1. Financial Instruments
Chapter 2

2. Major Types of 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
Commercial Paper
Bankers Acceptances
Eurodollars

5. Money Market Instruments (Cont.)
Repurchase Agreements (RPs) and Reverse RPs
Federal Funds
Brokers’ Calls
LIBOR Market

6. Bond Markets US Treasury Bonds and Notes Agency Issues (Fed Gov)
International Bonds
Municipal Bonds
Corporate Bonds
Mortgage-Backed Securities

7. Municipal Bond Yields
Interest income on most municipals is not subject to tax
To compare the yields on municipals to other bonds use equivalent taxable yield
(municipal return) / (1 – tax rate)
Or solve for the tax rate that equates the two yields
Tax rate = 1 – (municipal rate/taxable rate)

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

9. Stock Market Indexes Uses Factors in constructing or using an Index
Track average returns
Comparing performance of managers
Base of derivatives
Factors in constructing or using an Index
Representative?
Broad or narrow?
How is it constructed?

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

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

12. Bond Indexes Lehman Brothers Merrill Lynch Salomon Brothers
Specialized Indexes
Merrill Lynch Mortgage

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

14. Averaging Methods Component Return A=10% B= (-5%) C = 20%
Arithmetic Average
[.10 + (-.05) + .2] / 3 = 8.33%
Geometric Average
[(1.1) (.95) (1.2)]1/3 - 1 = 7.84%

15. 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