Class Business Homework – Solution Solution Group debates/presentations Stock-Trak – Clip Clip

Group Presentations 10 minute presentations Each group presents then class discussion Presentations: – Define topic for class – Argue your side – Use Business press, academic discussion, experts Submit – hardcopy of slides (can be multiple slides per page) day of presentation – Copy of references Emphasis on logical arguments

Account A717?? Trading requirements Purchase of at least five different company’s stocks Purchase at least one international stock Short at least one stock and then reverse your position before the end of trading. Purchase at least one mutual fund. Purchase of at least one corporate bond. Purchase at least one government debt security (bill, note, or bond). Take both a long and short position in a futures contract Take both a long and short position in an option Take a long position on a security by buying on margin

The Investment Process Asset allocation Security selection Risk-return trade-off Market efficiency Active vs. passive management – What is the appropriate benchmark?

Active vs. Passive Management Active Management Finding undervalued securities Timing the market Passive Management No attempt to find undervalued securities No attempt to time Holding an efficient portfolio Minimize costs

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

Investments and Innovation Technology and Delivery of Service Computer advancements More complete and timely information Globalization Domestic firms compete in global markets Performance in regions depends on other regions Causes additional elements of risk

Key Trends - Globalization International and Global Markets Continue Developing Diversification to improve performance Instruments and vehicles continue to develop Information and analysis improves

Key Trends - Securitization Securitization & Credit Enhancement Offers opportunities for investors and originators Changes in financial institutions and regulation Improvement in information capabilities Credit enhancement and its role

Key Trends - Financial Engineering Repackaging Services of Financial Intermediaries Bundling and unbundling of cash flows Slicing and dicing of cash flows Examples: strips, CMOs, dual purpose funds, principal/interest splits

The Future Globalization continues and offers more opportunities Securitization continues to develop Continued development of derivatives and exotics Strong fundamental foundation is critical Integration of investments & corporate finance

Chapter 2 Money Market Instruments Treasury bills Certificates of deposit – Large – Small Commercial Paper Bankers Acceptances

Money Market Instruments cont. Eurodollars Repurchase Agreements (Repos) and Reverse Repos 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 – Track average returns – Comparing performance of managers (benchmarking) – Base of derivatives Factors for Construction of Stock Indexes – Representative? – Broad or narrow? – How is it weighted? Stock Indexes

Examples of Indexes Domestic – Dow Jones Industrial Average (30 Stocks) – Standard & Poor’s 500 Composite – NASDAQ Composite – NYSE Composite – Wilshire 5000 International – Nikkei 225 & Nikkei 300 – FTSE (Financial Times of London) – Dax

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

Futures/Forwards Basic Positions – Long (Buy) – Short (Sell) Terms – Delivery Date – Underlying Examples – Rental contract, lease agreement, commodities

Options Basic Positions – Call (Buy) – Put (Sell) Terms – Exercise Price – Expiration Date – Underlying Examples – Stock, index, and currency