Chapter 2

Real and Financial Assets n Real Assets—Tangible assets such as houses, equipment and inventories n Financial Assets—Claims for future payment on other economic units— common and preferred stocks

Q: What are SECURITIES? A: Financial Assets that Investors purchase hoping to earn a high rate of return.

Types of Securities n Treasury Bills and Treasury Bonds n Municipal Bonds n Corporate Bonds n Preferred Stocks n Common Stocks Which of these are RISKY? Which promise HIGH RETURNS? Is there a relationship between RISK and RETURN?

Corporate Financing Sources n From , over $1.1trillion in external corporate financing was raised. n From 1998 through 2000, capital has been raised through the following sources: n Corporate Bonds and Notes 73.6% n Equities (Preferred & 26.4% Common Stock) Common Stock) (Interest is deductible and dividends are not)

Movement of Savings n Direct Transfer of Funds cash securities saver firm

Movement of Savings n Indirect Transfer using Investment Banker securities fundsfunds securities saver investment banker firm

Movement of Savings n Indirect Transfer using a Financial Intermediary funds intermediarysecurities funds firmsecurities financial intermediary firm saver

Financial Market Components n Public Offering u Firm issues securities, which are made available to both individual and institutional investors. n Private Placement u Securities are offered and sold to a limited number of investors.

Financial Market Components n Primary Market u Market in which new issues of a security are sold to initial buyers. n Secondary Market u Market in which previously issued securities are traded.

Financial Market Components n Money Market u Market for short-term debt instruments (maturity periods of one year or less). n Capital Market u Market for long-term securities (maturity greater than one year). FedFundsRate

Financial Market Components n Organized Exchanges u Buyers and sellers meet in one central location to conduct trades. n Over-the-Counter (OTC) u Securities dealers operate at many different locations across the country. u Connected by Nasdaq system (National Association of Securities Dealers Automated Quotation system).

Investment Banking How do investment bankers help firms issue securities? Underwriting the issue. Distributing the issue. Advising the firm.

Interest Rate Determinants Interest Rates

INFERRED REAL RATE OF INTEREST (Nominal less inflation = Real Rate) Nom. Infl. Real Nom. Infl. Real Yld Rate Rate Treasury Bills 4.5% 3.0% 1.5% Treasury Bonds 7.0% 3.0% 4.0% Corporate Bonds 9.0% 3.0% 6.0%