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Financial Securities

Major Classes of Financial Assets or Securities. Money marketBond marketEquity marketsIndexesDerivative markets. Money Market Instruments. Treasury billsCertificates of deposits Commercial PaperBankers Acceptances. Money Market Instruments cont.. EurodollarsRepurchase Agreements (RPs) and R

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Financial 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. Money Market Rates and Funds T-bills Money Market Funds i.e. Vanguard

    6. Figure 2.3 Spreads on CDs and Treasury Bills

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

    8. 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 Re-introduced in Feb 2006 Par Value - $1,000 Quotes percentage of par

    9. Figure 2.4 Treasury Notes, Bonds and Bills

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

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

    12. Figure 2.6 Outstanding Tax-exempt Debt

    13. 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 Taxable Yield = Tax Exempt Yield/ (1 tax rate)

    14. Example Suppose you have a marginal tax rate of 36%. Taxable bonds yield 5.5% while similar quality tax exempt bonds yield 3.8%. Which has the higher after tax rate of return? Taxable Yield = 3.8% / (1-0.36) = 5.9375%

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

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

    17. 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 Mortgages and Mortgage-backed Securities

    18. Figure 2.9 Mortgage-backed Securities Outstanding

    19. Equity Markets Common stock Residual claim Limited liability Preferred stock Fixed dividends - limited Priority over common Tax treatment

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

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

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

    23. Examples of Indexes - Domestic Dow Jones Industrial Average (30 Stocks) Standard & Poors 500 Composite NASDAQ Composite NYSE Composite Wilshire 5000 Russell Indexes

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

    25. Examples of Indexes - Intl Nikkei 225 & Nikkei 300 FTSE (Financial Times of London) Dax Region and Country Indexes EAFE Far East United Kingdom

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

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