Finance 4502 Instructor: Edward Lawrence Chapter 2 Financial Securities




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Finance 4502 Instructor: Edward Lawrence Chapter 2 Financial Securities



I Major Classes of Financial Assets or Securities


II Markets and Instruments


  • Money Market

    • Treasury bills

    • Certificates of deposit

      • Large

      • Small

    • Commercial Paper

    • Bankers Acceptances

    • Repos (repurchase agreement by dealers usually for a day, backed by govt. securities)

    • Brokers’ Call ( loan taken for margin borrowers by their brokers)

    • Federal Funds (funds in the banks reserve account)




  • Capital Market

    • Bonds (fixed income)

    • Equity

    • Derivatives


III Capital Market – Fixed Income Instruments


Publicly Issued Instruments

  • US Treasury Bonds and Notes (Listing of Issues: Explain Fig 2.4)

  • Agency Issues (Fed Gov)

  • Municipal Bonds

  • International Bonds

Privately Issued Instruments

Example: The following are the quotes for 7.50 August 04n treasury bonds from The Wall Street Journal

Maturity

Rate Mo/Yr Bid Asked Chg. Ask Yld.

7.50 Aug 04n 102:21 102:23 +4 5.64



  1. How much does it cost to buy the bond?


  1. If you already own the bond, how much would a bond dealer pay you for it?


  1. By how much did the price change from the previous day?



  1. What annual interest payment does the bond make?



  1. What is the bond’s yield to maturity?


IV Municipal Bond Yields

Pages 35-37



V Capital Market - Equity




VI Uses of Stock Indexes




VII Factors for Construction of Stock Indexes


  • Representative?

  • Broad or narrow?

  • How is it weighted?



VIII Examples:





  • Dow Jones Industrial Average (30 Stocks)

  • Standard & Poor’s 500 Composite

  • NASDAQ Composite

  • NYSE Composite

  • Wilshire 5000

  • Nikkei 225 & Nikkei 300

  • FTSE (Financial Times of London)

  • Dax (Germany)

  • TSX (Canada)



IX Construction of Indexes


  • How are stocks weighted?

  • Price weighted (DJIA)

  • Market-value weighted (S&P500, NASDAQ)

  • Equally weighted (Value Line Index)

X Derivative 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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