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CHAPTER 2. Asset Classes and Financial Investments. Major Classes of Financial Assets or Securities. Money market Bond market Equity Securities Indexes Derivative markets. The Money Market. Treasury bills Bid and asked price Bank discount method Certificates of Deposits

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  1. CHAPTER 2 Asset Classes and Financial Investments

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

  3. The Money Market Treasury bills Bid and asked price Bank discount method Certificates of Deposits Commercial Paper Bankers Acceptances

  4. The Money Market Continued Eurodollars Repurchase Agreements (RPs) and Reverse RPs Brokers’ Calls Federal Funds LIBOR Market

  5. Figure 2.1 Rates on Money Market Securities

  6. Table 2.1 Major Components of the Money Market

  7. Figure 2.2 Treasury Bill Yields

  8. Figure 2.3 The Spread between 3-month CD and Treasury Bill Rates

  9. The Bond Market Treasury Notes and Bonds Inflation-Protected Treasury Bonds Federal Agency Debt International Bonds Municipal Bonds Corporate Bonds Mortgages and Mortgage-Backed Securities

  10. Treasury Notes and Bonds Maturities Notes – maturities up to 10 years Bonds – maturities in excess of 10 years 30-year bond Par Value - $1,000 Quotes – percentage of par

  11. Figure 2.4 Lisiting of Treasury Issues

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

  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 2.5 Tax-exempt Debt Outstanding

  15. Municipal Bond Yields Interest income on municipal bonds is not subject to federal and sometimes not to state and local tax To compare yields on taxable securities a Taxable Equivalent Yield is constructed

  16. Table 2.2 Equivalent Taxable Yields Corresponding to Various Tax-Exempt Yields

  17. Figure 2.6 Ratio of Yields on Tax-Exempt to Taxable Bonds

  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. 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

  20. Figure 2.7 Mortgage-backed Securities Outstanding, 1979-2007

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

  22. Figure 2.8 Listing of Stocks Traded on the NYSE

  23. There are several broadly based indexes computed and published daily There are several indexes of bond market performance Others include: Nikkei Average Financial Times Index Stock Market Indexes

  24. Dow Jones Industrial Average Includes 30 large blue-chip corporations Computed since 1896 Price-weighted average

  25. Example 2.2 Price-Weighted Average Portfolio: Initial value $25 + $100 = $125 Final value $30 + $ 90 = $120 Percentage change in portfolio value = 5/125 = -.04 = -4% Index: Initial index value (25+100)/2 = 62.5 Final index value (30 + 90)/2 = 60 Percentage change in index -2.5/62.5 = -.04 = -4%

  26. Broadly based index of 500 firms Market-value-weighted index Index funds Exchange Traded Funds (ETFs) Standard & Poor’s Indexes

  27. Other U.S. Market-Value Indexes NASDAQ Composite NYSE Composite Wilshire 5000

  28. Figure 2.9 Comparative Performance of Several Stock Stock Indexes, 2001-2006

  29. Foreign and International Stock Market Indexes Nikkei (Japan) FTSE (Financial Times of London) Dax (Germany) MSCI (Morgan Stanley Capital International) Hang Seng (Hong Kong) TSX (Canada)

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

  31. Figure 2.10 Trading Data on GE Options

  32. Figure 2.11 Listing of Selected Futures Contracts

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