1. Investment Alternatives (Assets)
Chapter 2
Investment Alternatives (Assets)

2. Learning Objectives types of financial assets
non-marketable financial assets
money market and capital market securities.
options and futures.

3. Non-Marketable Financial Assets
Savings deposits
Canada Savings Bonds (CSBs) Guaranteed Investment Certificates (GICs)

4. Money Market Securities
Treasury bills, commercial paper, Eurodollars, repurchase agreements, banker’s acceptances (B/As)

5. Capital Market Securities Fixed-income securities
Marketable debt with maturity greater than one year
More risky than money market securities
Fixed-income securities have a specified payment schedule
Dates and amount of interest and principal payments known in advance

6. Fixed-Income Securities
Bonds – long-term debt instruments
Major bond types:
Government of Canada bonds
U.S. Treasury bonds
Provincial bonds
Provincially-guaranteed bonds – Ontario Hydro
U.S. federal agency securities – GNMAs (Ginnie Maes), FNMAs (Fannie Maes)

7. Fixed-Income Securities
Major bond types (cont’d):
Corporate bonds
Usually pay semi-annual interest, are callable, carry a sinking fund provision, and have a par value of $1,000
Convertible bonds may be exchanged for another asset
Risk that issuer may default on payments

8. Asset-Backed Securities
Asset-backed securities are “securitized” assets
E.g. mortgage-backed securities
Investors assume little default risk as most mortgages are guaranteed by a federal government agency

9. Equity Securities Represent an ownership interest Preferred stock
Preferred shareholders are paid after bondholders but before common shareholders
Dividend known, fixed in advance
May be cumulative if dividend omitted

10. Derivative Securities
Securities whose value is derived from some underlying security
Futures and options contracts are standardized and performance is guaranteed by a third party
Risk management tools
Warrants are options issued by firms

11. Options
Exchange-traded options are created by investors, not corporations
Call (Put) gives the buyer the right but not the obligation to purchase (sell) a fixed quantity of shares at a a fixed price before a certain date
Options can be sold in the market at a price
Increases return possibilities

12. Futures
Futures contract: A standardized agreement between a buyer and seller to make future delivery of a fixed asset at a fixed price
A “good faith deposit” called margin, is required of both the buyer and seller to reduce default risk
Used to hedge the risk of price changes