetrading/031314/mini-options-useful-tool-tradinghighpriced-securities. asp INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -32

Derivatives Markets: Futures • Futures Contracts: calls for delivery of an asset at a specified delivery or maturity date for an agreed-upon price, called the futures price, to be paid at contract maturity • Long position: is held by the trader who commits to purchasing the asset on the delivery date. • Short position: The trader who takes the short position commits to delivering the asset at contract maturity. INVESTMENTS | BODIE, KANE, MARCUS © 2018 Mc. Graw-Hill Education 2 -33