Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 1 Investments – The investment environment Asst.Prof.Ph.D Julijana Angelovska September 2012

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 2 Today’s Agenda Administrative Details Review Syllabus Investment? Real assets versus financial assets. The three broad types of financial assets.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 3 Schedules-Fall semester (B2)  Friday - Lecture  08:15-09:00 09:15-10:00 Exercise 10:15-11:00 Attendance: Attendance at lectures and exercises is compulsory. If there is less than 72% attendance the student is not allowed to take the exam. (max,4 weeks missed)

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 4 Class Structure Lectures: Begin 15 minutes after the hour and end on the hour. There will be a 15 minutes break midway. Determination of Grades: 1)Research Requirement 2)Homework 20% 3)Term Project Presentation 4)Term Project Final Write-up 5)Midterm Exam40% 6)Final Exam40% Text: Investment 5 th edition,Bodie, Cane, Marcus, Mc Graw Hill, 2003 Review Syllabus

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 5 Midterm & Final: 40% and 40% Midterm: 40-60% multiple choice. The rest of it will be short answer and short essay questions. No make-up midterm test. Final: Similar format. Focus on materials after the mid-term Review Syllabus

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 6 Class Etiquette Come to class on time and don’t walk out early. Turn off your cell phone. Don’t talk amongst yourselves, read the newspaper, or eat during lecture. Do ask questions and ask me to slow down if I am going too fast or the material is not clear. Do help out the class by initiating and participating in class discussion.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 7 Quick Review of Topics Review Syllabus Weekly Study Plan WeeksTopics 1The Investment Environment 2Financial Markets and Instruments 3Security Trade 4Time Value of Money 5Interest 6Securities (Fixed-Income) 7Securities (Fixed-Income) Valuation Mid-Term Exam Week 8Equity 9Equity Valuation Models 10Risk 11Portfolio Theory 12Capital Allocation Between Instruments 13Optimal Risk Portfolio Selection 14Cyclical Review Final Exam Week

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 8 You got money

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 9

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 10 Investment An investment is the current commitment of money or other resources in the expectation of reaping future benefits.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 11 Investing Putting your money to use in order to make money on it. Simple Interest vs. Compound Interest –Simple – interest that is computed only on the amount saved. –Compound – interest that is computed on the amount saved plus interest previously earned. Securities refers to bonds, stocks, and other documents sold by corporations and governments to raise large sums of money.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 12 Investing Through Banks Savings Account –Simplest form of saving –Offered by all institutions (banks, credit unions, etc.) –Generally, a low minimum deposit is required –Interest is low and varies from institution to institution Certificate of Deposit –Requires a minimum deposit for a minimum amount of time –Interest rates are higher than a savings account

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 13 Money Market Fund Investing Through Banks Continued –Kind of mutual fund, or pool of money, put into a variety of short-term debt by business and government.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 14 REAL ASSETS VERSUS FINANCIAL ASSETS The material wealth of society is determined by the productive capacity of its economy, that is, the goods and services its members can create. This capacity is a function of the real assets of the economy: the land, buildings, machines, and knowledge that can be used to produce goods and services (together physical and “human” assets).

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 15 REAL ASSETS VERSUS FINANCIAL ASSETS What about financial assets? as stocks and bonds. Such securities are no more than sheets of paper or, more likely, computer entries and do not contribute directly to the productive capacity of the economy. These assets are the means by which individuals in well-developed economies hold their claims on real assets.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 16 REAL ASSETS VERSUS FINANCIAL ASSETS What is asset? Broadly speaking, an asset is any possession that has value in an exchange. Assets can be classified as tangible or intangible. A tangible asset is one whose value depends on particular physical properties—examples are buildings, land, or machinery. Intangible assets, by contrast, represent legal claims to some future benefit.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 17 REAL ASSETS VERSUS FINANCIAL ASSETS The entity that has agreed to make future cash payments is called the issuer of the financial instrument; the owner of the financial instrument is referred to as the investor. examples of financial instruments: ■ A loan by HALK Bank (investor/commercial bank) to an individual (issuer/borrower) to purchase a car ■ A bond issued by the U.S. Department of the Treasury ■ A bond issued by Ford Motor Company ■ A bond issued by the government of France ■ A share of common stock issued by Toyota Motor Corporation, a Japanese company

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 18 REAL ASSETS VERSUS FINANCIAL ASSETS real assets Assets used to produce goods and services. financial assets Claims on real assets or the income generated by them.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 19 Investments & Financial Assets Essential nature of investment –Reduced current consumption –Planned later consumption Real Assets –Assets used to produce goods and services Financial Assets –Claims on real assets

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 20

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 21 Are the following assets real or financial? a. Patents b. Lease obligations c. Customer goodwill d. A college education e. A $5 bill

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 22 A TAXONOMY OF FINANCIAL ASSETS Fixed-income securities promise either a fixed stream of income or a stream of income that is determined according to a specified formula. fixed-income securities come in a tremendous variety of maturities and payment provisions. At one extreme, the money market refers to fixed- income securities that are short term, highly marketable, and generally of very low risk. In contrast, the fixed income capital market includes long-term securities such as Treasury bonds, as well as bonds issued by federal agencies, state and local municipalities, and corporations.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 23 A TAXONOMY OF FINANCIAL ASSETS Common stock, or equity, in a firm represents an ownership share in the corporation. Equity holders are not promised any particular payment. They receive any dividends the firm may pay and have prorated ownership in the real assets of the firm. If the firm is successful, the value of equity will increase; if not, it will decrease. The performance of equity investments, therefore, is tied directly to the success of the firm and its real assets.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 24 A TAXONOMY OF FINANCIAL ASSETS Derivative securities such as options and futures contracts provide payoffs that are determined by the prices of other assets such as bond or stock prices. For example, a call option on a share of Intel stock might turn out to be worthless if Intel’s share price remains below a threshold or “exercise” price such as $30 a share, but it can be quite valuable if the stock price rises above that level. Derivative securities are so named because their values derive from the prices of other assets.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 25 Questions? 1.Define an investment. 2.Distinguish between real assets and financial assets. 3.List and explain the three broad types of financial assets. Homework Make a search about the history of joint stock companies and come up with interesting PPT or essay.