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Major Classes of Financial Assets or Securities

This chapter explores the major classes of financial assets or securities, including the money market, bond market, equity markets, indexes, and derivative markets.

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Major Classes of Financial Assets or Securities

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  1. Financial Securities CHAPTER 2

  2. Major Classes of Financial Assets or Securities • Money market • Bond market • Equity markets • Indexes • Derivative markets

  3. Money Market Instruments • Treasury bills • Certificates of deposits • Commercial Paper • Bankers Acceptances

  4. Money Market Instruments cont. • Eurodollars • Repurchase Agreements (RPs) and Reverse RPs • Brokers’ Calls • Federal Funds • LIBOR Market

  5. Figure 2.1 Money Rates

  6. Figure 2.2 Treasury Bills

  7. Figure 2.3 Spreads on CDs and Treasury Bills

  8. Bond Market • Treasury Notes and Bonds • Federal Agency Debt • International Bonds • Municipal Bonds • Corporate Bonds • Mortgages and Mortgage-Backed Securities

  9. Treasury Notes and Bonds • Maturities • Notes – maturities up to 10 years • Bonds – maturities in excess of 10 years • 30-year bond • 2001 Treasury suspended sales • 2005 discussion to possibly resume sales • Par Value - $1,000 • Quotes – percentage of par

  10. Figure 2.4 Treasury Notes, Bonds and Bills

  11. Federal Agency Debt • Major issuers • Federal Home Loan Bank • Federal National Mortgage Association • Government National Mortgage Association • Federal Home Loan Mortgage Corporation

  12. Figure 2.5 Government Agency & Similar Issues

  13. Municipal Bonds • Issued by state and local governments • Types • General obligation bonds • Revenue bonds • Industrial revenue bonds • Maturities – range up to 30 years

  14. Figure 2.6 Outstanding Tax-exempt Debt

  15. 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

  16. Table 2.3 Equivalent Taxable Yields

  17. Figure 2.7 Ratio of Yields on Tax-exempts to Taxables

  18. Corporate Bonds • Issued by private firms • Semi-annual interest payments • Subject to larger default risk than government securities • Options in corporate bonds • Callable • Convertible

  19. Figure 2.8 Corporate Bond Prices

  20. Mortgages and Mortgage-backed Securities • Developed in the 1970s to help liquidity of financial institutions • Proportional ownership of a pool or a specified obligation secured by a pool • Market has experienced very high rates of growth

  21. Figure 2.9 Mortgage-backed Securities Outstanding

  22. Equity Markets • Common stock • Residual claim • Limited liability • Preferred stock • Fixed dividends - limited • Priority over common • Tax treatment • Depository receipts

  23. Figure 2.10 Listing of Stocks Traded on the NYSE

  24. Uses of Stock Indexes • Track average returns • Comparing performance of managers • Base of derivatives

  25. Factors for Construction of Stock Indexes • Representative? • Broad or narrow? • How is it weighted?

  26. Examples of Indexes - Domestic • Dow Jones Industrial Average (30 Stocks) • Standard & Poor’s 500 Composite • NASDAQ Composite • NYSE Composite • Wilshire 5000

  27. Figure 2-11 Comparative Performance of Several Stock Market Indexes

  28. Examples of Indexes - Int’l • Nikkei 225 & Nikkei 300 • FTSE (Financial Times of London) • Dax • Region and Country Indexes • EAFE • Far East • United Kingdom

  29. Construction of Indexes • How are stocks weighted? • Price weighted (DJIA) • Market-value weighted (S&P500, NASDAQ) • Equally weighted (Value Line Index)

  30. Options Basic Positions Call (Buy) Put (Sell) Terms Exercise Price Expiration Date Assets Futures Basic Positions Long (Buy) Short (Sell) Terms Delivery Date Assets Derivatives Securities

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