1. Global Financial Instruments
Chapter 2
Global Financial Instruments

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

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

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

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

6. 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

7. 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

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

9. Uses of Stock Indexes Track average returns
Comparing performance of managers
Base of derivatives

10. Factors for Construction of Stock Indexes
Representative?
Broad or narrow?
How is it weighted?

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

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

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

14. 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