Global Financial Instruments

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Presentation transcript:

Global Financial Instruments Chapter 2 Global Financial Instruments

Major Classes of Financial Assets or Securities Debt Money market instruments Bonds Common stock Preferred stock Derivative securities

Markets and Instruments Money Market Debt Instruments Derivatives Capital Market Bonds Equity

Money Market Instruments Treasury bills Certificates of deposit Large Small Commercial Paper Bankers Acceptances

Money Market Instruments cont. Eurodollars Repurchase Agreements (RPs) and Reverse RPs Federal Funds Money Market Funds

Capital Market - Fixed Income Instruments Publicly Issued Instruments US Treasury Bonds and Notes Agency Issues (Fed Gov) Municipal Bonds International Bonds Privately Issued Instruments Corporate Bonds Mortgage-Backed Securities

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 r = taxable equivalent yield t = marginal tax rate

Capital Market - Equity Common stock Residual claim Limited liability Preferred stock Fixed dividends - limited Priority over common Tax treatment

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?

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

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

Construction of Indexes How are stocks weighted? Price weighted (DJIA) Market-value weighted (S&P500, NASDAQ) Equally weighted (Value Line Index)

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