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Main ConceptsMain ConceptsReal assetsFinancial assetsRole of financial
marketsAgency problemCorporate
governanceFinancial
intermediariesInvestment companyInvestment banker
Pass-through security
SecuritizationPrimitive securityDerivative securityMoney marketMoney market
instrumentsBond marketBond market
instruments
Types of stock and bond market indices
UnderwritingSeasoned issuePrivate placementShort saleLong positionShort positionPrimary marketSecondary marketThird marketFourth market
Insider tradingUnit investment
trustManaged
investment companies
Hedge fundsMutual fundsInternational
fundsIndex fundsExchange-traded
funds
Real assets Financial assets
Land, buildings, equipment
Claims such as securities to the income generated by real assets
Role of financial markets Agency problem
Risk allocationConsumption timingSeparation of
ownership and management
Managers, who are hired as agents of the shareholders, may pursue their own interest instead.
Corporate governance Financial intermediaries
Banks Investment
companies Insurance companiesCredit unions
Investment company Investment banker
Pool together and manage the money of many investors
i.e. mutual funds
Advise the issuing firm on the prices it can charge for the securities issued, market conditions, and appropriate interest rates.
i.e. Goldman Sachs
Pass-through security Securitization
Backed by homogenous asset pools (i.e. mortgages)
The purchaser receives all interest and principal payments.
i.e. Mortgages are treated like other securities in financial markets.
Primitive security Derivative security
Offers returns based only on the status of the issuer◦ Bond-interest payments:
depend on the solvency of the issuing body.
◦ Dividend payments: depend on firm’s financial position.
Yields return that depend on additional factors pertaining to the prices of other assets (i.e. underlying asset).
Money market Money market instruments
Maturity: less than one year
Short-term fixed income market
Treasury billCertificate of depositCommercial paperBankers’ acceptancesEurodollarsRepos and reverses
Bond market Bond market instruments
Long-term fixed income market
Treasury notes and bonds
International bondsMunicipal bondsCorporate bondsMortgage-backed
securities
Seasoned Issue:all issues after IPO
Types of stock and bond market indices
Underwriting
Price-weighted indexValue-weighted indexEqually-weighted
index
The role of investment bankers in the IPO process.
Private placement Short sale
Opposite of public offering
Selling shares directly to to a small group of institutional or wealthy investors.
Allows investors to profit from a decline in a security’s price.
The investor borrows a share of stock from a broker and sells it.
The short-seller must purchase a share of the same stock in the market to replace the share that was borrowed (covering the short position).
Primary market Secondary market
Where the new issue takes place.
Where trading of already-issued securities takes place.
OTCNo membership requirements for trading
No listing requirements for securities
Third market Fourth market
Trading of exchange-listed securities on the over-the-counter market
Direct trading between investors in exchange-listed securities without benefit of a broker
Insider trading Unit investment trust
Private information held by officers, directors, or major stockholders that has not yet been given to the public.
Pools of money invested in a portfolio that is fixed for the life of the fund.
Managed investment companies
Hedge funds
BoD of the fund (elected by shareholders) hires a management company to manage the portfolio
Closed-end◦ Do not issue shares◦ Liquidation: shares are
sold to other investors Opened-end
◦ Issue shares◦ Liquidation: shares are
sold back to the fund
Are not registered as mutual funds and not subject to regulatory authority
Open to only wealthy or institutional investors
Like mutual funds allow private investors to pool assets to be invested by a fund manager