1. McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Securities CHAPTER 2

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

3. 2-3 Money Market Instruments Treasury bills Certificates of deposits Commercial Paper Bankers Acceptances Eurodollars Repurchase Agreements (RPs) and Reverse RPs Brokers’ Calls Federal Funds Between Money and Capital –LIBOR Market

4. 2-4 Figure 2.1 Money Rates

5. 2-5 Figure 2.2 Treasury Bills Zero Coupon Treasuries

6. 2-6 Bond Market Treasury Notes and Bonds Federal Agency Debt International Bonds Municipal Bonds Corporate Bonds Mortgages and Mortgage-Backed Securities

7. 2-7 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 2005 discussion to possibly resume sales Par Value - $1,000 Quotes – percentage of par

8. 2-8 Figure 2.4 Treasury Notes, Bonds and Bills US Treasuries US Treasuries US Treasuries

9. 2-9 Federal Agency Debt Major issuers –Federal Home Loan Bank –Federal National Mortgage Association –Government National Mortgage Association –Federal Home Loan Mortgage Corporation

10. 2-10 Figure 2.5 Government Agency & Similar Issues Fannie MaeFHLBFreddie Mac

11. 2-11 Municipal Bonds Issued by state and local governments Types –General obligation bonds –Revenue bonds Industrial revenue bonds Maturities – range up to 30 years Rates and Prices Rates and Prices

12. 2-12 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

13. 2-13 Table 2.3 Equivalent Taxable Yields

14. 2-14 Corporate Bonds Issued by private firms Semi-annual interest payments Subject to larger default risk than government securities Options in corporate bonds –Callable –Convertible Rates and Price Rates and Price

15. 2-15 Figure 2.8 Corporate Bond Prices Corporate Bond Listing

16. 2-16 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

17. 2-17 Equity Markets Common stock –Residual claim –Limited liability Preferred stock –Fixed dividends - limited –Priority over common –Tax treatment Depository receipts Prices

18. 2-18 Figure 2.10 Listing of Stocks Traded on the NYSE

19. 2-19 Uses of Stock Indexes –Track average returns –Comparing performance of managers –Base of derivatives Factors for Construction of Stock Indexes –Representative? –Broad or narrow? –How is it weighted? Stock Indexes

20. 2-20 Examples of Indexes - Domestic Dow Jones Industrial Average (30 Stocks) Standard & Poor’s 500 Composite NASDAQ Composite NYSE Composite Wilshire 5000

21. 2-21 Figure 2-11 Comparative Performance of Several Stock Market Indexes

22. 2-22 Examples of Indexes - Int’l Nikkei 225 & Nikkei 300 FTSE (Financial Times of London) Dax Region and Country Indexes –EAFE –Far East –United Kingdom

23. 2-23 Construction of Indexes How are stocks weighted? –Price weighted (DJIA) DJI DJI Buy and hold strategy Page 43 example 2.2 Divisor problem Page 44 example 2.3 –Market-value weighted (S&P500, NASDAQ) S&P500NASDAQS&P500NASDAQ Buy and hold strategy Page 46 example 2.4 –Equally weighted (Value Line Index) Requires rebalancing of portfolio

24. 2-24 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 Investment Derivatives 101: Payoff Diagrams